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All I Want For Christmas Is Everything, Health Care Edition…

December 21st, 2009 · 35 Comments
Markets · Policy

Dear Health Care Protesters: I fully support your right to make your voices heard, but really, if you want to be taken seriously, you might want to make your demands a little more reasonable. Even Santa Claus inwardly mocks the little kids that ask for the PlayStation AND the pony AND the bicycle (actually, I am told that kids want electric scooters nowadays…). To see what I am talking about, scroll to about 2:00 in the following:


The Daily Show With Jon Stewart Mon – Thurs 11p / 10c
Highway to Health – Last Tea Party Protest of the Year
www.thedailyshow.com
Daily Show
Full Episodes
Political Humor Health Care Crisis

“What we want is better health care, lower costs, not more government and more taxes.” Well, that’s nice. I would even go so far as to say that it’s good to want things- it builds character. That said, let me point you to Economic Principle #1: People face trade-offs, or possibly its corollary, “There’s no such thing as a free lunch.” But how, specifically, are the above demands unreasonable?

In general, creating a better product costs money, and at least some of this cost is passed on to consumers in the form of higher prices. In fact, even if creating a better product doesn’t result in higher production costs for the firm (but doesn’t substantially lower them either), the fact that the product is better will increase demand for the product and, at least in the short-term, result in higher prices. (I say in the short term because, in a competitive market, firms will eventually bid the price down to the minimum where they can still make a profit.) In those cases where it is possible to create a better product at a lower price point, it is competition among firms that usually creates the incentives for such innovation. (There do exist magical innovations that result in both lower prices for consumers and higher profits for the firm, but these usually come about without the arm twisting that seems necessary in the health care industry.) Therefore, either better health care* at lower cost (read, price) is fundamentally impossible or the free market lacks the competitive forces to make it happen.

Let’s think about the latter scenario- maybe it is possible to provide better health care at lower cost to citizens, but the market left to its own devices isn’t going go bother. (I feel comfortable saying this because the free market has had plenty of opportunity to get its act together.) I keep talking about this notion of perfect competition, where we have a bunch of small firms offering essentially identical products and competing with each other on price. This type of setup is optimal from a societal perspective, since it maximizes the value to society that the market creates. The health insurance industry, unfortunately, doesn’t have enough competing firms to create the perfect competition outcome. Instead, the health insurance industry has a smaller number of larger firms- this industry structure is referred to as oligopoly, and it results in higher profits for firms at the expense of consumers. In this sort of market setup, competition would have to be forced to a degree in order to get prices down for consumers. Too bad that’s not an option for the people above, since they were against “more government.” Hmm.

Don’t get me wrong- I do get the spirit of what (I think) these people are trying to say. They want a health care and health insurance system with more efficiency and less waste. This is a perfectly reasonable goal, but the fact of the matter is that these industries left to themselves are not heading in this direction. Therefore, there is going to have to be acceptance of government intervention on some level, since it’s the government that can actually mandate this sort of change. If I were one of these people and really wanted to keep the government out of my business, I would be rallying for change in front of Blue Cross/Blue Shield directly rather than marching on Washington.

As for the higher taxes point…yes, all else being equal, it’s going to cost money to provide affordable health insurance to households who cannot currently afford coverage. This development would be a form of subsidy, and subsidies are technically inefficient. However, we as a nation have the ability to decide whether some inefficiency is tolerable in order to achieve an outcome that is more equitable, or just, or whatever, and where the needle falls on that tradeoff is a question of values rather than one of economics. The best economists can do on that front is to organize the value judgments that need to be made, which I conveniently took a stab at doing here.

Can I have my pony now please? Actually, a miniature horse would be ideal:

I mean, I already have a miniature dog…and my best friend wants a mini pot-bellied pig, so we could have an entire menagerie of absurdly small animals…

* Note that I am using “health care” and “health insurance” somewhat interchangeably- I do this because on some level the health insurance and health case issues are fundamentally intertwined. Just bear with me on this one.

Tags: Markets · Policy

35 responses so far ↓

  • 1 Devon Inman // Dec 21, 2009 at 3:04 pm

    When people are saying they want “What we want is better health care, lower costs, not more government and more taxes.” The individual assumes that the person they are speaking to has had to deal with a government agency in some way, be it the US Postal SSer, DMV, DMA, SSA, DHHS, or DSS.

    If it is the case that the person they are speaking to has ever had to deal with any of these agencies they will understand that ‘better’ is a comparison to what will come when the government is in charge(thus second half ‘not more government’).

    Now to the arguement that the market will not lower prices. I manage a home health agency, and have had a lot of contact with insurers in this role. The notion that there is anything like a free market in health insurance is ludicrous. The first and most obvious example is that I as a resident of North Carolina cannot buy a policy offered in Nebraska. It’s against the law, I must buy a policy that the state of NC has approved to be offered in my state. [I believe such laws were most likely lobbied for by insurance companies as a rent seeking behavior, but I could be wrong]. Aside from not being able to buy insurance from another state with a lower premium, should I choose to buy insurance(I am willingly un-insured and quite happy that way) I would be forced to buy a plan with such things as ‘pregnancy insurance’ – which is quite useless to me since I am quite incappable of giving birth, much like a women would be forced to buy a plan covering prostate-related costs. These are once again matters of law – a restriction on the free market.

    Before we go saying people can’t expect to get lower costs and better care, lets look at cutting back on the rent seeking habits of insurance companies, and allow a bit more competition in, and see if rates don’t go down.

  • 2 Occam // Dec 21, 2009 at 6:24 pm

    Devon Inman nails down the fundamental reason your analysis is wrong.

    While I look up to your economic savvy, there is likely more to it than “the free market doesn’t work”, and therefore the only option is government intervention – since you (as an economist, none the less) blatantly ignore any other factors, your analysis above is shallow and, whether you want to or not, certainly makes you sound like a partisan.

    Certainly, there are areas that the free market (free from distortion) doesn’t work, and in that instance I agree with your stance. But here, could it possibly be that there are legislative pressures that distort the free market insurance environment, making it inefficient? The answer, of course, is yes. So when people say that they want less government, but better health care, that is not an impossibility, as you snarkily imply, but rather a reasonable goal.

    Competition can easily be increased without additional legislation. Instead of immediately adding legislation to “fix” something that is broken, why not first wonder why it is broken – and perhaps accept that it might be elements of legislation that have broken the system in the first place. Then, it only makes sense to remove the offending element. Instead of “forcing” competition via public option, we can instead “enable” competition by optimizing existing legislation. Ironically, that is done without government run health care. Wow. Groundbreaking!

    Instead, we have rationalized justifications for more legislation, and misplaced and inappropriate sarcasm. I’m a huge fan of your blog, but this was just plain silly.

  • 3 Charles Dolci // Dec 21, 2009 at 8:28 pm

    Jodi, et al.
    Alas, I am not smart enough to counter your economic claims, but I have a couple problems with your assumptions and facts.
    1. I fail to understand this assertion that the health insurance industry is operating in a “free market” and is failing to drive down costs. How can anyone claim that the health insurance or health care fields are free markets. There are hundreds if not thousands of laws and regulations that tie the hands of the insurers and the health care providers. Not to mention a constant stream of, largely bogus, lawsuits that add unecessary costs to the process. Is the government going to lower the barriers to market entry for doctors?
    2. Health insurance company profits.
    According to the Associated Press last October:

    “Health insurers posted a 2.2 percent profit margin last year, placing them 35th on the Fortune 500 list of top industries.” See http://www.foxnews.com/politics/2009/10/26/fact-check-health-insurers-profits-fat/

    3. It IS a matter of opinion and “values” if “we as a nation [should] decide whether some inefficiency is tolerable in order to achieve an outcome that is more equitable, or just, or whatever”. But I personally do not see it as being just to take the property from him who has created it and give it to one who has not. This is not a question of charity, it is a question of plunder.
    4. The ultimate issue, however, is being totally ignored. One function of the marketplace is to ration the scarce resources of health services. The government cannot, with the mere wave of a wand create greater resources. I think we all know (whether we chose to admit it or not) in an effort to cut costs, it will, in reality, reduce the resources available for health services. Limiting the pay of doctors and nurses, limiting the prices hospitals and clinics can charge, limiting what drug companies can charge, while at the same time greatly increasing demand, is going to lead to massive shortages. What I find so unseemly, is that the rationing function is going to be transfered from the marketplace to a bureaucracy. In the marketplace, if I think my Aunt Tilly is worth saving, I will scrimp and save and beg, borrow or steal whatever I need to get her the care required. If the government rations health services that decision is taken out of the family’s hands and it is the government that will decide if Aunt Tilly is worth saving – or not. Not a very appealing picture.
    I invite people to read some of the things written by Ezekial Emanuel – self proclaimed health advisor to Pres. Obama and the brother of Obama’s Chief of Staff – Rahm Emanuel. He makes no bones about it – health care has to be rationed and some people’s lives are not worth spending money on. See the October 2008 JAMA article by Emanuel
    See http://www.ipalc.org/Healthcare_Policy/The%20Perfect%20Storm%20of%20Overutilization%20(JAMA%202008).pdf

    Nuff said

  • 4 Cameron // Dec 22, 2009 at 2:10 pm

    One possible way to reduce costs without sacrificing too much quality would be to better align the incentives of the consumers with societal welfare. Under the current system the consumer has little incentive to shop around for lower prices relative to quality (in the form of generic drugs, cheaper procedures, less testing, etc.) due to the fact that after the deductible has been paid everything is essentially free (or in the case of a copay at least cheap). The only ones with any incentives to cut costs are the insurance companies, but when they try to cut costs by legally deny coverage to people they are viewed as evil, and since its simply not good business strategy to be viewed as evil, they raise premiums instead. If instead the government could somehow increase the abundance of health-savings accounts/high-deductible insurance plans then the firms that effect the cost/quality of health care would switch from the insurance companies to the hospitals, and as there are a lot more hospitals than insurance companies, the market would move toward a more competitive equilibrium.

    P.S. In the case of covering the uninsured a subsidy could be more efficient if you consider the warm fuzzies people feel from having more of the population covered as a public good.

  • 5 Devon Inman // Dec 22, 2009 at 2:24 pm

    Cameron,

    Your point on health savings accounts and high deductables is eactly right. Why can’t you buy a policy with high deductables in many states? State laws, the government doesn’t have to make them look better, they just have to get out of the way, and they will become available.

    Another interesting idea, is giving individuals the same tax break on health insurance as is given to corporations buying it for their employees.

  • 6 Cameron // Dec 22, 2009 at 3:09 pm

    Devon,

    While I agree that the removal of state laws regarding insurance is a necessary condition, I don’t believe that is a sufficient condition for a true solution to the problem faced with aligning the incentives of individuals with societal welfare. Though I’m aware this isn’t politically feasible, what I would advocate is to treat health insurance much like we treat car insurance. In the auto insurance industry liability coverage is required by law so the party not at fault does not have to worry about the party at fault’s inability to pay for damages done.

    Since emergency rooms are required to treat patients whether or not they have insurance the same sort of situation arises with one key difference: instead of a single party being harmed by the lack of payment, everyone is harmed due to the rising cost of health care to cover the unpaid procedure. This leads to fewer people being able to afford health insurance which leads to more unpaid emergency room visits which leads to higher costs and so forth… There are a number of ways to combat this (such as the reinstitution of debtor’s prisons) but the best way I can see is to simply mandating (and making the penalty much higher than the cost of getting it unlike the current bill: http://voices.washingtonpost.com/ezra-klein/2009/11/the_individual_mandate_is_too.html that everyone have some bare-minimum form of insurance. This would alleviate the problem of people going bankrupt due to health care and would also cover the entire nation. As far as equity is concerned I would have no problems with the government providing some level of health insurance to the poor and those with chronic health problems. As far as the tax break goes though I believe a better solution is to just eliminate the tax break for employers all together.

  • 7 Don Gooding // Dec 22, 2009 at 4:08 pm

    The other important reason (besides piles of regulations) that health care doesn’t resemble the free market is that federal and state governments, in the form of Medicare and Medicaid respectively, exert enormous influence on pricing as the 800-pound gorilla customer. I’m not an expert, but my understanding is that some bureaucracy sets the Medicare pricing list; that it underpays for an enormous number of procedures and products, thereby requiring hospitals to cross-subsidize through higher prices elsewhere; the relative prices distort the supply, for example, by decreasing the supply of general practitioners versus specialists since the latter get reimbursed at a much higher rate; directly sets the “full retail” price since government regulations require that Medicare get some set discount off of retail; and probably other things I’m not aware of that, again, prevent health care from ever being close to a free market.

  • 8 Don Gooding // Dec 22, 2009 at 4:41 pm

    Medicare pricing… I went to Wikipedia. And it turns out a Harvard professor designed the system currently in use.

    http://en.wikipedia.org/wiki/Resource-Based_Relative_Value_Scale

    The economically relevant point the article makes is that the “prices” are based on “costs,” rather than market-based “values.” So, it does not at all resemble a free market.

    Medicare and Medicaid account for about 4% of GDP; I think all health care is 17%, so therefore the government is about 25% of the market.

  • 9 Devon Inman // Dec 22, 2009 at 5:32 pm

    Don,

    I cannot speak to Medicare very much as my company is not involved in Medicare, but we are involved in Medicaid.

    An interesting fact about accepting medicaid is that you cannot charge any individual or insurance company less than you charge Medicaid for the same services. In other words, say Medicaid pays $15 for a service, and you have a client who has too many assets(like a house) to qualify for Medicaid, and desperately needs the service but cannot afford to pay the $15, and because people in the medical field often like to try and help people out, the provider is willing to offer the service for $10. The provider cannot charge that lower rate without now charging Medicaid that same rate for all their clients.

    This essentially creates a price floor for prices. In other words, when a healthcare provider wants to help someone out by charging a lower price they have to make the choice between helping one person(small opportunity cost) and loosing a large sum of revenue from Medicaid patients.

    I can almost assure you that the ‘public option’ would have similar provisions(remember its not competition when one competitor gets to write laws), and people who could have paid for procedures on their own will no longer be able to so, and will be forced into the ‘option’.

  • 10 Doug // Dec 22, 2009 at 6:50 pm

    Jodi,

    I love your blog but shame on you for this shortsighted post. You say that “In general, creating a better product costs money, and at least some of this cost is passed on to consumers in the form of higher prices.” That is true in the short term but not over time (otherwise CD players would be several thousand dollars today). Innovation leads to deflation.

    I would urge you to go back and review all of the forces prohibiting a truly free market (no competition across state lines, etc.). Then juxtapose it with a true free-market offering; cosmetic surgery. To paraphrase the Lending Tree: When doctors compete; you win. Prices have come down in the realm of cosmetic surgery, patients are happy and doctors are thriving.

    I am all for health care reform (as I have friends that are currently uninsurable and I don’t want them to die). This current bill is full of senator-holdout payoffs and favors to special interests. The American people don’t believe that this bill will reduce costs, no matter what Harry Reid says. And if you follow the ‘Wisdom of Crowds’, the American people are probably right.

    As for the private sector having plenty of time to “get its act together”, let us not forget that the govt. has been sitting on this medicare timebomb for ages. If Obama could fix the inefficiencies in Medicare, then I would be all for him trying the entire system. Here is conversation my grandmother had with her doctor recently:
    Doctor: Hello Mrs. Purvis, I see you are here for your bursitis shot.
    Grandma: Yes, I am. Do you think I could get a flu shot today, also?
    Doctor: I am afraid not.
    Grandma: Why, will in not go well with my other shot?
    Doctor: No, it would be fine. Its just that the billing codes are different for Medicare and I cannot bill them both on the same day. I will make an appoint for you tommorrow.

    I hope to see another post about the distortions of the health care market from you soon!

    Keep up the great work. I am learning a lot!

  • 11 Benjamin Neusse // Dec 22, 2009 at 10:05 pm

    Jodi,

    As a fellow economist I am disappointed in your analysis. All models have certain assumptions that must be true before they are useful to accurately predict reality. You have over-simplified the health care industry with your models and assume far too much.
    The health insurance industry did not self-organize into an oligopoly. The government set the conditions for that to occur by preventing the sale of health insurance across state lines. Once you account for the existence of 50 separate markets or pools of health insurance how can you expect anything other than 50 sets of oligopolies? Not accounting for this it is easy to falsely blame the failure of the free market on the companies when in fact blame falls directly on the government. Remove this one restriction and we can expect to see a few companies competing in one large nationwide market. That would in fact allow “better health care, lower costs, not more government and more taxes” because it lets insurance companies do what you rightly say they need to do. Can you imagine how expensive cars would be if you could only buy them from a factory in your state? Or what about a MacroEcon text book? What would be the cost of Mankiw’s work published through 50 different publishers because the government regulated that we could only buy books published in our state?

  • 12 Dave // Dec 23, 2009 at 2:07 am

    I believe your analysis to be completely wrong. Health care and health insurance is not operating in a free market by any means at all, hence this whole statement that the “free market has had plenty of chances and failed” has zero credibility.

    Better health care and lower costs are entirely possible without the government and higher taxes. Get the government out of the health care industry all together and I guarantee you’ll see lower costs for everyone. Don’t believe me? Look at the perverse incentives that programs like Medicare and Medicaid create. As you said yourself, life is about trade-offs. With the government subsidizing certain medications for only certain people, it’s no wonder they have an artificially high demand for these products which pushes the market demand curve out, thereby raising prices for everyone. Another economic phrase for you to ponder that applies here: dispersed costs, concentrated benefits.

    “Creating a better product generally costs money?” Not when government action is the cause of it being expensive in the first place. In this case, simply removing the government will allow firms to easily create better products at lower costs. Take a look at my blog post for more on how the government directly impacts the cost of pharmaceuticals: http://tinyurl.com/yfv2e74

    You claim that the health insurance industry is an oligopoly. What are you defining as an oligopoly? How many firms are there and how many would it take for it to not be considered as such? Further, what’s wrong with an oligopoly in the insurance business? Are you not aware of the law of big numbers and the fact that by aggregating risk we statistically eliminate it? Insurance companies exist to aggregate risk, an incredibly valuable service. The more risk that each individual company takes on, the more it is aggregated away. Therefore, it is perfectly natural that there would be only a few big firms in the insurance industry because, guess what, they serve their customers better because they’re bigger!

    These industries have never been “left to themselves” in the history of their existence. They have been heavily regulated since day one. Thus, we have no idea what direction they would go in if they were allowed to go in the direction they would go in.

    My question to you is, what makes you think that health care and/or health insurance are public goods that need to be provided by the government? They are certainly excludable and rivalrous in consumption, so… what basis do you have for justifying any of your claims?

    Oh, and health care and health insurance are not the same and I refuse to just “bear with you on this one.” They are completely different things.

  • 13 Dave // Dec 23, 2009 at 10:51 pm

    Further, what makes you think that innovation automatically incurs a higher price? Seems to me that every example I can think of it does not do so. Think about Apple Computers. They consistently keep their computers at the same price point despite the fact that year after year they improve their products probably twice.

    How do they do this? Research and Development are already included in the price you pay for the original product. So no, I do not think that even in the short run we will see an increase in price. Companies will re-invest any profit that they earn into innovating their products to try to keep up with their competition.

    This whole neoclassical model of perfect competition you cite simply does not exist in the real world. Yes it makes for a nice model and yes, it does make the calculations very simple. But the fact is that homogeneity does not exist in the marketplace and to try to draw any conclusions based on that assumption is foolish. And it can very easily lead you to error, much like I believe it has here.

  • 14 Rev. Pfloyd // Dec 26, 2009 at 8:43 am

    My question about the healthcare debate is a rather simple one: why do we (as the public, media, political groups) keep focusing on the insurance companies and their profits/prices instead of the fundamental aspect of the cost of healthcare itself?

    To me it would seem that instead of trying to find ways to wrestle with the insurance market, why don’t we address the issue of what makes THIER costs high?

    Someone else mentioned it, but healthcare itself is expensive–and increasingly so–because of lack of competition in THAT market. There are HUGE barriers of entry in the healthcare field while either lobbied for (in the case of the AMA trying to artificially keep the labor supply low) or directly created through regulation (creating economies of scale that push charity hospitals and non-profits out of the market too) to subsidization (Medicare/Medicaid making up around 45% of all healthcare purchases in the country).

    I think we shouldn’t be blaming the free market conditions of healthcare for its problems but the conditions of healthcare which are NOT free market-based. After all, plenty of other goods and services that are not even close to as heavily-regulated as healthcare follow the classical models just fine. When something *doesn’t*, we should be looking in the places where the industry diverges from the model, not just question the model altogether.

  • 15 Richard Voss // Dec 29, 2009 at 7:02 pm

    “What we want is better health care, lower costs, not more government and more taxes.” Sounds reasonable to me. Free the healthcare insurance industry up for healthy competition rather than overregulation, and we’ll get it. For those of you who are familiar with Porter’s model of generic strategies, the solution manifests itself economically by fomenting a competition-driven division in the industry between those insurers that adopt quasi-monopsonistic and those that adopt quasi-monopolistic service delivery models. The former build their service process structures so that their unit costs fall below the unit market price. The latter build theirs so as to target a premium segment of the market and thus build quasi-monopolies out of brands known for their reputation, reliability, customer-friendliness, or whatever special quality creates fierce customer loyalty. The market thus provides low-priced options for those who want the generic product, while providing premium options for those who choose to pay above the market.

    Therefore, it is no contradiction whatsoever to propose that the free market will simultaneously provide better and lower-priced healthcare insurance. Top-quality insurance will not be cheap, nor will low-priced insurance be top-quality. But both choices will be plentiful if the government does not kill off the industry through hyperregulation (e.g., by maintaining the status quo of state protectionism). And the rich availability of both choices will create natural economic forces that push mean quality up over time, not down.

    Should the government instead shut down competition and provide its own single-payer solution, there will be no premium insurance available for those who can afford it, but there will indeed be a reliable source of mediocre insurance for everybody, at a hefty price to taxpayers.

  • 16 Marcus // Dec 29, 2009 at 7:28 pm

    “This is a perfectly reasonable goal, but the fact of the matter is that these industries left to themselves are not heading in this direction.”

    These industries have not been ‘left to themselves’ in a very, very long time.

  • 17 David Welker // Dec 30, 2009 at 9:17 pm

    This is a really excellent post. It is true that opponents of healthcare reform do tend to want a free lunch.

    As a lawyer, I can say that the responses to your post have been extremely confused. Insurance has traditionally been regulated by the states. It always has been, and for good reason. The average consumer is not going to understand insurance contracts and there needs to be regulation to protect consumers from insurance lawyers who would love to help insurance companies collect premiums without paying claims based on technicalities in insurance contracts that consumers do not understand. Or, at least that has been the judgment of individual states, who are held accountable by local voters. Hence the traditional regulation of insurance markets by states.

    Basically, the commenters, to the extent that they are conservatives who support federalism principles and want to delegate significant responsibility to the states, are trying to have everything. Should we regulate insurance at a national level (or worse, according to the laws of whatever state is most favorable to the insurance companies instead of consumers) in blatant violation of federalism principles? I don’t think this is consistent with conservative beliefs, as dominantly expressed.

    Do conservatives who support federalism think it is free? Of course it is not. You cannot buy insurance across state lines because that would undermine the ability of states to regulate insurance, a traditional function they have long exercised. As soon as you undermine the ability of states to regulate insurance, then either insurance contracts in New York state are going to be regulated according to the law in Nebraska (or some other foreign state with regulations particularly favorable to insurance companies but not consumers) or by the Federal government but not according to the laws of New York state in accord with preferences of local citizens.

    You cannot have it both ways. You can’t have both traditional federalism and this proposal to allow insurance to be sold across state lines whether or not such contract violate state insurance regulation. There are tradeoffs. Maybe traditional federalism isn’t worth supporting and conservatives should abandon their support for a strong roles for the states… but that is not the typical argument that conservatives typically make when they invoke federalism. They seem to think they can have it both ways.

    Federalism is not a free lunch. Saying that the “free market” has not been tried because insurance is regulated at the state level and insurance sold in state X cannot be sold in state Y unless it complies with the laws of Y is a huge problem does not make sense unless one is really willing to abandon traditional federalism principles. Do these conservatives prefer insurance regulation emanating from the federal government or from foreign states which are not accountable to local voters or do they prefer regulation from the state in which they live in as has been the long established tradition with respect to insurance regulation?

    The bottom-line is this. As your commenters responses to you illustrate, opponents of healthcare reform really do think there is a free lunch. There isn’t. Their “solution” to the problem of lack of competition in insurance markets here is to abandon having the states as “laboratories of democracy.” In essence, the solution proposed is to destroy the “market” whereby states compete to create the best regulations and also to invade the traditional role of the states in regulating insurance markets.

    Whatever you think about these traditional federalism principles, abandoning them is not a free lunch.

    Thanks for your post.

  • 18 Cameron // Dec 30, 2009 at 9:54 pm

    Being an economist, I can tell that the above lawyer is confused. In economics, as opposed to law, tradition is not a reason to reject a better solution to a policy question. What he imagines we are so horrified at is exactly what we are suggesting, let the federal government regulate the insurance companies. He wrongly assumes that we have some strict dogma of federalism that we refuse to abandon even there is such an obviously better solution to this specific problem, what he fails to realize is that our belief structure is not pure federalism, but rather we believe in the government adopting the best policy for its people.

    His reference to the “ ‘market’ whereby states compete to create the best regulations and also to invade the traditional role of the states in regulating insurance markets” is rather naive by any economists standards. As any introductory public choice class will show, the government’s (both federal and state) incentive is to appease the special interests, not the general public (as is evidenced by the lack of free trade in anything). A change in tradition is not a real cost because no one (other than lawyers apparently) cares. Though I suppose it is technically true that a switch to federal regulations would not be a true free lunch (the insurance companies would suffer from the increased competition), but the general public as a whole would greatly benefit.

  • 19 David Welker // Dec 30, 2009 at 10:57 pm

    Cameron,

    I am amazed that, as an economist, you don’t even understand public choice theory. Public choice theory does not “show” or “prove” that the human beings who serve as legislators or in government are motivated to serve special interests instead of the general interest. It assumes it. As you should know, there is a big difference between proving a fact and assuming a fact. Indeed, I am highly skeptical of the assumption of public choice theory in terms of it reductionist impulse in terms of what motivates the actual human beings who serve in our government as legislators or in other capacities, as I think simple observing legislators would lead one to the conclusion that the reality is much more complex than the reductionist assumptions made in public choice theory.

    Second, the views of economists on normative issues, including the extent to basic respect for traditional allocation of roles under the Constitution, varies. Nothing in economics tells one not to respect our historical Constitutional tradition.

    You seem to be confused about the basic difference between positive economics and normative values. You speak as though “economists” don’t value tradition, as if there was something inherent in mainstream economics that leads to the adoption of certain normative values over others. But you have no right to speak for all economists, who may be liberal or conservative or something else completely.

    There certainly are real life conservative economists who respect traditional federalism values. There are also libertarian economists who belief that traditional divisions of powers embedded in our Constitution deserve some very thoughtful consideration before moving away from those values.

    So, as an economist, you have (1) failed to distinguish something that is shown or proven versus assumed and (2) failed to distinguish between the difference between positive mainstream economics and normative values which vary amongst economists.

    Finally, I will say that you know nothing about basic public policy or the law if you fail to recognize that taking away the power of local voters to decide on insurance regulations represents a cost. Maybe it is worth it, but certainly taking away local autonomy is a cost to those who lose such autonomy. We also lose the benefits of seeing how variations in regulation work out amongst the states. You assertion that there are no costs to anyone but insurance companies is untenable. Obviously, recognizing a cost does not imply that the benefits do not exceed those costs. But, one needs to recognize that tradeoff and make that argument rather than pretending that the costs do not exist.

    Again, I think you are proving the point made in the original post concerning a blindness to certain costs, as if there were no tradeoffs.

  • 20 Dave // Dec 31, 2009 at 12:37 am

    Mr. Welker,

    I would like to take this opportunity to respond to both of your comments.

    I agree, the average consumer is not going to understand all of the nuances of insurance contracts. But how exactly is this solved by regulation within the states? If it were solved, lawyers in the insurance industries would be completely out of work. Clearly, this is not the case so it must be that there is still plenty of confusion that is not being solved at all. In fact, I would argue that more regulation only makes it even less likely that consumers will understand their policies, but that increases the demand for your services which leads to a higher salary for you, so it is no surprise to me that you have justified the need for regulation to yourself and feel the need to justify it to the masses as well, but I digress.

    Second, we (or at least I) are not arguing that we should have national regulation. I would argue for zero regulation of the insurance industry, but realize that this is a radical ideal that few others share.

    Why would the insurance contracts go to the states that benefit the insurance companies the most? It seems like, since consumers ultimately choose to buy the insurance or not, the contracts would go to the state whose law favors the consumers the most. As a counter example, you can buy health care (note, not talking about insurance) across state lines and yet there are still private doctors in every state. When you need a good brain surgeon, you choose the one that’s best for you, not the one that’s best for the doctor. By your logic, there should be one state that has all the doctors in it and that state should have laws that disproportionately benefit the doctors.

    States do not sell health insurance. Health insurance companies sell health insurance. The insurance companies have a responsibility to their customers, not the constituents of a particular voting block. I believe your logic to be flawed in that it can be applied to literally anything. I can take the gist of the 6th paragraph (“Federalism is not a free lunch…”), scratch out insurance, and replace it with anything I want and it should still hold. The only assumption I need to make is that regulation exists, which may sound like a big assumption, but really it isn’t.

    And now your second post:

    First, I believe that Cameron is correct. Public choice theory does show that politicians have every incentive to pander to special interest groups. It certainly does not assume it, as you assert. I could fill this entire comment box with explanation as to why and how, but I will spare everyone else that visits the reading and not do so. If you wish to discuss this with me, please email me at Dave.Hebert@gmail.com

    Second, there is actually an entire field of economics called “Constitutional Political Economy” of which I happen to be well read in and am planning on seriously studying as one of my fields in graduate school. From my understanding, the basic tennent is this: establish a set of rules, make them well known, and live by them consistently. I would argue that a lot of things that the Federal Gov’t does today are in stark contrast to the Constitution, but again, I will spare further commenting on that as well and invite you to email me.

    Finally, “taking away the power of local voters to decide on insurance regulations” is and is not a cost. Yes, it is a cost to us in terms of political power as we get to decide on one less thing. HOWEVER, we still vote with our dollars when we purchase things. For example, casette tapes aren’t around anymore because nobody “votes” for their production with their dollars anymore. If enough people vote strongly enough (ie, demand it sufficiently) I guarantee that the market will provide casette tapes for them.

    The bottom line is this: I don’t think there is a free lunch and I did not get that impression from any of the other comments here. I don’t think you fully grasp public choice theory as strongly as you think nor the concept of competition as a form of regulation. If I were to sum it up in one sentence, I would say this: in the long run, dishonest companies will be driven out of business by honest companies.

    Again, please feel free to email me at Dave.Hebert@gmail.com if you wish to discuss anything. I will also gladly respond to your questions/comments here, if you so wish.

  • 21 Cameron // Dec 31, 2009 at 1:01 am

    Mr. Welker,

    First of all, you state that I don’t understand public choice theory and then try to evidence this by saying you don’t agree with public choice theory. Public choice doesn’t assume the result that the human beings who serve as legislators or in government are motivated to serve special interests instead of the general interest. It concludes it based on the same basic assumptions that all economics uses (that people are motivated by self-interest) . Of course it doesn’t prove anything about the real world. What it does is prove that given legislators are people and all other assumptions of economics hold, then they would likely serve the special interests instead of the public. Of course you are correct in that reality is more complex than the models proposed (just like in all sciences), but that doesn’t mean the models are useless, it just means they aren’t perfect.

    You are also correct in that I cannot speak for all economists, but when I say a free lunch, I mean a Pareto improvement. Sure people may incur costs in the form of lost political power, but those same people (on an individual level) will also benefit by at least as much as the cost making no one worse off while making at least someone better off (ignoring insurance companies). I could be wrong about this, but this is what I believe Ms. Beggs was referring to when she said we couldn’t have a free lunch. To be more specific she references that “What we want is better health care, lower costs, not more government and more taxes.” By removing the state regulations the resulting increase in competition would lead to precisely better health care (at least better health insurance), lower costs, less government and no new taxes.

  • 22 David Welker // Dec 31, 2009 at 2:51 am

    Dave,

    Thank you for your interesting comments. A few responses:

    “But how exactly is this solved by regulation within the states? If it were solved, lawyers in the insurance industries would be completely out of work.”

    First of all, I have a problem with the use of the word “solve” to the extent that you mean it to suggest a state of being without undesirable attributes. This sort of problem isn’t “solved” or not. It is made “better” or “worse” according to the value systems of individuals and local and national communities. That is, we are not dealing with a binary system that is either “solved” or “unsolved” we are dealing with a continuous system where things are “better” or “worse.” Furthermore, different people have different values and preferences, so even what is better or worse is not entirely objective.

    The problem of insurance companies taking advantage of consumer confusion will not ever be entirely eliminated. Even insurance contracts that are regulated, as they are now, are complicated and contain traps for the unwary. What we can have is not a world with no consumer confusion or predatory behavior by more powerful parties. These problems cannot, by their very nature, ever be entirely eliminated. What we can have is a world where these problems are minimized to the best of our ability and as consistently as possible with our other values.

    As to your assertion that public choice theory has managed to delve into the human psyche in a way that has totally eluded psychologists, behavior economists, and all other professionals, this remarkable claim is clearly false. Just to be clear. What I am asserting here is that the motives of the human beings who are legislators or play other roles in government cannot be reduced to satisfying special interests as opposed to the general interest. This is not an assertion that certain legislators are never motivated to serve more narrow interests at the expense of the general interest, which would be false and could easily be shown to be false. Rather, the assertion is instead that there is no one universal motive and that that politicians in fact often (and even usually) do what they perceive to be interest of society. That fact may disturb whatever simplistic public choice models you would like to propose that depend on such reductionist assumptions, but I don’t have a problem with disturbing such models. Unrealistic assumptions may be necessary for models, but at some point you end up modeling fiction rather than reality.

    So, while I am probably not as familiar with public choice literature as you are, I can already tell you, without reading it, that it fails to do that which is impossible. Namely, penetrate into the minds of legislators and government officials and determine their true motives or determine that the only thing that matters to them or “incentivizes” them is reelection or some other crass and simplistic maximization function.

    Common sense and observation will tell you that the idea that legislators are out to maximize one thing, whether it is probability of reelection or satisfying special interests is false. Human beings are more complex than that. That isn’t saying that politicians aren’t concerned with reelection. That is saying that this is clearly not the only thing they are concerned with.

    But, you apparently have a unduly and unjustly cynical view. For example, you think I am advocating certain ideas in order to justify an increased demand for lawyers. But, I think any fair outside observer would have to say that this is something you have assumed, rather than proven. Furthermore, I happen to know that in my case, your assumption is not only unproven, but false.

    If you have such sloppy reasoning with respect to your inferences about what motivates me due to my role as a lawyer, I think it is a fair inference that you probably have sloppy reasoning with respect to what motivates legislators. Again, you make the same mistake as a previous commenter. You think assumptions substitute for proof or even commensense observation about others. (The observation being that humans, including politicians, are quite complex and are difficult to reduce or simplistically pin down.)

    “From my understanding, the basic tennent is this: establish a set of rules, make them well known, and live by them consistently.’

    This is a very naive view of law. Law is complex because life is complex. Believe it or not, life is actually more free, better, and simpler because the law is appropriately complex in appropriate contexts. That is not to say that there is not a place for simple rules in certain contexts and that clear rules do not have benefits. But such rules also have costs, as they are rigid and inflexible and as a result often allow clear and blatant injustices to go remedied based on trivial technicalities. As a result, such rules also increase the probability that judges will employ legal fictions to avoid unjust results in particular cases, but such legal fictions will be employed in an inconsistent manner. As such, there are also an important place for standards of behavior (i.e. you must drive your car in a reasonably careful manner, there is an infinite number of ways you could drive in a careless manner and it is ultimately up to a jury to decide whether you drove unreasonable given the circumstances.)

    Once again, there are a lot of tradeoffs here that you seem to fail to perceive. There are tradeoffs between rules and standards — it is not as simple as you imagine.

    A final point, that anyone would put a preference for rules over standards and label that “Constitutional Poltical Economy” would demonstrate extreme ignorance about the Constitution and the law. The law was, if anything, more complex (some would say convoluted) when it was dominated by highly technical pleading rules and a strict separation between law and equity when the country was founded. We have since moved to notice pleading, which is much more straightforward. (But still surprisingly complex.) If someone tells you that the Constitution requires law to be simple or to prefer legal rules over legal standards, I would tell you that person knows nothing about the Constitution or legal history. If that person claims to be engaged in “Constitutional Political Economy” they in fact have mislabeled their field.

    “I would argue that a lot of things that the Federal Gov’t does today are in stark contrast to the Constitution, but again, I will spare further commenting on that as well and invite you to email me.”

    Please do spare me. You are unlikely to be well-equipped to argue about the meaning of the Constitution. But even if you were, I am sure that I would disagree with you. The necessary and proper clause, for example, has always been intended to be interpreted broadly. Read the Federalist Papers and McCulloch v. Maryland, for example. Most assertions like this, that the Constitution is in the present day regularly and consistently violated by the Federal Government, are based on confused ideology rather than clear legal reasoning and a sound understanding of history.

    “Why would the insurance contracts go to the states that benefit the insurance companies the most? It seems like, since consumers ultimately choose to buy the insurance or not, the contracts would go to the state whose law favors the consumers the most.”

    To use a rough analogy, I would assert that there is a “market for lemons” like problem in insurance markets. Consumers are in a poor position to understand the particulars of insurance contracts and just as importantly, the particular policies and attitude of an insurance company confronted with claims (insurance companies vary in their strategies with respect to their tendencies to resist paying claims). That is, the argument is that there exists assymetrical information concerning the insurance product. Insurance companies understand their own policies very well. Consumers do not. Given the inability of consumers to tell which insurance companies are “good citizens” or offer the best contracts, they are going to focus on the one thing that they do understand, which is price. Insurance companies who would like to have more liberal policies regarding claims or favorable contract terms for consumers would have a tendency to lose in the market place, when consumers do not well understand what they are getting with an insurance contract, but do understand the price they are paying. Therefore, insurance policies would tend to gravitate towards the least favorable terms for consumers as allowed by the most permissive states.

    Furthermore, it is absurd to say that state X can have its own laws governing insurance, when companies do not have to comply with those laws as long as they can find another state, state Y with more permissive policies that they can then offer in state X. As a matter of law, the regulations that would then govern in state X would not be the laws of state X, but the laws of state Y, the most permissive state. This is not an empirical prediction concerning the terms of insurance that will likely emerge. This is a legal assertion about what regime of law will actually govern insurance company behavior.

    You may be fine with that, given your apparent preference for laissez faire despite the fact that you concede that consumers have difficulty understanding insurance contracts. But, under federalism principles, it would be problematic for you to foist your lassez faire preferences on the citizens of state X through the laws you have your state level legislators pass in state Y, where citizens of state X have no representation. I hope you respect your fellow citizens enough to recognize they have a right to make up their own mind on whether they want to be governed by lassez faire or prefer some other philosophy.

    “The bottom line is this: I don’t think there is a free lunch and I did not get that impression from any of the other comments here.”

    I don’t know what people think. I am not in a position to read minds. (In this way, I am much more aware of my limitations than adherents of public choice theory.) All I know is that people have responded to the thoughtful post here by Ms. Beggs by asserting that we should just do X without any mention of the costs or complexities of just doing X. That appears on the surface as not being cognizant of the trade-offs inherent in doing X.

    A final point unrelated to this discussion. I would warn you against posting your email address on the Internet unless you want to be the target of spam. You should be aware that there are people who design computer programs called “robots” that scour the net and pick up text with the pattern XXX@X.com. Such programs will read your comment and put you on their lists to receive spam. One way to evade many (but not all) of these programs is to reference your email like this: David.Herbert “at” gmail.com. (Of course, the smarter robots will detect this pattern as well, but at least you will get less rather than more spam.)

  • 23 Cameron // Dec 31, 2009 at 3:23 am

    Mr. Welker,

    As I am not well-versed in law or the constitution I cannot argue the majority of your post. As for the small paragraph on public choice I do have a very quick response. First, the entire basis of economics is that everyone’s (including legislators, lawyers, and also other economists) actions CAN be boiled down into a single motive, that of self interest. Given this assumption and also assuming that a legislator’s happiness is influenced by things other than societal welfare (though this can most certainly be included), then it can be shown that a legislator will NOT always act in the public interest. This is not an assumption, this is a conclusion from a different set of assumptions. Whether or not you agree with the assumption that all people are motivated by self-interest is an entirely different matter.

    On a side note, I do not agree with Dave in that you are setting up regulations so you have a job, so my reasoning on what motivates people should still hold.

    All in all i agree that some regulations (only ones that protect the consumer from abuse, not ones that mandate specific coverage options) need to be made. I just believe that everyone is better off if the regulations are made at the federal level instead of the state.

  • 24 David Welker // Dec 31, 2009 at 4:26 am

    Cameron,

    Here what you wrote previously:

    “As any introductory public choice class will show, the government’s (both federal and state) incentive is to appease the special interests, not the general public (as is evidenced by the lack of free trade in anything).”

    This “conclusion” is so intrinsically related to the reductionist assumption of self-interest as to be indistinguishable. Yes, if legislators only cared about themselves and not about the people they represented, you wouldn’t expect anything good to arise from government. You don’t need “public choice theory” to arrive at that obvious conclusion.

    “Of course you are correct in that reality is more complex than the models proposed (just like in all sciences), but that doesn’t mean the models are useless, it just means they aren’t perfect.”

    Let N be how imperfect the model is. As N –> INFINITY the MODEL –> USELESSNESS.

    Which is to say, to the extent that models utilize unrealistic assumptions is in fact a problem and excellent grounds for great skepticism, especially when those assumptions conflict with much of observed reality concerning actual human behavior. Also, if you don’t say anything that isn’t obvious, who cares. Newton’s law (a sort of model) may be imperfect, but it makes accurate predictions that are also non-obvious.

    So far, I am not convinced that public choice theory is not useless. Tell me about the non-obvious conclusions that are not directly derivable (and in this case really driven) by the critical assumption concerning legislator motivation. Of course legislators who only care about themselves and not the people they represent will make lousy laws. I didn’t need “public choice theory” to tell me that. Although I could use Newton’s law to predict the velocity of a falling object if certain conditions hold which would otherwise be far from obvious to me, I don’t see what public choice theory shows that is not obvious.

    But regardless, my original criticism holds. Your “conclusion” is practically indistinguishable from your “assumption” and in fact can be directly derived from that assumption with very little else. Don’t act as though “public choice theory,” which is far from a science, somehow objectively establishes that legislators serve special interests instead of the general interest. Your begging the question. The legislator’s role is to “represent” his or her constituents. You are assuming without evidence that they consistently violate this most basic duty. But I know plenty of humans who take their duties to others, inside and outside of public life, quite seriously. Even at their own expense. This is a practical prerequisite for a legislator, who is known as a public “servant” for a reason. You can’t just get away with assuming that they don’t take their most basic duties seriously. The burden of proof is on you to prove they are not ethical enough to even perform their most basic duties. You cannot shirk your burden of proof with implausible assumptions, as public choice theorist do, and then claim your radical “conclusions” are somehow “science.”

    The bottom-line. The assumptions you make matter. They matter a whole lot. It is improper to take matters that are extremely controversial and assume them away and pretend that this is a substitute for actually meeting your burden of proof. Your model may be useful for something, but it isn’t useful for resolving any dispute where your assumptions themselves are called into question.

    I am not here asserting that only realistic assumptions are allowed. Unrealistic assumptions are okay in certain contexts, especially when those assumptions are incidental and concerning matters of secondary importance. But, you cannot go to the heart of the matter and assume it away and pretend like you have done anything to resolve a real controversy.

    Finally, your argument that we could have Pareto improvement without increased government intervention fails. Your heavy-handed proposal is for the Federal government to preempt state law and substitute the laws of each state with the regulations of the most permissive state, even though voters in all the other states will lack representation in the most permissive state. This is actually a fairly radical proposal, especially given that our country was founded on the concept of “no taxation without representation.” Your proposal is for the law in 49 of 50 states to be entirely determined by the law in one state where the people of the rest of the states are not represented. What cost is there in violating the basic principles upon which the American Revolution was based? I don’t think it even makes sense to quantify, much less argue that it is Pareto optimal. Certainly, when we violate core values, that doesn’t cost money or anything reducible to money exactly, but one cannot say that nothing is lost. I think the idea of Pareto optimality is the wrong conceptual framework for this particular assessment.

    Further, you may think that a race to the bottom with respect to insurance regulation is desirable. But you are going to be losing something when you, in effect, stop regulating insurance. As a lawyer I am probably more sensitive to abuses that can occur in such contracts than you are and believe that even you, though you are obviously educated, would probably be well advised to seek professional assistance if you wanted to actually understand what you are signing when it comes to insurance contracts.

    But, ultimately, my objections to stuffing this square problem in the round hole of Pareto optimality aside, I don’t have a problem with your assertion (which I nonetheless strongly disagree with) that the net benefits of your proposed action exceed the costs. I do have a problem when people make such proposals without mentioning (perhaps due to lack fo awareness) the complex costs that would be incurred.

    Finally, the idea of “there is no such thing as a free lunch” is quite distinguishable from Pareto optimality. If a person would be better off going to the movies than for a walk in the park, it is Pareto optimal for them to go to the movies. But, going to the movies is still not a free lunch. The cost of going to the movies is, among other things not going to the park. To say there is “no such thing as a free lunch” is not to say that some decisions are not better than others from a Pareto optimal stand point. In fact, most economists eat lunch, which is evidence that they think eating lunch is an optimal decision compared to other uses of their time. But, even if eating lunch is optimal, that doesn’t mean it is free.

  • 25 Doug // Dec 31, 2009 at 7:02 am

    All:

    (Disclaimer: I am not an economist or a lawyer but I did stay at a Holiday Inn Express last night)

    I will try to break it down from a layman’s point of view.

    1) In terms of buying across state lines, we certainly do this with auto insurance (I live in Indiana and my policy is from Texas), 529 college savings plans (mine are from Nevada) and incorporating companies (how many companies are headquartered in L.A. and incorporated in Delaware?). This seems to be working for other industries without distorting the market for local companies.
    2) The consumer is not on the hook for much of the cost (out of pocket, anyway) as seen here: http://tinyurl.com/yawc7wc
    Once consumers feel the pressure of that added to evaluate the costs of their health care will they start ‘maximizing their utility’ (see, I do know some econ stuff). 40-some percent of diabetes is caused by obesity. Most of which can be cured by walking a couple times a week (I know, I know I am oversimplifying), but why not gobble another cheeseburger when someone else is picking up the tab? Many companies (Whole Foods being a notable example) have shifted some of the decision making and costs to the ‘consumer’ (their employees) with dramatic results in well-being.
    3) I think Ms. Beggs was trying to be humorous with her post and allow us to peek behind the curain as to her political leanings.
    4) The government has demonstrated that they cannot do this effectively. To bite off such a large chunk with no history of success is scary (I won’t argue the constitutional issue, just the comon sense one). I don’t let my kids drive across country when they turn 16 (although I might give them a shot at managing Medicare costs; it couldn’t be worse than it is now). I would like the govt. to demonstrate that they can do what they say they are going to do as far as eliminating waste, ‘bending the cost curve’ and allowing more choice and competition before executing a giant power grab. I, again, argue that the government could do wonders for public opinion by focusing on Medicare for 18 months. If they could prove even a modicum of success, I think many more people would support an larger initiative.
    5) As far as politicians are concerned, if there was ever a self-interested lot, it is they. The only decernable skill set most of them have is getting elected. I understand that most are lawyers and some are doctors and that they are bright folks, but many (I believe) enjoy the power and prestige and will do anything to hold onto it. Most Americans are opposed to the current plan, even though most have no idea what it is. Some pols are arguing that ‘they will like it once the experience it’, but that isn’t how it is supposed to be. The Reps need to explain it to the constituents, get buy-in and then pass it. Not the other way around.

  • 26 Don Gooding // Dec 31, 2009 at 10:57 am

    I’m enjoying this exchange; I’ll add my two cents as a “returning economist” (after a career in business).

    First, I concur with our lawyer’s observation that at a superficial level assuming that humans maximize self-interest, then “concluding” that they pander to special interests in order to maximize their self-interest, has an air of tautology to it. However, the two views on this issue are not irreconcilable. For those legislators who derive enormous personal satisfaction from performing what they see as their duty or role to look out for “society’s interest” (as tough as that may be to truly comprehend), it would be consistent with utility maximization for them to spurn special interests and vote for “the interests of the people.” I’m unfamiliar with public choice theory, but from afar it appears that the overly reductionist assumption is that the only way to maximize utility is to get re-elected.

    As to federal health regulations overruling state regulations, I concur that there are examples where this is preferable, and the interstate commerce provision of the Constitution (I’m no scholar but I think States aren’t supposed to get in the way here) makes for some ambiguity as to what the Constitution has to say about health insurance. In addition, the word “regulation” is far too big a tent to generalize about. Where I have problems with state regulations – being in a nanny state with lots of health care mandates – is the degree to which they set minimum levels of service, including coverage of services that many rural poor in our state would never afford. Such mandates are sometimes well intended, sometimes a sop to special interests, but they force cross-subsidization of some people by others in a sense that is closer to transfer payments rather than insurance.

    Finally, the very notion of health insurance as one big product is one of the core causes of muddled thinking. Chemo for life-threatening cancer, hip replacements for eighty-year-olds, pre-natal care, physical therapy for aching backs (read: massages), drugs for chronically ill, doctor visits for sniffling kids… all of these separate products and services get bundled up (due in part to state regulations and in part due to market forces) when, IMO, the market would be better served by some product disaggregation.

  • 27 Dave // Jan 1, 2010 at 8:30 pm

    Mr. Welker,

    You’re right, the word “solve” is not a good word. Allow me to rephrase. You state that a lawyer is needed to understand the complexities of an insurance contract in today’s world, with the regulations in place that we already have, correct? I agree with this statement. With more regulations as you seem to propose, we would still need a lawyer to understand the contracts, correct? Where is the improvement? The way I see it, we are either going to be made better off, worse off, or neither better nor worse off with more regulation. I would hope that if it were clear that we would be made worse off, you would not support additional regulation. If we are objectively made better off, I would support regulation, and if we are made neither better nor worse off, I would apply Occam’s razor and go with no new regulation. I happen to be highly skeptical of increased regulation making us better off, which leads me to advocate no new regulations. Therefore, I now place the burden of proof on your shoulders to objectively prove to me that we would be made better off with new regulations.

    I apologize for asserting that public choice theory delves into the human psyche. That was not the message I was trying to send, however I would suggest that if you were as familiar with public choice theory as you implied in an earlier comment, you would be aware that this is not what I am asserting at all. I agree, politicians are, for the most part, actually trying to make their constituents better off. However, to do this, they need to be made aware of problems and possible solutions. Public choice theory tells me that individual voters have very little incentive to travel to their representative’s office and voice their opinion whereas special interest groups have very high incentives to do so. Therefore, the people that are talking to the politicians, bringing up problems and solutions and such, are the special interest groups and not the general public. The politicians listen to these groups, and pass legislation accordingly with discretion of course. Obviously if a special interest group that advocated killing babies came into their office, they would not pass legislation allowing this behavior. When people say that politicians “pander to the special interest groups,” they are either using short hand for what I have said or are using scare tactics picked up on Fox News. I would suggest that the latter is the source for the vast majority using this phrase, however I myself am not one and I assumed that you understood this. My mistake.

    You’re right again, I have not proven that you are out to increase demand for your profession. And I apologize, I did not mean to come across making you sound like a greedy, evil person. However, I would argue that your years studying law and such at Harvard did influence your views on the importance of the law and your profession, just like my years studying economics have influenced mine. I have no doubt that you genuinely want to help people, just like I do. However, you arguing for increased laws and regulations seems a lot like a doctor arguing for mandatory cancer screenings every X months. The doctor might have the very best of intentions (what could possibly be more noble than wanting to save lives by detecting cancer at earlier stages?), but I am skeptical of the resulting efficiency of such legislation.

    I will not debate you on what is Constitutional or not as 1) this is not the place for it and 2) I will never claim to (and hope that I don’t) understand the law and its history as fully as you do.

    I have no doubt that asymmetric information exists in the insurance industry, and every other industry for that matter, exists. It would be foolish to claim otherwise and I never did. However, you are guilty of oversimplifying human behavior just like you said I was. Consumers would never look at just price when buying anything. They look at perceived quality, how well known the dealer is, recommendations from friends/internet/news sources, seller reputation, etc etc as well as the price. I still fail to understand why honest insurance companies would fail in the market place while cheaters would prosper. It seems like, in the long run, the honest companies would survive while the dishonest companies would fail. Please explain this further, as to be as adamant about this as you are, you must know something that I am overlooking.

    What I am advocating is that no state should have laws regulating insurance. If any regulation were to exist, I would argue that it should be from the Federal level, however I believe that zero regulation should exist. Yes, I am aware that this would seem to be a dangerous thing to do. However, as you assert, I already need a lawyer to fully understand my insurance contract. Before signing any contract, I would read it myself, send a copy to my lawyer, and discuss the contract with him/her, just like you say I should do now. After this, I would then be able to make a good and informed decision on whether or not to purchase the insurance.

    With my solution, everyone gets what they want (or at the very least what they agree to). If they don’t want to consult a lawyer, that was their choice and they must live with the consequences, just like if I decide to put my life savings on 32 black in roulette in Vegas and lose. With your solution, a majority can impose its will on the minority. My free market solution has unanimous consent guaranteed, whereas your increased regulation solution has unanimous consent only in an extreme case. I sincerely hope that you can respect your fellow citizens who happen to be in the minority enough not to impose such restrictions on them when they clearly do not want it.

    Again, I invite you to email me. I would love to discuss these (and other) issues with you privately as I think both of us stand to learn a lot from each other. And thank you for your warnings regarding my email. I am always hesitant to post it, but I felt safe doing so in this case.

  • 28 Tim Cullen // Jan 6, 2010 at 12:11 am

    I’m a little late to this one but I’m glad to see it finally come up at the end of the discussion that public choice isn’t just about the politicians, but the voters as well. Those same individuals who can’t comprehend the insurance contract have to vote for the people who are going to not only regulate insurance but also fight wars, catch criminals, build roads etc.

    They are rationally ignorant and have little incentive to learn all about how insurance works and tell it to their congressman; while they are competing with special interest groups who have every incentive to do precisely that. Politicians don’t have a firm grasp of the platonic form of the public interest, as they are primarily hearing from political junkies who have an interest in the issue and those they have riled up along with the affected industries.

    Try talking to people about insurance, they don’t understand that it is about risk management rather than “spreading the risk around” as insurance would function perfectly fine and usually better if everyone in the pool was of equal risk. I’d buy the adverse selection argument if the mandate wasn’t being offered alongside guaranteed issue and massive underwriting restrictions, it’s not there get young people to take care of themselves; but to get them to pick up the extra slack that the politicians don’t have the courage or ability to explicitly raise taxes for.

    Now I think there are equity concerns with regards to healthcare and more importantly a kind of social benefit from having a basic level of care available to; but I still think that Jodi’s analysis was a bit off by not recognizing that regardless of the issue of insurance being sold across state lines there would be “free lunches” if we ended the tax advantages given to employer provided insurance over individual insurance, and if we got rid of foolish coverage mandates and hidden transfer payments while moving more twords a system where people paid more out of pocket and health insurance actually functioned like insurance primarily insuring against catastrophic events.

    We can have transfer payments to people who can’t afford such payments or even a government option of a high deductible/flexible savings account plan; but what makes the current reform so completely wrong is that it goes in the opposite direction trying to sell people free lunches by giving them more of the same old “health insurance like products” paid for by hidden transfers like the individual mandate, guaranteed issue, and restrictions on underwriting.

    I want to control costs, and that is why we need to pay more out of pocket; otherwise we will not be the ones controlling the costs but it will be the politicians and/or the insurance companies who have little knowledge and less incentive to control costs in our interest the way that we do acting acting through markets with money we control.

  • 29 Tim Cullen // Jan 6, 2010 at 12:22 am

    I also want to point out that the social costs of treating people in the E.R. aren’t comparable to those of random auto accidents; in that the former are artificial whereas the latter are natural. I can make anything an externality if I could pass laws by legislating that for every X action I would pump Y gallons of pollutant into the air.

    Also the people that complain about the costs of the uninsured going to the E.R. are generally liberals using it to advance their position but tend not to realize that their favorite government programs Medicare and Medicare routinely do the exact same thing by not fully compensating doctors and not always paying them on time (an interest free loan). One doesn’t hear the Democrats clamoring to pay doctors more to end this cost shifting, but rather they want to exasperate it by paying doctors even less. It makes me question their honesty, and goes back to my point above that much of the rhetoric about personal responsibility, “young invincibles”, and adverse selection seem to in truth be about stealth transfer payments; and while helping the sick/poor may be equitable and/or a good idea, if it is it should be done out in the open from both a moral and efficiency standpoint.

  • 30 JW // Jan 12, 2010 at 4:20 am

    I found your original post to be very insightful and something I’ve been arguing for a long time. For those who rant and rave about the government being inefficient…well no government agency or for that matter business is.

    Secondly, the health insurance market is an oligopoly and I can’t think of a better example – really!

    Thirdly, for those that argue that there are already too many regulations I agree..but we lack national cohesiveness in those regulations making it nearly impossible for insurance companies to do business across state lines.

    Lastly, would anyone believe me if I said that some state laws were created to diminish competition and were spurred on by the very insurance companies that operate in those states? I’m not saying that these insurance companies are evil…they’re just doing what they can to make sure they’re number one. Is it right? Me personally – absolutely no. So great analysis..I’m sharing it with my friends. ;0)

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