Thursday, July 12, 2012

Forget the mandate

(This is a Bloomberg "business class" oped, July 1. I got frustrated how the health care discussion has gotten stuck in a rut, "see, Obama's raising your taxes." "No, it's a penalty." Blah Blah.) 

On June 28, the Supreme Court upheld President Barack Obama’s health-care law. Opponents and supporters are still sparring over whether its mandate is a tax. It’s time to get over this debate. The mandate’s mild penalty was never this law’s central economic and policy flaw.

The distinctions among a mandate, a tax, a penalty, or a credit, and between federal and state powers, are important legally and constitutionally. But they are irrelevant in economic terms for this law.

To commentators who are apoplectic that the federal government is using taxes to nudge us to buy health insurance, I say this: Hello? The tax deduction for buying an electric car, or the mortgage-interest deduction for buying a house, is economically equivalent to a tax for not buying health insurance. Maybe all are bad, but did you really expect the Supreme Court to rule the mortgage-interest deduction unconstitutional in a case brought against the health-care law?

Let’s stop playing lawyer and get back to economics and policy. Opponents: Return to articulating the disastrous economic and health-care effects of this law. And articulate better ways to solve the mess. Supporters: Try to make this Rube Goldberg contraption work. Good luck.

On the July 1 “Meet the Press,” House Minority Leader Nancy Pelosi said: “If you are a person who has a child with diabetes, no longer will they be discriminated against because of a pre- existing condition. If you’re a woman, no longer will you have to pay more. No longer will being a woman be a pre-existing medical condition,” and “if you are senior, you pay less for your prescription drugs and nothing for a preventative check.”

She added: “And for everybody, no more lifetime limits on the coverage.” And young people will be covered by their parents’ policies.

A message to opponents: If all you (OK, we) can marshal in response is that you don’t like the legalities of a $1,000 penalty/tax for not buying insurance, we’re going to lose. And we should.

Let’s start with the obvious question: Who is going to pay for all this? Someone has to pay for every expanded benefit, whether through higher premiums, higher prices or higher taxes. And tapping “the rich,” reducing administrative costs or executive pay would just be a drop in the bucket. 

The more important fact is that the law won’t work.

Health care is a complex service, in which each person’s needs are blurry, and the line between “need” and “want” blurrier still. Imagine if the government decreed that law firms, car-repair shops, or home contractors had to charge everyone the same price, and couldn’t turn anyone away. “House fix,” for example, would be $1,000 per year, no matter how large the house or what shape it’s in. Why do we think this will work for medical services?

Health care will be rationed. Period. If we don’t ration by price, we will ration directly.

The Patient Protection and Affordable Care Act is a bureaucratic nightmare. About 2,700 pages of law, 13,000 pages of regulations and counting, 180 boards, commissions and bureaus, according to one media report.

It’s an invitation to crony capitalism. Thousands of companies have already asked for, and won, exemptions. They had better be in the good graces of the Department of Health and Human Services.

Enough. There are plenty of analyses of all the ways this law won’t work.

But one cannot complain without alternatives. “Repeal and replace?” OK, but with what? Pelosi’s promises address serious concerns. It isn’t enough to say “that costs too much,” or “it should be unconstitutional.”

Sensible alternatives exist. This need not be a choice between the Obamacare mess and the mess we had before.

Fix health care, not just health insurance. Where are the health-care equivalents of Southwest Airlines, Wal-Mart, and Apple -- innovating, dramatically lowering costs and bringing everyday low prices to health care? They have been kept out of the market by anti-competitive regulation. As one small example, in my state of Illinois, every new hospital, expansion of an existing facility or major equipment purchase must obtain a “certificate of need” from a state board. “Need” explicitly means that it doesn’t undermine incumbents’ profits.

Insurance should be insurance, reserved for unpredictable and catastrophic expenses. Car insurance doesn’t pay for oil changes, and you shouldn’t pay for checkups through health- insurance premiums. Such insurance would be a lot cheaper, and more people would buy it.

Insurance should be individual, portable from job to job and state to state, and guaranteed renewable for people who get sick. That neatly solves the pre-existing-condition nightmare. Insurance companies would be happy to sell such coverage. The government stands in the way, by subsidizing employer-based group plans at the expense of individual insurance. (My “Health status insurance” (see here and here)  proposal is one example among many that describe functional private health insurance.)

Cost control is achieved in only one way. Competition. Not price controls.

Innovation comes from competition, too, and from innovators’ ability to initially charge rich people more -- and their ability to pay it -- make great profits, and then commoditize. You cannot have innovation in a government cost- controlled system.

It takes courage these days to have any trust in markets, or for politicians to oppose handouts to voters. Without that courage, our health-care system, and our economy, will fall apart.

45 comments:

  1. Great post, Dr. Cochrane. However, it's worth noting that there's also some 'low-hanging fruit' in health care policy which doesn't necessarily require a dramatic overhaul change. This includes easing licensing requirements, allowing for more open immigration of foreign medical processionals, and abolishing the tax exemption on employer-provided insurance (I suppose you already tackle that last one).

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    1. Good points. I was just rationed for words. We could write a book on all the distortions and competition-destroying, price-raising, incumbent-protecting laws and regulations in health care.

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    2. ^^Suggestion: write it. I know I'd buy it because that's the best way to learn more.

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  2. I don't know that I'd call myself a defender of Obamacare. Its not the law I would have passed and i think it has a lot of problems but I do think its a step in the right direction. So you could consider me a supportor of the law in a sense.

    But i am not a democrat nor really a liberal. I don't have any tribal affiliation that requires me to support Obamacare so if the other side has some proposals I am willing to honestly consider them.

    So I have some questions:

    Question 1:

    how is this regulated? Presumably its by the federal government. You aren't proposing, I assume, that there be NO regulation of health insurance products. However, if you are saying the federal government will regulate health insurance products sold across state lines, then that seems to imply two things:

    1. all state regs on health insurance should be thrown out
    2. a single federal health care exchange that would have a similar legal and economic architecture to Obamacare's state based exchanges.

    Most likely you'd oppose (2) saying that you argue for "true" health insurance and thus jettison most of the mandates and other requirements that insurance companies currently operate under. However that leads to my next question.

    Question 2:

    I am not in principle opposed to considering such a policy though I have a lot of reservations about this. But put that to the side. What's the point of proposing an alternative that is so profoundly unpopular that it has almost no chance of passing in any conceivable political coalition you could imagine?

    I could say, "Healthcare policy is a problem. I have a solution. Lets implement single payer healthcare." While an interesting political, philosophical, and policy debate, its an academic discussion in the truest sense of the word.

    I thought you were proposing ideas that actually had some bearing on the legal and political process as it exists today and in the next few years.

    Bill Clinton learned this the hard way and Obama made sure he took that lesson to heart: You Do Not Screw with People's Health Insurance because they like what they have. It doesn't matter if a policy will eventually have the effect of screwing with their insurance as Obamacare eventually will -- it can't be a frontal assualt like what you are describing and have a ghost of chance to be considered as a viable solution.


    Question 3:

    how do you handle people with chronic health conditions?

    Question 4:

    how do you deal with old people who get sick and die? I believe its around 80% of all healthcare costs come from 20% of the population. End of life care is prohibitively expensive. How does your proposal deal with that aside from saying "sorry grandma, you aren't getting that triple heart bypass because you don't happen to be one of the lucky ducks that has money. Go get some charity or ask your kids for help. Not the government's problem." If you think that's a winning message, I have another bridge to sell you.

    It seems to me that in the end, you favor rationing. The difference between Obamacare and your proposal is that you want to ration care based on income whereas Obamacare relies more heavily on regulations and bureacracy. Its unclear to me that one is particularly superior another, especially considering our healthcare outcomes and the amount we spend versus other first world countries healthcare outcomes and how much we spend.

    I know you are assuming that economic rationing combined with a significant reduction in regulations will eventually reduce the price of healthcare so that everyone can pay for their healthcare needs. I get the theory. It may even work to some extent, though I am awfully skeptical considering how people are wired from an evolutionary point of view. I just don't understand why you consider that politically viable in the sense of here's a replacement for Obamacare.

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    1. It will become politically viable when the obamacare system totally breaks down which is a certainty. You know how there is all of this print about the newly revised cost estimates being many times more than was previously thought?

      Well they are still incorrect, it is many many times worse than that. I doubt if the entire thing can even be implemented before it sucks all of the money right out of the budget.

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    2. Evolutionarily, people are supposed to die when they get old.
      J.M.K.
      Will you ever repay that debt. ?
      He will go to his grave a doubling.
      This is a disease if the mind that the baby boomers think they need to play the stock market till they die. Now the institutional investors have designed the retirement system so that people are required to play the stock market till they die. Savings becomes irrelivent.

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  3. I will be citing this on my blog.

    "...the law won't work."

    Conjecture.

    Not that I am a big PPACA fan. And, not that I disagree with your JD Kleinke riffs But, health care needs cannot be boiled down to cheap airfare, cheap crap from China, and pricey Apple toys from China.

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    1. Cheap crap from china.
      You -----
      Chinese are superior in every way. It is you government mind controlled people who make crap.

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  4. John, how do the following countries make it work with laws quite similar to this one:

    Switzerland, Sweden, Norway, Denmark, Germany, Hong Kong, Singapore, Australia, Austria, Finland ?

    ( Canada has single payer so I didn't include it )

    how do they do it ? Don't you have to answer this first before arguing that it won't work ?

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    1. Here is the quick answer, they do not have a similar system to the United States, they are not in similar constraints. and their systems are much much better written, and it is safe to assume will be better administered than with our sorry government.

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    2. Not to mention the fact that many of these countries (maybe even all to a degree?) free-ride off the medical innovations generated here. In effect, American consumers of health care are helping to subsidize the recipients of these products in other countries by bearing the cost of their development.

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    3. When I was young I worried that people would steal my ideas. Now I worry that they won't.
      Also
      Property rights. Who is the person who owns something. If I pay you to design something. I pay your living. I pay your expenses. I pay for everything. I invest in you. Your produce belongs to Me. All life support from 1990 to the present has come from China. Where do you get off saying you created anything. You need to take a little time researching the topic of domestication. You Americans have not created anything for a long time now. You are just a whining runt who refuses to acknowledge property rights. THIEF YOU

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    4. Ok, you guys are repeating a bunch of assertions without any substance. I get that that's what you think, I am just asking for evidence not for assertions. I am aware of these assertions already

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    5. Indy,

      I am fearful of comparing the US to relatively homogeneously well off peoples inhabiting smaller countries. There is a lot that can go wrong as countries get bigger...

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    6. Yes, and other advanced countries "make it work" for a lot less. It costs us a lot more to do significantly less. We don't have universal coverage. And these countries do this principally through public systems without primary reliance on markets or competition. If you don't acknowledge and deal with this up front, all the rest is hot air.

      As to wether other countries "free-ride" off our innovation, consider that the greater part of US innovation comes from government institutions and government subsidies. See
      http://www.tnr.com/article/politics/creative-destruction

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  5. Get rid if the AMA and all accreditation services liscenced by the gov. Then there would be no need for insurance. Insurance removes people's need to be educated. Thus. Americans are stupid and make crap.
    Inflation allows incompitent people to enter the market.
    Insurance protects stupid people from the natural consequences of their actions.
    Americans make crap.

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  6. J.C
    This is a great blog. Please continue to expose these pasty faced American RUNTS who go crying to mamma because their brains were not developed.

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  7. I appreciate your efforts to encourage a conservative proposal for healthcare reform -- in my opinion part of the reason the ACA is such a mess is that republicans effectively refused to have anything to do with healthcare reform. With more conservative ideas and a broader caucus involved in the discussion, reform could have been more cost-effective, more market-oriented, and less contentious.

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  8. Prof. Cochrane, I feel that you might be missing the real, core problems with government healthcare. (That's okay, lots of people miss it.)

    Americans have no familiarity with how this works in practice.

    What good is "free healthcare" if you die in the waiting line?
    What good is a "free doctor visit" if no doctor will see you?
    What good is "free diabetes care" if you don't get to choose your preferred therapy?
    What good is "free cancer care" if your only options are whatever happens to be on the government formulary?

    Supporters of Obamacare constantly repeat this bland trope that everything is going to be free. Figuring out how to pay for it is not the issue. It's not "ration by money" versus "ration by mandate." It's far worse than that.

    It's "have a fighting chance at the care you need" versus "take what the government gives you and then go die in a hole."

    Having a chronic medical condition while living in Canada for almost a decade taught me everything I need to know about government medicine.

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  9. Professor Cochrane:

    While I disagree with your premise---health care will more than pay for itself because healthy people are far more productive---I agree with about 99% of your criticisms, starting with your pointS that:

    Insurance should be insurance, reserved for unpredictable and catastrophic expenses. Car insurance doesn’t pay for oil changes, and you shouldn’t pay for checkups through health- insurance premiums. Such insurance would be a lot cheaper, and more people would buy it, and that, "Insurance should be individual, portable from job to job and state to state, and guaranteed renewable for people who get sick. That neatly solves the pre-existing-condition nightmare. Insurance companies would be happy to sell such coverage."

    And, I further agree that employer provided health care should be ended.

    If you truly believe these things, you would be a Democrat, like me.

    The only candidates who have ever advocated these positions have been Democrats.

    1. No serious Republican candidate has ever advocated these positions and all have taken a written pledge never to advocate these positions.

    2. Mitt Romney and his supporters are opposed to all of them. Being the rich and sr. corp. management, who most benefit from the Gov't current funding of health care by exclusion from income, they will never support what you are talking about, because that would be a tax increase, AS THEY OPPOSE ELIMINATION OF ANY DEDUCTION THAT WILL RESULT IN A TAX INCREASE

    SO, INQUIRING MINDS WANT TO KNOW, WHY ARE YOU PLAYING ON TEAM REPUBLICAN, IF YOU REALLY BELIEVE WHAT YOU WRITE?

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    1. Me and this blog are deliberately and explicitly non partisan. If you got the idea I'm "team Republican" you're wrong. The free-market instinct is alas quite shallow in the Republican party, and the instinct for social freedom shallower still. I write these things in the hope that good people of both parties will see that greater economic and personal freedom helps us to achieve our common goals. Don't forget, Ted Kennedy was instrumental in deregulating airlines and trucking.

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    2. Me and this blog are deliberately and explicitly non partisan.

      If true, then will you join me in condemning Romney as an admitted felon?

      You, more than anyone I know, call for transparency in markets. Romney, by his own admission (taking him at his word that he had nothing to do with Bain post leaving to head the Olympic Committee) made many false statements to the markets (and the SEC), between 1999 and 2002.

      And, if true, then will you join me in condemning Romney for all the false statements he is making now about Obama being responsible for a jobless recovery since the evidence is undisputed that, as well summarized in the Stock and Watson paper (Mar. 2012) and many others, our inability to recover jobs is caused by demographics, not government policies.

      BTW, in that same vein, I believe the great fault of the Democratic Party is that it created DOE under Carter, as I recall, and that since we have spent billions and billions, yet we are no closer to energy independence now than when we started. Thus, the oil price shocks that clearly had to be a major cause of the Lesser Depression are squarely the fault of the Government, over many years. The Democrats do get a pass on this however, compared to the Republicans, who policies are over support for oil price shocks and runs ups.

      IOW, if you want to claim to be deliberately and explicitly non partisan, then you have to implicitly be that way also, which means directly confronting the mendacity of Romney and the GOP

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    3. If you think publicly accusing presidential candidates of felonies is what defines a "non partisan" academic economic blogger, I think we are reading from different dictionaries. I thought your escapade with your buddy Aaron Burr might have suggested that such behavior isn't the wisest course of action.

      Case closed. I am not discussing the character of presidential candidates on this blog, and I'm going to be deleting comments from those who do.

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    5. I will try to restrain my enthusiasm for That political party.

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    7. Wasn't hamelton the one who wanted to copy England and institute government bonds. Bondage is slavery. Simple deduction. Hamelton wanted slavery. Burr wanted people to be free. I suppose you are a supporter of Lincoln too. I will suggest you do your research and apply some moral reason to your findings. Lincoln was SATEN in carnage. I presume he was the reincarnated Hamelton return from hell to enslave mankind on direction from his HELL CLUB brothers. Do your research John. Hamelton was the enemy of freedom.

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    8. To help you. Hamelton died 1804. Lincoln was born 1809. I know you probably don't accept this possibility, but it is possible that Lincoln/SATEN was in fact Hamelton return from hell. HELL CLUB. After all politics is just a game. And war is the game of KINGS. The divine right of kings. It is time you put some history behind your research. John

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    9. Sorry. I should have taken a closer look at this guys code name. Oops. I am curious if you like Lincoln though.

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    10. O, you are so sadly informed about American History you probably went to a private school or Booth.

      Hamilton was, after Washington, probably the most important of our Founding Fathers, especially in the formation of the United States under the Constitution.

      He was a complete believer in meritocracy, including (with Franklin) believing that black people were equal and was opposed to slavery.

      He favored a stronger executive and national government. He was a genius at business and finance and was responsible for the formation of the National Bank and the laws, passed by the First Congress, by which the Federal Government issued bonds and became responsible for payment of state debt for the Revolutionary War, debts which people like Madison and Jefferson had no intent of paying.

      In fact, during the Constitutional Convention, Madison promised to support Hamilton's plan. When Madison reneged during the First Congress there was a complete split between Washington, Madison and Jefferson over the duplicity and dishonesty of the later, leading Washington to release the secret minutes of the Constitutional Convention. Washington never really spoke with Madison or Jefferson after that, through to his death.

      The issue of those bonds and the National Bank laid the foundation for American prosperity by providing confidence and liquidity, especially the bonds which quickly became acceptable as collateral.

      Lincoln, like Hamilton, had the same good sense to see the central role of the National Government in support of the economy. He especially understood the railroads and knew the role they and the telegraph did play and would play (it is interesting to speculate whether the telephone was anticipated when Lincoln was President).

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    11. I think the issue here is growth VS development. Growth is akin to cancer. Thus the current predicament we are in today. I am a believer in global warming and it is not a good thing. Overpopulation is also something to be avoided. We have far too many unloved children who are forced to attend land grant schools that teach them to be good slaves. What you se as good I see as evil.

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    12. As for those consols. We have a good example in our modern derivative. Winter wheat and added value are not equivalent. This we must refer to good John's definition of time. Real time or IMMAGINARY time. Demands on an IMMAGINARY world can not be met by a REAL world.
      What say you brother John.

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  10. I love your line: "one cannot complain without alternatives." Very true--I hate it when people complain bitterly about something, but never demonstrate that there exists a better alternative.

    I worked in a hospital for three years. The doctors differed in their opinions on Obamacare and none of them are economists, but there was one point that everyone of them seemed to be in agreement: we already ration healthcare, both by price and directly. By price since insurance companies are incredibly non-competitive and use their market power to distort prices, and directly since insurance companies usually attempt to flat-out refuse to pay for things that are medically necessary, and often the hospital lawyers can't get them to change their mind, leaving patients without treatment. That's in addition to all the patients they can't help because they have no insurance at all. According to the doctors that have been working here for 40 years, this rationing has been going on for decades.

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    1. True. And necessary. An insurance company is in the same boat as the government. If you promise to give something for free, you have to ration it or limit exposure somehow.

      But you forget, the ultimate "access" is some cash in the bank and a hearty competitive market of businesses who want to help you. Now, once insurance gives out, you're really stuck because the cash market is so completely distorted. In a competitive health care market, many more people would be able to afford services insurance won't cover -- if not alone, with the help of family, friends, neighbors and charity.

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    2. About 10 years ago I had an inexpensive to treat but incredibly difficult to diagnose illness that came very close to killing me.

      Every physician with whom I spoke during that course of treatment admitted that, if a poor or uninsured person had the disease it would not have been diagnosed and they would have died, a horrible death, resulting in a massive lawsuit against the care givers once the autopsy revealed the cause of death.

      If the illness was caught in time to prevent death the costs of care and resulting disability would have been millions.

      When I got ill I immediately went to a specialist. They thought it was a bad back and sent me to physical therapy, but I kept getting worse and people finally realized something was bad wrong, but even then the testing was very difficult for the illness was so masked.

      When you stand silent and permit a Sarah Palin to talk about Death Panels when the system now is a Death Panel, well I have many thoughts, but that you are deliberately and explicitly non partisan, that is not one of them

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  11. John,
    you mention your past articles on Health Status insurance. That you know of, is anybody looking into this, in the policy making world?

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  12. John, I am curious to hear your thoughts why Jonathan Gruber designed both ObamaCare and RomneyCare to be this way? After all, he is considered the expert on healthcare. no? and there are several other experts that heavily participated in designing both? Why are they missing these obvious proposals of yours?

    is it because they are

    1) liberals who hate America and free markets
    2) or have thought these things through in detail and this is what they came up with
    3) some combination of both

    ?

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  13. I honestly have not yet read through the comments - I don't have time right now - but to me, this talk of competition sort of begs the question as to when do we stop and realize that the "free market" is itself an idea competing with other ideas about economic structuring. Those structures being, abstractly, various forms of mixed economies and statism.

    Perhaps your coveted "free market", despite its advantages, has simply failed to win the competition. Perhaps there is, after a few hundred years of thought and development, good reason for this to happen.

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  14. When Romney and Ryan tell us what tax deductions they will eliminate it seems likely that deduction of employer sponsored plans will be one of them. My personal view is that eliminating that deduction will put the US on the fast track to single payer in one form or another.

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  15. John, I like your post very much. I wanted to let you know I used your blog as inspiration to draw a political cartoon that can be seen at ourprocess.wordpress.com and at http://www.gocomics.com/the-ogre tomorrow morning.

    Thank you again! Fantastic article.

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  16. The assertion about where are the Walmart's, Apple's, and Southwest Airlines in health care is mostly non-sense. Which sector do you think has had the greater rate of technological progress: health care (broadly defined) or airlines? Big box retail? Personal computing, maybe. There are companies that are very innovative in health care. Genentech, phillips imaging to name a couple..

    The problem is that the government has told everyone 65 and over that there is no limit on your health care. If we're going to have a safety net, there needs to be more rationing, not less. Now you might say we don't need a safety net, but most of the country disagrees with you (I'm not sure if this your position or not).

    Its not clear that employer benefits aren't as successful as individuals for getting the best deal. There are reasons that they might be even better than individuals for buying a complex product. And there are reasons they might not be. But the assertion that they are simply not is just a conjecture.

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  17. I agree with you for the overwhelming majority of the population who make informed choices. What about those who currently don't have the background and/or the economic circumstances to consume health care, (e.g. take anti-hypertensive medicine instead of an iphone)?

    You might have a situation where 1-2% of the population gets themselves into real trouble (1 in 10 of the 10-20% who blow off preventive healthcare consumption)

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  18. What liberals (including some commenters here) are missing is that current system is inefficient because of govt intervention. More govt will surely make it worse.

    I will actually go as far as claiming that all that govt does works worse : transportation (broken roads, mass transit multi million debts, airports), education (disaster in schools, sky rocketing prices of college), healthcare (prices, quality)

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Comments are welcome. Keep it short, polite, and on topic.

Thanks to a few abusers I am now moderating comments. I welcome thoughtful disagreement. I will block comments with insulting or abusive language. I'm also blocking totally inane comments. Try to make some sense. I am much more likely to allow critical comments if you have the honesty and courage to use your real name.