Look: I am eager to learn stuff I don't know--which requires actively courting and posting smart disagreement.

But as you will understand, I don't like to post things that mischaracterize and are aimed to mislead.

-- Brad Delong

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Everything that appears on this blog is the copyrighted property of somebody. Often, but not always, that somebody is me. For things that are not mine, I either have obtained permission, or claim fair use. Feel free to quote me, but attribute, please. My photos and poetry are dear to my heart, and may not be used without permission. Ditto, my other intellectual property, such as charts and graphs. I'm probably willing to share. Let's talk. Violators will be damned for all eternity to the circle of hell populated by Rosanne Barr, Mrs Miller [look her up], and trombonists who are unable play in tune. You cannot possibly imagine the agony. If you have a question, email me: jazzbumpa@gmail.com. I'll answer when I feel like it. Cheers!

Saturday, December 17, 2011

Of Health Care and Insurance Redux

Just a year ago today I spelled out why for-profit health care insurance is an inferior model compared to single payer or socialized medicine.  Today, Krugman revisits the issue.  He links to yesterday's article by Ezra Klein, where Ezra naively says: "But the CBO is in the right here: No matter how much sense competition makes in theory, no matter how obvious it is that it will drive down the price of health care, the fact is that it keeps failing when we put it into practice."

Ezra totally misses the main point: competition makes no sense at all in theory, and can only drive costs up.  The failure in practice is the result that should have been expected by anyone who had devoted as much as 5 minutes objective thought to the issue.   He goes on to show specifically how it hasn't worked in the real world.

Krugman continues:

Why doesn’t the market work here? Ken Arrow explained it all half a century ago. Patients by and large don’t have the information to evaluate medical treatments; in any case, they mainly buy insurance rather than medical care directly; and insurers profit not by providing the most cost-effective care, but by trying to insure people who won’t need care.

The red highlighted section briefly summarizes part of my argument.  The Arrow link is to a 33 page PDF file.

Clearly, the brute economics of heath care refute models proposed by right wing ideologues.  There is another aspect to this, though - health care is not merely "a commercial transaction."   Decisions are literally life and death, frequently made under emotionally trying circumstances, the Dr. - patient knowledge disparity is wildly assymetric, and opportunities for over-care and conflict of interest abound.

As PK put it:

The idea that all this can be reduced to money — that doctors are just “providers” selling services to health care “consumers” — is, well, sickening. And the prevalence of this kind of language is a sign that something has gone very wrong not just with this discussion, but with our society’s values.

And for this wrongitude we can specifically and directly thank the lizard people.


The Arthurian said...

Didn't bob dylan write a song about ezra klein and t s elliot?

The Arthurian said...
This comment has been removed by the author.
BadTux said...

I will simply point out that competition *always* results in higher prices, either due to reduced economies of scale or due to fixed sunk costs needed to provide a particular service. It costs a certain fixed cost $X to build rails between point A and point B if we're talking about railroads, for example. And businesses don't sell goods for less than their cost of providing them (otherwise they're *former* businesses), so if there are n customers and the rails are amortized over 20 years, we know that at a minimum those n customers are going to each be charged $x / n / 20. Now let's say that a *second* railroad forms between points A and B and takes away half the customers. So now we have the total cost being $2X / n / 20 -- i.e., it now will cost twice as much to ship goods between points A and B!

Of course, in many cases we don't *care* that competition results in higher costs. For example, it costs roughly $1B to design a new engine nowadays, and another $1B to design the car that goes around it. If there was only one car company with only one engine which sold this one car to every car buyer in America, which is roughly 20M/year car buyers, the average cost of a car would be halved. But: Most of us prefer having a choice of cars, rather than every single person in America being forced to buy a Chevy Cruze. I have a Jeep Wrangler, for example, and paid a pretty penny for the privilege of buying that car. I wouldn't want a Chevy Cruze if you gave it to me. Efficiency, in the case of automobiles, simply was not on my list of criteria.

But when we're talking about funding health care, *every* insurance company is a Chevy Cruze -- i.e., you get sick, the insurance company pays to get you well again, and it doesn't really matter *which* insurance company, they all (are supposed) to do the same thing -- pay for your treatment when you get sick. So insurance companies are more like the railroad between points A and B, you really don't care which railroad gets your goods from point A to point B, as long as your goods get there. All that having multiple insurance companies does in this case is cause increased costs due to the fixed infrastructure which each insurer must duplicate.

BTW, it would be possible to have a single clearing house shared by all insurers. I know someone in the medical billing industry who actually proposed that it be done -- i.e., one set of forms, one set of treatment codes, one computer system attached to one clearing house. The proposal was never acted on, because insurance companies view their in-house processing as a competitive advantage (allows them to more competitively deny claims and hopefully ties their provider network more tightly to them), and insurance companies really don't care about the costs that this causes because they just pass those costs on to their customers (i.e., our employers, and, eventually, *us*). So you *could* get almost as much efficiency with multiple insurance companies as you get with a single-payer system... but the insurers deliberately refuse to cooperate to make it happen.

Ooooh, I said a dirty word -- "cooperate". It's the anti-competition! Alrighty, then!

- Badtux the Economics Penguin

The Arthurian said...

A = London, B = York ?
"but not so two railways from London to York" -- JMK.
But Keynes was talking about the marginal propensity to consume, not about the effects of competition.

Tux, your first example leaves out the effects of competition between the two competing rail companies.

Inflation has been such a permanent thing in our lifetimes, that people now seem to believe everything makes prices go up. I disagree. I think if you separate inflation from competition you see that competition most often drives prices down.

BadTux said...

Arthurian, competition reduces prices only under a small number of circumstances:

1) There are no large sunk costs needed to enter the market.
2) Buyers in the market buy based upon cost

So let's examine, say, the market for large luxury vehicles. There is significant competition in this market. Yet the price of luxury vehicles goes up on a yearly basis. Why? Because a) there are large sunk costs needed to enter the market -- it costs around $6B to create a new luxury car from scratch, and this cost must be amortized across the relatively few units sold (the average luxury make will sell perhaps 50k units per year over the typical 6 year model life, meaning that this cost must be amortized over 6 years, meaning we need to recoup $20K per car before we even start adding up the costs of steel and components and labor) and b) the market is relatively price insensitive -- people buy luxury cars based upon prestige, comfort and performance, not upon price.

So, the question is, how many items meet the two criteria above -- no large barriers to entry into the market, and people buy based primarily on price? You claim that "most" items meet these two criteria. Yet this appears to contradict actual observed data, which is that people rarely buy the cheapest object, but, rather, buy the object which they view as "best" by some subjective criteria.

So my question to you is this: Do you have some actual data to support the assertion that competition "usually" or "in most cases" causes lower prices? I know that this is established dogma, but I'm a heretic -- whenever I see established dogma that contradicts what I observe around me, I have the same response as I do to religious zealots: "Show me the data."

Oh yeah, back to health care and single payer: Health insurance does obey rule #2 (people buy primarily based on cost). As a result, if we completely eliminated the U.S. health insurance system and went to single payer, we would gain economies of scale, but the total savings would be relatively modest -- I believe I did the computations and it'd be on the order of 5% of total U.S. health care spending. The big money is on the actual provision of health care itself, which a) has significant barriers to entry (need to graduate med school, get licensed, and either join a practice or start a practice, all of which entails huge amounts of debt that must be repaid), and b) people do *not* choose health care based on price, because health care is literally "your money or your life" -- if you don't get the care you need, when you need it, you're *dead*. And most people place infinite value upon their own lives. Meaning that they will literally bankrupt themselves to get the best medical care they can obtain for themselves, regardless of who's cheapest. In short, New York Central Park mugger rules, with doctors and hospitals the ones holding the gun to patients' heads and demanding, "your money or your life."

So anyhow, 5-6% is nothing to sneeze at, but we need to do something about health care costs in general. Going single-payer could help, but I'll just point out that one of the highest per-capita health expenditure cities in America is almost 100% Medicare and Medicaid... i.e., single-payer (well, dual-payer) has *not* been the magic bullet to push down medical costs there.

- Badtux the Late-night Penguin

Jazzbumpa said...

Art -

You'll have to explain the Dillon joke.

Tux - Competition does not ALWAYS result in higher prices. Two examples: costs can be reduced by improving efficiencies, and the incentive to do this comes from competitive pressure; prices can be reduced by lowering profit margins, and the incentive to do this comes from competitive pressure. The auto world had suffered from this syndrome for decades.

In the case of health insurance (not health care itself) profit margins are maintained by reducing coverage.


The Arthurian said...

Jazz, I think it was Ezra Pound and TS Elliot. A really old album. My bad memory turned it into Ezra Klein. Never mind :)

Tux: "Do you have some actual data to support the assertion that competition "usually" or "in most cases" causes lower prices? I know that this is established dogma, but I'm a heretic..."

Perhaps my evaluation of your thinking is incorrect, but it seems to me that you take inflation as evidence to deny that competition lowers prices. That is a cluttered argument at best. Inflation and competition are separate concepts, and I would argue that competition might be pushing prices down at the same time that inflation is pushing prices up.

(I was careful NOT to apply the competition-lowers-prices view to health care.)

Jazzbumpa said...

My main point is that in the absence of competition you have monopoly power. A monopoly has no incentive to control costs, boost efficiency, or provide good service.

Consider any location that has a single cable provider vs locations with competition.

Also consider why providers form cartels, such as OPEC. This collusion effectively reduces competition, allowing prices and profit margins to remain high.