Thursday, February 15, 2007

Socialist Drivel Gussied Up As Real Economics in the NY Times

Greg Mankiw gives note to a NY Times op-ed by Cornell economist Robert Frank. Like another economist who writes for the NYT, Frank must have did something at some point in his career to merit a certain level of respect, but he is now well known as an inveterate socialist that is impervious to anything but his own collectivist worldview (I noted before that he doesn't like this whole freedom of movement thing we have going on here in the US). Anyhow, Frank offers an argument for national healthcare that is so simplistic and biased and lacking in economic logic that it lives up to Krugmanesque standards of economic opinion and reflects poorly on Mankiw for including it. Forgive the length of this post but such is the requirement of the task, Frank cannot be merely rebutted rather than fisked. So here we go...

"In his State of the Union address, President Bush proposed tax cuts to make health insurance more affordable for the uninsured. The next day, Stephen Colbert had this to say on his show on Comedy Central: “It’s so simple. Most people who can’t afford health insurance also are too poor to owe taxes. But if you give them a deduction from the taxes they don’t owe, they can use the money they’re not getting back from what they haven’t given to buy the health care they can’t afford.”

"Just so. As health economists have long known, market incentives induce private insurers to spend vast sums to avoid people who may actually require health care. "

Here Frank makes the typical error of assuming that the current state of affairs is a properly functioning market rather than a market that has been distorted by government policy so much that it reflects perverse incentives. Yes indeed, if you are horribly sick today, insurance companies will avoid you because all you are is guaranteed costs. Nobody, nowhere argues that a free market healthcare solution can help such people. Even the most ardent free marketers claim that a government role is necessary to address the chronically sick. But that is only for people who are sick today. If you are not sick today but might be one day, insurance companies have no incentive to avoid you if they are allowed to price your risk properly. If you are an overweight, chain-smoking couch potato, insurance companies have no incentive to avoid you so long as they can price you differently from an active, health-conscious person. But they are not allowed to do so today due to policies like "guaranteed issue" which Frank conveniently makes no mention of. Fortunately the population of people who are terribly sick today is small and the government can handle the costs. The problem starts when we tell the vast majority of the country, the people who are currently not sick, that their future healthcare obligations are not their responsibility. What incentive is there to quit smoking or eat right or exercise if you know you can fob off all the costs on your fellow taxpayers? Frank in fact likes the idea of fobbing off your costs on fellow citizens....

"This problem is mitigated (though not eliminated) by employer-provided group policies. "

The whole point of employee-based healthcare is that it 1) benefits from a tax break, and 2) allows insurance companies to spread the costs of the unhealthy over a large base of people, most of whom are healthy. So people who need alot of healthcare are supported by people who need very little. The impetus for the subsidy comes only from the fact that these people work at the same company. So what we have is something akin to "from everyone at IBM according to their health, to each at IBM according to their sickness." The reason that this only mitigates sick people from getting insurance is that the risk pools are limited to the composition of large company labor forces. Since the chronically sick are not fully represented in the large company labor force, Frank is unsatisfied with the extent of the cost sharing.

Because Mr. Bush’s proposal would steer people toward individual policies, it would actually strengthen the incentive to shun unhealthy people.

As we have stated, people who are unhealthy today are a special category. But for the vast majority who are healthy, individual policies that were free from the requirement to insure high risk people the same as low risk people would not result in shunning anybody. Insurance companies want to insure people, but they don't want to take your likely liabilities for the fun of it. This is basic.

"Such people can now keep their insurance by not changing jobs. But no private company would want them as individual policyholders at a price anyone could afford. "

So, if you are sick or likely to be sick don't even think about expanding your employment horizons, stick with where you are. We wouldn't want you to have the freedom to move to another job. Who is to say what an insurance company will want? What if you left IBM and could shed all the specific healthcare provisions that IBM has so caringly negotiated for you and contract for just those healtcare provisions you want. Let's say IBM's coverage was hyper generous to single mothers because it was a corporate goal to attract single mothers to IBM, but you are a middle-aged childless man. Why would we assume that you are unattractive to an insurance company. Why on earth couldn't the insurance company offer you coverage at least as good as what it offered single-mom heavy IBM? It is pure assumption on Frank's part. He is onlt speculating based on a biased view of healthcare insurance companies.

“That Mr. Bush’s proposal will not shrink the ranks of the uninsured is not its most serious problem."

The “uninsured” is the catch-all hobgoblin that has come to be code for the poor and/or sick. The unthinking assumption is that these people are uninsured, they must be in circumstances beyond their control and they need help. The facts are that most uninsured today are uninsured because they are between jobs or they just want to use the money for other things. Some 30% of the uninsured make over $50,000. This is not rich but it is not poor either and insurance in most states is affordable at that level, but it is not deemed valuable.

“Far more troubling is its embrace of a system under which we spend more than twice as much on health care, on average, as the 21 countries in which life expectancy exceeds ours. American costs are so high in part because the reliance on private insurance multiplies administrative expenses, currently about 31 percent of total outlays.
Most health economists agree that government-financed reimbursement is the only practical way to control these expenses, many of them stemming from insurers’ efforts to identify and avoid unhealthy people. Canada’s single-payer health system, which covers everyone, spends less than 17 percent on administrative expenses. “

Here again Frank pays no mind to source of the administrative excesses – overregulation at the state level and the distorted system whereby insurance is not insurance but prepaid spending. Insurance companies have to comply with different regulations and mandates for every state in which they do business. Getting rid of the regulatory patchwork would cut a lot of administration cost but that doesn’t require government-financed reimbursement, it could be achieved just the same by creating a federal market for health insurance, which is why most health economists do not agree the government reimbursement is the only practical solution. Only those economists that Frank wishes to acknowledge feel that way.

"Annual health spending in the United States currently exceeds $2 trillion. A single-payer system that did nothing more than reduce administrative expenses to the levels of other countries would save roughly $300 billion annually. Some critics worry that expensive but ineffective medical interventions may proliferate if health care becomes a federal responsibility. But Victor Fuchs, a respected health economist at Stanford University, and Dr. Ezekiel Emanuel, chairman of the department of clinical bioethics at the National Institutes of Health, have outlined a single-payer plan that would limit such interventions far more effectively than the current system. (A copy of their plan is on the links page of my Web site,
If the single-payer system embraced by virtually all other developed countries is clearly the best solution, why doesn’t the United States adopt it? Some analysts concede its merits, but characterize it as either unaffordable or politically unrealistic. But why should a policy that promises better results for less money be considered a nonstarter?"

Here Frank just makes bald assertions and assumes that the single-payer system is better based on efficiency over a multi-third party payer system. Either way, you have a third-party payer, which has been proven to encourage overconsumption of healthcare and create a rigid system of micromanagement that leads to dissatisfaction among patients. Why you would expect better outcomes from a government bureaucrat reviewing claims and cutting checks than from an insurance company bureaucrat doing likewise goes unexplained. In addition, Frank conveniently ignores that a government system would just be a centralized version of the bureaucracy that the insurance companies now represent and assumes that government can do better, although there is no reason to expect that that government can do anything more efficiently than the private sector. History and experience tell us otherwise. Furthermore, other countries spend less because they brutally ration healthcare consumption through wait times while we encourage over-consumption through a third party payer system – our system is guaranteed to induce more spending while, for example, Canada’s is guaranteed to rein it in. The comparison is apples to oranges and neither level of consumption should be assumed to be the appropriate level, but Frank assumes that the level of care that prevails in countries where it is rationed by wait times is the benchmark level.

"There are two obstacles, which could both be overcome by intelligent political leadership. One is that the single-payer system would require additional tax revenue. In the current climate, that’s a tough political hurdle, to be sure. Yet how complicated would it be to explain to voters that because the single-payer plan would reduce costs substantially, every additional tax dollar would be offset by an even larger reduction in private insurance spending? Given that such a system is so much cheaper over all, calling it unaffordable makes no sense. "

Again, just an assumption that the government will bring efficiency to the system when there is no basis or precedent of government’s efficiency.

"The second obstacle is opposition from private insurers, who would be understandably reluctant to abandon multibillion-dollar annual profit streams. Those who stand to lose from policy changes always battle harder than those who stand to gain — an asymmetry that is exaggerated when losses would be concentrated and gains diffuse. So, yes, the insurance industry would bitterly resist. "

Yes insurance companies would be upset if the government usurped their role full stop, but insurance companies are dying to actually be insurance companies and not payment agencies. If they were free to underwrite health risks and not administer payments they would glad switch to a new business model and give up the bad business of micromanaging your healthcare.

"But intelligent leadership could overcome that resistance. Whenever a pie gets bigger, everyone can get a larger slice than before. Because moving to a single-payer system would make the economic pie bigger, it should be possible for everyone, including the insurance industry, to come out ahead."

This totally ignores a little thing called supply and demand. Why is the size of “the pie”, a government supervised pie, a starting point for available healthcare. Demand is bottom up and cares not what Washington defines as “the pie”.

"The first step is to acknowledge that insurance companies are not evil, that they invested in good faith under tax laws that favored employer-provided private health insurance. To put them out of business with an overnight switch would be unjust. Even so, they are not entitled to a permanent license to operate a system that has become economically unsustainable. The move to a single-payer plan would save far more than enough to compensate insurance companies for lost profits. Compensation for losses could start at 100 percent, then be gradually phased out as companies shifted investments elsewhere. "

The notion of “lost profits” is highly elastic and all this scheme does is create another opportunity to game the system and encourage economic rent-seeking. We should not fret over insurance company profits, but break down the system of rules that are the foundation of the unsustainability. Let’s focus on a sustainable system and insurance companies will adjust and find new ways to insure people. What is sustainable? Medicare? Social Security? These are the models for what Frank is proposing. Are these what are supposed to believe are sustainable?

"Selling this argument in an era of 15-second sound bites would be challenging, but hardly impossible. Indeed, forceful advocacy of the single-payer approach offers a golden opportunity for any serious presidential candidate. Voters are fed up with rising insurance costs and dwindling coverage. "

Voters are also fed up with lack of options and rules that impede them getting what they want.

"On the merits, single-payer coverage is an unassailable solution to both problems. Its rationale is simple enough to articulate clearly during a long campaign. And if the proposal were devised so that everyone stood to win, corporate interests would have little reason to attack it."

Yes, if you believe that government solutions are always better, then the idea is unassailable. If you believe that government has a poor track record, often results in waste, inefficiency, and ultimately worsens the problem due to unintended consequences, then no, the idea is incredibly assailable.

"Critics of the single-payer plan have long railed against the specter of socialized medicine, suggesting that it means being treated by government functionaries. Yet people who have experienced single-payer coverage firsthand seem unconcerned. "

Does "the unconcerned" include Canadians who come to the US for cutting edge medical treatment or Canadians who sue their government to escape the government run system?

"When one of my sons needed surgery for a broken arm during a sabbatical in Paris, for example, the medical system we encountered was just as professional as the American one and far less bureaucratic. And in France, which spends half as much on health care as the United States and has more doctors and hospital beds per capita, everyone is covered."

Fine. I won’t worry about breaking my arm in France, but would Frank send his wife to France for a triple bypass? Can they do a vitrectomy in Montreal? Would Frank be comfortable if his daughter gave birth six weeks prematurely in Britain? Maybe, maybe not, but he sure wants to make those decisions for you and me. He wants to give you the system of healthcare that he wants, not let the extent and nature of demand for medical care bubble up from the desires of you and me and let us choose among a multitude of options as we see fit.

"We live in challenging times. Does a candidate who couldn’t persuade voters to embrace the single-payer approach deserve to be president?"

What a weird formulation. If you are somehow opposed to collectivism in a major sector of the economy, you don’t deserve to be President. Wow.

For an alternative vision of healthcare, see here, here and here.


Blogger Bat One said...

" argument for national healthcare that is so simplistic and biased and lacking in economic logic that it lives up to Krugmanesque standards..."

With all due respect, that should read "...DOWN to Krugmanesque standards...."

12:12 AM  
Blogger Tax Shelter said...

Robert Frank, another "economist" who is cluless about economics. It's sad. I blame Cornell for hiring idiots to teach their students.

1:03 PM  
Blogger king said...

Usually for an annual premium, an insurance company agrees to assume the risk associated with a client’s assets. This difficult, yet rewarding industry will probably maintain its current rapid growth.

1:11 AM  

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