RomneyCare lessons

Here’s another opinion piece worth-reading from the Wall Street Journal this morning. Key snippets:

The health reform that Mitt Romney passed in 2006 in Massachusetts presaged President Obama’s, and its results are showing what we can expect nationwide. The latest warning comes in a huge new tax increase proposed by Governor Deval Patrick.

But last August Beacon Hill was forced to impose new price controls and a cap on overall state health spending because “health-care spending has crowded out key public investments,” as Mr. Patrick puts it in his budget.

He’s right about that: Health care was 23% of the state fisc in 2000, and 25% in 2006, but it has climbed to 41% for 2013. On current trend it will roll past 50% around 2020—and that best case scenario assumes Mr. Patrick’s price controls work as planned. (They won’t.) In real terms the state’s annual health-care budget is 15% larger than it was in 2007, while transportation has plunged by 22%, public safety by 17% and education by 7%. Today Massachusetts spends less on roads, police and schools after adjusting for inflation than it did in 2007.

 

Free Market Masterpiece

I agree with Don Boudreaux, of Cafe Hayek, that John Cochrane’s health care essay is a must read.

I first titled the post, “Health Care Masterpiece,” but then changed it to “Free Market Masterpiece”. In his essay, Cochrane does a masterful job of contrasting free market success stories to our government-restrained market for health care.

Here are a few snippets.

I bet you didn’t know:

About 70% of hospitals and 85% of health‐care employment is in non‐profits,whose legal and regulatory treatment protects much inefficiency from competition.

Maybe for‐profit companies pay too much attention to stock prices. But non‐profits can go on inefficiently forever, with no stockholders to complain.  The whole point of a non‐profit is to pursue goals other than economic efficiency.

Here he summarizes the competing goals of various government actions in health care:

…here we have the government forcing small size in order to boost competition with one hand, stopping entry to protect hospitals from competition with another, trying to force larger “networks” through “Affordable Care Organizations” to obtain the needed economies of scale with the third, but laws preserving doctor independence with the fourth.

And:

On reflection, it’s amazing that computerizing medical records was part of the ACA and stimulus bills. Why in the world do we need a subsidy for this? My bank computerized records 20 years ago.

Why, when you go to the doctor, do you answer the same 20 questions over and over again, and what the heck are they doing trusting your memory to know what your medical history and list of medications are?

He answers that question (read it to find his answer) and OMG:

No, we did not get cheap and amazing cell phones by government ramping up the pressure on the 1960s AT&T. Southwest Airlines did not come about from effectiveness panels or an advisory board telling United and American (or TWA and Pan AM) how to reorganize operations. The mass of auto regulation did nothing to lower costs or induce efficient production by the big three.

When has this  ever worked?  The post office? Amtrak? The department of motor vehicles? Road construction? Military procurement? The TSA? Regulated utilities? European state‐run industries? The last 20 or so medical “cost control” ideas? The best example and worst performer of all,..wait for it…public schools?

I will post more quotes later. But, I also agree with Boudreaux that you should take the time to read the whole thing.

“Why I Support Obama”: Point 1 – Addendum

In addition to what I wrote in my previous post, I’d like to add this short video from Richard Epstein.  He says government has the responsibility to “get out of the way”.  (Thanks to David Henderson of EconLog for the link).

 

His closing:

If we started to unravel that [all the government interference in health care], we would solve many of the access problems caused mainly by our own regulatory ingenuity, which somehow or another, always manages to backfire.

“Why I Support Obama”: Point 1

This my response to the first point made by the Facebook Obama Supporter.  Let’s first review her point:

For 30 years I’ve heard politicians talk about health care reform, and he’s the first one to do something about it.  The Affordable Care Act removes conditions on pre-existing conditions, makes health care more affordable for small businesses, raises the age at which children can be on their parents’ policies, removes lifetime caps, and more. With the possible exception of insurance execs, who would not want these changes?

First, politicians have been reforming health care for a long time.

Second, the Obama supporter doesn’t realize those reforms are why we have the problems that she wants the government to solve, like pre-existing conditions.

I wrote about how government created the pre-existing condition problem here.  John Cochrane, finance professor at the University of Chicago, agrees with me.  So does economist Steven Levitt.

Next, the Obama supporter believes Obamacare will make health care affordable for small  businesses. First, intentions of government programs are rarely realized. Usually it’s the opposite — the government programs make things worse. Second, affordability is partly caused by the government tax treatment of health insurance (see links in previous paragraph).  If we purchased health insurance like we do auto and home insurance, small business — or any business — could get out of the health insurance business and focus on whatever they do best.

Next, it’s not clear to me what problem raising the age for children to remain on their parents’ policy solves that wouldn’t be solved by decoupling insurance and employers as discussed in the previous two paragraphs.

Next, lifetime caps?  I haven’t heard of these caps being a problem.  And, in a freer market of health insurance, if people wanted protection over and above the lifetime cap, they could probably get it.

I’m not an insurance exec and I don’t want these changes.  I believe they will have negative unintended consequences that will slow progress and innovation in health care and lower quality and availability.

Plus, I bet insurance execs are not as upset by this as the Obama supporter thinks.  They are now politician’s cronies and as long as they keep their political cronies happy, the political cronies will keep directing our money to them.  That’s easier than developing innovative products that individuals choose over the competition.

Because we choose to

As I read through the rest of Bruce Bartlett’s blog post on health care that I linked to in my previous post, I came across a number of logical errors and stretches, which I find disturbing coming from a former Presidential policy adviser.

Here’s one logical sequence that I found rather weak:

Conservatives universally believe that whenever the government provides a service it will be vastly more costly than if the private sector does so. This is why they support the plan offered by Representative Paul D. Ryan, Republican of Wisconsin and chairman of the House Budget Committee, to essentially privatize Medicare. Conservatives believe competition will drive down health costs for the elderly.

But O.E.C.D. data show that Americans pay vastly more for health care than the residents of any other major country. In 2008, we paid 16 percent of G.D.P. in total health care costs, public and private combined. The people with the next heaviest health care burden were the French, who paid 11.2 percent of G.D.P. Indeed, at 7.4 percent of G.D.P., the governmental share of health spending in the United States is about the same as total health care costs in many other countries, including (as a percentage of G.D.P.) Luxembourg (6.8 percent), Israel (7.8 percent), Japan (8.1 percent), Britain (8.4 percent) and Norway (8.5 percent).

First, I cringe when anyone uses words like “universally”.  That’s a tip-off for a straw man argument and a debilitating bias.  To believe any group of people are in universal agreement on anything is naive at best.  And folks who use such words are prone to exaggerate their case and disband with objective consideration of the truth.

Second, the logic of Bartlett’s argument doesn’t necessarily flow.  It appears Bartlett’s argument is:

A. Conservatives believe government health care would be costlier than private sector health care.

B. The U.S. spends 5% – 8% more, as a percent of GDP, than countries with government health care.

C.  B proves A as false.

While B may prove A false, there are a number of reasons why B does not necessarily prove A to be false.  Accepting his argument without any other consideration demonstrates confirmation bias, which is the willingness to stop thinking once you get the answer you expect.

Here are a few reasons why B may not prove A false:

Reason 1: As mentioned in the prior post, U.S. citizens may be receiving better quality health care for their money.  If so, it’s not surprising that it costs more.

Reason 2:  It could be that current government spending is the cause of the higher percentage of GDP spent on health care in the U.S.  As Bartlett points out in his post:

…the governmental share of health spending in the United States is about the same as total health care costs in many other countries [with government-provided health care].

Reason 3: It could be that the Franken-system that is U.S. health care — the combined government, private sector and government mandates — contributes to the higher spending.

Government, at the Federal and state levels, has inserted itself into the medical care market in ways that drives up medical costs.   The tax advantage of employer-provided health insurance, emergency room must-treat mandates, state level coverage mandates and government coverage were all created for good intentions, but have the unintended consequence of driving up costs (and causing problems that too many people attribute to market failure rather than government failure).

One way these government distortions drive up costs is by weakening rationing of scarce medical resources.  Both free markets and centrally controlled systems ration better than this Franken-system that we have.  In free markets, individuals ration.  Committees ration in centrally controlled systems.  We don’t seem to like either very much, which why we have what we have.

Yet, no matter how badly we wish to avoid rationing, we can’t change the fact that medical care is a scarce resource.  So, we’ll either have to accept some form of rationing at some point or go broke.  Obama has proposed rationing by committee.  I think rationing by individual produces better results.

Remember the housing bust that we’re still recovering from?  That too was a rationing avoidance scheme.  We got the idea that the old rationing mechanisms for home ownership, like requiring folks to put 20% down (which demonstrated the ability to save and also helped reduce lending risk), were no longer necessary.  Home prices skyrocketed (sound familiar) and we went broke.

Consider Canada, which did not suffer a housing bust.  Their finance minister said, “some people are better off renting.”

Reason 4:  Now, let’s say reasons 1, 2 & 3 are wrong.  There’s another possible reason that we spend more on health in the U.S.   We still live in a free country.  We may spend more, because we choose to.

Steven Levitt on health care

On the April 13, 2011 Freakonomics podcast, Steven Levitt describes the two problems he doesn’t believe were addressed with health care reform.

The following is my dictation of Levitt’s comments, which start about 10 minutes into the podcast:

There were two things you needed to do to health care reform to materially improve the situation.

The first was to break the link between the provision of health care and employment.  That is just an archaic element of our health care system that really makes no sense, and yet because of tax subsidies, it’s the way that most get their health care.   There’s no good economic justification for it.  If anything, I think this health care reform bill strengthened that link.

Why doesn’t it make sense to have health care tied to employment?  I think that you actually want to turn the question around.  Why in the world would you want it tied to employment?  I think there’s no good reason.  For one thing, many people don’t work.

It leads to job lock, where it’s difficult to change jobs, and it leads to circumstances where we have to have these overlapping systems, which are inefficient.

He then asks a question I often ask:

Why is your auto insurance not tied to your employer?

Reason number two:

An even bigger problem with health care today, which was not addressed at all in the reform bill, is that people aren’t paying for the services that they’re getting.

It’s virtually the only part of the economy where I can go out and get any service I want — cancer treatment, open heart surgery — whatever it is and I pay $3 for it even if it costs $50 thousand or $100 thousand.

Then Levitt goes on to explain that health care is just like any other good in the economy and because

…we aren’t charging people for it what it costs to produce, people are inefficiently consuming it, they’re making the wrong choices and you can tolerate that if it were a small part of the economy, but since it’s 15% to 17% of economy we have to treat it like its any other good.

Now people hate to talk about this trade-off between health and life and money, but the fact is that if not today, then sometime in the not too distant future, we’re going to have to make trade-offs, such as my grandmother is in a vegetative state being kept alive by machines pumping her heart, and instead of the state paying for that, they’re going to say, look, you’re going to pay for some of this.  You can either take the $150,000 and we’ll keep your grandmother alive or you can put your kids through college, your choice.

And people are going to have to start making those tough choices.  It won’t be pretty.  It won’t be fun or happy.  Economics is the study of scarcity and in a world where health care becomes more and more costly, the scarcity is going to be more and more binding and we’re going to have to make those tough choices that are imbued with this moral element, but nevertheless it’s an economic choice when you get down to it.

I agree with Levitt.  I believe these two things will do more to improve the status of our health care and the world’s health care than anything else.

But, as I typed the last two paragraphs it occurred to me that perhaps those tough choices are what people hope to escape.  In a freer health care market, we fear for that moment when we have to make such an economic choice, knowing we have to live with it and others may question our motives.  Maybe its easier on our conscience to have someone else make that choice for us.  Or we’d rather make the choice without money being a factor.

However, something I think many of us overlook is that innovation and competition in a freer health care market could drive costs down and improve effectiveness to the point that money is about as much of a factor as it is in deciding whether to eat at Chili’s or Applebee’s (it’s not).  Innovation and competition have worked wonders for other goods and services.

The other part of the podcast on college education was worth it too.