Monday, September 25, 2017

Health Care Policy Isn't so Hard

Last July, as the last Republican Obamacare bill was imploding, Greg Mankiw wrote "Why Health Care Policy is So Hard" in the New York Times. For once, I think Greg got it wrong. Health care policy isn't hard at all, at least as a matter of economics. (Politics, and ideological politics, is another question, but not Greg's question nor mine.)

There are some important underlying themes uniting how Greg's piece goes wrong (in my opinion)
  • A little bit of economic education can be a dangerous thing
While most opinionated people and most "policymakers" are blissfully unaware of any economics, a little bit of economics education can sometimes mislead. Economics is full of pretty fairy tales, passed on through the decades or even centuries. The day after one sees the beautiful tale of the natural monopoly, or the externality, or the public good, then like a two-year-old with a hammer to whom everything looks like a nail, one starts to see natural monopolies, externalities and public goods all over the place. Wait a moment. Just because it's in the textbook -- even Greg's textbook -- doesn't mean every single industry and case fits.

The other rhetorical error is of the type, "well, we can't have homeless people who get heart attacks dying in the streets." No, of course not, but, is every single line of the ACA and tens of thousands of subsidiary regulations absolutely necessary to provide for homeless people who suffer heart attacks? Why must your and my health insurance be so totally screwed up -- and so totally micromanaged by the Federal government -- just to solve the problem of homeless people heart attacks? I'm struggling to find just the right category for this sort of argument
  • Gross disregard of the size of effects. 
  • Straw man -- a theoretical problem with a completely free market justifies any regulation. 
  • Disregard of the choice at hand -- it's not benevolent perfection vs. free market. 
  • Using problems as talking points. If the same "problems" exist elsewhere and you don't want to or need to fix them, then you're not serious about that "problem" for health. 
Maybe we can come up with a better one sentence characterization later. (There must be a Greek word for these rhetorical tricks!)

Let's review Greg's "why health care policy is so hard" problems.
"...free market sometimes fails us when it comes to health care. There are several reasons.
Externalities abound.  Take vaccines, for instance. If a person vaccinates herself against a disease, she is less likely to catch it, become a carrier and infect others. Because people may ignore the positive spillovers when weighing the costs and benefits, too few people will get vaccinated, unless the government somehow promotes vaccination. 
Another positive spillover concerns medical research. When a physician figures out a new treatment, that information enters society’s pool of medical knowledge. Without government intervention, such as research subsidies or an effective patent system, too few resources will be devoted to research." 
Well, ok. We require vaccinations to enroll children in schools. And basic research might be under funded. But basic chemistry research might be underfunded too. Does the Federal government need to buy half of all chemicals in the country and intensely regulate the other half just to keep basic chemistry research going? There are externalities everywhere. A neighbor mowing his lawn on a Saturday morning might wake you up. Does this justify the entirety of America's exclusionary zoning codes, or make "housing policy hard?" We do have research subsidies and a patent system, by the way. People like Greg and I are paid pretty handsomely to do research!

These "problems" exist in many markets -- and the ACA, or even pre-ACA regulation, is hardly a minimalist solution to the problem of vaccination and basic research!

The logical connection from "free markets sometimes fail us" to "and therefore the Federal Government needs to take a heavy hand as it does for health care" deserves its own place in the pantheon of fallacies. We have a choice between imperfect alternatives.
"Consumers often don’t know what they need. In most markets, consumers can judge whether they are happy with the products they buy. But when people get sick, they often do not know what they need and sometimes are not in a position to make good decisions. They rely on a physician’s advice, which even with hindsight is hard to evaluate."
"The inability of health care consumers to monitor product quality leads to regulation, such as the licensing of physicians, dentists and nurses. For much the same reason, the Food and Drug Administration oversees the safety and effectiveness of pharmaceuticals."
I am surprised that Greg, usually a good free marketer, would stoop to the noblesse oblige, the cute little peasants are too dumb to know what's good for them argument. This argument applies equally to car repair, tax advice, contracting, home repair, computer setup and repair, economics teaching... and just about everything else in our economy. We purchase complex personal services from people who know more than we do. It seems to work out ok.

Rhetorically, it's a good example of an argument that isn't serious because it isn't uniform. Why haul this out just for health care?

Again, is the ACA a minimal solution? All policy is a choice among alternatives. Do you really think government run insurance systems are better for figuring out what you "need?" Does Greg think he and his family are too dumb to make medical choices, so wishes for a government bureaucracy to determine his and his family's care?

Is inability to monitor quality a central economic problem? How much of the ACA is devoted to that? How much of the ACA and surrounding regulation is instead devoted to stopping the free flow of information,  to stop competition over quality, to maintain the illusion that all doctors are equal?

Licensing.. In this age when the Obama administration started to sound like the Cato institute on the subject of occupational licensing, 70 years after Milton Friedman showed how the AMA uses licensing to restrict supply and keep their earnings up, and as London Transport brazenly bans Uber, Greg gives us this vision of the wise benevolent government licensing for our protection? Those unlicensed dog-walkers sure are a national disgrace. And let's not start on the FDA's wise overseeing of the safety and effectiveness of pharmaceuticals, like, say, the epi-pen.
"Health care spending can be unexpected and expensive. Spending on most things people buy — housing, food, transportation — is easy to predict and budget for. But health care expenses can come randomly and take a big toll on a person’s finances." 
"Health insurance solves this problem by pooling risks among the population. But it also means that consumers no longer pay for most of their health care out of pocket. The large role of third-party payers reduces financial uncertainty but creates another problem." 
Greg surely knows better than this. Spending on houses and cars is not easy to predict and budget for -- when the house burns down or the car crashes. That's why we have insurance, regulated and perhaps over-regulated, but nothing like health insurance.

"Consumers no longer pay for most of their health care out of pocket" is not a necessary consequence of insurance. Insurance, in a free market would not cover routine predictable expenses, just as car insurance does not cover oil changes. This is entirely an artifact of regulation.

Let me skip to the last, most common and most important argument, most illustrative of how a little economics education can be a dangerous thing.
"Insurance markets suffer from adverse selection....If customers differ in relevant ways (such as when they have a chronic disease) and those differences are known to them but not to insurers, the mix of people who buy insurance may be especially expensive. "
"Adverse selection can lead to a phenomenon called the death spiral. ...Suppose that insurance companies must charge everyone the same price.... the healthiest people may decide that insurance is not worth the cost and drop out of the insured pool. With sicker customers, the company has higher costs and must raise the price of insurance. ...As this process continues, more people drop their coverage, the insured pool is less healthy and the price keeps rising. In the end, the insurance market may disappear."
We have all been to that beautiful econ 1 class, where we hear Ken Arrow's asymmetric information insurance spiral, or George Akerlof's justly famous proof that the used car market does not exist.

But are these fables true of our world, or is this a case of two year old with hammer? In the fable, you know things about your health that a pure free-market health insurer, armed with your entire history, every scan and test they can dream up, cannot know. In reality, the information advantage is exactly the opposite! They know a whole lot more about you than you do. That's not the asymmetric information of this fable.

In fact, a few paragraphs ago, Greg make exactly that opposite argument! Health care must be run by the government because the poor peasants don't know how sick they are and what to do about it, but now health insurance must be run by the government because the crafty little buggers know exactly what they need and private health insurers can't tell them apart.

We do have asymmetric information and a death spiral -- because the government forbids insurers to use information they have! The government forces insurers to take everyone at the same price, so only the sick sign up.  Maybe that's good or bad, but it's not the  fundamental asymmetric information problem of the fable. And somehow life insurers, car insurers, home insurers, and carmax exist.

Greg is a careful writer. "the mix ... may be expensive... the insurance market may disappear." Yes, every fable is a possibility. But we have to think whether in fact this is a real problem, whether it is a central problem, whether we advocate the same policies uniformly when we see this problem or whether it's just a talking point for policies advocated for other reasons, and whether the ACA or other regulation is a minimally crafted solution to this problem.
"One thing, however, is certain: The existence of a federal law mandating that people buy something shows how unusual the market for health care is."
Really? Does the existence of every federal law show how unusual the underlying market is? Agricultural subsidies prove how unusual the food market is? Solar panel subsidies show how unusual the market for energy is? Tariffs and quotas show how unusual steel is?
"policy wonks of all stripes can agree that health policy is, and will always be, complicated."
As a matter of economics, this wonk disagrees. 95% (made up number) of health expenses are relatively predictable complex personal services, bought by savvy shoppers who buy houses cars and cell phones. I will agree that it always will be complicated only because our government will always be screwing it up. But not that it must be complicated.

OK, health care policy is hard. But it's hard because so few in our political and commentary class have any trust that markets actually can work, and that by and large thoughtfully getting the heck out of the way can lead to a better system for health, as it has for just about everything else where it has been tried. Allowed to do so, competitors will come in and provide better service at lower prices. People and the businesses that want to serve them will find a way to overcome econ 101 problems. CarMax does exist, despite the lemons theorem. Companies really care about their reputations.  What a lot of economics education can do -- including a bit of economic history -- is to patiently remind people of these fact, rather than to give them excuses for endless mindless dirigisme.

Greg is careful, and this is a good review of the potential theoretical problems of health care and insurance markets, as presented in a standard (his!) econ 101 textbook. Greg does not say that the ACA, or even 5% of the ACA, is a necessary solution to these problems. But Greg does not say the opposite either. That these are small, manageable problems, which a government bureaucracy will likely mismanage for health as it does everywhere else, is absent in Greg's column. The average New York Times reader will come out thinking Greg's on board with the basic architecture of the vast complex mess coming out of Washington. If Greg thinks, as he may well do, that a regulatory system about 5% of the size of the ACA could handle all of these economic problems with your and my health insurance, that the rest of the ACA is a vast mess mostly designed to cross-subsidize health care from one group to another,  maintain rents for incumbents, and hide the cost of it all, you wouldn't know it from this article. Greg is a great writer, and knows his audience and the context in which he is writing, so it is a puzzling sin of omission.

I suspect I know what happened. It sounded like a good column idea, "I'll just run down the econ 101 list of potential problems with health care and insurance and do my job as an economic educator." If so, Greg failed his job of public intellectual, to help us digest just which economic fables are actually relevant.

(The last section of After the ACA goes through all these arguments and more, and is better written. I hope blog regulars will forgive the self-promotion, but if Greg hasn't read it, perhaps some of you haven't read it either.)

Update: Greg Responds. Thoughtfully, politely, and unlike me, concisely, as one expects. Yes, there is a great question as to what the role of an economics educator should be! Do we run through the standard list of theoretical possibilities for market failure? Or do we go to the second step of questioning just how much they apply, how central they are, how much they actually drive the regulatory outcome, how effective regulations are at addressing them; making sure they aren not just turned into talking points for political outcomes and rent seeking? All in 900 words or less!

Update 2: Sometimes I'm really slow. It occurs to me only this morning that both Greg and I missed the elephant in the room. The number one lesson that econ 1 has for health policy is: The demand for health care, and health care quality, is highly elastic. And Lesson 2, the income elasticity is pretty high too.

The standard vision in the policy world, the public, and too many health “economists” is that we “need” health care and it is a homogenous good. Translated to economics, they suppose a vertical demand curve.  The hard fact is exactly the opposite. Perhaps less obviously, quality is highly price elastic too. Your back hurts. Do you “need” surgery? (and if so what kind, performed where?) steroid injections? Ibuprofen? Physical therapy (an incredibly varied and price elastic service)? Many people looking at the cost go to chiropractors.

For the world of policy, this fact is what upends all health care schemes. If the cost is low, people will expand their demand for health care services enormously. If the demand curve were vertical, the supply curve could be flat. Sadly, if the demand curve is very flat, the supply curve must rise, and if not through price, through rationing. Someone else will decide what you "need."

Income elasticity is huge. What else is there to spend your money on, if you can? Plus, like business class, people are willing to pay a lot as income rises for the ancillary parts of health care services.

Update: Noah Smith thinks my blog posts and essays aren't long enough. Perhaps a book-length asymmetric-information literature review is a good idea. Someday. 

60 comments:

  1. Interesting points, but I think it is best to ee helpful and suggest a solution. Be specific. This debate has enough "free market" and "deregulation" or "Medicare for all" hand-waving. Most people probably think medical licensure is a useful thing. Perhaps not, but that would be a hard sell to allow whomever could save up for a surgical drill to perform decompressive craniectomies in their basement. It's kinda hard for the market to work something out when the buyer can't tell anyone the service isn't done correctly because they are dead. Maybe I'm a bit off, but it seems there is a difference between a dog walker and a brain surgeon. Perhaps a literal straw man and a brain surgeon would be a better comparison?

    To the point of being helpful and offering something new, here is one highly specific new proposal:

    To date, healthcare funding models have been limited to insurance, savings programs, and unreimbursed care, with insurance being the dominant model. However, many modern insurance panels include deductibles which are fundamentally incompatible with the reality that many Americans live paycheck-to-paycheck. By reexamining old assumptions of how healthcare should be funded, in the context of a modern society with ubiquitous information technology, a new model could alleviate a common source of frustration for voters while preserving recent policy advancements. This paper outlines a proposal which could bridge the coverage gap created by high deductible levels, which are common in both ACA exchange plans and many employer provided plans today, using a loan-based approach. Such an approach would seem to greatly reduce the rather substantial transaction costs in healthcare by simplifying most transactions and provide a more patient-centered approach for common transactions up to a deductible limit. A specific proposal of how to implement such a proposal, using existing systems operating right now, is presented and payment scenarios are also presented. On the provider-side, debit card processing systems, which are widely used to process health savings account (HSA) payments, could be combined with something like the federal student loan program for loan repayment. The federal student loan program provides substantial funding with highly flexible repayment terms in a manner which is currently slightly profitable to taxpayers. Combining these two existing systems could provide much needed relief to patients in a way which is more patient-centered, reduces cost, expands coverage, and at minimal cost to taxpayers.

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    1. The blog post is ridiculously long already, so it's not the moment for "solutions." Besides, take a look at "after the ACA" and "health status insurance." I've written about solutions before, and there is a limit to how often even a blogger should restate points

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    2. I'll stick to my licenced physicians and Arrow as a starting point on health economics. Things get weird at the corners, healthcare is the corners in many respects. Look at the cost curve on MEPS. The graph is almost unreadable given the skewness. It's like something that should be graphed using a logarithmic scale like astronomers use. Most people don't have $2M potential uncertainties in housing. It's not 95% that are predictable, more like 1/3 somewhat predictable (toddler with earache)...1/3 unpredictable, but reputation should be able to make market work (broken bone), and 1/3 unpredictable. Pauly 1978. Two hard parts: 1) is the small portion that need really expensive (e.g. major organ transplant, multiple brain surgeries, etc.) and 2) chronic conditions than run tens of thousands or more a year. The point is that, yes, it is a hard area.

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    3. Though already long, there's nothing wrong with a little self-promotion.

      I think sometimes academics take the attitude, "I said it once in this paper, didn't you see that?" And most people haven't. It's fun and interesting to write up new ideas. It's boring repeating the same arguments over and over. But in reality you need to shout things from the rooftops a thousand times if you want to change the world.

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    4. >95% (made up number) of health expenses are relatively predictable complex personal services, bought by savvy shoppers who buy houses cars and cell phones.

      This is preposterous, way less than 95% are "relatively predictable". Aside from annual physicals, vaccinations and a few other things (that are mostly already very cheap even without insurance), all of health care is very unpredictable.

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  2. " I'm struggling to find just the right category for this sort of argument" Maybe it's a variant on the motte-and-bailey doctrine: http://slatestarcodex.com/2014/11/03/all-in-all-another-brick-in-the-motte/

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  3. I think a significant contributor to both sides talking past each other on this topic is a refusal to discuss the foundational assumption that the goal of the policy is not to provide the most efficient system for the provision of health care/insurance. That is secondary. The primary purpose is to construct a floor of access to health care that we find socially acceptable given our collective well-being/good fortune.

    That doesn't make current policy good, certainly. But while the discussion above many times talks about minimalist solutions, it does so in the context of evaluating the success without regard for scale of failures in the first purpose given the free(r) market approach. It simply hand-waves away the question by citing the extreme case of a homeless person dying of a heart attack in the street and saying "well of course we won't let that happen".

    But the particulars of that conversation matter. In fact, they're the most important part of the conversation. I know many on the right argue that the private sector, through formal and informal charity, will provide for those who cannot provide for themselves. They might even support something like a stripped down Medicaid.

    But history is instructive. How did we get to this point? There was a time when we had much less federally support insurance. How well did the market work? What was access like? How was care distributed? How well did the industry worked.

    I may very well be mis/under-informed about the history of quality and access to medical care. I may be wrong about the degree of suffering the occurred because people simply couldn't afford care; suffering reduced through socialization of the costs in ways that aren't possible in a free market.

    But once you allow for the "well, we won't allow the homeless heart attack death", you start down the policy road that leads us right back in this direction. Just how "homeless" is necessary? Just heart attacks? Is it OK if they die from cancer? Is it OK if they die of the heart attack in a hovel instead of a box? These are the substantive questions.

    It doesn't mean we have the right solution. No informed person would suggest that. But just as free marketers beg for humility about the power of people to design solutions, I would urge for humility about the need for complex solutions given a shared desire to tame the worst consequences of a free market.

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    1. I agree that a primary purpose ought to be " to construct a floor of access to health care that we find socially acceptable given our collective well-being/good fortune." But just why does your and my health care and insurance need to be so massively screwed up for this purpose? The answer: because rather than forthrightly tax and spend money to help people, our government tries to hide it in a massive cross subsidy scheme, whose inefficiency is drowning us all.

      Your and my health care does not need any regulation if the purpose is to provide health care for people of limited means. Pay taxes, send them a voucher. Argue about how much. I happen to lean on the side of efficient generosity here.

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    2. We probably disagree as to whether or not insurance is the most appropriate mechanism for delivering basic health care. I happen to believe that it is more efficient to directly pay the provider rather than to pay the patient to pay an insurer to pay the provider.
      On the other hand I would certainly agree with you that insurance is a good way to handle supplemental medical services.
      --E5

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  4. Can't believe you complain about strawmen and then make these arguments.

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    1. What? Brain surgeons aren't analogous to dog walkers? The thing is I couldn't tell if it was sarcasm or he was actually being serious.

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  5. Great article. Reading your blog and After the ACA has fully convinced me that free markets can work in healthcare.

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    1. yet our system is not the best and is the most expensive, especially the free market part....and studies show the free markets really lead to excessive costs....big pharma for example. ACA was never the perfect or right answer and just a dipping a toe in the water for some change...again to be passed aside

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  6. Just a thought from outside the USA. Given a free choice, which real country's solution to this easy problem would you choose.(At any point in te last 150 years).

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    1. Singapore's. They spend about 1 1/2% of GDP on health care (or around that), with equivalent outcomes.

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  7. Hi, John, Jim Forrest from Hoover here. Those anti-free-marketeers should be asked to explain how the market for Lazik surgery has seen quality (accuracy) go up 100 times and prices fall by 90% in the past 20 years...with NO insurance subsidies, only free market forces at work. One might also look at "open MRI" facilities.

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    1. My guess would be a bunch of "government regulation" to ensure that your LASIK surgeon knows WTF they're doing and the devices and procedures he's using have been thoroughly tested.

      Another could be that most of the cost is in the machinery and not the labor/skill of the surgeon. The machine gets better/faster and the doctor doesn't have to improve much.

      Or perhaps LASIK is getting cheaper because it has to compete with wearing glasses or contacts that have order of magnitude less risk and costs.

      You've picked a peculiar petard as an anti-anti-free-marketeers argument.

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    2. Because LASIK is one of the very few (perhaps only) medical procedure that automation makes almost trivial and doable in like 30 seconds. Open heart surgery not so much. It really bugs me when people bring up LASIK. It has no relevance to the 99.9% of medical procedures. There are certainly cases where free market forces can bring procedures down somewhat, but not ever to the level of LASIK until and unless someone figures out a robot surgeon that can do bypass surgery in < 1 hour.

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    3. REALLY? Do you know that PRK and lasik surgery was severely overpriced for MANY YEARS because a committee "forgot" to stop pricing it as still "experimental". Yeah then the ophthalmologists saw a huge drop in their billings/salaries.

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    4. For all you who think health care is so complex, I suggest you re-read "I, pencil", http://www.econlib.org/library/Essays/rdPncl1.html, or if you prefer, re-view it, https://www.youtube.com/watch?v=IYO3tOqDISE. The production of any product, including the lowly pencil, is complex. Far too complex to be centrally managed.

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  8. Sorry, health economics is the most difficult subfield in economics. It's the Twilight Zone. Nothing else is even close to the same difficulty.

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  9. John, I'd really like to hear your thoughts on the role of price in health care. How can we possibly have any discussion about a market mechanism when there are no clear and competitive prices for medical services?

    The ACA keeps the US on this socialized rationed angels-on-a-pinhead administrative dictat system. Why cant we have antitrust law break up insurance-hospital price fixing and collusion?!

    Without prices, there is no possibility of any market mechanism.

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    1. You are correct, the lack of visible prices is a real problem. But if we migrate to consumer directed health care with FSA's, HSA's and the like, and people have to spend their own money from their own accounts (even if funded by their employers), suppliers of health care goods and services will have to respond with published prices. Urgent care providers, physical therapy providers, and others are already doing it in many areas of the countries; imagine if people who do annual physicals begin to compete the same way. Actually, it is not hard to imagine, you can get a physical at a reasonable price at many urgent care providers. Markets always respond to competitive forces IF competitive forces are allowed to play out. However, I admit I have no answer if you need a heart transplant, but that's where providers of catastrophic care insurance policies should be playing.

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  10. "Suppose that insurance companies must charge everyone the same price.... the healthiest people may decide that insurance is not worth the cost and drop out of the insured pool. With sicker customers, the company has higher costs and must raise the price of insurance. ...As this process continues, more people drop their coverage, the insured pool is less healthy and the price keeps rising."

    Actually a good description of what's happening right now and why insurers are abandoning ObamaCare. Try to get out more and talk to people who have to make the decision whether to buy health insurance. Ironically, ObamaCare has created the beginning of an underground cash-based health care system. I didn't think the model would work in my pain management practice but when I'm charging $250 and the hospital wants $800 word gets around. I can get my cash patients an MRI for under $400. Using GoodRx we can get great cash prices for meds.

    And the AMA does NOT control physician supply in the US. They have zero control over the number of medical schools, number of students, or how many international physicians come into the country. Licensing is controlled by the states and to my knowledge there are no quotas.

    Now that pricing power is almost exclusively in the hands of 3rd party payers supply and demand are irrelevant. In Houston there is exactly one pain specialist who accepts my Blue Cross insurance plan. Even I don't accept my insurance because the fees suck. Obviously the insurers don't care about scarcity or the fees would rise to bring on more physicians.

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    1. "the AMA does NOT control physician supply in the US"

      Totally disingenuous comment. The AMA is a lobby group, of course it does not directly control supply just like taxi unions cannot ban Uber on their own. Here is the AMA on nurse practitioners:

      https://www.ama-assn.org/ama-statement-va-proposed-rule-advanced-practice-nurses

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  11. Informational asymmetries exist. How many airline passengers understand Bernoulli's principle of lift? How many insured are actuaries? People make private decisions with good outcomes without nanny interference. Scott Atlas's article in yesterday's Hoover is an excellent rebuttal to the ACA and single payer

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    1. Sooooo... there is no regulation in the airline industry ... that is how you base your defence of the free market? Wow.

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    2. WOW!!! I don't know how you draw that conclusion? I never said NO regulation. Actually, Carter deregulated the airline industry. READ about it. BTW. I am NOT duty bound to provide anything for another. I will NOT be forced!

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  12. "We do have asymmetric information and a death spiral -- because the government forbids insurers to use information they have!"

    As opposed to what, having the companies use that information to deny coverage based on "pre-existing" conditions or raising premiums to such high levels they cannot be paid? No mention of that behavior in the article... I'm sorry but a free insurance market that by last count left over 50 million uninsured surly calls for some regulation.

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    1. Read "health status insurance" here http://faculty.chicagobooth.edu/john.cochrane/research/news.htm#health
      and come back. I don't repeat everything in every blog post.

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    2. I read this and see one critical issue: transaction costs. Layering one insurance over another just creates more administrative overhead. My guess would be another 12-15% or so? In my 20+ years of "adulting" and paying my own insurance premiums, I've never had one lose a check or payment. I have had them lose paperwork multiple times for claims or deny claims. That is not a coincident. Insurance companies are simply a collection of very smart actuaries, lawyers to nitpick, and accountants to nitpick. In other words, transaction costs generators. In my mind, humans and their health would seem to be highly asset specific. Transaction costs are exactly what theory predicts and exactly what the empirical evidence shows.

      As an alternative, you could just loan people money (at low rates and flexible terms, just like student loans) and let doctor and patient settle on the price among themselves...for the range/scope of transactions where the literature (Pauly 1978,1979,and 1981) suggests it would be feasible. It would bring much needed price transparency and competition to the portion of the market where they could work. So, toddler with earache, but not brain surgery. To get a loan or carry a balance, you need a HDHP. Insurance plans might have to be modified to include lifetime caps on deductibles.

      Or stated more simply, I wouldn't hang my hat on another layer of lawyers making things more efficient.

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  13. If I could make one change to our system, it's this: Once a provider (doctor, hospital, whatever) agrees to accept a price of $X from any insurer, then the price to the uninsured is capped at 110% of $X. I've gotten bills for $50,000 where the insurer's final payment was $5,000. If I could pay $5,500, then I could go uninsured and there is a possibility of the market providing incentives to adjust care. But at $50,000 the only incentive is for me to buy insurance and once I'm insured, the incentive is to use care willy nilly.

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  14. Here is my silver bullet. Allow all drugs to be legally available. Tolerate self-inflicted illness, and death. People learn to be responsible for self-preservation from when to jaywalk, to when to go see a dentist, even when to be charitable. Government is the use of force to impose behavior. When benevolent, it tries to lead. What is produced routinely are crony subsidized sectors dependent on the political class; citizens sometimes follow, but learn to opt out legally, or illegally, when excessively directed. Governments are learnign to try getting out of the way. Politically, people need to disabuse themselves of the habit believing that, it there is a problem, there needs to be a law.

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  15. Professor,
    Everything you say is great and very agreeable.
    But I think you forget the "public choice" or "political economy" component of the whole discussion.
    Politicians sell the ACA (and single payer) as the Shangri-La, the freebie, to their voters. And, truth be told, voters (many at least) want a freebie. They want others to pay for it.
    The regular question that my lefty friends ask me is: "How come that the richest country in the history of the world cannot provide universal health care to its own citizens?" "How come Canada can, Britain can, Australia can, but not the United States, a much richer country?"
    What do you say to that?
    I even heard a listener in a radio talk show saying: "I am a public school teacher in California, and I have cadillac-style health insurance paid for by my school board. But I am willing to take a cut and take an inferior health care plan if the United States introduces a single payer system. I am willing to take one for the team!" True story - the listener actually said that.
    How do you counter this mentality?

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  16. Before the ACA the majority of Americans received their health insurance thru their employer. That is still true after the ACA. the ACA is designed to address the problem of the uninsured.

    But you repeat time after time that the ACA screwed up your health insurance. I do not believe this is true. Can you give one specific example of how the ACA changed your personal health insurance. If you can not all I see is someone ranting about their own biased beliefs.

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    1. The ACA was supposed to lower premiums (premia?). Remember when President Obama promised a reduction in premiums of $2500 on average? It didn't - to the contrary, it increased premiums by a manifold for many people. It increased deductibles, it increased out of pocket expenses. Many people lost their preferred doctors ("if you like your doctor you can keep him", remember?).
      And not to speak about Medicaid - Medicaid outlays will increase by a few magnitudes into the future, and not to mention the unfunded liabilities that come with it.
      So, yes, Anonymous, the ACA is a screwed up law.

      Delete
  17. "We purchase complex personal services from people who know more than we do. It seems to work out ok."

    Gigantic straw-man alert. Choosing a grossly inept auto technician/accountant/pc geek/carpenter is likely to cost you money, but not your life/health. Healthcare isn't widgets. Why do you keep insisting that it is?

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    1. I don't think it is such a straw man. If your mechanic screws up your breaks, you can potentially die. Or if he causes the engine to overheat, your car may explode or burn. Your carpenter may hang your kitchen cabinets in the wrong way, and they fall on your head, leaving you crippled.
      Why is it not possible to search for good doctors, good MRI technicians, good hospitals, just like you look for a good mechanic?

      Delete
    2. But but but ... the auto industry has tons of regulation on safety, emissions etc. And the result, of course, is that the cosumer is protected without being an expert in the field.

      Delete
    3. "Why is it not possible to search for good doctors, good MRI technicians, good hospitals, just like you look for a good mechanic?"

      Ex-post selection bias? Just like "dead men don't wear plaid", dead men don't post on Yelp. It is not possible to search for a Yelp review on a bad neurosurgeon because the person will die before they can post the bad review.

      Perhaps you can have people write two Yelp reviews before surgery? Post review #1 if I die and review #2 if I live? But how do you ensure post #1 makes it to Yelp? Principal-agent problems with dead principals seem problematic.

      Or...just spitballing here...maybe it is a good thing that we make sure people can pass the USMLE before folks drill into folks skulls? Maybe?

      I can't believe people are actually asking these questions.

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    4. "I can't believe people are actually asking these questions"
      Wouuw, Matt, feeling snotty today? Sorry for asking these questions, which for me, as an economist, are central.
      When your car breaks down on an interstate highway in the middle of Wyoming or Kansas or Montana, you do not have much of a choice of a mechanic either. You have an emergency and you go with the first mechanic that you think can solve your problem.
      Of course you will not be able to shop around for a surgeon in an emergency.
      But why can't you shop around for managing your chronic condition? For your annual physical? For a routine procedure, like extracting your wisdom teeth? Why is not possible to look on Yelp, ask friends, colleagues and family about their experiences with different doctors? Yes, and if you find contradictory comments, well, you go with your own common sense and make a value judgement. Is this so difficult? Is this so unbelievable that it is not possible to offer it as a possibility?

      Delete
    5. The original issue in this thread, as I understand it, was the issue of licensing itself. Which is what I was commenting about, not about picking between physicians and surgeons. It was commenting that society needs clear boundaries about who is a surgeon or physician and who is not. I don't think a bartender with no medical training should just be able to decide on a whim that they want to be a doctor because there is a market opportunity for them to earn more and let the market sort it out. This isn't mortgage lending after all :-) So, yes in my mind a test like the USMLE is necessary because it provides some degree of certainty that the person has the skills they claim to have. Or maybe I have now met the second person in my life that thinks there should be no medical licensure at all. As it stands now, this is one of the strongest government interventions we have. Practicing medicine without a license is a serious crime. Most would think for very good reason.

      As far as the choice angle, Pauly (1978, 1979, 1981) covers this.

      Delete
  18. You do realize that both you and Mankiw are both right, correct? That's what makes it hard. Health economics will put hair on you chest, so to speak. It's not like if you mess up someone's portfolio will go down for a bit. In this field, if you mess up people will die. Literally. You should read the literature a little more. Lots of awesome papers with relatively low cite counts. Phelps information diffusion paper in 1992 is a masterpiece. The Wennberg stuff. The other Dartmouth folks, Birkmeyer perhaps? The Harris Model. Grossman. RAND experiments. Great stuff. All quite mind blowing. Welcome to the Twilight Zone.

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  19. And you respond with a straw man. Most health care expenses are not life or death but more mundane things. More over you put your life in the hands of pilots, cab drivers, the people who prepare your food, etc. on a daily basis. Nor do you explain why central planners will do a good job of picking your doctor instead of you.

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    1. There was a Seinfeld espisode about this. "Pimple Popper, MD"...but, Jerry and George forgot about skin cancer. Ex-post, yes. A priori...not so simple. Also, lots of things aren't immediately life-and-death, but are in the long run. This is why one gets a checkup. See hypertension and cholesterol as one example. Or you can rely on Dr. Google. Sure you might think that melanoma is a bug bite or you can convince yourself you have the plague. I'll assume I don't know ahead of time and go see the doctor. I didn't say anything about central planners picking doctors, but that is what insurance companies...private or public are. My point was simply that this is very hard stuff. Which is what the title of the article was...that it was easy. It's not. You don't know if the straw man has skin cancer, but the doctor does.

      Delete
  20. "As a matter of economics, this wonk disagrees. 95% (made up number) of health expenses are relatively predictable complex personal services, bought by savvy shoppers who buy houses cars and cell phones. "

    This is misleading. While the number is "made up", it appears to me that it confuses 95 percent of number of health *services* with 95 percent of health *expenses*. Chronic conditions, major surgery, cancer treatments, end of life treatment and the like are responsible for a greater part of health *expenses*. Numerous routine visits to the doctor's office not so much. Correctly distinguishing the two is important to this discussion. And while dying is predictable, I don't think most people know how or when they will die or suffer other major events that add most to the overall *expense* of "health care".

    Also, even if the delivery of health services becomes more efficient and less costly per each service, I would expect this to have little effect on the overall amount spent. Consumers would simply consume more. That would be a good thing, generally; however, again, the total amount spent is not the only metric that is relevant to the discussion.

    The fact that Americans spend a lot on health care is largely a resut of our compartively greater wealth and therefore (inefficiency aside) not particularly troublesome. What is troublesome is extensive borrowing to pay for it. The fact that government serves as a borrowing agent to pay for much of our large healthcare expenditures is probably more responsible for the overall level of spending than are the inefficiencies government otherwise injects into the system.

    Viv

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  21. This is an excellent debate and conversation. However, I think a broader conversation about how health policy ideas come to be in the first place might be useful. The tech industry has this concept of "eat your own dog food", which might be useful here. In economics, particularly the Chicago kind, this means paying attention to the value of local knowledge. Here is normally how health policy ideas are discussed: some millionaires from Harvard and MIT get together with some millionaires from the University of Chicago and Hoover. Maybe some millionaires, or at least people with really generous insurance, from DC are there. Perhaps an odd millionaire New Yorker. And they discuss the uninsured and working class folks. You know who is not in the room? Anyone who has actually been uninsured or likely anyone that even personally knows anyone who is. Basically, the policy debate lacks people with local knowledge. The result seems to be you get some silly stuff. I say this as someone who was uninsured for several years. Sadly, social hierarchy seems to be more important than meaningful discussion in most cases.

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    1. While uninsured, what exactly would you have contributed to the discussion of health care policy?
      And what exactly would the millions of other uninsured people have contributed to such discussion?
      The situation of the uninsured varies so much from case to case, what exactly is the value to the discussion of health policy?
      Policy should not be decided on anecdotal cases, because if you do, you will have a million different policy decisions, many contradictory.

      Delete
    2. Manfred - I think the perspective of the uninsured probably converges on principles that might be common across large classes of uninsured. My transition to uninsured for example made me very aware of "tradeoffs" which I suspect are missing from millionaire policy makers. Fix the car or see the doctor being the most common and simplest case. I do not guess that policy designers took into account that being uninsured makes "rational" sense in many cases. Having an actual uninsured human being in the room forces policy makers to consider the an actual uninsured person instead of the class of uninsured people. Policy made at the USA level tends to target some idealized average individual instead of recognizing, as you point out, that there are millions of different local cases. Getting the designers to consider that would be the reason to have even one member of the class in the room.

      Delete
  22. Hey, I'm just a guy from Detroit. It's not Chicago or Cambridge or DC. Maybe that is a good thing in that I'm not in the echo chamber and have done some independent thinking on my own? See above my loan proposal above as example of what I could add to the conversation.

    It is a novel proposal. It would get care to millions (technically all, since all would be eligible). It should reduce cost. It would seem to be the closest thing to a free market that you can get, because it eliminates the third-party intermediary between doctor and patient for 80% or so of patients. It would also score as costless with the CBO. I think it is novel and worth discussion. It is well-grounded in the health economics literature and I'll present it anywhere, anytime.

    I do think a program using debit cards (which doctors already have) linked to a loan program (which the government already administers at a slight profit) is better than arguments resting on analogies between transplant surgeons and dog walkers. The recommendation of stripping away the third-party intermediary, where possible, seems to have better chance of improving efficiency than a "health status insurance" proposal which involves adding another layer of lawyers between doctor and patient. Maybe it is different in Chicago, but in Detroit...things don't get more efficient with more lawyers.

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  23. I'll provide the perspective of an active physician-scientist, albeit not an economist. In thousands of conversations with patients, I have learned that patients are generally not able to make "free" decisions in the many clinical contexts. There are certainly some, uncommon, contexts where they can. Lasik surgery is typical of a clinical context where free market principles work. There is time to consider options, and results are predictable, permitting the exchange of money for a desired result without introducing a requirement for complex probabilistic thinking. There are other places where this might work: some joint replacements perhaps. However, the majority of medical spending is in contexts where group outcomes are characterized but individual outcomes are unclear. For example, a rectal cancer patient might have to consider the risks of radiotherapy for locally invasive disease and balance these against the risks of local tumor recurrence - which are known in an analogous, but ethnically different population...and then try to apply this to a decision. Characterizing this as a choice most consumers could reasonably make is like suggesting someone could learn quantum mechanics to buy a digital camera...except the wrong decision might kill them. Unfortunately, the bulk of medical spending happens in high stakes contexts: the intensive care unit and cancer therapy, in particular. These are places where rationality breaks down. Perhaps Mr. Cochrane would be rational in these circumstances. But all it takes is a little bit of clinical experience to know that that's not how the real world works.

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    1. There are those who "trust" that markets work better than other institutions and those who don't, they "trust" government. Drawing the latter conclusion in face of all real world experience still disappoints, but no longer surprises.

      Markets aren't perfect, they're just better than the alternatives.

      Delete
    2. Anthony,

      Good points. Agree mostly, except for the use of the word "most". Which I think is critical here. The most frequent spending is that which goes on in primary care, such as check-up on hypertension or toddler with earache. Or one-off emergency care like a odd broken bone. These aren't "most" of the spending in dollar terms, but are in number of transactions/visits. There is some good research to suggest for these sort of thing...a market approach could work. People do actually visit urgent care and pay cash. In dollar terms the two big categories are situations you mentioned and ongoing maintenance of chronic conditions like MS or Diabetes. But, yes much of the aggregate spending is situations you mention.

      The problem is both ACA and many employer provided plans at small-medium sized business now have deductibles of upwards of $12,000...a level which is wholly unworkable. It does protect for the cases you mention, but doesn't help for toddler with earache. For every rectal cancer patient, you have a thousand earaches. Yes, the cancer case is 5,000 times more costly so it costs way more in aggregate. These are somewhat made up numbers, but you get the point. Those earaches need treatment too. Basically, the current systems makes sure hospitals and specialists get paid...but not primary care. Primary care is important too and in many cases seems like a context where market forces could work and even some good evidence patients can understand things reasonably well. My proposal was sort of designed to bridge that gap. It was written by someone who made to conscious choice to go uninsured for a few years to finish school, because working 60 hours a week on a nightshift isn't conducive to finishing an undergraduate economics degree. It was a choice I made a couple months after I spent a couple days in the ICU. The proposal makes more sense if you look at repayment scenarios and what the actual cost curve in the US is by percentile. It is so skewed it is difficult to describe. My proposal is just designed to give relief to people who need care (mostly primary care), but aren't the ones with immediate life threatening illnesses. It seems like a good thing to get people to a primary care doctor, so fixable problems don't become expensive life threatening illnesses. I could be wrong, but what I am suggesting is something I would to have loved to have when I was uninsured. And I have close personal friends that are primary care doctors who like the idea too.

      The paper can be found at the link below and I would love to hear your feedback.

      https://ssrn.com/abstract=3013457

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  24. I'll provide the perspective of an active physician-scientist, albeit not an economist. In thousands of conversations with patients, I have learned that patients are generally not able to make "free" decisions in many clinical contexts. There are certainly some, uncommon, contexts where they can. Lasik surgery is typical of a clinical context where free market principles work. There is time to consider options, and results are predictable, permitting the exchange of money for a desired result without introducing a requirement for complex probabilistic thinking. There are other places where this might work: some joint replacements perhaps. However, the majority of medical spending is in contexts where group outcomes are characterized but individual outcomes are unclear. For example, a rectal cancer patient might have to consider the risks of radiotherapy for locally invasive disease and balance these against the risks of local tumor recurrence - which are known in an analogous, but ethnically different population...and then try to apply this to a decision. Characterizing this as a choice most consumers could reasonably make is like suggesting someone could learn quantum mechanics to buy a digital camera...except the wrong decision might kill them. Unfortunately, the bulk of medical spending happens in high stakes contexts: the intensive care unit and cancer therapy, in particular. These are places where rationality breaks down. Perhaps Mr. Cochrane would be rational in these circumstances. But all it takes is a little bit of clinical experience to know that that's not how the real world works.

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  25. "Why haul this out just for health care?"

    Why? Because health care sector is 16% of the economy.

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  26. Please let me say a real experience about price elasticity of health care and tell you how government's neglect of this fact has leaded to huge waste of public funds in our country.

    In our country one day (tow years ago) government officials said let do something for people. So, government said that it would pay a significant proportion of health care expenses of every people. They had thought that they could pay the it because they had an estimate of previous expenses of people. But they didn't pay attention to this simple fact that health care is elastic. And now two years after the announcement of the plan, the expenses of it have skyrocketed simply because they didn't know when you decrease the price of health care the demand would reaction very much. It is a real story that shows sometimes policy makers do not know the simple lessons of economics.

    And after creating such a mess, they don't know what they should do about this plan: on the one hand the have created a right for people that they can cancel it, on the other hand, they do not have enough budget for paying it.

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  27. I agree with Norman above. Although I introduced the idea of a Motte and Bailey doctrine to criticise postmodernism it applies just as well here. Such a doctrine is a body of propositions with a two-part structure, the ‘Bailey’ of dubiously defensible propositions and the ‘Motte’ of easily defensible propositions. This allow a distinctive kind of dishonest rhetorical manoeuvre, which manoeuvre is what many are now calling the Motte and Bailey. The Bailey propositions are given up when under argumentative pressure. In their place the Motte propositions are brought into view and advanced as if they were what was being defended all along. When the critic has retreated the proponent of the doctrine returns to advancing the Bailey propositions. This kind of deceit is often practised with the economic efficiency of the division of labour.

    The doctrine on health care being complained about is indeed a Motte and Bailey doctrine. The Bailey in this case includes propositions such as that “the ACA and tens of thousands of subsidiary regulations [are] absolutely necessary to provide for homeless people who suffer heart attacks …. your and my health insurance [must] be … totally micromanaged by the Federal government” (in Professor Cochrane's words). The Motte includes such propositions as “well, we can't have homeless people who get heart attacks dying in the streets.”.

    For my original introduction of this idea see https://philpapers.org/rec/SHATVO-2. For my more recent analysis in response to the idea’s adoption by others see http://blog.practicalethics.ox.ac.uk/2014/09/motte-and-bailey-doctrines/. For an excellent analysis of recent bodies of thought each inhabiting their own Motte and Bailey castle, see the blog post referenced by Norman above.

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  28. Professor Cochrane, I'm a graduate student in political science and a regular reader of your blog. I recently read a review by Poterba (1994) on government intervention in the US health and education markets (http://www.nber.org/papers/w4916). His main point is that standard economic arguments related to market failures don't make much sense of why government intervenes in particular ways in these areas. I was wondering if you might know of a similar review that quantifies the size of externalities/market failures across different markets and then examines if the scope of government provision of regulation, goods, or services is consistent with the theoretical case for intervention in these markets. Thank you very much.

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  29. John Cochrane criticizes Greg Mankiw for not informing his readers how much of the ACA attempts to fix these hard economic problems. "Greg does not say that the ACA, or even 5% of the ACA, is a necessary solution to these problems."

    Noah Smith criticizes Cochrane for not informing his readers of how extensive the hard economic problems are. "Cochrane does not engage with the empirical literature."

    Noah (2nd to last paragraph) and Cochrane (3rd to last paragraph) agree that the ACA has little to do with hard economic problems. From Mankiw's article, it is straightforward to infer that he thinks hard economic problems make health care policy hard.

    It is also straightforward to no longer draw this conclusion after Mankiw confirms Cochrane's speculation:
    http://gregmankiw.blogspot.com/2017/09/more-on-economics-of-healtcare.html
    "It sounded like a good column idea, "I'll just run down the econ 101 list of potential problems with health care and insurance and do my job as an economic educator." "

    Noah Smith should level his criticism toward Mankiw, not Cochrane.

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  30. hn. . so much education and yet stuck in an academic bubble... you are a moron if u don't see that free market for profits in high risk products only means reduce costs and risks for insurance companies and higher profits ROE.... which means old or sickly patients are either killed or charged sky high premiums ... = profits... (which means is companies don't really control costs .. they simply pass doc/treatment costs through to patient premiums)
    maybe you skipped micro economics 101 ??
    most other countries have figured out that to be patient centered and actually control costs, they have a public health care option.. for catastrophic or base line health care... what do you call a few for profits dominating an industry .. = ? hell for the sick.. death to the sick.. =higher profits .. why would z business insure a sick person eacharges year ?

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