Sunday, December 15, 2013

Chris Demuth on Obamacare

Source: Weekly Standard
I found a nice Obamacare essay by Chris Demuth, "The Silence of the Liberals: Obamacare is Inimical to Their Values Too," in the Weekly Standard.

The point: Liberals ought to join in the project of constructing a market-based alternative to Obamacare.  We do, in fact, have the same goals, and the question is simple cause-and-effect of what policies will actually produce those goals.

A few highlights with comments (but read the whole thing). We start with a quick reminder of the unfolding train wreck:
Obamacare will never achieve its promise of affordable health care for all paid for with improved efficiencies in health insurance and medical care. ...the program improves “access” mainly by herding millions of people and firms into insurance they do not want or need. A great many will simply refuse, having little to fear for the time being, with the result that government expenditures will be far higher than projected. It is equally clear that the variety and quality of medical care will be seriously restricted for all concerned.
"Liberals" may not care about expenditures, but surely ought to worry on the last point.

The charge "you have no alternative" is false:
...many prominent Republicans and conservatives​...[and libertarians]...​have come forward with specific proposals for expanding affordable health care more than Obamacare does, while eliminating its many harmful and unworkable features. 
This is an important point. The alternatives will advance "liberal" values, and give people of modest means better care at lower cost than Obamacare. They "go further and aim higher."  This is not the usual narrative of "people need" government help vs. stingy budget hawks. This is about a better way to achieve the same goals-- and more.

What are we talking about? In a nutshell,
Tax and regulatory reforms, and targeted public subsidies, would provide portable and renewable insurance, including for those who have developed costly health conditions; would legalize (rather than banish) low-cost insurance for essential medical services..and would encourage direct purchase of routine medical goods and services where insurance has nothing to offer but paperwork
The hitch: this takes political courage.
Are Americans prepared to part with the illusion that everything related to “health” should be available free or far below cost...? Will they distinguish between higher-priced insurance for medical services they don’t need and insurance that leaves them to pay directly for services they do need but are quotidian and noncontingent? Do they understand that competition and innovation are as valuable in health care as in smartphones and coffee shops?
My emphasis, as this is the point I've been stressing most lately. Want cost control? Let the Southwest airlines and Walmart of health insurance enter and compete.
... The conservative reformers are betting that the public, now that it is paying attention, will answer in the affirmative. They may be right, but they need help.
The help we need is from "serious liberals,"
Serious liberals are those for whom the primary purpose of politics is to protect personal liberty and advance social equality.
I didn't realize I was also a liberal!

Now, the two most important and novel reflections on Obamacare.  (Maybe this should come first!)
Obamacare’s two central features are as inimical to liberal values as to conservative values. The first is monopoly and the suppression of diversity and competition. The second is extreme concentration of power, exercised continuously in monitoring and directing the activities of millions of citizens.
Expanding on the first theme, which is on my mind but not common in health care discussions,
Obamacare ... establishes a profusion of regulatory controls over prices, entry, and services in insurance and medical care, policies whose systematic anticonsumer perversities have been documented by generations of economists of all political persuasions...That some states operating their own Obamacare insurance “marketplaces” are already moving to ban the private sale of individual and small-business insurance is one example of the program’s tendency toward explicit monopoly.
More darkly, the second theme, also only beginning to get press:
But the most harrowing aspect of Obamacare is that it vests political executives and government administrators with sweeping discretionary power, free of conventional checks and balances. It gives federal officials the authority to set insurance prices without any of the economic and legal standards that govern regulation of public utilities...
Collaterally, Obamacare is introducing a new form of government​—​improvisational government, characterized by continuous ad hoc revisions of statutory law by executive decree. This is a reversion to a primitive form that long antedates our Constitution and rule-of-law traditions. Transported to the modern world, it leaves the private sector in a state of constant uncertainty and subjection.
And that's only the beginning of the dangers of rule by executive decree with no checks and balances or legal recourse. (What large insurer will dare to stand up to the latest White House pronouncement?)

"Serious liberals," libertarians and conservatives, can come together to fix this.
Serious liberals... should dare to join a coalition of reconstruction with the serious conservatives who have already dared to lay their cards on the table. There would be many significant disagreements to be hashed out... But the prospect of letting Obamacare run its course gives both sides a great deal to gain from compromise


  1. You can't judge the value of something unless you have all the necessary info and know how to use it.

    The time to discover that your cut-rate policy doesn't cover cancer should not be the day you find out that you have it.

    How does the average person know what they need? Are 12 sessions of physical therapy enough coverage? Well, if you had a knee scoped then probably yes. If you had a severe stroke I doubt it.

    Right now health insurance is pretty opaque. To paraphrase Ms Pelosi, you have to have the disease in order to know how good your coverage is. In addition, the insurer can change the rules at any time. What's covered in 2013 may not be covered in 2014 and they don't have to tell you each and every rule change.

    So start the discussion with how you will make insurance transparent and understandable. The insurance companies will hate this and they will fight it tooth and nail, but since insurance is one of the prime reasons we have this mess it needs the most modification.

    We seem to want two irreconcilable things: no cost barrier to health care when health care costs money. No one is going to have a successful market system if the consumer never has to make a value decision. The marginal dollar must play a role in every decision a patient makes.

    I just hope ObamaCare finally disabuses the population of the notion that governments can manage complex social issues.

  2. Don't worry, you are not a liberal.

    Conservatives have no credibility on health care. Pre ObamaCare the United States spent significantly more on health than anyone else in the developed world and got worse outcomes. The conservatives have had decades to fix health care and are only now offering diversions as a rear guard action against ObamaCare (which itself was based on a conservative plan).

    Conservatives are free to persuade conservative states to implement health care market reforms on a conservative / Libertarian model and all the states are free to experiment with a wide range of reforms.

  3. How come I never hear you comment on health economics models?

  4. I find your commentary on Obamacare to be quite convincing, but I worry that I am missing the other side of the story. People like David Cutler and Jon Gruber must have had reasons for supporting Obamacare, but they have not made those reasons public, I presume because they are politically constrained. Is it possible for you to give us your imagined version of how David Cutler or Jon Gruber would respond to your arguments?

    1. Jon Gruber has written a number of opinion pieces. You can link from his faculty page.

    2. Nobel laureate George Akerlof won his prize for showing how market failures can result when asymmetries of information exist between buyers and sellers. His paper The Market for Lemons, addresses health insurance market failures amongst other things.

    3. I believe failure of all conservative policy prescriptions in healthcare stems from inability to make a convincing case that Akerlof is wrong. Maybe because he is right ?

    4. The problem with conservative prescriptions for health care (such as Professor Cochrane's) is that nobody takes them seriously. Why that? Well, because the market of ideas is efficient.

  5. Beginning at the beginning, health insurance policies in the U.S. circa 1900, the advent of such policies being marketed on a wide basis, where scheduled hospital policies. They listed particular procedures and associated flat dollar payments. Those policies morphed into scheduled hospital policies based on a daily hospital room rate where the insured picked the room rate and the list of procedures were paid as a multiple of the room rate e.g. tonsillectomy 4 x room rate. Those policies in turn morphed into major medical insurance that paid procedures at “reasonable and customary charges” based on the regional prices of region of the country the procedure occurred.

    Around 1960, 6% of medical bills were paid by insurers while 94% were paid by the insured. By 2010, 94% of bills were paid by insurers and 6% were paid by the insured. During the same time period politicos through the mechanism of government began mandating particular items be included within policies. At the Zenith, there were some 1600 mandates among the 50 states with some states having over 100 mandates each. Rather than particular items being offer by endorsement at a price for those seeking the particular item, all insured ended with the mandated items and associated price hence subsidizing the few that want the item.

    It is worthy to note that the vast majority of mandates came from special interests wanting to focus benefit upon themselves at the expense of the many. Politico entrepreneurs looking for ways to fund political constituency building exercises with other people’s money were glad to oblige.

    During the entire episode from 1960 to present, price of health-care became less and less known to the consumer to the point that consumers rarely, if ever, ask about price. The same consumer that would never step foot in a store with no posted prices became trained to never ask about price for health-care. How odd. Yet politicos who are always on a moral grandstanding crusade regarding price never bothered with this aspect of non-price. Which proves yet again there is a difference between the benighted and the beclowned.

    Meanwhile back on the supply-side, the suppliers of health-care, acting as good little rent seekers, lobbied for protection from others wanting to enter the supply-side. Politicos once again eager to find ways to expand political constituency building obliged. From “certificate of need” to the AMA restricting physician supply, health-care supply is stunted, non-robust and competition-less. The supply-side is so dysfunctional that technological innovation driving prices up rather than down.

    The problem outlined above has a common thread, as do most problems: politicos through the mechanism of government. The dupery and nitwitery is that a politico produced problem, is then going to be solved by, politicos [Obamacare]. Sweet!

    Episode 1.209,472 of economic questions with political answers. Rather than individuals particular time and particular circumstance being the criteria, the process becomes the infamous “one best way” which fits no one.

    “The plans differ; the planners are all alike…” - Frédéric Bastiat

  6. I think the problem is that conservative alternatives may exist but it is very hard to understand why/how they would work. For example, even on this blog - I know that John has an extensive policy proposal - but even though I've been reading this blog for a while, I can't for the life of me explain how it works if at all, and I have an MBA from University of Chicago !

  7. The US will have a good , value for money healthcare system only once the average American will recognise that a single payer, state system does not mean socialism USSR style and that actually we live in a society. A society where everyone fends for themselves is not in anybody's interest. Even cave men understood that.

    1. "A society where everyone fends for themselves is not in anybody's interests" ... who is promoting that as an alternative?

      Responsible individuals COOPERATE with each other every day. We don't need the threat of taxation or jail to do so. The difference between a single payer solution and a non-single payer solution is the issue of choice and competition. Single payer = no choice, no competition.

      In 2010, the GAO estimated that roughly 10% of all medicare payouts ($48 BILLION) were based on fraudulent claims. What incentives does the federal government have to reduce that fraud if there is no risk that they'll run out of money?

    2. Your idea that we have to treat healthcare as a competitive market is deeply flawed and is bound to lead to a disastrous outcome. Just look at any European system and you will see why. But then again don't let facts get in the way of your ideology.

    3. By "any European system", do you include the UK's National Health System, where in 2010, the government was compelled to issue an “NHS Constitution” in which it was declared that no patient should wait beyond 18 weeks for treatment – four months – after GP referral?

      In addition, for diseases like cancer, survival rates are much higher in the US (the breast cancer mortality rate is 88 percent higher in the United Kingdom than in the U.S.; prostate cancer mortality rates are strikingly worse in the UK than in the U.S.; mortality rate for colorectal cancer among British men and women is about 40 percent higher than in the U.S).

      Yay! I can't wait for that here in the US!

    4. "In 2010, the GAO estimated that roughly 10% of all medicare payouts ($48 BILLION) were based on fraudulent claims. What incentives does the federal government have to reduce that fraud if there is no risk that they'll run out of money?"

      The same incentives that the federal government faces in military contracting or hiring of civil servants.

  8. Also, I think it is worth pointing out that since 87% of all Americans had some sort of health insurance in 1/1/2009, the notion we needed this grand social re-engineering project to fix the problem is the equivalent of using a nuclear weapon to light a cigarette.


    1. "Also, I think it is worth pointing out that since 87% of all Americans had some sort of health insurance in 1/1/2009, the notion we needed this grand social re-engineering project to fix the problem is the equivalent of using a nuclear weapon to light a cigarette."

      I think it is worth pointing out that the US was spending 16% of GDP on health care -- that is a failure any way you define it. Maybe Obamacare will fail too, but at least it is an attempt to face the problem.

    2. Your argument may be completely wrong. Check out

  9. One challenge that Conservatives have is the premise upon which Obamacare is presented: as a Big Government solution to a big problem. Central planners have trained the public to think that only through a raft of policies and regulations will things get better. It won't work with Dodd & Frank, and it won't work here. Conservatives have to come up with a way to explain their policies in a manner that compares apples to apples in terms of OUTCOMES, not in terms of IMPLEMENTATION (which would be radically different between the Central Planners and the Conservatives) - by showing advantages in terms of OUTCOMES, the debate can be shifted and the battle won.

  10. Like all Grumpy commentary on health care, there's still an elephant in the room:

    U.S. health care costs are two or more times as much per person as those of every other advanced country, and these countries somehow also provide universal care, which we do not. Their health care outcomes are generally as good as and in some cases better than ours. Yet none of these countries achieves its superior performance through any type of market based system like what you advocate. Far from it. And their citizens frequently report considerable satisfaction with how their health care is provided. Nor is some ostensible loss of freedom an issue in the forefront of debate.

    How can those who fail to address this reality expect their thoughts on health care reform to receive serious consideration?

    1. Your claim that healthcare results are generally as good and in some cases better than in the USA does not bear out when it comes to the UK NHS - along with cancer, results are worse in the UK for cases of diabetes, hypertension and stroke.

    2. Granted while it lags in some areas there are others in which US health care performance is superior. Nevertheless, compared to the UK we spend three times as much (!) for generally similar results.

      And we'd do well to consider too that the Veterans' Administration in the US, which most closely resembles the UK National Health Service, vastly outperforms its private sector counterparts on every front.

    3. This US vs. Europe controversy is rather beside the point. The US has a highly regulated crony-capitalist system. Much of Europe has a state-run system, with a private business class on top of that for wealthy people who don't want its miseries.

      This is like comparing the 1960 US phone system -- regulated monopoly -- to the 1960 European phone system -- government monopoly.

      And the argument "nobody else does it" is just as silly. Until the 1980s, every other government monopolized telephones, television, air travel, truck transport, etc. etc. etc. Then a little deregulation brought us all wonders.

      The US is not now even close to a free market system. The fact that the current US system can even be compared to state-run systems is a measure of its dysfunction -- and how much better a free market sytsem can be.

    4. One can describe different health care approaches however one wishes. The bottom-line is that the current US approach is vastly more expensive; there already exist alternative approaches which do as good a job by and large for much, much less. It's hardly self-evident that what is being called a free market system is anything more than ideological pie in the sky, and meanwhile we see other systems which in terms of cost/outcomes are doing a significantly more creditable job right now. How on earth is it beside point that these well established systems provide unquestionably superior value?


  12. Professor, what are your thoughts on the government covering all catastrophic care? If the problem is simply that we are overinsured, does that leave room for the statement that the government should foot the bill for catastrophic events?

  13. Professor Cochrane:

    What do you make of the argument that as income increases and living standards rise, people reach a point at which they don't want more stuff but more and better quality life? This line of argument then suggests that we should observe health care spending rising as a proportion of total spending. If this mechanism is operative it seems that the macro aspect to the health care crisis is largely overblown. Focus should be on fixing the micro inefficiencies that limit access.

    related article

    1. To clarify my earlier post -

      Is health care a superior good? If the answer is yes then we should expect health care costs to rise over time relative to the costs of other goods and services, and the health care industry will become an ever increasing proportion of the entire economy. This is simply a natural consequence of economic growth (per capita) and the income elasticity of health care demand, i.e people's preferences. I do not see why we should try to counteract this mechanism through some form of artificial cost control.


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