I like it when well-respected Harvard economist, Greg Mankiw, gets snippy. In this post on his blog, he snips at Kathleen Sebelius’ lack of understanding of the the term insurance.
Also, I recommend reading Mankiw’s Sunday NY Times opinion column about what fiscal sustainability means.
In this post I explained why I think the tax advantage to employer-provided health insurance, over individually purchases health insurance, is the government-induced cause of the pre-existing condition problem that most folks prefer to solve by introducing even more government, rather than addressing the root cause.
In John Cochrane’s health care essay, he agrees.
Before ACA, the elephant in the room was the tax deduction and regulatory pressure for employer‐based group plans. This distortion killed the long‐term individual market and thus directly caused the pre‐existing conditions mess. Anyone who might get a job in the future will not buy long‐term insurance. Mandated coverage, tax deductibility of regular expenses if cloaked as “insurance,” prohibition of full rating, barriers to insurance across state lines – why buy long term insurance if you might move? – and a string of other regulations did the rest.
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.
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.
There was an excellent opinion piece in the Wall Street Journal today from John Cochrane, finance prof at the University of Chicago.
In it, Cochrane repeats something I wrote in 2009 about the root cause of one key problem in health insurance: pre-existing condition restrictions. This is Cochrane:
When the administration affirmed last month that church-affiliated employers must buy health insurance that covers birth control, the outcry was instant. Critics complained that certain institutions should be exempt as a matter of religious freedom.
Critics are missing the larger point. Why should the Department of Health and Human Services (HHS) decree that any of us must pay for “insurance” that covers contraceptives?
I put “insurance” in quotes for a reason. Insurance is supposed to mean a contract, by which a company pays for large, unanticipated expenses in return for a premium: expenses like your house burning down, your car getting stolen or a big medical bill.
Insurance is a bad idea for small, regular and predictable expenses.
How did we get to this point? It all leads back to the elephant in the room: the tax deductibility of employer-provided group insurance.
The pre-existing conditions crisis is largely a creature of tax law. You don’t lose your car insurance when you change jobs.
Here’s what I wrote in 2009:
President Obama proposes to fix the problem of health insurance companies not providing coverage to people with pre-existing conditions by forcing insurance companies to cover these people.
What’s the root cause of this problem?
The tax advantage companies have in purchasing health insurance plans over individuals. Without this tax advantage, the health insurance industry would look more like the auto and home insurance industries. We’d buy policies directly from insurers instead of being covered by employers and stay with those companies much longer.
In the last fifteen years, I’ve changed my health insurance provider ten times, twice due to changing employment and the other times due to my company changing providers or me switching from one plan to another within the company. Luckily I haven’t had a pre-existing condition to worry about.
I use the same auto and home insurance company I used fifteen years ago, same agent too. My choice to stay with this company has been wholly independent of my employer.
I recommend reading the whole thing.
