Saturday, August 15, 2009

Of Profit and Public Options: Public Option Talk, part 4

There are two things that proponents of public health care systems are loath to admit. The first is that they all ration care. As noted above, that doesn't distinguish them from a system in which care is privately provided, but the "rationing" that occurs in the latter is by agreement between the insured and insurer. People decide, either individually or through their employer, how much care - how much coverage - to purchase. It is true that these transactions are distorted in the US through operation of the tax code and that individual choices about how much to spend are distorted by heavy reliance on third party payment. The US does not have an efficient market for health care. But, however distorted (often by regulation and government policy), the nature of coverage (and the degree of "rationing" if that's even the right word to use) emerges from a market. Your employer provides chooses that degree of insurance that will attract employees and that can be justified by the labor market.

The advantage of this system is that it does not need to presume that there is an omniscient body (i.e., the government) that has the abililty to decide how much and what kind of care should be provided. President Obama's statement of an equivalence between "an insurance company" and "government" interfering in your health care is false. If an insurance company (or your employer) does not provide the type of coverage that employees want, there are other employers and other insurers. People vote with their dollars and that is what determines the degree and type of care.

The disadvantage of such a system is that it is affected by ability to pay and those without resources can be left to the sometimes less generous care offered by government programs and charity. (In the US, that problem is exacerbated by the fact of employer provided coverage - a system that is entirely a result of government policy.)

One way of solving that problem would be to subsidize the ability of those without the means to participate in the market. (In the US, the problem would also be helped greatly by migrating away from employer-dependent coverage.)But public health care goes beyond that, seeking to eliminate or further constrict the market. Either through a public payment or heavy regulation, it seeks to have decisions about the amount of coverage and what can be covered made by the government. Proponents tend to believe that this type of centralized ("top down") unsullied by considerations of profit will be "purer" and "fairer" than market decisions on these things.

There are at least two problems with this view. The first is that we know that government decisionmaking is almost never a product of disinterested consideration of the public interest. Just as market outcomes can be affected by the initial allocation of resources and incomplete information, political outcomes are affected by parties with more intense interests than the general public, the effectively opaque nature of much state decisionmaking and the self interest of state actors. (Thus, my frequent references to public choice theory.)

The second problem is that the notion that a single entity can decide what type of coverage is best and what forms of care constitute the "best practice" and are "effective" is highly suspect. Much of our back and forth about private and public decisions revolves around the relative competencies of public and private entities. But proponents of markets don't have to presume that any single market participant is competent. Markets permit - and even anticipate - failure. In addition, competence is forged from competition. Even the best intentioned human beings benefit from incentives. Every year, I see law students who really want to do well, but who only actually do well when they appreciate what it takes to match the competition.

Similarly, proponents of markets don't have to assume the public spiritedness of any market participant. As Adam Smith said, "[i]t is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest." Economic rent and sharp practices are disciplined and eliminated by competition and (I freely admit) by certain forms of regulation which permit efficient operation of the market (e.g., enforcement of contracts).

Of course, it is not true that public systems can be totally imperious and the public can provide a certain amount of corrective feedback (by, for example, voting the bastards out), but this participation is more indirect, delayed and attenuated than that of the market place. It takes longer to happen. A vote is a blunt instrument (markets permit thousands and thousands of choices, while elections only permit us to change a handful of people who are responsible for many things other than health care) and voters must make their infrequent and limited choice on many matters other than health care.

Of course, proponents of ObamaCare claim that he market will survive its implementation. Is that true? Watch this space.


Anonymous said...

Rationing of health care doesn't occur "by agreement between insurer and insured." In our country rationing of health care is according to ability to pay. Princeton economist Uwe Reinhardt compares this country to China, where the new millionaires, the urban middle class, migrant workers, and poor peasants all have access to different classes of health care. In Germany, on the other hand, everyone has access to the same quality of care. A sense of social solidarity underlies the subsidies and social pact that ensure that result.

You assume the hobgoblin of complete public control of health care (and an absence of market incentives), and wage war against this nonexistent enemy. You fail to recognize that what is being proposed is a public option in a marketplace of insurers -- more competition, not less.

You fail to recognize that much of what the administration seeks to accomplish is cost containment. This country spends a higher percentage of GDP on health care than any other, for mediocre results. And yet tens of millions go without health insurance completely. Without any change, in ten years health care will consume 22% of GDP. More employers will drop insurance as a benefit. A higher percentage of employees' overall compensation (for those lucky enough still to have it) will be in the form of employer-provided health insurance. Other countries provide universal health care to their populations, obtain better public health results, and spend a lower percentage of GDP on health care. How do they do it? There are a variety of approaches, but most seem to involve public subsidies, public participation in health insurance, or, often, both. And yet these countries usually do not eschew competition and markets. In many of them, private and public health insurance options coexist.

A public option for health insurance is one of several initiatives to control costs. Regulatory encouragement of the kinds of practice environments that lead to lower costs is another.

You are presenting a false choice in asking, in effect, shall we have the government run each and every aspect of health care, or shall we have a market system. Nobody's proposing eliminating our market system. We need to make it better, and make it affordable for all Americans. Your Burkean conservatism says, if it ain't broke, don't fix it. It's broke, all right, and getting worse. A government insurance option, as part of a larger approach to make health coverage more universal and more affordable, won't destroy what we have now.

Rick Esenberg said...

I think you missed something. Of course rationing of health care occurs by agreement of the insured and insurer. Of course, ability to pay affects what that agreement is. That's elementary economics and I made it quite clear that this was a feature of market provision of health coverage.

As for subsidizing participation in the market, once again you fail to attend to what I say. I favor that.

As far as the hoblobin of complete public control, what you fail to recognize is that the the public option(in which the government may exercise monopsony power) and the encouragement of preferred practice environments (by, e.g., controlling reimbursements). Controlling costs, moreover, is also a form of rationing. It may not be affected by ability of pay. It will be affected by the way in which specially interested parties affect political decisionmaking. (You can - as Obama so often does - deny that, but sixty years of public choice theory suggests that you are wrong.)

As for the notion that other countries pay less and achieve more, I think this is a wildly simplistic argument. They do not achieve better results in the things that doctors actually do. Want to survive cancer or a heart attack? You are better off in Milwaukee than London or Berlin.

Want to add a year or two to US life expectancy? You are unlikely to do it by improving health care.

As for whether health care should take 10 or 16% of the GDP, I must admit that I don't know. I am also fairly certain that President Obama and Speaker Pelosi don't know either. The US is a very rich country. Maybe we want to spend a lot of money to buy a few better years for old people. One of the huge defining differences between the left and the right in this country is the extent to which the former believe (and Obama, in particular, is a zealot) in centralized solutions.

But, of course, the fact that the system works for 80-90% of us does not mean that it is acceptable for the devil to take the hindmost. It does mean that the system is not "broke." It means that it is in need of improvement.

Anonymous said...

"but the "rationing" that occurs in the latter is by agreement between the insured and insurer."

B.S. - Insurance companies are the only ones I know that hire people and lawyers to screw their own customers. The people that oppose government programs also want the system fixed.

Seth said...

Having fun swatting at the straw man, Rick?

It's either the current system (perhaps slightly sprinkled with more public spending in the form of subsidies) or a monolithic "public health care system."

Thing is, the public option would be just that -- an option. And while you feel content to explain how employees can just switch jobs if they don't like the coverage offered to them today -- "people vote with their dollars" -- you seem to refuse to accept a similar logic being applied to the public option. That is, if people don't like it -- and if it does all the scary stuff you claim it will, they shouldn't -- why wouldn't the labor market just sort that out, too?

Anonymous said...

Great column by Paul Krugman in today's Times. I know, I know, I risk sending you into a fit of apoplexy by mentioning his name.

Krugman notes the ridiculous Investors Business Daily editorial that said the British National Health Service would consider Stephen Hawking's life worthless. He points out that Hawking was born in Britain, has lived there all his life, and has been well treated by the NHS. Hawking "was not amused."

The IBD editorial, like your blog post, notes that critics of "Obamacare" think that it would turn the US into Britain, "or rather a dystopian fantasy version of Britain." In reality, per Krugman, Obamacare would be more like the Swiss approach: a combination of regulation and subsidies, but with competition among insurers rather than a single-payer approach.

By the way, with regard to those (unspecified) cancer-survival stats you reference: The statistics are influenced by the standard of American medicine to order routine PSA tests for men and mammograms for women over a certain age. The USA has better breast cancer and prostate cancer survival rates than other countries. But these statistics, at least in the case of prostate cancer, are misleading. Prostate cancer has been described as an ailment that virtually all men will get if they live long enough. But in most cases it's slow growing. There's a debate over the appropriate treatment for prostate cancer. Many physicians recommend "watchful waiting." So a superior 5-year survival rate for prostate cancer is an ambiguous statistic. We detect it earlier because physicians here routinely order PSA tests; European physicians, as a general proposition, don't. A 2008 study showed that, while the US enjoyed better 5-year survival rates for breast and prostate cancer, Japan and France enjoyed better 5-year survival rates for rectal and colon cancer (for men, in Japan; for women, in France).

Anonymous said...

"Thing is, the public option would be just that -- an option. And while you feel content to explain how employees can just switch jobs if they don't like the coverage offered to them today -- "people vote with their dollars" -- you seem to refuse to accept a similar logic being applied to the public option. That is, if people don't like it -- and if it does all the scary stuff you claim it will, they shouldn't -- why wouldn't the labor market just sort that out, too?"

I think that can be answered by comparing the current public option of Medicare. To date the Government has kept the costs down by dictating what it will pay. Subsequently, the private market has it prices raised for both normal cost increases and the Government refusal to pay more than about 25% for services. If a government option can dictate rather than negotiate a price while private insurers cannot, the Government option will, of course, be cheaper while private insurers are forced to pay for the increases. Very soon few private options may not be able to even remotely compete with public options.

Good news, prices go down for all the public option participants.

Bad news, the current Medicare option is only affordable (despite paying 25% on the dollar, Medicare will go bankrupt in its current form) because the rest of the market pays for its static prices. If/when the majority of people go to a public option, there will be no private market to float the government controlled pricing. Two very likely outcomes of that scenario is that private options will be extinct except for the very wealthy, and the public options will need a large infusion of money to pay for what the private market no longer covers for them (higher health taxes).

Seth said...

That doesn't address the question, Tuerqas.

For starters, the existence of a public option is not dependent upon being tied to Medicare rates. If that's the issue, then argue against the potential for that provision, not the public option.

But, as it happens, House Democrats already agreed not to tie the public option rates to Medicare, and to explicitly make them stem from negotiations with providers.

Second, Rick's point is that undesirable rationing will result from a public option. The question asks, if the rationing is undesirable, then -- using Rick's own conception of the workings of the labor market -- shouldn't it follow that the labor market will shift employees toward other options that are more desirable, even if they're more expensive?