Monday, April 2, 2012

Supreme court and health insurance part II

Yesterday's post morphed into a Wall Street Journal Op-Ed, reprinted below.

Why am I going on? I think too many people don't understand there is a coherent free-market, deregulated alternative. President Obama himself said today,
"I think the American people understand — and I think the justices should understand — that in the absence of an individual mandate, you cannot have a mechanism to ensure that people with pre-existing conditions get health care."   
This just isn't true. I don't blame Obama, but his health insurance advisers ought to know better. "Guaranteed Renewable," or "premium-increase insurance" is a possibility. It solves the genuine pre-existing conditions problem. It's been in the academic literature for almost 20 years (see e previous  ArticlesOpeds, Blog posts and citations in the Articles, especially to Mark Pauly's work and extensive coverage on Cato's health insurance and Universal Heath Care sites). A deregulated, competitive market can work. 

The WSJ Oped: 

Last week, the Supreme Court heard arguments on the constitutionality of the administration's health law, aka ObamaCare. Opponents are giddy with the possibility that the law might be struck down.

But what then? Millions of uninsured, both those who choose not to purchase coverage and those who can't due to pre-existing conditions, will still be with us. The rising costs and inefficient delivery of health care will still be with us.

The country can have a vibrant market for individual health insurance. Insurance proper is what pays for unplanned large expenses, not for regular, predictable expenses. Insurance policies should be "guaranteed renewable": The policy should include a right to purchase insurance in the future, no matter if you get sick. And insurance should follow you from job to job, and if you move across state lines.

Why don't we have such markets? Because the government has regulated them out of existence.

Most pathologies in the current system are creatures of previous laws and regulations. Solicitor General Donald Verrilli explained as much in his opening statement to the Supreme Court: "The individual market does not provide affordable health insurance," he noted, "because the multibillion dollar subsidies that are available" for the "employer market are not available in the individual market." Well, if the problem is subsidies, we know how to fix it!

Start with the tax exemption for employer contributions to group health-insurance policies—but if your employer contributes an individual, portable insurance policy, you pay taxes. This is why you have insurance only so long as you stay with one employer, why you face pre-existing conditions exclusions if you change jobs, and why individual lifetime insurance is unattractive to young healthy people who know they will be employed someday. 

Continue with the endless mandates (both state and federal) on insurance companies to provide all sorts of benefits people would otherwise not choose to buy. It sounds great to "make insurance companies pay" for acupuncture. But that raises the premiums, and then people choose not to buy the insurance. Instead of these mandates, at least allow people to buy insurance that only covers the big expenses.

What about Medicare and Medicaid? Two words: premium support. The underlying point of premium support is simple. If insurance costs $5,000 and the government gives an individual a $4,500 voucher, that individual will still feel the correct economic signal to shop for cost-efficient health insurance and health care.

The main argument for a mandate before the Supreme Court was that people of modest means can fail to buy insurance, and then rely on charity care in emergency rooms, shifting the cost to the rest of us. But the expenses of emergency room treatment for indigent uninsured people are not health-care's central cost problem. Costs are rising because people who do have insurance, and their doctors, overuse health services and don't shop on price, and because regulations have salted insurance with ever more coverage for them to overuse.

If we had a deregulated, competitive market in individual catastrophic insurance, that market would be so much cheaper than what's offered today that we would likely not even need the mandate.

Meanwhile, staggeringly inefficient markets for health care itself need a thorough, competition-focused deregulation. Americans will know there's a healthy market when hospitals post prices on their websites, and when new hospital and health-care businesses routinely enter to challenge the old ones. Here too regulations keep competition at bay.

The number of new doctors is still restricted, thanks to Congress and the American Medical Association. Congress caps the number of residencies, the AMA has fought the expansion of medical schools, state tests make it difficult for foreign doctors to work here, and on and on.

There are hundreds of government impediments to competition. New hospitals? In my home state of Illinois, every new hospital, expansion of an existing facility or major equipment purchase must obtain a "certificate of need" from the Illinois Health Facilities Planning Board. The board does a great job of insulating existing hospitals from competition if they are well connected politically. Imagine the joy United Airlines would feel if Southwest had to get a "certificate of need" before moving in to a new city—or the pleasure Sears would have if Wal-Mart had to do so—and all it took was a small contribution to a well-connected official.

The result is a monstrous system in which insurance patients are gouged to subsidize Medicare, and cash patients are gouged most of all. Here's Mr. Verrilli again: "Insurance has become the predominant means of paying for health care in this country." Yes, the cash market has been badly damaged. Whose fault is that? Shouldn't we bring it back?

Group health plans in today's system may appear reasonable enough—they seem to resemble "buyers' clubs," where people pool together to get good deals from providers. But in a real buyer's club, each buyer still pays his own bill—you don't go into a Sam's Club and haul off whatever you can with only a fixed $20 copayment. And real buyer's clubs don't depend on where you work. Real buyers' clubs for health services could be a useful way to get competition going and revive the cash-and-carry market for individuals.

A deregulated health-care and health-insurance market can work. We can at least start by removing the obvious elephants in the room: all the legislation, regulation and interventions that needlessly keep prices up, keep competition and innovation out, shelter people from the economic consequences of their decisions, and prevent the emergence of real insurance that follows you from job to job and from health to illness and back.

51 comments:

  1. John,

    Something general that's very important:

    You implied that positional externalities are laughable (but Gary Becker doesn't think so, and he cites from a branch of literature in top journals as evidence. See: http://www.aeaweb.org/articles.php?doi=10.1257/aer.97.2.487)

    But surely you aren't going to dispute that people's utility functions are highly concave. And as a result, just of this, financial security can dramatically increase expected, and ex-post, societal utility.

    Well, what you don't seem to consider, or refuse to acknowledge, is that having government health care that you can never lose (or find out you're not covered because of the fine print), no matter what, like in Britain and Japan, where it's about a third of the cost per person, tremendously increases the average person's security (let alone the decrease in stress), and has a huge impact on total societal utils.

    With your system, what if you lose your job? How do you have the money to pay the premium, even if your supposed efficiencies make it cheaper? You say sign on when you're young and healthy and just stay signed on so you never have to worry about a pre-existing condition. But what if you're young and imprudent, and you try going without health insurance, then you get a pre-existing condition, like permanent damage from an accident or injury? Sorry, your life's ruined because you were a typical uncareful young person? This is not the kind of unforgiving and dangerous society I think most people want to live in, and it's certainly not maximizing of total societal utils. What about if the parents are irresponsible and don't spend the money on health insurance? The kids suffer without medical care?

    And I haven't even gotten into asymmetric information (which is far more grievous and severe than with auto repair, where rip-off is common anyway), and diseconomies of much lower scale, and much higher fragmentation and complication, in an industry where these things are huge.

    But a big question is, do you actually care much about total societal utils, or is this just a matter of libertarianism; you're fine with far less total societal utility, and a great deal of tragedy, if it avoids giving up some personal freedom. If that’s the case, I wish you'd just let us know. Otherwise, I'm just wasting my time talking about the great loss in total societal utility or welfare.

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    1. Go read the links. I have addressed all these questions; maybe not perfectly, but I haven't ignored them.

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    2. Technology reduces costs
      Medicine is technology
      Conspiracy increases costs
      Government is conspiracy

      Economics is science
      Science is technology
      Economics reduces costs

      You are a conspirator

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    3. This comment has been removed by the author.

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    4. It may be a while before I go through all of the links, but I did read, “Long Term Health Security from Free Markets”.

      You write that your proposed “health-status insurance” (an insurance policy that guarantees you the non-pre-existing-condition rate, no matter what) solves the problem, “Since you can always purchase medical insurance with no change in out of pocket costs, you have complete long-term health security.”

      Now this really gets to the heart of it. Most people (and the English language) would say “complete long-term health security” means health care that you can never lose, like in Britain or Japan. Just saying that you can always get health insurance, IF you pay the regular rate, and IF you have uninterrupted payment of your health-status insurance premium, is not the same by any stretch. Just ask anyone who’s lost his job and doesn’t have the money to buy his family health insurance, even at the regular rate (It’s obviously still going to be a lot of money, even under the most optimistic scenario). And if you’ve lost your job in the past, or had some other financial crisis, you may not have been able to keep up your payments on the health-status insurance.

      Especially with as financially risky as the country is today (see Yale’s Hacker’s, The Great Risk Shift), saying you’re guaranteed that you can buy your family insurance at the regular rate (if you kept up your regular-rate insurance premium), is nowhere near as secure as saying you and your family will always have access to free government health insurance, like Medicare or the VA, no matter what, no matter how bad things get. That’s vastly more security, not to mention a 100% insured rate, as opposed to your system, where a whole lot of people would still be uninsured.

      There’s a lot more I could comment on, but I’d like to keep this from being too long. So just a little more:

      “Government does a mediocre and costly job of basic simple services like garbage removal; government-provided health insurance is a certain recipe for expensive, inefficient, and ossified health care.”

      It takes Chutzpah to say this. Medicare and the VA are widely acknowledged to provide comparable or better benefits to the private sector at a much lower price, with much lower administrative costs, and much higher customer satisfaction. All of the other advanced countries in the world typically provide about as good or better health care at one-half or one-third the price.

      The free market (especially the pure free market) is not better for everything. And this is widely acknowledged by economists. In particular, when economies of scale are very high, you either have competition but terrible scale and efficiency, or monopoly, and in health care there are very high economies of scale, as well as economies of simplicity. And of course, there’s also asymmetric information that’s a magnitude more serious and grievous than anything in used cars.

      Finally, let’s acknowledge that when you throw people to the wolves in a very complicated world with, as a result, great asymmetric information, you force them to waste huge amounts of time (and stress) studying everything to make sure they aren’t tricked or trapped. This is usually not in models, so just assumed to be zero. But it’s a very ugly thing for people who already have too little time to spend with their families to have to now become lawyers and doctors to make sure they are not grievously taken advantage of by their insurance companies and health care companies. Or to become electrical engineers to make sure that the cheaper appliances, which may be the result of efficient competition, instead aren’t the result of being fire traps.

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    5. Yes, excellent point. That's why no one without an electrical engineering degree ever buys a toaster, lest they be "thrown to the wolves" and that chaotic mixture of excessive choice, asymmetrical information and fraud. I'm surprised you aren't organizing again the injustice behind the Underwriters' Laboratories that deprives us the benefit of the government to simplify our choice of electronics.

      I'm always amazed that those of you in favor of the complete destruction of health care markets in the US are still so enamored with the dinosaur models of healthcare in the UK and Japan that have been disastrous and ignore the much more effective Swiss and Singaporean models that do a much better job of preserving choice, innovation and market discipline.

      Singapore in particular seems to achieve a miracle, with government healthcare spending a meager 1.3% of GDP (vs 7.5% US, 7.2% UK ) on healthcare and using the flawed measures of healthcare outcome commonly pushed by proponents of killing private healthcare markets (infant mortality and life expectancy) Singapore absolutely trounces the competition.

      -Mercy

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    6. Um, but there is a lot of safety and non-rip-off regulation now; that’s a big reason people don’t have to waste as much (very valuable and scarce, even if assumed away in models) time researching the safety and tricks and traps of the things they buy. There is also litigation as a deterrent, but litigation is expensive; often preventative regulation is cheaper, and more practical, and lawsuits don’t bring people back to life.

      At: http://www.globalhealthfacts.org/data/topic/map.aspx?ind=66 , Switzerland’s health care spending is $4,815 per person in 2008 (absolute cost per person is what matters, not per GDP), much higher than Japan at $2,358, or Britain at $2,723. Singapore was lower at $1,838, but Singapore is hardly a free market system. It’s universal healthcare with an individual mandate, strong regulation, heavy subsidies, and price controls, yes, that’s right, price controls. And the vast majority of the people use public health care facilities, not private ones.

      The UK ranked number 2 overall in a major study of healthcare quality of 7 advanced countries. The US was dead last, even though we spend about 3 times as much per person as the UK, at: http://www.commonwealthfund.org/News/News-Releases/2010/Jun/US-Ranks-Last-Among-Seven-Countries.aspx

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    7. And with regard to underwriters laboratories and other private watchdogs -- like the bond rating agencies! and stock analysts! Often, it's well worth it for executives and mangers to lie, even though it trashes the companies long term reputation. Those executives and managers will only incur a fraction of the total cost to the company and society. Their pay can only be so tied to the company's long run fortunes (let alone to the externalities of lying), otherwise you incur too much idiosyncratic risk on them that must be compensated, plus they may be retiring in 10 or 20 years. It just can't practically be done, as we've seen. Private watchdogs can help to an extent, sometimes, but they're far from good enough to eliminate the need for any government role. Reputation clearly alone is not enough of an incentive. There's too much money people can make in the short run, and there's a new sucker born every minute.

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    8. @Serlin:
      There are two basic facts from which any reason discussion of US health care reform must begin, otherwise it descends into nonsense:

      1. US healthcare is expensive compared to other developed countries. This expense contributes to an availability problem in the US.

      2. If the object is to achieve good *medical outcomes*, as it should be for the subject of health reform, then the US has the best medical outcomes in the world. Period. Get breast cancer in the UK, and your chances of dying from it inside five years go up by 20% over the US. Similar outcomes obtain for most other cancers, transplants, cardiovascular surgery, on and on. And that is just the life and death issues. Wait times abroad in single payer systems are also terrible compared to the US. There are any number of red herring 'studies' available (from the likes of the Commonwealth Fund) that mark down the US on "equality" other irrelevant metrics. A study that attempts to rank national heath care across (say) a lifespan difference of 2-3 years, which in addition to medical treatment is also related to factors like auto accidents (high in the US), homicides (high in the US), genetics, diet (bad in the US), i.e that which has *nothing to do with medical treatment*, is a sure sign that nonsense lies ahead. There are plenty of outcome studies in the serious *medical* literature, e.g. Lancet and NEJM, that googling will find showing ample evidence of this view.

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    9. Quality is definitely a research issue, although overall it's not clear if there's much advantage, if any, the US has. You can find cancers where Europeans are better, etc. (And what about prevention, an ounce of which, can be more important... Our system supports it relatively little)

      But here's something I asked in a blog post a couple of years ago, which is profoundly important:

      We spend about $100 billion per year on medical research, public and private combined, something of this magnitude (see here).

      We spend about $2 trillion per year on health care delivery, the doctors, hospitals, administration, etc. If we adopted a European style system, cutting our spending per person in half, as in European countries (that I think the evidence shows have about as good or better health care and results anyway; see for example here), then we would save about $1 trillion per year.

      Now, what if we spent that $1 trillion in savings on medical research? It would increase medical research spending more than 10 fold.

      Even if delivery did get a little worse, even if we did get a little bit less of our brightest and best becoming doctors due to lower pay, it seems like this would be totally outweighed over the long run by tremendously more advanced medical understanding and treatments due to the more than 10 fold increase in medical research spending.

      So it looks like if you want better medical results, better treatment, breakthroughs in rejuvenation, better odds of surviving cancer, you name it, you should support going to a European style system, and using the immense savings to increase medical research more than 10 fold.

      So if our health care system really is more efficient than the Europeans, then why...is it possible to make such a vastly favorable trade?

      at: http://richardhserlin.blogspot.com/2010/01/if-our-health-care-system-really-is.html

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    10. I should have thrown in the last part too:

      If the Republicans really care about our children and grandchildren so much why don't they do this, so in 50 years they could have medicine as advanced as it would take perhaps 150 years to achieve with our current system. I don't care how bad you imagine European health care to be, you cannot think a European medical center of today is less effective than even the Mayo clinic of 100 years ago when penicillin and polio vaccines hadn't even been invented.

      And don't tell me about private sector basic research. Please, the externalities, the free rider problems, the zero marginal cost of ideas, the transactions costs, the difficulty of price discrimination, these things are enormous.

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    11. > (absolute cost per person is what matters, not per GDP)

      That's just silly. GDP has all sorts of influence on healthcare. But hey why argue. Even so, based on your one-dimensional analysis (life expectancy/$) Singapore trounces everyone else. In reality, the health care system is really an insignificant component of the differences in life expectancy.

      In the U.S. we probably have a horrible ratio of pet life expectancy/$ as well even though I doubt any country short of North Korea and Cuba have nationalized their veterinary care system.

      Now the Singapore system is not exactly free market, but based on the metric of the ratio private/public spending it's about twice as free as the U.S.

      What I don't understand about the hardcore healthcare authoritarians like the Commonwealth Fund is why they have to keep choosing examples like the UK that do the worst job at retaining freedom of choice. It's almost as if they think waiting in line or having to travel overseas for elective procedures builds common character through mutual suffering.

      Regarding Underwriters Laboratory it sounds like you want to switch from talking about toasters and electrical appliances to banking and securities. But these are some of the most highly regulated industries in the country.

      It seems to me that you should be more worried about the areas suffering from woeful lack of aggressive regulation and oversight, like consumer electronics, computer software, cell phones and so on. Aren't you concerned about the staggering asymmetrical information that allows Apple to abuse its customers?

      Ever notice how the industries with the most government involvement and regulation (banking, securities, healthcare) are also the ones perpetually screwed up and the ones where the left is always railing against free markets and calling for greater regulation?

      Finally regarding your $1 trillion plan, it's always fun (for some) to pretend that you're a dictator with the power to just arbitrarily reallocate wide swaths of resources.

      The problem is 1) central planning doesn't work and 2) even if or when it did work, we live in a representative government. Even if the people in government were as wise as you seem to think you are, the political process would assure that the money would be spent to reward those interest groups with the most political power. That's a big part of why Medicare, that great untouchable single payer system for the middle class is bankrupting the government.

      -Mercy

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    12. This government can never be good thing is just at odds with history, and economics. It depends, and it's also highly endogenous. If you always attack government and try hard to make it cynical and worse (like one of our major parties), it will be a lot worse (to the extent we vote for that party). But to take one example of a long list, the VA, if you try to make it better and instill professionalism, you can be very successful, and for most of the 20th century until the start of the Republican era, we saw a great increase in professionalism and efficiency.

      With regard to the $1 trillion in R&D, it's important to note, would it be utility maximizing, given great market problems, not just would it ever happen. If we can agree it would be far more efficient to spend the money that way, then we can get pressure to do so to a large extent. You'd think free trade can never happen, with government supposedly always being so horrible, and all the special interests, and just be all cynical about it and never try to make it happen, but because economists and VSPs have been almost unanimous about it we've had a very large amount of it and have made great strides over the last few generations.

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    13. And also, come'on, central planning doesn't work, so we should have no government basic scientific and medical R&D? Obviously some amount of government is efficient due to the obvious and myriad market problems that can occur, the only question is how much and which. And I think it's clear, if our goal is better health care, and we care a lot about our children and grandchildren, that we should go to a more European system (or Singaporean, where they do have price controls and mandates and about 70-80% use of government health facilities from what I've read), and use the savings to fund basic medical science, then we would get the same or lower cost with vastly higher quality over time.

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    14. Serlin:

      "although overall it's not clear if there's much advantage, if any, the US has."

      That's simply false.* You do a disservice to the sick looking for the best information and your subsequent, plausible, arguments by making such sweeping statements.

      "You can find cancers where Europeans are better, etc."

      True. The Germans for instance own the best outcomes in the world for Hodgkins Lymphoma, but that does not negate the *overall* medical outcomes advantage in the US.

      *
      http://www.ncpa.org/images/1703.gif
      http://www.ncpa.org/pub/ba596#footnotes
      http://www.thelancet.com/journals/lanonc/article/PIIS1470204508701797/abstract?iseop=true

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    15. Falstaff, what matters is not just survival rates for specific diseases but overall life expectancy because that also takes into account the likelihood of getting cancer in the first place.

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    16. @I.Voter:

      The "likelihood of getting cancer in the first place" (i.e the incident rate) has little or nothing to do with the US medical system, or any other nation's medical delivery system. If you want to spend more on medical research to prevent cancer in the future, fine, but you will not walk into a doctor's office in the US, the UK, or Canada and for any amount of money or government program get a drug that reduces the "likelihood of getting cancer"

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    17. "If you always attack government and try hard to make it cynical and worse (like one of our major parties"

      So apart from the no-government straw man you're coming back to the shallow partisan politics which the good professor has asked us to take elsewhere.

      Without getting too far into the weeds, I disagree with you about the political landscape in the US. I see one party pushing cynical and unsustainable populism fueled by a collection of specific interest groups while somehow getting the support of some economically illiterate academics who seem to think that there will be some cake left for them. The other party suffers some of the same problems but overall unites on the basis of a "leave us along" coalition that prefers limited government acting as the referee rather than the coach.

      -Mercy

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    18. Back to the trillion healthcare dollars you'd like to reallocate. In the US, government spends more per person (relative to GDP) than any other country in the world.

      If you really want to win the sort of ideologically diverse support that free trade enjoys, why don't you figure out a more efficient way for government to spend the money it already spends. If the UK can offer universal healthcare for less per person than the US is CURRENTLY SPENDING, then why do you have to take away my freedom to do so?

      Just take the huge 7.5% of GDP pot of money that the government already spends, use it to cover everyone in the US at the UK level and then if I want to foolishly buy "unneeded" MRI's for my kid or drive a crappy car to afford no-wait knee surgery, then I'm welcome to do so.

      So think about that for a bit and then I'll tell you the reason why this isn't a politically feasible option and why all of your great ideas for spending money will NEVER come from existing government spending.

      HINT: Why do you think a revenue-neutral tax swap that raised taxes on oil while cutting payroll taxes an equal amount (a policy that Paul Krugman and Grover Norquest) would both agree to seems so devilishly hard to acheive?

      -Mercy

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    19. @Falstaff:

      I am not claiming that US healthcare system is bad. The issue is lack of access and cost, not quality. Somehow, Europeans manage to reach overall higher life expectancy than US ( Asians, too ), despite the lower cancer survival rates

      if that is not connected to healthcare but to lifestyle, then why are we spending so much on healthcare ?

      bottom line of this whole discussion is how to expand access and control cost, not to badmouth the quality of American healthcare.

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  2. John, What about Coase's theorm?

    And, the reactionary right---we don't have conservatives in the USA---fought the reforms you mention tooth and nail. They would be law, today, if the reactionary right had supported such changes.

    Democrats aren't so stupid that they are going to take away tax advantaged employer based health care on their own? Such a law will only pass 435 to 0, 100 to 0, or not at all.

    Wasn't Koch/Cato one of the "Opponents … giddy with the possibility that the law might be struck down."

    We are to believe Koch/Cato?

    Now to Coase.

    One frivolous argument was that health insurers should be allowed to sell insurance across state lines, but nothing such now. Qualifying to do business in a state is an easy process which takes, maybe, 20 minutes.

    Why don't health insurance companies do that? Because you do not accurately describe what health insurance companies do.

    Contrary to your arguments, hHealth care is a very competitive business. Health insurance companies buy health care at wholesale from hospitals, doctors, and others, through network contracts and then re-sell health care to "insureds," collecting premiums in exchange.

    If Blue Cross Illinois wants to sell health insurance in Missouri it has to come into Missouri and incur the costs of setting up its Missouri network (Coase). The reason we do not have a "cash" system is that, applying Coase's principles, it is more efficient for a few health insurers to negotiate once a network contract period over price than it is for millions of consumers to shop price day in and day out. Look at the wasted time if consumers are to be expected to "shop." I don't want to spend my time going on the Internet shopping for a doctor by price. I want an agent to do that for me, for such would be many times more efficient. I want that agent to have a brand as a trusted navigator, getting me skilled physicians at appropriate cost.

    Did you never learn anything about returns to scale or efficiency? It is far more efficient for one agent, an insurer, to bargain over price for 10 million customers (Blue Cross Ill) than for 10 million customers to bargain over price. That is why health insurers voluntarily stopped being indemnity insurance (cash) and went to networks. It's cheaper!!!!!!!!!!

    As for your other examples about competition, you are mistaken. Do we need more auto factories to increase competition in autos? Do we need more banks? For the same reason, we don't need more hospitals, we need fewer ones. Same with doctors, etc.

    Instead we need to be more efficient in using what we have. That is how we restrain cost and cut price

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    1. Essentially you are dismissing John's argument that the real rise of healthcare costs as rent-seeking activities and mis-use (and over-use) of medical resources for routine and mundane activities.

      If the insurers were doing such a good job negotiating and navigating the healthcare market, you would think they would be eager to show it off. The existence of a transparent marketplace does not eliminate the existence of healthcare agents.

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    2. JLD,

      Here's another way to view it: the central problem is the supplier versus the demanders. Coase's theorem is not so much applicable as is Coase's conjecture (see the respective wikipedia articles). It predicts that a monopolist over a durable good will price efficiently (from a societal viewpoint).

      So what is the problem? We are talking about non-durables. Cochrane is emphasizing precisely that we are rented health insurance only for the short run hence making it a non-durable good. Even Coase points out that this is one (of many) ways the monopolists will avoid an efficient outcome.

      There are many models where non-durable monopolist markets are improved when you add more agents bargaining for themselves. Especially in low cost environments (say for instance in a world with the existence of the internet). I recommend Dudey 1996: http://ideas.repec.org/a/eee/jetheo/v70y1996i2p470-488.html

      Now I certainly still find a role for intermediaries in this line of reasoning since there are SOME costs associated with information...costs that are ever more rapidly evaporating.

      Secondly, aggregating human health contracts creates all of the problems that we are trying to address. The moral hazard is so obviously the main problem here and it happens because we are forbidden to differentiate our products.

      And seriously? we need fewer banks in control of everything? FEWER?

      Tell you what: next time we have to bail out GM, you front the bill yourself.

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    3. dillsmith

      I don't think the rise is rent seeking by health insurers or large heath care providers like hospitals.

      I think the rent seekers are Big Pharma and physicians who are in overt conspiracies with patients, especially because of fee for service. (Hospitals exploit fee for service, but in a different way)

      The simple, unhappy fact is that, if someone says they have a headache, or a cold, or the blues (the damn list is endless) there is damn little that anyone can do about it. The opportunism that modern medicine opens to the patient just grows and grows.

      Second, the Palin death panel syndrome makes end of life just incredibly stupidly expensive.

      As for health insurers, it seems very clear to me that they buy health care a wholesale cheaper than can I and that John is dead wrong on "cash."

      It would be terribly inefficient for the average person to seek out health care on the internet on a per transaction basis, with all the marketing power shifting to the provider. You think not. Go buy tires and look at the hidden markups. It may say $86.00 per tire on the website, but always when you arrive at the shop it is $115 and your only choice is to shop again, incurring the loss of time for walking out.

      John shows little understanding of costs, bargaining power, etc., in his comments and no ability to think in terms that Coase illustrated had to thought through

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    4. LAL

      BS to you

      I have seen your comments before. You are a right wing reactionary, concealing such in the BS of a liberatarian.

      Your POV is that there are no monopolies so why ask me about something you say doesn't exist?

      John also denies monopolies, and the need to regulate the same, so I will leave him to answering your questions.

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    5. JLD,

      hmmm uncalled for, read again, i say there are monopolies right now and suggest why.

      but hey if you gotta protect yourself from reading comprehension go right ahead. It's all in Coase, you probably just missed it...

      http://en.wikipedia.org/wiki/Coase_conjecture

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  3. It appears to me that one of the biggest complaint against your proposal would come from Grover Norquist and many in the Republican party. Surely, they would complain about "tax increases" and the burdens on businesses if the favorable tax treatment of job-linked health insurance were to disappear.

    It's not an accident that Rep. Ryan refuses to talk about which "loopholes" to close in his budget plan. Good luck convincing the Republican party let alone the American public. And wasn't ending mandated coverage linked to "death panels" just a bit ago, once more by the supposedly so free-market "ObamaCare" opponents?

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  4. John, we have a system in which insurance is regulated by the states. Realistically, the states are not giving that up any time soon. That is also the reason why selling insurance across state lines doesn't work.

    Secondly, people who have jobs and have insurance ( vast majority of population ) don't want to lose it, so taking away the tax break is extremely unpopular, even though economists on both sides of the aisle agree it's a bad idea that should go away.

    The mandate under ObamaCare is an attempt to make the market work better, given those two realities. Your plan may or may not work in theory, but it appears to ignore those issues alltogether.

    This reminds me of the Ryan plan that promises to close loopholes, while refusing completely to specify which ones.

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    1. "Realistically, the states are not giving that up any time soon."

      The issue is not up to the states but to Congress. Interstate insurance will pass the House easily.

      "Secondly, people who have jobs and have insurance ( vast majority of population ) don't want to lose it, so taking away the tax break is extremely unpopular"

      The immediate proposal is *not* for it to go away, but to extend the tax break to individuals. McCain had the same idea in '08.

      "The mandate under ObamaCare is an attempt..."
      How can you on the one hand raise objections to interstate insurance because it is supposed unpopular, and then ignore popularity for the mandate.

      "Ryan plan that promises to close loopholes, while refusing completely to specify which ones."
      Ryan is the Chairman of the Budget Committee. Loopholes in the tax code come out of Ways and Means. Ryan is not at leisure to start proposing loophole closures. The President on the other hand, has no such restriction, yet does little or nothing.

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    2. "How can you on the one hand raise objections to interstate insurance because it is supposed unpopular, and then ignore popularity for the mandate."

      I am not objecting to interstate insurance, I am claiming that the states will not give up their political power to regulate insurance. The mandate is already law, assuming it doesn't get struck down, popular or not.

      You say that it will pass the house easily. Really? Where is the proof ? My guess is this nonsensical system of not being able to sell across state lines is there precisely because the states LIKE the system and apply strong political pressure to keep it.

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  5. So Professor Cochrane - you are advocating that the Federal government trample the States regulatory power over insurance, impose a national framework for health insurance and prohibit the States from regulating health insurance.

    Good luck with that.

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    1. lol

      doesn't seem hopeful does it

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    2. It might not be hopeful, but removing regulation of interstate commerce is actually an intended power of Congress under the Commerce Clause, unlike Obamacare.

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    3. Federal intervention on state prohibitions of out of state health insurers are a *textbook* case of the correct use of the Commerce Clause, unlike the ARRA mandate. The states can no more trump the Fed, should it act, than they can insist on having their own my-state-only automotive industry by screaming the Fed wants to destroy auto regulation.

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    4. Falstaff

      Under Cochrane's scheme there does not appear to be any scope left for state regulation of health insurance companies - all policies have to be transportable across state lines and the states cannot regulate the terms of the coverage.

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    5. Absalon

      That's more of the same strawman. Again, the fallacy is apparent if one asks the same question about any number of products and services sold across state lines: because the federal government has automotive regulations, are the states completely banned from any control? Was your last state car inspection therefore mysterious?

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    6. Falstaff

      Cochrane argues that regulation has prevented the spontaneous emergence of his fantasy system. He points in particular to Federal and State mandates as to the terms of the policies.

      My point is simple and remains - if the Federal government wants Cochrane's proposal to fly then they are going to have to impose uniform policy terms on the States - no more State mandates for acupuncture. If the complaint with Obama care is that it treads on State (as opposed to individual) rights then Cochrane's proposal is probably even worse in that regard.

      I support an expansive reading of the commerce clause but there is no denying that an expansion of the commerce power necessarily restricts States' freedom of action.

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    7. Absalon
      Your point that states will resist a uniform policy of coverage only seems reasonable if the mandate for that coverage was more expansive than the states' desired. I do not see states resisting against a uniform policy of coverage where that coverage includes only the most essential aspects of health insurance protection. Coverage that all policies would provide for under any circumstance.

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  6. John, you are right on. Look at the LASIK eye surgery market. 12 years ago it cost $6,000 per eye. Now it's $250 and the technology is better. In Las Vegas, the boob job and tummy tuck capital, doctors advertise their prices on billboards and we've watched them plummet as well. The difference between those services and MRIs? They are not covered by insurance. When people go shopping with their own cash prices get competitive. The federal government does not have to trump state law, it just needs to provide better tax incentives to encourage Health Savings Accounts. A family plan deductible is $5000 a year, but they get to put that much (don't have to) into a savings account to cover it and you keep what you don't spend and it becomes like an IRA, tax deferred on interest gained.

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    1. Two points on LASIK. If you cannot pay (with cash or credit) they won't do it. So they do not have to charge more to recover money they lost treating patients who could not pay. This approach fails with emergency services. If they charge $250 per eye, what is their cost? The problem with deregulation is that you just cannot claim it always works because it sometimes works (logical error). If you go back to the Gilded Age you will find out how health care worked in the absence of regulation. Would you like to live then? You don't have to reinvent deregulation. It has been tried already. All you need to do is to look back...

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    2. rafal:

      "...go back to the Gilded Age... All you need to do is to look back..."

      Then go do it. Put down your Upton Sinclair for a moment. Read de Tocqueville. Read the history of 19th century charities, of the Great Awakening, of Clara Barton and the Red Cross, of Catholic charity hospitals, of the YMCA in the mid 1800's, Rotary founded in 1905, Kiwanis in 1915, Lions in 1917, Optimist in 1919.

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  7. In general, many good market-oriented suggestions in this post.

    That said, many Western nation seems to provide universal insurance, and get about some results, for half what we spend. Japan is amazing, perhaps spending one-third and with older demographics.

    In a free-market system, we still have problem of people who choose not to pay for insurance and end up really sick. I am not prepared to say "Go die."

    Also: In true free-market system, I suspect health care would become unaffordable after age 80+/-. Sure, if you join at age 22 and stay in system for 60 years and the law said they could not drop you....how many could meet such strict standards?

    And if your insurer decides to go out of business? What is free-market fix to make sure someone picks you up, now that you are old with a chronic condition?

    I hate to say it, but euthanasia needs to be openly discussed by anyone who is serious about affordable health care system. Keeping carcasses alive well past due dates is very expensive. I doubt Cochrane or any other free-marketeer will address the necessary issue of euthanasia.

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    1. You are mistaken about free markets and you are a monster talking about euthanasia. But the two seem to go together. Anti-market lunacy and a willingness to abrogate the rights of individuals.

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    2. Kyle8-

      Look---when someone over 80, terminally ill, enters a hospital that bills (paid by Medicare) can top six figures.

      In a free market, whom would spend that kind of money? Really, you would foreclose your children's chances for college education to keep Grandma alive for another six weeks?

      A truly free market in health care will force consumers to align benefits to costs. The benefits of keeping Uncle Joe, age 87, alive for another bedridden year at $400k?

      Kyle, you are not facing up to reality. Neither is anyone on the right- or left-wing, of John Cochrane for that matter. We get platitudes and pompous pettifogging.

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  8. I am entwined in Michigan's CON process. Given the dual requirements to maintain adequate access to care and control of costs, the CON restrictions in line with Roemer's Law are appropriate. In Michigan, hospital bed utilization, at all aggregation scales, is greater than optimum driven largely by an oversupply of beds. It is very likely that Illinois is in the same position with an oversupply of beds. Increasing the supply of beds would only increase utilization and inevitably systemic costs as it is incredibly unlikely that competitive cost reductions would offset the increased utilization.

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  9. Interesting stuff, all of it.

    What is the moral purpose of "markets," net?

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  10. If one fails to address the fact that all other advanced countries provide universal health care with very similar outcomes to ours at a much smaller cost than our system, which falls significantly short of universal care, the whole discussion seems like a lot of hot air. No advanced country achieves its greater efficiency and more complete coverage through deregulated competitive markets.

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    1. Cheerleaders for "efficient markets" theory willfully overlook the core fact that the most "efficient" markets are inexorably those with the lowest margins.

      Milken long ago chuckled that "in the gap between perception and reality, there's money to be made."

      In health care, there's now all this fashionable Kumbaya talk of "collaboration" and "transparency," notions utterly at odds with the imperative of "business intelligence for competitive advantage."

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  11. Great post, definitely makes sense. For the life of me, I cannot figure out why the US does not allow more foreign doctors into the country. This is especially true of General Practioners. One reads articles all of the time about the shortage of GPs, especially outside major metro areas. So, why not allow more GPs into the country, and have as one condition that they settle and practice in areas where there are GP shortages? Of course, they still would need some kind oftraining/certification to meet US standards, but bet this type of approach would solve the GP issue.
    farmland investment

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  12. Dr. Cochrane, moar updates plz! In the past month we've seen 2 (very good) op-eds reposted from WSJ/Business Week and one post on health care. Where's your post analyzing NGDP level targeting? Your fans need you!

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  13. Nice post. People can create a document that declares someone their health care proxy, granting them the power to make medical decisions if a doctor declares the patient mentally incapacitated. This can result from a wide variety of circumstances, ranging from a stroke or advanced dementia to an auto accident. The document can include specific instructions, such as whether the person wants to be an organ donor or be cremated.

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