The Obama administration has its knickers all in a twist over rising health insurance premiums. As you wade through the rhetoric, here are a few things to keep in mind:
-
Greed does not cause rate hikes. I’m not sure why some premiums have shot up lately, but I’m quite sure that “greed” is not the answer. That’s because I’m quite sure that the insurance companies are no greedier today than they were a year ago. To explain a change in prices, you’ve got to point to something that’s changed. Greed is pretty much a constant.
So what relevant factor has recently changed? The only plausible candidates are costs, including expected future costs due to health care “reform”. What costs, specifically? I wish I knew. Maybe some commenter does.
- Greed, by itself, does not cause high prices either. In competitive markets, greed causes low prices as greedy companies struggle to steal each others’ customers.
- Monopoly causes high prices. Monopoly power, like greed, can’t explain recent rate hikes because monopoly power in this market has not recently changed. But monopoly power, unlike greed, can explain permanently high prices. And there is considerable monopoly power in this market, partly because you’re not allowed to shop for insurance out of state and largely because your employer does your shopping for you. The Administration has shown almost no stomach for combatting this problem.
Instead, their position is something very like this: “We can’t help ourselves from misusing our power to prop up this terrible monopoly, so give us the power to control it.” Kind of like the alcoholic who needs you to buy him a drink to steady his nerves before he drives home tonight. Don’t let him snow you.
- Profits do not raise costs. The administration wants you to believe that we could lower the cost of insurance by limiting the profits of insurers. That’s bad economics, bad accounting and bad arithmetic.
Imagine a hypothetical insurance company that forgoes profits in order to keep down premiums. That insurance company, just like any other, needs capital to operate—but it can’t attract investors, because it has nothing to attract them with. So where does the capital come from? It’s got to come from taxpayers—taxpayers who fork over money that could otherwise be earning income in retirement accounts. And that forgone income is a fullfledged cost.
So yes, a publicly run insurance company could choose to earn $12 billion less in profit and return that saving to us in lower premiums—but only by taxing us enough and reducing our savings enough so we collectively earn $12 billion less in interest, dividends and capital gains.
By analogy, that same public insurance company could hypothetically require 10,000 clerical workers to put in 40 hours a week at zero pay. Would that reduce the cost of insurance? Surely not. It would reduce the premiums, but not the cost. Instead, it shifts the cost to those 10,000 workers, who, I’m sure, would tell you quite forcefully that the cost to them is considerable.
Capital and labor are costly. Those costs are quite literally unavoidable. They can be shifted around but they can’t be eliminated. Lowering wages does not lower costs; it just shifts them on to the backs of the conscripted workers. Lowering profits does not lower costs; it just shifts them on to the backs of the conscripted investors, for which read “taxpayers”.
[These arguments apply to ordinary profits. If you think that profits in the insurance industry are excessive, then we’re back to the issue of monopoly power, which is the only plausible source of consistently excessive profits. Keep in mind too that a single years’ profits are the wrong way to measure excess; all industries have good years and bad years.]
- Choices must be made. Adminstration spokesperson Robert Gibbs said the other day that you shouldn’t have to choose between having more health care and having more housing. Note well that when he says that’s a choice you shouldn’t have to make, what he means is that it’s a choice you shouldn’t get to make. He wants to make it for you.
Maybe as people have less money to spend, they are having to make tough choices (say between housing and health care), and the people who are not choosing health care are, almost certainly, going to be healthier than average. So the risk pool is getting unhealthier, and so premiums are rising.
The consequence, I imagine, is that more people are going to opt out (be forced out, might be a better term) of health care, leaving the risk pool yet unhealthier, and forcing further premium rises.
I will need to think this through a bit more, but here’s to get a ball rolling. It may come to a rapid stop. Recently we saw that the market could lead to too many athletes. Is it not possible that in a similar way the market could lead to too much healthcare? Steven helpfully linked to a paper about “superstar” performers, unfortunately I have not been able to fully take it on board, but I think it was getting at the point that a single “superstar” performer could not be replaced by a number of lesser performers. In healthcare, this is also the case. You cannot replace the absolute, top-notch, state-of-the-art body scan, even if the chances of it finding something are very small. As an individual, anyone is going to say “I must have it”. The body scan is rather like the superstar performer, and gets overvalued. This leads to too much healthcare. In this instance, too much means that the last dollar spent on healthcare would provide more value spent elsewhere. I don’t know how this could fit in with rate hikes, rather than chronic overspend, but the income of superstar performers has very rapidly increases in some sectors. Could this provide a market expalanation?
Harold: One of the key aspects of the superstar theory is that there’s no limit to how many cusotmers a single superstar can entertain. There clearly *is* a limit to how many patients can be served by a single body scanner, so I don’t think there’s anything like an analogy here.
Yes, well, I said it might come to a rapid stop! I will continue to ponder.
I have had further thoughts. The Insurance company provides healthcare to individuals and receives premiums in return. Out of the premiums he pays for the healthcare, his own costs and takes a normal profit for his troubles. The correct level of healthcare to provide is that at which the last dollar spent could not get more value spent elsewhere. Lets say a test will cost $1M and we value a life at $100M. The test should be done if it has a 1% chance of saving the life. Provide too much healthcare and your premiums are above what the customer is prepared to pay. Provide too little, and the customer prefers to spend more with a competitor to get more healthcare. If we ignore monopoly power and excessive profits, then rising premiums could be caused by 3 things: 1) rising costs, 2) increase in the value of a life or 3) a market failure resulting in the provision of too much healthcare.
1) Costs were mentioned in Steven’s piece, although I don’t think they are the only pausible candidates.
2) Is it possible that we value life more? Are we now prepared to spend more to save a life? It is possible. As we see the chance of avoiding death through ever more complex medical interventions, maybe we are prepared to pay more. As far as we know, no medical procedure prevents death, only prolongs life for a while. Life expectancy is going up. If an intervention will give me 40 extra years, I will pay more for it than if it gives me 20 extra years. I am not sure how this is measured, as I think part of the assesment is how much we pay for insurance, leading to a circular argument.
3) Is it possible that too much healthcare is provided? Crucially, is it possible that the amount of extra healthcare is rising? I think this is also possible, though not through the “superstar” medicine mechanism I mentioned earlier. One possibility is the old cliche – litigation. This provides another incentive to the supplier. If the cost of litigation for failing to provide a procedure excedes the value of the procedure as measured by the value of a life, then the supplier will provide too much healthcare. Rising premiums require increasing frequency of litigation, or increasing awards of compensation. I don’t know if either is occuring, but it does provide a possible mechanism. There could be other incentives I haven’t thought of.
For 2 and 3, I am not sure why they should lead to a sudden jump in premiums, but I think they should be considered alongside costs as a possible factor.
“And there is considerable monopoly power in this market, partly because you’re not allowed to shop for insurance out of state and largely because your employer does your shopping for you. The Administration has shown almost no stomach for combatting this problem.”
Why do you say that? Isn’t that the idea behind the national Exchange, a centerpiece of the reform proposals?
Initially the Exchange would be limited in that if your employer shops for you on it, you don’t get to do so yourself, but that’s something that can be changed later if the idea works out, whereas completely replacing employer-provided insurance in one fell swoop seems like a political impossibility.
“Profits do not raise costs. The administration wants you to believe that we could lower the cost of insurance by limiting the profits of insurers. That’s bad economics, bad accounting and bad arithmetic.”
Here I’m fairly sure reality contradicts you, in the form of regulated basic utilities compared to their unregulated counterparts here and in other countries.
Regulated utilities may make lower profits, but they also carry far lower risk, because they’re *guaranteed* a certain profit level. Some capital seeks high reward potential; some capital seeks reasonable reward at low risk.
I’m an actuary and work for a small insurer; my job involves pricing auto and home insurance and filing any changes with the state. A much overlooked cost of insurance is the cost of regulatory compliance. At any insurance company, there is an entire department of people who deal exclusively with regulatory issues, and in addition to that, almost everyone’s job is made far more difficult by regulatory issues. Things take longer than they need to, and more people are employed than need to be. It’s the customer who ends up paying for all those man-hours of work.
Ultimately, the department of insurance (which each state has) has veto power over an increase in premiums; they may say “Raise your rates only by 5%, but not by 10% as your studies indicate you should.” To put it in other words, a bureaucrat can override decisions that are based on statistical processes he doesn’t understand, based on his own “judgment.” Our prices are very sticky because of this; insurers must nearly always take an increase in rates, knowing they must anticipate future cost changes and knowing also that they may only change their rates once or twice a year. Even still, we are very constrained in our rate increases. Every insurer is well aware of the competition, and actuarial departments get pushback from field agents who have to sell the insurance that we price. There is no need whatsoever for price regulation.
Also, a lot of the “uninsurables” are explained by regulatory effects. When the state passes a law that says, “You may not charge a higher rate for factor X,” our underwriters decide, “It is unprofitable to insure people with factor X.” There’s no reason these people couldn’t obtain insurance at a true market price, if we only had a free insurance market. I know some people can’t even obtain health insurance in the individual market because of this; the insurers look at your medical history and exclude you sometimes based on a trivial episode in your health history.
I don’t know how much of the high price is explained by “monopoly”; I’m skeptical of that explanation for high prices (although it’s certainly more plausible to explain health insurance prices than car insurance prices). But it’s certain that innovation is hampered; there’s practically no way for the little guy to enter the market. A lack of innovation has to affect prices, at least in the long run.
I should add, I was a borderline socialist when I began working as an actuary; seeing the effects of ham-fisted, incompetent regulators (including self-anointed politicians) has turned me into a more-or-less laissez-faire capitalist. A proper economics education, which I’ve recently received, has had the same effect on my political outlook.
In short, regulation causes high prices in general, a steady stream of new regulation causes prices to rise, and anticipation of future regulation causes prices to rise. My personal experience comes from auto/home insurance, but most of what I said applies to health insurance, too.
Are regulated utilities not regulated because of their monopoly position? The regulation I think attempts to impose “normal” profits, which are sufficient to attract investment.
I know I am off topic here.
There are a number of Americans who would like to have a health care system closer to the health care system in (fill in the blank) (Canada, UK, France, Germany, Japan, virtually any first world country). There are a number of Americans who don’t want Medicare changed, (because they like their healthcare?).
I used to live in Japan, Canada, England, and Switzerland and can tell you that from my limited personal experience that the health care systems in those countries are far cheaper and virtually as good as the system here. It is also so much less confusing.
I have also never met anyone from those countries who wished their health care system looked more like America’s.
We charge huge amounts to uninsured people and give huge discounts to the major insurance companies. How can an individual shop for care when all of the prices are marked up by 100% to 1000%? How can we shop for cheaper drugs when a miracle happens and the drugs can be sent from New York to Ontario and back to New York and they end up significantly cheaper?
I don’t know what the answer is. I know it isn’t to allow Medicare to continue as it is because our grandchildren are not going to pay 100% of their income to pay our medical bills. But the answer isn’t to stick your head in the sand and repeat “best medical care in the world” either.
So I’m not sure I understand — are you claiming that Kaiser Permanente (the large nonprofit with 36% market share for HMO in California &c) does not exist, or are you claiming that it somehow manages to get higher taxpayer subsidies than e.g. Blue Shield of California (how?), or are you underwriting accusations about its nonprofit status somehow being a fraud?
I just don’t see the accounting underpinnings of your thesis that non-profits can’t exist without taxpayer subsidies (given e.g. an initial endowment from rich individuals to use as operating capital), and I see many that appear to exist despite your “proof” — can you please show me e.g. how exactly the Bill and Melinda Gates Foundation (a large nonprofit that sure appears to exist) is a fraud, or where it manages to cleverly snatch extra taxpayer subsidies…?
In the countries with more socialized healthcare, the citizens have been fooled into thinking they’re getting something for free. The costs of healthcare are largely or entirely hidden from the consumer. Actually, that’s true here in the US, too. Some of us naively believe that our employer buys us a portion of our healthcare, when in reality every dollar of benefits is a foregone dollar of wages. The result is a system with many of the pathologies of socialized medicine, but without the sole benefit of covering the very poor. Realize that the research costs of new medicines are recouped in the US. The rest of the world gets cheap medicine because they only pay for the cost of the pill; we pay the full cost of the research plus the tiny cost to actually make the pill (we pay, in other words, the brunt of the fixed costs).
A good case can be made for healthcare vouchers for the very poor. The case for the state running the healthcare industry is much weaker (and heavily regulating counts as running in my book.) I actually wish we’d disband the entire welfare system and spend a fraction of the money (and a small fraction would be sufficient) on income redistribution to the poor. A lot of terrible policies are defended in the name of income redistribution, even policies that achieve no such effect. We ought to single out the desirable effect of a policy and scrap the rest of it. We’d avoid a lot of obscene market distortions that way.
Alex Martelli: When Bill and Melinda Gates contribute $100 to a worthy cause, they sacrifice an eternity of future interest on that $100. That’s a cost. That doesn’t mean they’ve made a mistake, but it does mean they’ve chosen to bear a cost. There are no free lunches.
GregS, very nicely put, thanks.
neil wilson, my Canadian friends sneer at Canada’s system (actually Ontario’s). When they have serious health issues the fly down to the Mayo Clinic, where they don’t have to WAIT, and the doctors are competent.
As one man put it to me, ‘They tell you it’s free, but, you know what, you get what you pay for.’
Patric R. Sullivan, Ill counter your worthless anecdote with my own worthless anecdote. All of my family goes to Canadian doctors, irregardless of their disease. None fly south for healthcare.
Now that theorizing from anecdotes is done, lets look at numbers.
Nearly all Canadians get all of their healthcare in Canada.
Canada has lower infant mortality, and longer lifespans (Canada ranks 11th in the world, where the US is 38th)
Why costs for premiums are rising was nailed right off the bat by EricK. Healthy people are leaving the system, sick people stay, thus premiums rise. That seems obvious to me.
As much as I would like to see a single payer system in the US, I agree that increasing choice would lower prices. The best way to get the cost of health care down would be to limit government regulation across the board. Shutting down Medicare and Medicaid would help quite a bit too. I’m not being hyperbolic, I’m quite serious. Its this blended socialist/capitalist system that is really messed up. Whenever you have a private company that dictates prices to a government program you’re guaranteed to have graft and waste.
The best explanation I’ve read came from Robert Hansen at the Tuck School. http://robertghansen.blogspot.com/2010/02/price-increases-on-individual-health.html
He talks about “deductible leverage”. The insurance company’s revenue comes from deductibles and premiums. Deductibles tend to remain fixed from year to year. If the cost of cost of providing insurance increases by, say, 10% and deductibles remain the same, then premiums are going to have to increase by even more than 10% just for the insurance company to break even. It‘s painfully obvious once you think of it.
I don’t know how much of the increase in premiums this effect explains, but it clearly must be a factor.
Jon Shea: That is extremely enlightening. Thank you.
Ill second that. What a thought provoking article. Thanks for the link Jon Shae.
Greed may not be constant. Maybe the insurance companies are greedily jacking up the premiums on certain customers that they expect to lose anyway under the new health care bill.
I would say that the employer part is a much bigger problem than the shopping out of state part, mostly because it’s what keeps the market from really churning at the margins (instead of consumers moving from plan to plan as they please we get big, clumpy, hard to get in and out of contracts).
But when we talk about shopping out of state, aren’t we really just talking about shopping outside of/avoiding state healthcare regulations? I mean, Kaiser Permanente exists in more than one state. They offer different packages at different rates because different states require different regulations for what they must cover. On the face of it, that implies that consumers would get a lot more choice if they could pick the regulations they wanted their plans to have to follow. If I can live in Maryland but enjoy California-brand healthcare, that’s a plus for me.
But then again, I think there is also a decent case to be made that we would end up with a lot of companies relocating to a particular state that awarded them with really consumer-hostile regulations (indeed, they’d probably effectively capture the state legislatures). We’re not ever going to be dealing with a free market here: some regulatory structure is inevitably going to distort the market somehow. And insurance companies all pooled in, say, Wyoming, are going to collude to distort the market in the one way that collusion is completely legal and commonplace: by very effectively lobbying politicians to help them do so. I’m not sure what the solution to that problem is: unfortunately, even if you think the government should get out of the business of making what turn out to be lousy regulations, that’s going to require the government to take up regulation as an issue in the first place, which always seems to result in more lousy regulations (which half the time turn out to be forms of rent-seeking for the very industries they’re supposed to “regulate”).
What’s interesting to me is that it seems like under the current system there is a very high barrier to entry in the insurance market because so much of it is tied up in large employer-based contracts. But theoretically, providing insurance, especially in this day and age with computerized records, should be a pretty easy new venture to start up compared to a lot of industries; especially if consumers can simply shop based purely on the guaranteed benefit packages they are getting, price should matter. It’s not like insurance should have a lot of brand loyalty because it tastes better than Pepsi or whatever, or requires some CEO with a grand vision of product lines or a huge new marketing campaign to alert consumers. It’s supposed to be paying out pre-defined portions of money based on calculated risks. Money doesn’t come in different subjective flavors, and benefits levels are things that can be laid out on the table beforehand: something that should ultimately boil down to consumers looking at a spreadsheet and seeing what costs/benefits of any given plan are to them, picking the best match, end of story.
Drew:
But then again, I think there is also a decent case to be made that we would end up with a lot of companies relocating to a particular state that awarded them with really consumer-hostile regulations
In that case, wouldn’t you expect some greedy insurer to locate elsewhere and advertise that unlike the others, it is not looking for ways to underserve its customers?
Great theory. Too bad Hansen didn’t bother to check to see whether his assumption (constant deductibles) is a fact. It is not. http://www.kff.org/newsroom/ehbs092408.cfm
Deductibles have been rising as fast as premiums.
Am I misunderstanding Robert Hansen’s blog post? Shouldn’t he be using the expected value of the deductible rather than the actual deductible? i.e size of deductible x probability that claim will be made? That would decrease (although not eliminate) the effect.
EricK
You’re very nearly right. In place of “E(x) – d” he should have written “E(x-d)”. If you really want to geek it up, it should be “the expected value of Max(0,x-d)”. What he gives is an approximation that’s simple enough to understand; but it’s a good approximation. He actually, I think, UNDERSTATES the increase due to inflation. Because of rising claim costs, more potential claims will be pushed above the deductible, and will actually be claimed on insurance instead of paid for directly by the patient.
I think you have the right idea, though: “E(x) – d” overstates the savings due to a deductible; but pretending for a moment that’s correct, “(1+i)*E(x)-d” then understates the increased cost of a policy.
Good points GregS. Since I live in a civilized country :-) and am not used to having to worry about this sort of thing, I am working things out from first principles. It seems to me, though, that a large part of the premiums is effectively to cover the small probability of a very costly claim. And conversely, claims which are only paid becuase rising prices have pushed them above the deductible, are by their nature, going to cost the companies very little in payouts. Very little per claim that is – I don’t have a feel for the number of claims so pushed over.
What is the average rate of claims? I personally go for years without incurring more than very minor healthcare costs. But I don’t know how normal I am in this respect. But for me E(d)<<d
Steve,
Regarding your hypothesis that insurance costs are being driven up by health care “reform” — that seems like a testable hypothesis. Do they go up less during periods where health care reform is less likely to pass, like the Bush administration, when health care reform was the furthest thing from anyone’s mind?
I suspect insurance premiums keep going up because we keep getting fatter and more unhealthy.
And you already wrote a Slate column wondering about why that was true. We still don’t know. I suspect it’s partly because we’re such a competitive society that people want to optimize every moment of their time, and not fritter it away on things like cooking, so we end up eating easily-prepared but unhealthier food as a result. (That doesn’t explain poor health among the poor and unemployed with lots of time on their hands, but in their case it might be because they consume too much *cheap* food, which is also high in carbs, and unhealthy.)
EricK
Hold on, now. How much does a claim cost if it’s $5 above the deductible? If the patient is cheap enough to file it, it costs the five bucks plus the cost of all the paperwork, phone calls, etc. Since I live among capitalist pigs :-) I worry about these things. Those borderline claims cost the company money; luckily, as another commenter pointed out, deductibles change with increasing costs. This keeps the frequency of small claims low. Deductibles are still somewhat “sticky” because companies like to offer nice round deductibles; you’ll never see one that doesn’t have zeroes after the decimal (or, in a civilized country, “after the comma” :)). Anyway, capitalism is good at rooting out unnecessary administrative costs (because someone gets to keep the savings). Government bureaucracies are very bad about this; they tend not to take even the most rudimentary cost saving measures.
I worked out the case where the probability distribution is an exponential and it’s in very close agreement with Robert Hansen’s equation.
Oh come on.
1. Greed does cause rate hikes, in the sense that companies (and for that matter individuals) will charge what the market will bear. This amount, to the extent that it exceeds their costs of doing business can be characterized as greed, except that’s pejorative and speaks of excess. In an ideal situation we refer to that as profit and expect people to make a profit in commercial enterprises. The problem is how far real world situations deviate from the ideals.
Greed is actually not a constant; it’s opportunistic and highly subject to environmental factors. In particular, greed is an often emotional response; for example, people who are seen as greedy often justify their actions in terms of ‘getting my share’ – that is, as a response to perceptions that others are similarly charging higher-than-necessary amounts.
In addition, if you think that the climate around health insurance today is the same as it was a year ago then you’ve really not been paying attention. The rate hikes are, almost certainly, a response in part to anticipated concessions and increased expenses associated with the potential changes in the industry landscape brought on by new legislation. So, really, I have no problem pointing to “something that has changed” as an explanation.
2. Greed may in fact not cause high prices in competitive markets (your own phrase) and you are well aware that health insurance is NOT in any sense a competitive market, even to the extent that insurance companies are granted exemptions from anti-trust statutes. So, while you might be right in the abstract your point is precisely irrelevant in the current discussion.
3. So if you’re going to bitch about the lack of competition in the marketplace, go to town. But do try to keep your arguments straight. Greed, in a protected monopoly environment does lead to spikes in pricing.
4. You’re splitting the wrong hairs. When you say “profits do not raise costs” you’re conflating “cost to produce the service” with “cost charged to the consumer of the service.” It’s true that profits don’t change the former, but I’ll bet you a good dinner that when speaking of “lowering costs” the implication is “lowering costs to the end consumer.”
Your politics really seem to be messing up your usual excellent ability to reason.
Alan Wexelblat:
The rate hikes are, almost certainly, a response in part to anticipated concessions and increased expenses associated with the potential changes in the industry landscape brought on by new legislation. So in other words, to explain the rate hikes we have to look at something other than greed. We agree.
When you say “profits do not raise costs” you’re conflating “cost to produce the service” with “cost charged to the consumer of the service.” At least in economics, “cost” always refers to the former. The latter is called a price.
‘All of my family goes to Canadian doctors, irregardless of their disease. None fly south for healthcare.
‘Now that theorizing from anecdotes is done, lets look at numbers.
Nearly all Canadians get all of their healthcare in Canada.
Canada has lower infant mortality, and longer lifespans (Canada ranks 11th in the world, where the US is 38th)’
To take the latter point first; your numbers are irrelevant. You’d need to control for the differences between the two countries populations. Asians live longer than caucasians; possibly for genetic reasons, possibly for dietary ones. America has large numbers of teenager girls giving birth to low weight babies; especially among Mexican and Negro women. I’d be amazed if Canada comes close to those numbers.
Nor is medical treatment the sole driver of life expectancy.
But we could come up with numbers for your former point that would blow it out of the water. Do you know of any Americans who go to Canada for surgery–the way the Premiere of Newfoundland came to Florida? I’m writing from Seattle, and know that the U. of Washington Medical Center treats Canadians.
I could produce a dozen examples of Canadians denied treatment in their own country from You Tube videos alone. Can you do the same?
Are you aware that the Supreme Court of Ontario ruled that that provinces medical care violates basic human rights, because waiting lists aren’t the same thing as health care?
The fact that Canada doesn’t have the same ability to treat its citizens is so well known if was almost the entire plot line of the first half hour of the French Canadian movie Les Invasions Barbares (note the crowded hospital corridor in the trailer).
Not to claim that there are no problems with Canadian health care, but why not just look at the polls as to how residents feel about their health care systems instead of swapping stories?
http://www.gallup.com/poll/8056/healthcare-system-ratings-us-great-britain-canada.aspx
The problem with those polls is that it’s better to put different weights on the opinions of those who are sick and require more care, not weight everyone equally (including all the healthy people).
Patrick,
“I could produce a dozen examples of Canadians denied treatment in their own country from You Tube videos alone. Can you do the same?”
Are you saying that no US citizen has ever been denied access some sort of healthcare that they wanted? I’m not being facetious, I really genuinely don’t understand what point you’re trying to make. Whatever system you have, there is some limit on what healthcare is available to people – there are a finite number of doctors in the world (and more relevantly, a finite amount of money people are willing/able to spend on healthcare).
(Presumably Canada has some private option for those who are willing to pay for services not available through their public healthcare system? If not, ignore the previous paragraph, as clearly that would be a massively suboptimal situation, and count me baffled as to how anyone would want to defend the Canadian system)
Canada’s private option, in essence, is the USA. While private medical practice isn’t exactly illegal in most provinces as far as I know, it is regulated heavily and unable to compete with US offers.
didn’t there used to be a time when doctors would actually come to your house to treat you? why did this service become obsolete?
i think i agree with bennett – ‘I suspect insurance premiums keep going up because we keep getting fatter and more unhealthy’.
Cos:
“And there is considerable monopoly power in this market, partly because you’re not allowed to shop for insurance out of state and largely because your employer does your shopping for you. The Administration has shown almost no stomach for combatting this problem.”
Why do you say that? Isn’t that the idea behind the national Exchange, a centerpiece of the reform proposals?
Fair enough; this does appear to be at least a half-hearted attack on the problem. It still ignores the root cause, though.
whereas completely replacing employer-provided insurance in one fell swoop seems like a political impossibility.
It is a political impossibility largely because politicians like Barack Obama have so thoroughly demagogued the issue. John McCain had the courage to call for eliminating the tax deduction for employer-provided insurance, which would pretty much have solved the problem. Obama had an opportunity to do the right thing and endorse something similar; with both candidates on board it would have happened. Instead, he chose to discard good policy for political advantage.
John: “Presumably Canada has some private option.”
http://www.canada.com/topics/news/story.html?id=16141a15-58d5-4e05-a1d2-78eaaeae207a&k=29315
As to Robert Gibbs’ statement, I want a pony! Isn’t the point of having a spokesperson to avoid the utterance of fatuities?
@Steve, I find your response to my objection wrt non-profits totally unsatisfactory. In the main post you say non-profits can’t exist without subsidies from taxpayers; now it seems to mutate into “subsidies from taxpayers OR endowments from wealthy individuals” — IOW, nonprofits are perfectly possible (and if they took over all of healthcare, they would, other things equal, offer lower costs a bit, by removing the modest fraction of such costs that goes to for-profits’ shareholders’ profits — definitely not a game changer but every little bit helps;-).
Such endowments must of course have positive utility to those making them, since they’re entirely voluntary, but that’s hardly “a puzzlement”!-) Warren Buffett (a major donor to the Gates’ Foundation) and Bill Gates’ dad (dunno ’bout Bill himself) are on record as fierce opponents of abolishing estate taxes for the very wealthy (such as themselves), in part because they think that leaving too much money to a heir is doing that heir terrible damage — so, putting billions into endowing non-profits is one way to help ensure their heirs don’t get *too* much money when they die. The Gates are foregoing “infinite timespan interests” only if they believe they will live forever (the Woody Allen way — immortality by not dying) and, even though they’re hardly old (you may recall — I’ve long been going around telling everybody I meet — that I’m just about exactly the same age as Bill Gates and Steve Jobs;-), I don’t believe they’re stupid, definitely not to the point of believing that.
Can a nation’s whole healthcare system be based on non-profits funded by endowments? Switzerland appears to be making a good fist of it since their 1994 reform — despite being, for its size, the home of more and bigger insurance companies than any other country (skipping purely formal Caribbean “domiciliations” of some actually-US ones;-). I’ve never lived in Switzerland, but I have many friends and colleagues there and they appear quite glad with their reforms.
So: you could make a fair point that the fraction of health care costs that goes to profit, while not negligible, is far from huge; you could focus on what’s really broken with the current US system, such as the hidden brakes it puts on the whole economy by making it costlier and much riskier for employees to strike out on their own (as they’d lose health insurance by founding a startup, at least if they had previous conditions); but you just _cannot_ fairly argue that insurers’ profits are a mandatory, or necessarily positive, part of the current setup!
BTW, I fully agree there are good profits to be made by serving customers well — the only portion of my portfolio that’s in the insurance sector is all in AFLAC stock — I like their guaranteed-renewable policies, and their general attitude so sharply in contrast with the average insurer’s focus on not paying out, and they’ve been executing consistently and lucratively (to their stockholders, like me;-). Plus, I absolutely adore ducks, but that’s another issue;-).
So, if health coverage became all-non-profit in the US, as it did in Switzerland 16 years ago, I’d mourn my AFLAC dividends; an arrangement where for-profits outfit can provide “supplementary” coverage, like e.g. in France, would suit me better, speaking as an investor. But, as an analogy, that’s like saying that the base-load electricity (made mostly by nuclear plants, in France) can usefully be supplemented by fast-to-turn-on gas plants… it doesn’t justify providing the *vast majority* of electric power generation by gas, as seems to be the case in Italy these days — that’s just wasteful (as is having the vast majority of health coverage provided by for-profit outfits in the US;-).
Alex Martelli:
Can a nation’s whole healthcare system be based on non-profits funded by endowments? Sure. And unless something else is changed, those non-profits will use exactly as much capital, and therefore have exactly the same costs, as the for-profits they replace.
Patrick R. Sullivan, I hate do bring this up again, but Youtube videos and a documentary movie are also anecdotal evidence.
Do you think that part of teenagers giving birth to low weight babies might have something to do with poor prenatal care? Last I read, it was the single most important factor in giving birth to healthy babies. In Canada, they have prenatal visits and education for all expecting mothers.
Your argument about ethnicity and longevity falls flat when looking at the statistics also. Top 10 countries in order are Japan, Hong Kong, Iceland, Switzerland, Austria, Spain, Sweden, Israel, Macau, and France. Thats a pretty diverse group, so ethnicity has very little impact on longevity.
Are you seriously trying to argue that longevity isn’t a consideration when judging a healthcare system? I personally would consider it a failure of those providing me with health care if I died early. (not that I would know, since I would be dead)
Do I know Americans who go to Canada for surgery? Yes, quite a few. Specifically Lasic eye surgery. The doctor who invented the procedure lives and works in Calgary, and has patients who fly in from around the world for it. I personally went to Canada for a procedure because it was far more inexpensive, and I’m from Oregon.
Do I know that there are waiting lines, and there are problems? Of course! No system is, or will ever be perfect. But the statistics from around the world are quite clear, the US is failing in most categories. All the countries that do better than us use a socialized system. That seems like pretty clear evidence that a capitalist driven system of public health care is not optimal.
It may be somewhat unrealistic to ask people to read this entire article, but in my searches for various solutions to health care reform I came across this article. http://www.theintelligenthsa.com/
It seems to be a combination privatized/universal coverage system (reminds me a little of Singapore’s health care system).
Does anyone see any gaping holes in why something like the “intelligent HSA” would not be a useful solution?
One more American that heads into Canada for good cheap health care:
Sarah Palin.
Quote “We used to hustle over the border for health care we received in Canada. And I think now, isn’t that ironic.”
Source:
http://jezebel.com/5488322/sarah-palin-loves-socialized-health-care-when-shes-paying-for-it
I think if you suggested to McCain in public during the campaign that he was trying to eliminate employer-sponsored health insurance for employees, he’d have reacted with extreme horror. Your theories about how political change is done in the US are quite bizarre, but that’s okay, that’s not what I read you for :) Suffice it to say that Obama’s proposals do provide us a reasonable path towards displacing employer-sponsored insurance. (McCain’s did not, though I can see why you think they did)
This one quibble aside – and this is in the realm of political strategy and pragmatism, not economics – the rest of my objections stand as well.
It seems to me that the USA pays a lot more than other countries, and gets slightly better healthcare. Earlier posts mentioned Canada, where spending is less than half that of the USA. Going back to my earlier point, this suggests one of 3 things: Healthcare costs more in the USA, Americans value health more than in other similar countries, and therefore are prepared to pay more, or that Americans are buying too much healthcare. Perhaps I could add Americans need more healthcare. Is there another explanation?
bart.mitchell, Canada didn’t have socialized health care back when Sarah Palin grew up. Even today, Americans are free to go over to Canada for medical care, if they pay for it themselves. Strangely enough, most of them prefer to stay in the US.
Lukas, Canada’s public health care system started in 1946, and began a step wise program that extended coverage to more and more people. By 1966 all of Canada was under the Medical Care Act. Palin was born in 1964, so it seems you are factually incorrect.
The Palin anecdote was thrown in by me as a bit of snark, referring to the earlier conversation I was having with Patrick R Sullivan where he asked me to name just one person who went to Canada from the US for medical care.
Harold, on what statistical measure do you make the claim that the US gets ‘slightly better healthcare’? The only place I’ve ever seen the US ranked in the top 10 was in cost, on every other measure we’re down in the 20’s or 30’s.
There is one cause of high medical prices that gets almost no media play: artificially low supply. This needs more attention. The AMA strictly limits the supply of doctors; they threaten to pull a school’s license if it admits too many students. There’s clearly nothing wrong with most of the medical school rejects; many of them are finally admitted in the next year or two after re-applying. The AMA also shuts down clinics that perform low-cost low-skill services, and demands that doctors do certain work that could be done by a nurse or some other technician. There are also so-called CON laws (Certificate of Need) in many states, which require a potential new hospital to demonstrate that there is a need for its services. I guarantee the board that approves or rejects the certificate of need is staffed by existing hospitals. CON laws are used to squash competition. Finally, the supply of new medicines is kept artificially low by the FDA. Experimental new drugs are tightly controlled, so people who might benefit from them find it hard to get their hands on them. Even people who are dying are “protected” by the FDA’s controls. There’s nothing wrong with granting adults in a civilized country the right to decide which experimental medicines to take. That choice does not belong to the state. The price of a doctor’s time is higher because of the artificially capped supply of doctors and hospitals, even though the actual costs are really no different than they would be if there were more doctors. And the actual costs of medicine are far higher than they need to be because of excessive testing; this obviously drives up the price to the patient.
I’d say that the most important factor in rating medical care, is how well it does making sick people healthy. And by that metric the USA is tops:
http://www.ncpa.org/pub/ba649
And, it is highly disingenuous to claim that Canada had its present day look by 1966–if Palin used Canadian health care, it was most likely as a child. As far as I can tell Canada’s current difficulties with rationing stem from the major legislation in 1977 and 1984–the Canada Health Act–that finally ruled out ‘extra-billing’; i.e. people willingly paying their own money for better care.
Btw, is it being claimed that the French Canadian socialists who made The Barbarian Invasions were lying? What was their motive, to make the U.S. look better?
I also have to say I’m amazed by the apparent state of denial that diet and nutrition, lifestyle, exercise, and crime rates play in a nation’s life expectancy. Here’s a recent article in The New Scientist:
http://www.newscientist.com/article/dn13154-new-year-resolutions-could-add-years-to-your-life.html
that claims four simple things; ‘not smoking, exercising, eating fruits and vegetables, and drinking alcohol moderately’, can add 14 years to a person’s life.
More good points, GregS. Milton Friedman’s Phd dissertation was on just that; the higher incomes the AMA had managed to produce for its members by artificially denying some applicants to med school.
Of course not smoking, exercising, eating fruits and vegetables, and drinking moderately have large impacts on health.
Thats why the Canadian health service spends so much on campaigns to improve Canadians education in these issues! Thanks for pointing that out, its something else that Canada is doing better than the US.
Ive been all over the NCPA site. They seem to be a political action committee, not a research institute. They offer some interesting claims where there data is ‘individuals self reporting’. That’s spurious at best. They even have advertisements for electing conservative candidates. Hardly an independent source.
As for the AMA, that is new information to me. But it looks like another example of why we need more government in health care. The AMA is a private organization. If you want to encourage them to certify more doctors, you will need legislation.
Bart, your claim about Canada’s propaganda efforts are a non-sequitur. But, what’s their pitch, ‘Canadians, you better watch what you eat and drink, because we sure don’t have enough doctors to treat you if you don’t?
And, the AMA is, in effect, a quasi-governmental agency. It couldn’t get away with its conspiracy in restraint of trade without governments enforcing it.
As for Laskik surgery in Canada, yes some Americans did go up there because it WAS cheaper due to the favorable exchange rate years ago–I suspect it not longer is cheaper–and that Canadian law doesn’t allow for payments of royalties, unlike the USA.
But, the real reason it’s available, is that Canada Medicare doesn’t cover it! Note the bit about financing the procedure here:
http://www.locateadoc.com/PatientFinancing/index.cfm
Btw, my Canadian friends who were treated for stomach cancer and other life threatening illnesses at Mayo had their Lasik surgeries in Ontario. Since it wasn’t ‘free’, they were allowed to pay for it (they didn’t have to be hockey players or politicians to avoid waiting lists).
‘Ive been all over the NCPA site. They seem to be a political action committee, not a research institute.’
They’ve footnoted to the research institutes:
———–quote———–
1] Concord Working Group, “Cancer survival in five continents: a worldwide population-based study,.S. abe at responsible for theountries, in s chnologies, ” Lancet Oncology, Vol. 9, No. 8, August 2008, pages 730 – 756; Arduino Verdecchia et al., “Recent Cancer Survival in Europe: A 2000-02 Period Analysis of EUROCARE-4 Data,” Lancet Oncology, Vol. 8, No. 9, September 2007, pages 784 – 796.
[2] U.S. Cancer Statistics, National Program of Cancer Registries, U.S. Centers for Disease Control; Canadian Cancer Society/National Cancer Institute of Canada; also see June O’Neill and Dave M. O’Neill, “Health Status, Health Care and Inequality: Canada vs. the U.S.,” National Bureau of Economic Research, Working Paper No. 13429, September 2007. Available at http://www.nber.org/papers/w13429.
————endquote————
They would seem to be legitimate.
Im new to the AMA argument, I hadn’t heard they were limiting graduates to keep supply low. My first bit of searching seems to confirm it, so I’m going to work on the assumption that it’s correct.
The fact is, the AMA is a private organization. I did some looking for laws concerning them, and came up with none. If you know of any, I would love to read up on them. The claim that they are ‘quasi-governmental’ seems a bit exaggerated, but I’m open to evidence. The real issue here is that they are a monopoly on issuance of doctors licences. The only way I’ve seen monopolies broken up is through government legislation. As I said, this is a brand new issue to me, so I’m going to be looking for information.
Back on Canada, they do seem to do a better job educating people about health. They also tax the hell out of cigarettes, which seems to drive smoking down. Half my family lives in Saskatchewan and Alberta, so I get to see their health propaganda often. I’m not a die hard fan of their system, it has many flaws. I doubt there is an ideal system. But of all the systems that I’ve lived under, the current one in the US is the most flawed.
I think the root of the flaws comes down to an unhealthy blend of socialism and capitalism. Most doctors are for profit, but they are billing the government for medicare, medicaid, schip, state health programs, government contracts for employees, etc. Any time you have a private contractors billing the government, the price gets inflated. If we want a capitalist system for healthcare, then we need to seriously cut the amount of government sponsored care. I just don’t see it being politically possible to eliminate all of the current entitlement programs that we currently have. In lieu of a true capitalistic system, we should abandon the quasi-socialist monster we have now and adopt a single payer system.
I’m willing to admit that encouraging competition in the market will lower prices. I just doubt that Americans would be willing to abandon their entitlement programs they already have.
bart.mitchell: If the USA does not provide slightly better healthcare it does not alter my point, which is that the extra money is not providing significantly better outcomes. I am proposing that this is in part due to too much healthcare, not just higher costs for the same healthcare.
Harold, I’m not sure what you mean. Are you talking about unnecessary testing? Unnecessary procedures? Which country are you suggesting has too much?
Most of my reading has indicated there is a shortage of available care in both Canada and the US (and in many other parts of the world). Im keenly interested in learning more about the AMA and doctor shortages that Patrick Sullivan mentioned. If we can get more doctors into the pipeline, then demand for them would go down, and so would prices.
My greatest hope for healthcare is technology. If someone could create a machine that could do the diagnosis without having a trained physician involved, we could drop the cost of most treatment very quickly. Training technicians to do basic medical care like stitches and bone setting, with the aid of a machine to ensure quality, could be the new model for health care. It might be a bit Sci Fi, but I imagine in my lifetime a small box similar to a photo booth where you get checked for a myriad of common ailments. The only time you would need to see a doctor is for rare difficult to diagnose illness, and advanced surgery.
My guess is too much testing and expensive end-of-life care for little return. Of course, it is not a little return for the individual concerned, but it is costing much more than other valuations on life would suggest it is worth. There will never be too much in absolute terms, just that the value of the bucks is less than optimum. This is speculation on my part, but seems to provide another explanation than just high cost in the USA. Why should the cost be so much higher in the USA? I also suggested it could be that Americans value health more, so are prepared to pay more, but I don’t see why this should be the case.
Bart, you seem like a nice guy, and reasonable, but you’re not well informed on the issues on which you’re expounding. It’s closer to say that no monopoly exists without government sanctioning it. AT&T may have been broken up by government, but it was first created by the same government.
As for the AMA, the government enforces its edicts. There are laws against providing medical care without licenses. The AMA decides who gets those licenses. But it goes further. Here:
http://www.aapsonline.org/medicare/hcfaama.txt
A contract between Health and Human Services that says:
———-quote———-
WHEREAS, AMA is willing to permit HCFA, its agents and other
entities participating in programs administered by HCFA, and
the health care field in general to use CPT-4 codes and
terminology as part of HCPCS;
NOW, THEREFORE, in consideration of the foregoing and the
mutual covenants and agreements contained herein, the
parties agree as follows:
1. HCFA shall adopt and use CPT-4 in connection with HCPCS,
for the purpose of reporting physicians’ services under
Medicare and Medicaid. HCFA agrees no[t] to use any other
system of procedure nomenclature in HCPCS for reporting
physicians’ services.
————-endquote———-
That’s just one example.
I’ve already stated that the AMA and licencing of physicians is a new topic to me, and that I’m engaging in learning more about it and how it applies to the health care debate. No one can be an expert on every level of the law, national or international.
Politically, I’m an Empiricist, or a Rationalist. I will accept evidence, and change my position according to that evidence. If you’ve found anything I’ve stated as a fact to be specious, please point out a source to correct it. I am very open to changing any opinion I hold. I only require sources to be from experts in the field upon which they expound, and that they have information that passes peer review.
As to the AAPS document you referenced, that is a contract not a law. When the government has laws mandating that only x number of physicians can be certified in a specified amount of time, I would call that a clear problem with government. As it looks so far, it seems like a cozy relationship between government and private industry that needs some tighter regulation.
I fully agree that AT&T was created as a monopoly at the behest of the federal government, but that was a needed to create a single connected telecommunications line. Since the lines needed to cross large areas of federal land, it wouldnt have made sense to install multiple different, non compatible communications systems. So they only licensed one. That created the problems that led to the break up. It’s still an imperfect system, but any time you merge private and public, it is a Frankenstein monster.
I would like to echo Neil Wilson here.
I am a US citizen who has lived abroad for 11 years in Japan, AU, UK, Singapore, and Argentina. In my 11 years, I have NEVER met ANYONE who wanted the US system (Admittedly, as I read on another blog they may not appreciate the ‘free rider’ they are experiencing based on medical research here).
Now, I am the first to admit that this blog does not very well align with many of beliefs and (implied) politics. However, one of the things I have distilled about individuals more conservative than myself is their desire to have individuals making decisions, not government.
Now, if you can forgive the irony in discussing individual preference as the basis of an argument for a government plan, can we not appreciate the fact that no one wants our system? Is that not saying something to anyone?
You make two statements that I believe are contradictory:
‘Politically, I’m an Empiricist, or a Rationalist. I will accept evidence, and change my position according to that evidence.’
and
‘I fully agree that AT&T was created as a monopoly at the behest of the federal government, but that was a needed to create a single connected telecommunications line. Since the lines needed to cross large areas of federal land, it wouldnt have made sense to install multiple different, non compatible communications systems. So they only licensed one.’
Where’s the evidence for the latter? I only see theory. As also this:
‘As it looks so far, it seems like a cozy relationship between government and private industry that needs some tighter regulation.’
The position I hold on running public utilities was taught to me by my economics professor. He laid out the case that since utilities wouldn’t benefit by having multiple redundant lines, they should be regulated to one single service. Sewer is another example. If anyone wanted to open up a second sewage system, in competition with the one that currently exists, then the roads would be a complete mess. Add in a 3rd competitor, or a 4th, and you would just run out of places to put pipes.
I hold that position because of evidence presented to me. If someone has better evidence, I would gladly consider it. If it was convincing, I would change my position.
As to the cozy relationship between the AMA and government, I stated earlier that today is the first time that I had seen that information. I am still forming an opinion, and just saying (typing) how I feel about the information that Ive seen so far. I know next to nothing on the AMA, and have a vacillating position on it at this time. Legally the AMA is a private company. I’m starting to wonder if they have the same types of conflicts of interest as public universities, but that might be an entirely different topic.
But, you’ve presented me with NO EVIDENCE for your beliefs. Merely theory.
And, you’re mixing up theories of ‘public goods’ with ‘natural monopolies’. Not to mention entirely ducking any explanation of what you believe about AT&T’s necessity as a monopoly.
It sounds as though you have some vague idea of ‘network effects’ creating a natural monopoly in telephony. There is extensive literature casting doubt on the advisability of government making that decision. You might start with:
http://www.utdallas.edu/~liebowit/palgrave/network.html
‘In my 11 years, I have NEVER met ANYONE who wanted the US system…’
Yet, it is indisputable fact that tens of thousands of foreigners have come to America to avail themselves of that system. Mo?
Well, I’ve presented no evidence for my positions on natural monopolies, utilities or public goods, because this is a discussion about health care.
You are the one who brought up AT&T, I just merely responded to it as an aside. Perhaps if Prof. Landsburg has a post on natural monopolies, and how it does or doesn’t apply to the concept of modern information networks, then we could have that discussion.
Im curious why we’ve wandered so far from our original topic. We seen to have derailed over the AMA topic, but Ill say again, I don’t have nearly enough information to form a position I could confidently defend.
I do have solid opinions of the benefits and faults of single payer systems like Canada Health and the NHS in England. I’ve lived under all the systems, and looked at a great many studies on the efficacy. I’ve agreed that market forces could be used to lower prices, but made the claim that American voters would never give up the existing entitlements that would be required to turn our health care system into a free market. Since a true free market system doesn’t seem to be politically viable, I choose to put my influence behind the single payer system as it seems to function in the 36 countries that have a higher approval rating by their populace than the US. (sitation: WHO report June 2000).
My main argument with both sides of the ‘debate’ is that they both resort to emotional pleas, and anecdotal evidence. “Do it for the Children!! Can you imagine your grandma with no health care?” Or “Going to the doctor will be like going to the DMV. They will have Death Panels deciding who lives or who dies!” Those kinds of arguments are worthless, and they make me want to bonk all their heads together. That’s how this entire discussion got started. You said you had this friend who lived in Canada, then you mentioned one state official who flew to the US for treatment, then you talked about an emotionally charged scene in a documentary. All those arguments are worthless! They serve no purpose furthering the discussion. Just as Michael Moores horrible mocumentary “Sicko” didn’t help. These kinds of arguments just further the divide between the two wings of the rotten carcass of our bird of state.
I state that I’m an empiricist because I know, without a doubt, that my positions on many issues might be dead wrong. I used to be entirely against public health care. All I heard about was waiting lines, and people refused service. Once I got a hold of the facts, and actually left my country and saw for myself, then I realized that it was all just propaganda.
A system for which a country has 45 million people without health insurance, yet devotes over 17% of its GDP to health care as compared to other developed countries that devote less than 10% on average with better health outcomes, is broke by definition in my opinion.
The initial premise of the blog was certain amount of brokeness, but why is it broke, and how could it be fixed?
The real fix is fairly easy, getting past the Congress, President and the voters is neigh impossible.
Reduce regulations, make it easier to get a Doctors licence, set caps on malpractice lawsuits, and eliminate existing entitlement programs in order to let market forces reduce costs.
Or
Institute a single payer system similar to the NHS or Canada health.
I would be happy with either, but I think politically the second option is more probable in the long run.
Regarding deductible leverage:
1. You can divide every healthcare claim into two portions, “within-deductible” and “excess-deductible.” If an individual claim goes up X% and the deductible remains constant, the within-deductible portion will increase by no more than X% and the excess-deductible portion will increase by at least X%. So “excess-deductible inflation” is always greater than overall inflation.
2. Real world data: the number of insurance underwriters who would find this idea relevant, and yet are unaware of it, is quite high.
3. More important real world data: deductibles tend to rise over time, even if
4. The cost of medical care has risen much faster than general inflation, from the ground-up.
5. The eagerness to embrace an explanation that *could* explain something, without bothering to do any work to see if it *does* in fact explain it, is quite revealing. Basically, some people seem to have a very strong need to believe that the assumption of perfectly competitive markets holds in the real world. This isn’t a terrible intellectual gambit (intellectual progress might be best made by tenacious individuals willing to focus on one type of explanation) but it’s tedious when such ideology makes one impervious to basic facts and alternate theories of the world.