Single payer sympathy?

A July 30 2018 Op-Ed in the Wall Street Journal, titled "The tax and spend health care solution"

Why is paying for health care such a mess in America? Why is it so hard to fix? Cross-subsidies are the original sin. The government wants to subsidize health care for poor people, chronically sick people, and people who have money but choose to spend less of it on health care than officials find sufficient. These are worthy goals, easily achieved in a completely free-market system by raising taxes and then subsidizing health care or insurance, at market prices, for people the government wishes to help. 

But lawmakers do not want to be seen taxing and spending, so they hide transfers in cross-subsidies. They require emergency rooms to treat everyone who comes along, and then hospitals must overcharge everybody else. Medicare and Medicaid do not pay the full amount their services cost. Hospitals then overcharge private insurance and the few remaining cash customers. 

Overcharging paying customers and providing free care in an emergency room is economically equivalent to a tax on emergency-room services that funds subsidies for others. But the effective tax and expenditure of a forced cross-subsidy do not show up on the federal budget. 

Over the long term, cross-subsidies are far more inefficient than forthright taxing and spending. If the hospital is going to overcharge private insurance and paying customers to cross-subsidize the poor, the uninsured, Medicare, Medicaid and, increasingly, victims of limited exchange policies, then the hospital must be protected from competition. If competitors can come in and offer services to the paying customers, the scheme unravels. 

No competition means no pressure to innovate for better service and lower costs. .....

...

As usual, I have to wait 30 days to post the whole thing.  It synthesizes some of my earlier blog posts (here here here)  on how cross subsidies are worse than straightforward, on budget, taxing and spending.

Let me here admit to one of the implications of this view. Single payer might not be so bad -- it might not be as bad as the current Medicare, Medicaid, Obamacare, VA, etc. mess.

But before you quote that, let's be careful to define what we mean by "single payer," which has become a mantra and litmus test on the left. There is a huge difference between "there is a single payer that everyone can use," and "there is a single payer that everyone must use."

Most on the left promise the former and mean the latter. Not only is there some sort of single easy to access health care and insurance scheme for poor or unfortunate people, but you and I are forbidden to escape it, to have private doctors, private hospitals, or private insurance outside the scheme.   Doctors are forbidden to have private cash paying customers. That truly is a nightmare, and it will mean the allocation of good medical care by connections and bribes.

But a single provider or payer than anyone in trouble can use, supported by taxes, not cross-subsidized by restrictions on your and my health care -- not underpaying in a private system and forcing that system to overcharge others -- while allowing a vibrant completely competitive free market in private health care on top of that, is not such a terrible idea, and follows from my Op-Ed. A single bureaucracy that hands out vouchers, pays full market costs, or pays partially but allows doctors to charge whatever they want on top of that would work. A VA like system of public hospitals and clinics would work too.  Like public schools, or public restrooms, you can use them, but you don't have to; you're free to spend your money on better options if you like, and people are free to start businesses to serve you. And no cross-subisides.

Whether we restrict provision with income and other tests, and thus introduce another marginal disincentive to work, or give everyone access and count on most working people to choose a better product, I leave for another day. It would always be an inefficient bureaucratic problem, but it might not be the nightmare of anti-competitive inefficiency of the current system.

The free market describes well how your and my health care and insurance should work. It does not offer nearly so clear advice on how the government should manage the finances and bureaucracy that provide subsidies (if we want to provide them).  There are always tradeoffs, generosity vs. moral hazard and disincentives. Economics is crucial to understanding those tradeoffs, of course, but the answer will always be a muddy middle of tradeoffs. I have offered that taxing and spending -- on budget and appropriated -- to provide those subsidies may be better than the current mandated cross subsidies. We already have a "single payer" -- the federal government. The argument that a  single point of entry, a single payer, or a single provider, may be more rational and cost effective than the current system  for the purpose of providing subsidized care is not as crazy as it sounds -- if it allows a free the market for the majority of Americans who own cars, houses, TVs and cell phones and can pay for better services in that free market.

"Single payer" also usually means "single price-setter." It means a gargantuan Federal bureaucracy that will somehow produce health care cost savings by simply decreeing that doctors and hospitals be paid less. Good luck with that.

Both left and right forget that "negotiation" means only you pay less and somebody else pays more. We can't all pay less by negotiation. Price controls mean rationing. Period. This is the heart of current "single payer" proposals, and they are doomed.

My "single payer" is just that, a "payer," operating in a completely free market.

Still, when a politician endorses "single payer," ask "does that mean we all can use a single payer? Or does that mean we all must use a single payer?"

Health care competition?

Continuing the health care series, there does come a time in which innovative disruptors can break open a protected market and bring some competition. Think Uber and taxis. In a very nice essay, John Goodman describes one such effort, MedBid, an online marketplace where hospitals (gasp) bid for your business:

[entrepreneur Ralph] Weber says MediBid got about 3,500 requests last year from patients; and providers made 12,000 bids on those requests. ...

The average knee replacement on MediBid costs around $15,000. The normal charge by U.S. hospitals is around $60,000 and the average insurance payment is about $36,500.  A similar range exists for hip replacements, with an average Medibid price of about $19,000.

Recall prices of $180,000 per hip in my last post. The most interesting feature of Goodman's essay is the nature of price discrimination hospitals practice. It turns out they will negotiate lower prices for cash customers... Sometimes:

...Canadians can come to the U.S. and pay about half as much as we Americans pay. By taking advantage of Medibid, you and I can do the same thing. So can employer health plans. 

So which hospitals are giving Canadians and MediBid patients 50% off? It could easily be a hospital right next door to you. Strange as it may seem, hospitals are willing to give traveling patients deals that they won’t give those of us who live nearby. 

The reasons? Hospitals believe that if you live in their neighborhood, they’re going to get your business, regardless. Also, after your operation, your insurance company might argue over whether the operation should have been done in the first place. They might argue that there was no pre-authorization. They may argue over price. They may argue over many other things. And when the hospital finally gets its money, it might be a year or two after the fact. 

The “medical tourism market,” as it’s sometimes called, has three requirements: (1) you have to be willing to travel and (2) you have to pay up front, and (3) there can be no insurance company interference after the fact. 

This last part is really interesting. You have to travel to get the discount.

We'll see how long the price discrimination lasts in the face of a market that organizes people around it. More and more people have high copayment policies, ACA policies that have such narrow networks they can't get the treatment they want, health savings accounts and so forth. Employers can steer you to Medbid as well.

Cross subsidies again -- hip replacement edition

From the Wall Street Journal, a familiar story of medical pricing mischief:

Michael Frank...had his left hip replaced in 2015. The Manhattan hospital charged roughly $140,000. The insurance company paid a discounted rate of about $76,000, and his share—a 10% copay, plus a couple of uncovered expenses—was a bit more than $8,000. 

The author, Steve Cohen

I’d recently had two hips replaced, six months apart, at the same hospital that had treated him....the hospital had charged $175,000 for my right hip and $180,000 for the left. The insurance company had paid discounted rates of $75,000 and $77,000. 

The usual picture is a huge sticker price, an "insurance discount" and Medicare and Medicaid paying even less than that. I googled around a bit looking for the latter numbers, which I didn't find but I did find here a nice study of cost variation

The average typical cost for a total knee replacement procedure was $31,124 in 64 markets that were studied. However, it could cost as little as $11,317 in Montgomery, Alabama, and as high as $69,654 in New York, New York. Within a market, extreme cost variation also exists. In Dallas, Texas, a knee replacement could cost between $16,772 and $61,585 (267 percent cost variation) depending on the hospital. 

Similar trends also were seen for the average typical cost for a total hip replacement procedure, which averaged $30,124. However, it could cost as little as $11,327 in Birmingham, Alabama, and as much as $73,987 in Boston,5 Massachusetts, which had the greatest variance within a given market, with costs as low as $17,910 (313 percent cost variation). 

These are, I think, insurance costs not the above sticker prices. Also from the LA times,

New Medicare data show that Inglewood's Centinela Hospital Medical Center billed the federal program $237,063, on average, for joint replacement surgery in 2013. That was the highest charge nationwide. And it's six times what Kaiser Permanente billed Medicare eight miles away at its West L.A. hospital. Kaiser billed $39,059, on average, and Medicare paid $12,457. The federal program also paid a fraction of Centinela's bill -- an average of $17,609 for these procedures.

That does give some sense that Medicare is paying even less than private insurers.

Economics

What's going on here? Observations:

1) This market is grotesquely uncompetitive. In any competitive market, suppliers bombard you with price information to get you to shop, and prices are driven to something like cost. Airlines don't need a government run nonprofit to disclose how much they charge. There is not just massive price-based competition for flights, there is massive competition for price-shopping services -- google flights vs. orbitz vs. kayay vs. priceline vs. expedia and so on.

2) The insane list price, the insurance discount of about half, and medicare paying about half that is telling. You would expect a cash discount. There are people with $30k to spend, insurance that doesn't cover hip surgery, and hospitals should be jumping to serve them, cash and carry, no paperwork. There are plenty of people with that kind of money to spend on cosmetic surgery.

The clearest sign of pathology in US health care is that the cash market is dead. Even if you have the money, you must have an insurer to negotiate the "insurance discount."

I suspect that in fact if you go to the hospital and say you're paying cash and negotiate, you can get a much better deal. So long as you don't let anyone else know what you're paying. But even that is no defense. You don't have to go visit airline offices and negotiate one on one for a ticket to New York. Competitive businesses chase after their cash customers. And people with $30k to spend on hip replacements don't want to spend weeks negotiating.

Why don't they advertise? Hospitals cannot publicly say what the cash price is. If they did, insurance would demand that price too and the cross subsidies would vanish.

The quoted price is a fiction. It allows hospitals to declare lots of charity care when they treat uninsured people with no money at all. But more importantly, it gives them a great starting point for a one-on-one ex-post negotiation for the unwary.

As in "cross subsidies," we have an immense scheme of cross-subsidies going on, in which private insurance at $70k overpays compared to Medicare, and the hospital is left free to fleece the unwary with outrageous $140k bills. Cross subsidies cannot withstand competition.

3) The huge price variation gives some sense how wasteful the system is. In addition to the obvious variation across hospitals in a given town, variation across cities is telling.

Google flights shows $591 for a first class ticket from New York to Birmingham Alabama, and the most expensive hotel I can find there is $177 per night. Why not fly to Alabama? Well, of course, insured patients are insured. And insurance is, per law, state based, so Alabama is out of network!

Regulations 

The government needs to do something about this, right? Steve mentions one apparently failed effort,

In 2009, New York’s then-attorney general, Andrew Cuomo, announced the creation of a nonprofit organization called FAIR Health. Its mandate is to provide consumers accurate pricing information for all kinds of medical services. 

I found the FAIR Health website and queried its database. It reported that the out-of-network price for a hip replacement in Manhattan was $72,656, close to what Mr. Frank’s and my insurance companies had paid. The problem: We were both in-network, and FAIR Health estimated that cost as only $29,162. 

I never did figure out the reason for the difference in pricing—but somebody ought to.

The second natural response, which we hear over and over, is that the government needs to pass rules mandating price disclosure. But what happens when the government forces price disclosure and companies (evidently) don't want to tell customers what the price is? Well, there are rules mandating price disclosure for hotel rooms, which must be posted on the door of the hotel room.

Yet on the hotel's website,

Well, that regulation is working great isn't it.

It's easy to jump to the conclusion that people need more skin in the game, greater copays, greater incentive to shop. But the real problem is lack of supply competition. Incentive to shop is no good if you can't find out what things actually cost.

The problem is that hospitals don't want to tell you the price to attract your business. They don't want to because they don't have to, because they are protected from competition.

Hotels do want to tell you the real price. Until hospitals do too, they will find their way around disclosure regulations too. It's easy to post phony prices and wink that nobody actually pays that price.  Hospitals already do that when forced to disclose by stating huge prices and then offering insurers bundle discounts separated from the individual bill. 

Cross-subsidies

Cross-subsidies are an under-appreciated original sin of economic stagnation. To transfer money from A to B, it would usually be better to raise taxes on A and to provide vouchers or otherwise pay competitive suppliers on behalf of B. But our political system doesn't like to admit the size of government-induced transfers, so instead we force businesses to undercharge B. Since they have to cover cost, they must overcharge A. It starts as the same thing as a tax on A to subsidize B. But a cross-subsidy cannot withstand competition. Someone else can give A a better price. So our government protects A from that competition. That ruins the underlying markets, and next thing you know everyone is paying more for less.

This was the story of airlines and telephones: The government wanted to subsidize airline service to small cities, and residential landlines, especially rural. It forced companies to provide those at a loss and to cross-subsidize those losses from other customers, big city connections and long distance. But then the government had to stop competitors from undercutting the overpriced services. And as those deregulations showed, the result was inefficiency and high prices for everyone.

Health care and insurance are the screaming example today. The government wants to provide health care to poor, old, and other groups. It does not want to forthrightly raise taxes and pay for their health care in competitive markets. So it forces providers to pay less to those groups, and make it up by overcharging the rest of us. But overcharging cannot stand competition, so gradually the whole system became bloated and inefficient.

A Bloomberg article "Air Ambulances Are Flying More Patients Than Ever, and Leaving Massive Bills Behind" by  John Tozzi offers a striking illustration of the phenomenon, and much of the mindset that keeps our country from fixing it.

The story starts with the usual human-interest tale, a $45,930 bill for a 70 mile flight for a kid with a 107 degree fever.

At the heart of the dispute is a gap between what insurance will pay for the flight and what Air Methods says it must charge to keep flying. Michael Cox ... had health coverage through a plan for public employees. It paid $6,704—the amount, it says, Medicare would have paid for the trip.   

The air-ambulance industry says reimbursements from U.S. government health programs, including Medicare and Medicaid, don’t cover their expenses. Operators say they thus must ask others to pay more—and when health plans balk, patients get stuck with the tab.

Seth Myers, president of Air Evac, said that his company loses money on patients covered by Medicaid and Medicare, as well as those with no insurance. That's about 75 percent of the people it flies. 

Source: Bloomberg.com

According to a 2017 report commissioned by the Association of Air Medical Services, an industry trade group, the typical cost per flight was $10,199 in 2015, and Medicare paid only 59 percent that. 

So, I knew about cross-subsidies, but $45,950 vs. $6,704 is a lot!

OK, put your economics hats on. How can it persist that people are double and triple charged what it costs to provide any service? Why, when an emergency room puts out a call, "air ambulance needed, paying customer alert" are there not swarms of helicopters battling it out -- and in the process driving the price down to cost?

ACA dropouts

Half of the people who sign up for Obamacare (ACA) get a flurry of medical care, then drop out before a year is over. They can always sign up again if they need to. People who stay on insurance tend to be those who have ongoing chronic and expensive conditions that need continual care. The implications for the viability of such insurance are not good.

This is the interesting conclusion of a new paper, "Take-Up, Drop-Out, and Spending in ACA Marketplaces" by Rebecca Diamond, Michael Dickstein, Tim McQuade, and Petra Persson. One good summary graph:

Atlas on Health

My colleague Scott Atlas has a superb oped in today's (October 4) Wall Street Journal. Instead of just arguing about health insurance and how we, via the government, will subsidize and pay for health care demand, let's fix the equally catastrophically broken health supply system.

"Republicans have now failed twice to repeal and replace ObamaCare. But their whole focus has been wrong. The debate centered, like ObamaCare, on the number of people with health insurance. A more direct path to broadening access would be to reduce the cost of care. This means creating market conditions long proven to bring down prices while improving quality—empowering consumers to seek value, increasing the supply of care, and stimulating competition."

This is the kind of out of the box, out of the usual left-right mudslinging idea that might someday spark a bipartisan reform, if our legislators could someday get past scoring symbolic points and sit down to actually fix something. (I have written similar ideas, but nowhere near as clearly, or as based in lots of fact-based scholarship and detail as Scott has.)

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.

Duet

Sometimes the blog posts write themselves from contrasting newspaper headlines.

New York Times

New Gene-Therapy Treatments Will Carry Whopping Price Tags
By GINA KOLATA September 11, 2017

Emily Whitehead, the first pediatric patient to receive the gene-therapy treatment Kymriah, which put her leukemia into remission. The treatment has a $475,000 price tag, raising questions about how patients and insurers will pay. ...

One drug, to prevent blindness in those with a rare genetic disease, for example, is expected to cost between $700,000 and $900,000 per patient on average,..

Washington Post

The dam is breaking on Democrats’ embrace of single-payer
By Aaron Blake September 12 at 9:39 AM

Sen. Cory Booker (D-N.J.) became the fourth co-sponsor of Sen. Bernie Sanders's (I-Vt.) “Medicare for all” health-care bill Monday. In doing so, he joined Sens. Elizabeth Warren (D-Mass.) and Kamala D. Harris (D-Calif.). 

What do those four senators have in common? Well, they just happen to constitute four of the eight most likely 2020 Democratic presidential nominees, according to the handy list I put out Friday. 

Update: Gillibrand just signed on to Sanders's "Medicare for all" bill. So now 5 of my top 8 potential 2020 Democratic nominees have now come out for the bill -- before it is even introduced. "Health care should be a right, not a privilege, so I will be joining Senator Bernie Sanders as a cosponsor on his Medicare-for-All legislation," Gillibrand said.

Hint. Budget constraints? Hint 2: get ready to start making lots of noise if you want treatment.

By the way, let us watch for the crucial buzzword question. Does "single payer" mean there is a single payer that anyone can use -- but you're free to buy and sell your own insurance on top of that, hopefully deregulated since there is no need to regulate anymore, everyone has access to medicare for all? Or does "single payer" mean there is a single payer that everyone must use -- private insurance, private practice, just paying cash illegal, to cross-subsidize the system? I fear the latter. We'll see.

The previous champion was stories on the same page in WSJ, roughly ``self driving trucks coming soon'' and ``shortage of truck drivers.'' I lost the link.

Ray of hope update

The July 13 Wall Street Journal editorial updates yesterday's ray of hope.

One remaining debate is over Ted Cruz’s “freedom option.” The Texas Senator’s amendment says that any insurer that offers at least one ObamaCare-compliant plan could also sell other types of coverage off the exchanges. The expectation is that a more competitive and dynamic insurance market will emerge outside of ObamaCare. Released from federal mandates and price controls, insurers could offer many more innovative products designed for individuals, rather than standardized coverage planned in Washington.

Mr. Cruz acknowledges that insurance markets could “segment,” meaning that younger and healthier people would gravitate to the Cruz option, where premiums are likely to be much cheaper. Older people with more health expenses would remain on ObamaCare, which bars insurers from charging higher premiums based on health risks and bans exclusions for pre-existing conditions.

The logic of the Cruz proposal is that there is a rough consensus among Republicans that government should guarantee access to coverage for people with pre-existing conditions. In that case, government should pay for this guarantee, in the form of a de facto high-risk insurance pool, rather than hiding the cost in cross-subsidies imposed on private citizens.

The virtue of this approach is transparency and honesty. In a bifurcated market, premiums would be much higher for ObamaCare plans. But they’d be offset for consumers by much higher federal subsidies that rise with premiums...

So, the solution envisioned yesterday could actually emerge. The exchanges become what they already are -- places to get subsidies. Where you go to sign up for medicare, income-based premium subsidies, and so on. [The "rough consensus" really is not all that much about preexisting conditions. It is about subsidies based on income and age.] The rest of the market can be free.

It's not perfect. If we "bifurcate," just why should insurance companies have to offer an exchange policy? You can smell a cross subsidy from off exchange to on-exchange already, together with restrictions on competition to enforce that cross subsidy.

Will the off exchange policies offer guaranteed renewability, portability from state to state, and portability into and out of employment? Not yet, I think, but that's where they need to go.

The WSJ emphasizes preexisting conditions, but let's make a distinction between people with preexisting conditions right now, the day after Obamacare destroyed the individual market, and people who get conditions next year that become preexisting the year after that.

If the point of exchanges is to be high risk pools forever, for anyone who in the future develops a preexisting condition as the WSJ seems to envision, then Sen. Cruz free market idea will be very weak. It will offer people one year worth of cheap insurance, and then the minute anyone gets actually sick they transition to subsidized insurance.

The combination of free market and exchange has to be designed to keep people out of the exchanges. The previous limits on signing up for people who, starting a year from now, do not have continuous coverage, go a step in that direction. You want people to buy health insurance not so much for this year's expenses, but for the right to be covered next year if they develop a preexisting condition, and then to stay with their individual policies.

Yes, people who have preexisting conditions now cannot jump in to the market, because the market doesn't exist. But that does not mean that subsidized exchanges should forever be an absorbing state for anyone who gets sick or old. Which is all of us.

Still, the outlines of subsidies for those who need them, and freedom for the rest of us, seems to be on the table.

Update: 

Or maybe not. Mike Cannon writes there will be price controls on the "free" market alternative, linking them to exchange policies. Together with a requirement to offer exchange policies, this looks just like a small broadening of exchange policies, cross subsidies intact.  Since the exchange policies are specific to counties, I can't see how this is portable across even county lines, let alone state lines, guaranteed renewable,  and so forth.

A ray of health insurance hope

Kristina Peterson, covering the senate health bill in in the July 11 Wall Street Journal reports a ray of hope for our legislative and policy process:

“If we’re going to subsidize Americans who can’t afford health insurance, do it directly. Don’t do it through the premiums of others,” said Sen. Jeff Flake (R., Ariz.) 

Few wiser words were spoken.

Our government wants to subsidize some people's health insurance -- poor, sick, old, disabled, veterans, children, people with specific diseases, and so on. And, in many cases, rightly so.  But our politics are allergic to "tax and spend." So, we hide it -- we force some people to buy overpriced insurance to subsidize others.

It is financially completely equivalent to taxing and spending. To those who don't want "taxing and spending," you are fooling yourself by allowing cross subsidies instead.

Except it's far more damaging to the economy than the disincentives of broad-based taxation.

Cross-subsidies cannot stand competition.

If competition and free entry are allowed, insurers offer policies tailored to the wealthy, healthy, young, able-bodied, etc., and peel them off from the cross-subsidy scheme. The equivalent tax and spend can simply say, here is a voucher, go buy health care and insurance from an innovative, competitive, dynamic, cost conscious markets.

A health care and insurance market that subsidizes certain groups cannot be competitive. Then costs spiral, then health care and insurance are even more "unaffordable," then the need for subsidies is greater, the overpriced insurance rises to ridiculous costs, and people need to be herded ever more reluctantly into the system.

Peterson's reporting neatly captures this lovely revelation.

The biggest sticking point in recent days has centered on a provision supported by GOP Sens. Ted Cruz of Texas and  Mike Lee of Utah that would allow insurers that sell plans complying with ACA regulations to also sell health policies that don’t.

Well, that sounds sensible, no? Why ban competition and innovation in health insurance? Whatever happened to selling insurance across state lines anyway? Well,

Health analysts say that would likely lower premiums for younger, healthier people, who would buy more limited policies, while causing premiums to rise for people with pre-existing conditions, who would buy the more comprehensive plans that comply with the ACA.

And

“His proposal would lead to unaffordable rates for people with pre-existing conditions,” Ms. Collins said Monday of Mr. Cruz’s proposal.

Cross subsidies cannot stand competition.

Senator Flake has it right. We are at a crossroads. America can choose to acknowledge the extent of subsidies we wish to have in our health care system, and forthrightly tax people to provide subsidies, transparently, on budget, where we can see what we're doing, and allow a vibrant competitive health care and insurance market to emerge -- or we can continue the cross-subsidy / anti-competition spiral to its inevitable denouement.

The Cruz/Lee/Collins/Flake debate hopefully makes that choice  abundantly clear. That this little bit of freedom -- you're allowed to sell off-exchange policies again -- cannot be tolerated ought to make the choice so clear, so stark, so simple that perhaps they will all see that "muddle through" is at an end.

Michael E. C. Moss puts it well in a related blog post,

the obvious compromise, the only good solution, is to do both: free-market pricing of healthcare and insurance in order to drive down prices, coupled with government subsidies for the needy to enable them to buy care and insurance at market prices. 

Free market health care?

Farzon Nahvi, writing in the New York Times, reiterates the tired argument that health care can't be left to the free market, because people in comas can't negotiate.

As an emergency medicine physician in a busy urban hospital, I have patients brought to me unconscious several times a day...

Well, if the Times can recirculate tired stories, I can recirculate responses. Responding to an eerily similar essay way back in 2012, I argued in "After the ACA"  (starting p. 189)

Yes, a guy in the ambulance on his way to the hospital with a heart attack is not in a good position to negotiate. But what fraction of health-care and its expense is caused by people with sudden, unexpected, debilitating conditions requiring immediate treatment? How many patients are literally passed out? Answer: next to none.

What does this story mean about treatment for, say, an obese person with diabetes and multiple complications, needing decades of treatment? For a cancer patient, facing years of choices over multiple experimental treatments? For a family, choosing long-term care options for a grandmother with dementia?

Most of the expense and problem in our healthcare system involves treatment of chronic conditions or (what turns out to be) end-of-life care, and involve many difficult decisions involving course of treatment, extent of treatment, method of delivery, and so on. These people can shop. Our healthcare system actually does a pretty decent job with heart attacks.

And even then . . . have they no families? If I’m on the way to the hospital, I call my wife. She is a heck of a negotiator.

Moreover, healthcare is not a spot market, which people think about once, at fifty-five, when they get a heart attack. It is a long-term relationship. When your car breaks down at the side of the road, you’re in a poor position to negotiate with the tow-truck driver. That is why you join AAA. If you, by virtue of being human, might someday need treatment for a heart attack, might you not purchase health insurance, or at least shop ahead of time for a long-term relationship to your doctor, who will help to arrange hospital care?

And what choices really need to be made here? Why are we even talking about “negotiation?” Look at any functional, competitive business. As a matter of fact, roadside car repair and gas stations on interstates are remarkably honest, even though most of their customers meet them once. In a competitive, transparent market, a hospital that routinely overcharged cash customers with heart attacks would be creamed by Yelp.com reviews, to say nothing of lawsuits from angry patients. Life is not a one-shot game. Competition leads to clear posted prices, and businesses anxious to give a reputation for honest and ef cient service.

So this is not even a realistic situation.

To be sure, some conditions really are unexpected and incapacitating. Not everyone has a family. There will be people who are so obtuse they would not get around to thinking about these things even if we were a society that let people die in the gutter, which we are not, and maybe some hospital somewhere would pad someone’s bill a bit. (As if they do not now!)

But now we are back to the straw man fallacy. Once again, the idea that ACA is a thoughtful, minimally designed intervention to solve the remaining problem of poor negotiating ability by people with sudden unexpected and debilitating health crises is ludicrous. As is the argument that we should accept the entire ACA because of this issue.

More generally, (p. 185)

There is a more general point here... Critics adduce a hypothetical situation in which one person might be ill served by a straw-man completely unregulated market, with no charity or other care (which we have had for over eight hundred years, long before any government involvement at all), which nobody is advocating. They conclude that the hypothetical justifies the thousands of pages of the ACA, tens of thousands of pages of subsidiary regulation, and the mass of additional federal, state, and local regulation applying to every single person in the country.

How is it that we accept this deeply illogical argument, or that anyone making it expects it to be taken seriously? Will not one person fall through the cracks or be ill-served by the highly regulated system? If I find one Canadian grandma denied a hip replacement or one elderly person who cannot get a doctor to take her as a Medicare patient, why do I not get to conclude that all regulation is hopeless and that only an absolutely free market can function? Both straw men are ludicrous, but somehow smart people make the first one, in print, and everyone nods wisely.

(Sorry for recycling, but good prose is hard!)

This is also great example of selected sampling and the dangers of making policy by anecdote. I'm sure Dr. Nahvi is a wonderful and caring emergency room physician. But despite the vividness of his experience, that does not make him a great expert on policy. In a completely heartless free market, most of the people he describes showing up on his doorstep would have bought catastrophic coverage. They are employed, normal people who buy cellphones, life insurance, car insurance and home insurance. (That's his point -- poor people are treated for free in emergency rooms. His point is entirely the cost of treatment, for that extremely narrow group, people with assets who somehow don't have insurance.)  As a doctor, he does not see that economic counterfactual, or how cheap unregulated catastrophic coverage would be.  And emergency room physicians dealing with comatose patients are not exactly an unbiased sample of the health care system. Even if such patients need to have government support, just why does a routine dermatologist visit need to be subject to the tender mercies of the Federal Government?

And leave it to the times to deliberately confuse health care with health insurance, and to get in a gratuitous swipe at Paul Ryan,

When it comes to health care coverage, House Speaker Paul Ryan says, “We’re going to have a free market, and you buy what you want to buy,” and if people don’t want it, “then they won’t buy it.” In this model of health care, the patient is consumer, and he must decide whether the goods and services he wants to protect his life are worth the cost.

The health care debate has, apparently, become like the old joke about jokes in prison. One inmate says "31" and everyone laughs. Another says "22", and they laugh again. The new guy says "11!" and is greeted with silence. "What's wrong? he asks." "You didn't tell it right" they answer.

Well, "22" says the Times. "35" say I. We're going to make a lot of progress this way. At least people like me acknowledge and respond to their view. The bubble, apparently, is a one-way street.

NoahLogic

My little foray here into the blogosphere sometimes leaves me in slack-jawed amazement at the leaps of illogic in the commentariat.

Such was the case last week, when Noah Smith writing at Bloomberg.com, took on a recent post of mine about food stamps. 

My post was about food stamps, and about the language that people use to hide agendas in the policy debate. Scott Simon at NPR thought he had a big gotcha by repeatedly asking Congressman Adrian Smith "Is every American entitled to eat?" because the budget proposal reduces food stamp payments. The title was "single payer food," as it seemed Scott's view of food was like many people's view of health care. 

This sent Noah on a tear about "free market purists" who disdain "single-payer" health care:

In a recent blog post, Hoover Institute senior fellow John Cochrane likens single-payer health care to single-payer food:
...
by drawing an equivalence between health care and food, Cochrane is ignoring the long history of economic research showing that the health-care market is very different from others.  

Here I am left scratching my head. I did not, in fact, "liken single payer-heath care to single-payer food." I didn't mention health care at all. How can a post about food stamps "ignore" research on health economics? And if you spend 10 seconds googling you will find I have addressed all these arguments in other writing that is actually on this topic. You might not agree with my answers, but I don't "ignore" them.

A bit of advice to Noah: OK, you can't be bothered to do any real research before mounting a personal attack on  Bloomberg.com. But try to make it all the way through a blog post before writing a takedown.

(Or, back in the old days, before writing that "Cochrane is ignoring" something, basic journalistic ethics would demand that you contact Cochrane for comment, at which point Cochrane could point out that no, he is quite aware of Ken Arrow's work and has responded to it in detail, especially when actually writing about health care, not food. Or an editor or fact checker would require that. Some news media still practice this kind of basic journalistic ethics. Bloomberg, we see, does not.)

***

However completely unrelated to the subject at hand, though, Noah does bring up some interesting issues regarding health care. I'm grateful for the opportunity to rebut, because, as a matter of fact, I have written about health care,  and the attack gives me an opportunity to recycle some great old prose to prove that point.

The issue at hand: Can markets work for health care and health insurance? Noah:

There are so many problems with the health-insurance and health-care markets that it’s little wonder that they operate differently from the markets for food or cell phones. 

That's a misleading comparison. Health care is a complex personal service. The right comparison is lawyers, accountants, tax preparers, contractors, car repair shops, architects, gardeners, interior designers, bankers, brokers. These are all cases in which people deliver a complex service, and they know a lot more than we do. We hire their expertise as much as a product.

Health insurance is insurance. The right comparison is car insurance, home insurance, personal liability insurance, life insurance, disability insurance, and more complex insurance associated with businesses, such as director liability insurance, product liability insurance, freight insurance, and so forth.

All of these we generally leave to somewhat free markets. Nobody thinks there needs to be a single-payer contractor. (Well, maybe Noah does. I can't wait to see what kinds of bathroom tiles ContractorCare will pay for.) Just what is it about health care and insurance that have an essential market failure, and these do not?

Noah summarizes a 1963 Ken Arrow essay about health care, which Noah cites as research showing that markets cannot possibly work. The objections:

.. the importance of moral norms.  People have all kinds of moral considerations associated with health care. They expect doctors to act honestly and selflessly, and not just seek profit

Any time economists start telling you to pass complex regulations to enforce morality, run in the opposite direction. The Obama administration had something with the idea of "science-based" policy. At least let's get the cause and effect science right before we start making moral claims.

Let's read economists about economics:

...incomplete markets. Can people really know all of the possible health conditions they might get, including how much they would pay to cure or treat each one? ... The answer is certainly no. 

...uncertainty -- in health care, people don’t know what they’re buying until it’s already too late to make a different choice. Unlike food, which you buy over and over, open-heart surgery tends to only happen once.  

...adverse selection. People with health problems are more likely to try to buy health insurance; and since insurance companies know this, they have to charge everyone more. 

....moral hazard. After you’ve paid for insurance, the insurance company has every incentive to deny as many claims as it can get away with denying

These are all the standard objections to markets. They are all theoretical possibilities, echoed in every econ 101 textbook. But are they true of health care and insurance? And so much so that the evident pathologies of a government run system is better? (Remember, the free market case is not that markets are perfect. It is the long and sorry experience that governments are worse.) And are they so much more true than they are of all the above listed complex personal services, that the latter can be left to markets but a vast government bureaucracy must not only provide for all but outlaw the private option?

As it turns out, I have written about these things, in "After the ACA" easily available on my website and rather relentlessly promoted on this blog, especially p. 184ff,

B. The Straw Man 

...Critics adduce a hypothetical situation in which one person might be ill served by a straw- man completely unregulated market, with no charity or other care (which we have had for over eight hundred years, long before any government involvement at all), which nobody is advocating. They conclude that the hypothetical justifies the thousands of pages of the ACA, tens of thousands of pages of subsidiary regulation, and the mass of additional federal, state, and local regulation applying to every single person in the country.

How is it that we accept this deeply illogical argument, or that anyone making it expects it to be taken seriously? Will not one person fall through the cracks or be ill served by the highly regulated system? If I find one Canadian grandma denied a hip replacement or one elderly person who cannot get a doctor to take her as a Medicare patient, why do I not get to conclude that all regulation is hopeless and that only an absolutely free market can function? Both straw men are ludicrous, but somehow smart people make the first one, in print, and everyone nods wisely

Wild health care proposal

I found a lovely post on health care full of wild ideas at market-ticker.org. You may not agree with all the proposals -- wild even by my standards.  But it is full of interesting detail on what's wrong with the microeconomics of health care delivery, as opposed to the usual focus on health insurance, and who pays, ignoring the vast dysfunction of the underlying market. 

A few choice quotes to whet your appetite

All providers must post, in their offices and on a public web site without any requirement to sign in or otherwise identify oneself to access it, a full and complete price list which shall apply to every person....  

All customers must be billed for actual charges at the same price on a direct basis at the time the service or product is rendered to them.  This immediately and permanently decouples "insurance" from the provision of care.  The current system of an "explanation of benefits" that often features a "negotiated discount" of some 90% is nothing other than an extortion racket and is arguably felonious...

A Healthy Reform?

Holman Jenkins and Cliff Asness have worthy commentaries on the health insurance reform effort.

Jenkins has quite a few fresh thoughts. He also gets the incurable optimist award for viewing the bill as the "inklings of a salvation" for America’s health-care system. It's possible. Whether it is likely depends on your views of the political process.

Individual insurance:

Jenkins' freshest thought comes last:

We’ll say it again, now for the Senate’s benefit: Apply a few GOP-style fixes and ObamaCare, or something like it, becomes a solution to America’s health-care muddle. You could phase out every other federal program, including Medicare, Medicaid and the giant tax handout to employers, and roll their beneficiaries into ObamaCare.

This wisdom is exactly the opposite of most current commentary, and, here in grumpy-land, where it seems the political process may be heading.

Yes, if any memory of markets remains, the goal should be to get everyone on individual insurance -- functional, portable, individual, lifetime, guaranteed-renewable, competitive health insurance, married to mercilessly competitive innovative and disruptive health care supply. People who need help -- sick and poor -- get it by subsidies to buy that insurance. Period. (Newcomers, some of my many writings on this topic are here.)

I fear we are going in the opposite direction. I fear that the non-subsidized individual market is going to shrink more and more, to become more and more an insignificant, government run, dysfunctional waystation for a handful of unlucky self-employed and young people, on their way to employer care, a government program (medicare, medicaid, VA, etc.) or now to a miserly high-risk pool.

The second original sin of healthcare regulation

Whenever I advance one or another view of how a relatively free health care and insurance market could work a lot better than the mess we have now, the obvious question comes up: Well, what about the homeless person with a heart attack? You won't let him die in the gutter will you?

No. Of course not. We are a compassionate society. We will provide for poor people, very sick people, those with diminished mental capacity, the unfortunate, the incompetent, or the merely improvident. People don't die in the gutter.  Any half-reasonable health care reform proposal, including mine, provides some system of charity care; whether via medicaid, government run hospitals (VA for everyone, county hospitals), premium subsidies or vouchers, support for charity hospitals, and so forth; and in our society the government will have a big part in this; I do not appeal to private charity alone.  Such systems will also always be a thorn in our public side; as the tension between cost, effectiveness, quality, moral hazard will not magically disappear no matter how nice the promises of their architects, and the fraud, inefficiency, and bureaucracy of anything run by governments will not disappear as well.

But the great puzzle of health care policy: Just why is it, to accommodate this worthy goal, must your and my health care and insurance be so deeply regulated and so thoroughly dysfunctional? As one small example, why does a 20 minute skin check with the resident of my dermatologist generate a phoney baloney bill for over $1000, meaning a cash and carry market for such a simple, elastically demanded, and perfectly predictable service is impossible?

Why, in order to provide for the unfortunate, do we not simply levy taxes, and pay for charity care, and leave the rest of us alone?

Consumption vs. GDP

Random Critical Analysis has a really interesting blog post from a while ago, on the difference between consumption and income as measures of well being.  The level of data analysis and detail on that blog is really impressive.

The narrow question is whether the US spends "too much" on healthcare. A counterargument has always been, what else should we spend money on? As a society gets wealthier, it's natural to spend more on health care, just as we spend more on art, travel, and so forth.

(The counterargument to that is, whether we spend more or less is beside the point. The point is a dysfunctional regulated oligopoly is charging way too much for what we get. It's not so bad to spend this much, it's bad to get such a bad deal.)

So, the question is not whether the US spends more on health care, the question is whether we spend more on health care relative to a measure of our standard of wealth.  Using GDP as a rough proxy, we spend a lot more on health care relative to GDP than other countries.

But, the larger point of the blog post, on which I'll focus -- consumption is not GDP (income). Americans are far better off relative to other countries than we think we are. See the graph:

The Obamacare Unraveling

I usually leave Brad DeLong and Paul Krugman alone. If you haven't figured them out by now, you are beyond my help.

In particular, Brad a few years ago made fun of me for "predicting" in 2013 that Obamacare exchanges would unravel due to adverse selection. I have so far  resisted the temptation to needle Brad about that as, well... the Obamacare exchanges unraveled due to adverse selection!

But, unbelievably, Brad is doubling down. While recommending again a snarky 2015 Krugman piece, in which even Krugman was not naming his snarks, DeLong writes:

Miserable 21st Century

Nicholas Eberstadt in Commentary, (HT Marginal Revolution) offers a revealing look at what's wrong with "middle" America's stagnation. Read the whole thing, but the following snapshot jumped out at me.

He starts with a review, probably familiar to readers of this blog, of the sharp decline in work rates, even among prime-age men and women.

As of late 2016, the adult work rate in America was still at its lowest level in more than 30 years. To put things another way: If our nation’s work rate today were back up to its start-of-the-century highs, well over 10 million more Americans would currently have paying jobs.

Why are so many not working, not studying for work, and not even looking for work? What is going on in their lives? One answer:

The opioid epidemic of pain pills and heroin that has been ravaging and shortening lives from coast to coast is a new plague for our new century...

According to [Alan Krueger's] work, nearly half of all prime working-age male labor-force dropouts—an army now totaling roughly 7 million men—currently take pain medication on a daily basis.

I think Krueger had a different idea in mind: that they are in pain, indicated by medication, so can't be expected to work. How the explosion in disability jibes with a much safer workplace is an interesting puzzle to that view. Eberstadt has a different interpretation, and the lovely thing about facts is they are facts, not interpretations.

We already knew from other sources (such as BLS “time use” surveys) that the overwhelming majority of the prime-age men in this un-working army generally don’t “do civil society” (charitable work, religious activities, volunteering), or for that matter much in the way of child care or help for others in the home either, despite the abundance of time on their hands. Their routine, instead, typically centers on watching—watching TV, DVDs, Internet, hand-held devices, etc.—and indeed watching for an average of 2,000 hours a year, as if it were a full-time job. But Krueger’s study adds a poignant and immensely sad detail to this portrait of daily life in 21st-century America: In our mind’s eye we can now picture many millions of un-working men in the prime of life, out of work and not looking for jobs, sitting in front of screens—stoned.

Healthcare repair on "The Hill"

On repeal and replace, a healthcare oped on "The Hill", here.  

Republicans replacing Obamacare, beware. It has a certain logic. Much of it patches up unintended consequences of previous regulations. If we just roll back and patch once again, we will end up right back where we started.

It’s wiser to start with a vision of the destination. In an ideal America, health insurance is individual, portable, and guaranteed renewable — it includes the right to continue coverage, with no increase in cost. It even includes the right to transfer to a comparable plan at any other insurer. Insurance companies pay each other for these transfers, and then compete for sick as well as healthy patients. The right to continue coverage is separate from the coverage itself. You can get the right to buy gold coverage with a silver plan.

Most Americans sign up as they graduate from high school, get a drivers’ license, register to vote, or start a first job. Young healthy people might choose bare-bones catastrophic coverage, but the right to step up to a more generous plan later. Nobody’s premiums subsidize others, so such insurance is cheap.


People keep their individual plans as they go to school, get and change jobs or move around.  Employers may contribute to these individual plans. If employers offer group coverage, people keep the right to individual plans later.

Health insurance then follows people  from job to job, state to state, in and out of marriage, just like car, home and life insurance, and 401(k) savings.

But health insurance is not a payment plan for small expenses, as home insurance does not “pay for” lightbulbs. Insurance protects your wallet against large, unexpected expenses. People pay for most regular care the same way they pay for cars, homes, and TVs — though likewise helped to do so with health savings and health credit accounts to smooth large expenses over time. Doctors don’t spend half their time filling out forms, and there are no longer two and a half claims processors for every doctor.

Big cost control comes from the only reliable source — rigorous supply competition. The minute someone tries to charge too much, new doctors, clinics, hospitals, and models of care spring up competing for the customer’s dollar. “Access” to health care comes like anything else, from your checkbook and intensely competitive businesses jockeying for it.

What about those who can’t afford even this much?  Nobody dies in the street. There is also a robust system of government and charity care for the poor, indigent, those who have fallen between the cracks, and victims of rare expensive diseases. For most, this simply means a voucher or tax credit to buy private insurance.

But — a central principle — the government no longer massively screws up the health insurance and health care arrangements of the majority of Americans, who can afford houses, cars, and smartphones, and therefore health care, in order to help the unfortunate. We help people forthrightly, with taxes and on-budget spending.

Why do we not have this world? Because it was regulated out of existence, and now is simply illegal.

The original sin of American health insurance is the tax deduction for employer-provided group plans — but not, to this day, for employer contributions to portable individual insurance.  “Insurance” then became a payment plan, to maximize the tax deduction, and then horrendously inefficient as people were no longer spending their own money.

Worse, nobody who hopes to get a job with benefits then buys long-term individual insurance. This provision alone pretty much created the preexisting conditions problem.

Patch, patch. To address preexisting conditions, the government mandated that insurers must sell insurance to everyone at the same price. Insurance companies will then try to avoid sick people, so coverage must be highly regulated.  Healthy people won’t buy it, so it must be nearly impossible for people to just pay out of pocket. Obamacare added the individual mandate.

Cross-subsidies are a second original sin. Our government doesn’t like taxing and spending on budget where we can see it. So it forces others to pay: It forces employers to provide health insurance. It forces hospitals to provide free care. It low-balls Medicare and Medicaid reimbursement.

The big problem: These patches and cross-subsidies cannot stand competition. Yet without supply competition, costs increase, the number of people needing subsidized care rises, and around we go.

The Republican plans now circulating make progress. Rep. Tom Price’s plan ties protection from preexisting conditions to continuous coverage. His and Speaker Paul Ryan’s “Better Way” plan move toward premium support for private insurance, and greater portability.

So far, though, the announced plans do not really overturn the original sins. But those plans were crafted in a different political landscape. We can now  go big, and really fix the government-induced health care mess in a durable way.

I visited my dermatologist last month. I spent 20 minutes with a resident, and 5 minutes with the dermatologist. The bill was $1335. An “insurance adjustment”  knocked off  $779. Insurance paid $438. I paid $118.  The game goes on. We start with a fake sticker price to negotiate with the uninsured and to declare uncompensated care. But you cannot just walk in and pay as you can for anything else. Even $438 includes a huge cross-subsidy.

We’ll know we’ve fixed health care when we don’t get bills like this.

Mr. Cochrane is a Senior Fellow of the Hoover Institution at Stanford University and an Adjunct Scholar of the Cato Institute.

Growth full oped

Source: Wall Street Journal

On November 7 I wrote "Don't believe the economic pessimists," an oped about growth in the Wall Street Journal. Now that 30 days have passed, I can post the whole thing here. pdf here (my webpage).

Don't Believe the Economic Pessimists

No matter who wins Tuesday’s presidential election, now ought to be the time that policy makers in Washington come together to tackle America’s greatest economic problem: sclerotic growth. The recession ended more than seven years ago. Unemployment has returned to normal levels. Yet gross domestic product is rising at half its postwar average rate. Achieving better growth is possible, but it will require deep structural reforms.

The policy worthies have said for eight years: stimulus today, structural reform tomorrow. Now it’s tomorrow, but novel excuses for stimulus keep coming. “Secular stagnation” or “hysteresis” account for slow growth. Prosperity demands more borrowing and spending—even on bridges to nowhere—or deliberate inflation or negative interest rates. Others advocate surrender. More growth is impossible. Accept and manage mediocrity.

But for those willing to recognize the simple lessons of history, slow growth is not hard to diagnose or to cure. The U.S. economy suffers from complex, arbitrary and politicized regulation. The ridiculous tax system and badly structured social programs discourage work and investment. Even internet giants are now running to Washington for regulatory favors.

If you think robust growth is impossible, consider a serious growth-oriented policy program—one that could even satisfy many of the left’s desires.