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Posts Tagged ‘Insurance’

Peter Suderman does an excellent job of clarifying Ezra Klein’s misconceptions about health care.

This is the house they’ve built: an insurance market where plans are written for the healthy and all legal efforts are made to exclude the sick. That’s meant premiums are somewhat lower than they’d otherwise be, but only because the people who most need health-care insurance aren’t able to afford it, or in some cases, aren’t able to convince anyone to sell it to them. Now that arrangement is ending and they’re scared that they can’t provide an affordable product to the people who need it. They may be right, but it’s evidence of how deeply perverse their business has become, not of what’s wrong with health-care reform.

That’s one way to look at it. But Klein’s conclusion rests on the assumption that the insurance industry exists to provide inexpensive protection and support to those deemed “in need” rather than a service business built to help provide a safety net against genuine catastrophe—you know, insurance—to those who want to pay for it. Essentially, this view entails seeing insurance as a social good rather than as a business, which explains why many reform advocates see a single payer system as their ultimate goal.

Now, that’s par for the course for folks with a preexisting liberal worldview. And none of this is particularly surprising given that a) Americans tend to understand insurance as medical prepayment rather than actual insurance and b) the country has built its medical system around third-party payment.

I’ve never understood the concept of health care as a public good.  It’s not a resource, there’s no fount of endless good-health that we can dip into.  Health care and insurance are services, and in a service economy it’s clear that multiple providers and competitive pricing are the best discovered mechanisms for lowering costs and increasing access.

Consider cell phone service.  When the first bulky cell phones came out they cost an arm and a leg, had terrible reception, were ostentatious and you could only use them if you stood under a tower.

But competition and creative destruction have (and continue) to work their invisible hands in the cell phone industry, and now you can have a slim blackberry set to vibrate, and reasonably expect 3G coverage in the middle of Montana.  Google “cell phone providers” and see how many options you find.  True, most people you meet will have either At&t or Verizon, but that’s because by most standards they’re the best.  But the variety of carriers, and more importantly, the potential for increased variety, is intrinsic to the market.

When it comes to something as important as health care, we should be trying to actively promote that kind of diversity, expansion, and cost-cutting.  Baucus-care and its single-payer ilk won’t do any of these things, but Ezra Klein doesn’t care nearly as much for actually helping people as he does about bashing insurance companies for not operating as he’d like.

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There’s a reason a big-ass lie is called a “whopper”.  Someone’s going to try to convince you this is a good deal.

The CBO reported late today, in a letter to Senator Bauccus, the CBO spelled out the news.

That net cost itself reflects a gross total of $829 billion in credits and subsidies provided through the exchanges, increased net outlays for Medicaid and the Children’s Health Insurance Program (CHIP), and tax credits for small employers; those costs are partly offset by $201 billion in revenues from the excise tax on high-premium insurance plans and $110 billion in net savings from other sources. The net cost of the coverage expansions would be more than offset by the
combination of other spending changes that CBO estimates would save $404 billion over the 10 years and other provisions that JCT and CBO
estimate would increase federal revenues by $196 billion over the same period.1 In subsequent years, the collective effect of those provisions would
probably be continued reductions in federal budget deficits. Those estimates are all subject to substantial uncertainty.

But let’s run with that substantial uncertainty, all the way to the bank.  Obama’s “this is not a tax” rhetoric is busted, as if there were any doubt.  And even judging by a liberals’ analysis, this doesn’t really change the costs at all.  In fact, the mandate penalties are reduced by $16 Billion.  To my mind, that makes it less likely that people will join, meaning the other numbers will skew.

Anyway, those are my initial impressions.  Would you trust $196 Billion in ‘savings’ marked “other”?  I don’t, and won’t, and some very smart people think you shouldn’t either.  From The Tax Foundation’s Joe Henchman:

Other $196 billion

NET CHANGE TO 10-YEAR DEFICIT: +$81 billion

As the non-economist, I should note that when Medicare was passed in 1965, it was estimated to to cost $3 billion in 1990, the equivalent of $12 billion after adjusting for inflation. The actual cost in 1990 was $98 billion. And my earlier blog post on the argument that entitlement programs paying for themselves is worth relinking to.

Give me a hamburger today, and I shall gladly pay you $196 Billion on Friday.

UPDATE: Now that a day or so has gone by, here’s some excellent number crunching and deeper analysis from someone who knows what they’re talking about.  Upshot: Total cost is closer to 2 trillion.  Remember when a billion seemed like a big number?

UPDATE II: via Marginal Revolution

Jim Capretta looks at the Baucus healthcare bill and concludes that, because the subsidies phase out as income rises, it imposes an effective marginal tax rate on income of about 30 percent for many families. Add that figure to the income tax, the payroll tax, and the phase-out of the EITC and “the effective, implicit tax rate for workers between 100 and 200 percent of the federal poverty line would quickly approach 70 percent — not even counting food stamps and housing vouchers.”

Link here.  I await further updates on these estimates…

So much for a ‘sock-the-rich’ mentality most lefties I know where hoping for.

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Take a look at this video.

The video is useful because the producer really tries to strip away many confusing aspects of the health care industry, and in doing so, presents a very clear case for single-payer, government-run, socialized health care. The clarity is a strength and a weakness, because the argument is exposed for its wrongness and illogic.

The video lists water treatment, police, fire, postal service, and the coast guard as being provided for by the government, just because they are essential services, services that we need just to get by. I’m willing to accept that explanation perhaps, but a simple historical explanation would suffice. The government has opted to provision and run such services. The producer claims that these services that are government run because they are essential, and health care is just as essential, so it should be government run. Do you see the fallacy yet?

By the way, the post office is a particularly terrible example, because of how obviously inefficient it is. Milton Friedman demolished the case for a government-run postal service in Capitalism and Freedom, and let’s not forget the story of Lysander Spooner. Strangely, even President Obama seems to understand this.

Anyway, the fallacy is pointing to unrelated sectors with completely different characteristics as evidence that the government can run one more sector. What counts as essential, anyway? Is food essential? A market provisions food quite efficiently, even when correcting for insane distortions from agricultural subsidies.

The problem with the video’s argument is that it proves too much. What isn’t essential? What shouldn’t be provided for? If everyone pays everything they have to the government, everyone can have everything! Margaret Thatcher was correct when she noted that the problem with socialism was running out of other people’s money.

The producer demonizes profit. On a market, profit is not money that is being skimmed out of the product that would otherwise go to producing something of value for consumers. Profit is a signal to a producer that they are producing something of value to a consumer. Loss is a signal to a firm that they are not doing something of value and that resources should be put to other uses. The problem with government provision of services is that they don’t respond to such signals. Maybe the fire department is a small enough portion of the economy that this doesn’t matter, but to say that the police and the criminal justice system function fine without these signals is laughable.

Why would a self-interested agent sell insurance if they were not getting something for it? The mistake here is a common one from the American left. The mistake is considering only the utility of consumers and not producers. Leftists forget that consumers on a market are also producers if they own a company or work for a wage. So, it’s silly to expect people not to engage in mutual voluntary exchange, which creates value. The instigation of class warfare by labeling investors as rich people is unfortunate as well.

Also, even if profit were immoral and unjustifiably selfish, this leftist sentiment of trusting agents in the government as somehow not responding to incentives is bizarre. People in government are just as self-interested as private agents, but troublingly, they have access to public power that makes them less accountable.

This video also has the same mistake that I’m seeing everywhere in discussions about health care reform. The purpose of insurance is not to provide care for customers that would otherwise not be able to pay for such care. An insurance firm does not aim to redistribute from healthy types of clients to sickly types of clients. They buy off risk and distribute it into their pool of clients so that they can turn a profit.

The whole discussion about health care reform in the media is frustratingly muddled. There are a few separate issues on the table which are often conflated. Lowering costs is a separate issue from increasing access. Indeed; these two goals are at odds. I cringe when I hear someone preach about a panacea that could feasibly accomplish both for the long-term. The claim is just absurd on its face.

Now, it’s true that insurance companies sometimes aim for profit by denying coverage in really seedy ways. Such behavior is to be expected from a highly regulated industry with all sorts of distorted incentives and firms that don’t have answer to market discipline. Still, that kind of behavior has little to do with the rise in costs. Joseph Newhouse’s 1992 paper attributes the rise in costs to advances in technology, correcting for all the usual suspects, such as aging, moral hazard from increased insurance, increased income, supplier-induced demand, and factor productivity from the fact that much of the sector is a service industry. Think of all the wonderful yet expensive technologies today that we have that did not exist in the 1960s.

The video ends with an amusing analogy of how fire departments might work if they looked like insurance companies. It’s effective because this is a false analogy. Insurance companies are subject to all sorts of distortional regulation that explain their actions, but none of that applies to fire departments. Economists have the difficult job of trying to show effects that are not easily seen. See Bastiat.

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At Cafe Hayek, a reader asked Russ Roberts how the elderly would be able to purchase health insurance on a free market, one without Medicare or Medicaid.

Tom’s question is interesting. But it’s the wrong question. And that Tom asks it and that everyone answered it is fascinating in and of itself.

It’s the wrong question because when you’re 65 the problem isn’t getting insurance. It’s paying for health care. But the public debate has become so obsessed with health care insurance we’ve forgotten what the real issues are.

When you turn 65, the high cost of insurance isn’t the problem. The problem is that you’re old. A lot more things are going to go wrong. Yes insurance is going to be costly. But that’s because so many things are more likely to break in your body. The high cost of insurance at that point is just a result of the problem. It’s not the problem itself.

It’s like saying that if you drive your car in a demolition derby, it’s hard to get coverage for collision damage. No kidding.

What’s funny (well not funny, really) is that we’ve totally forgotten the point of insurance and why it’s economically sensible. Insurance is designed for the unpredicatable. There’s nothing unpredictable about bad health when you get old.

Read the whole post.  This explanation is quite consistent with my observation that many people discussing health care policy today ignore or do not understand what the purpose of insurance is.

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Something that has puzzled me  about the debate on health care reform is the framing of insurance companies as organizations that fund health care for their customers.  Advocates of the public option offer the idea that the government will be better able to to provide health care, as against the insurance companies, which have failed to do provide enough care, for whatever reasons, such as high prices, patient dumping, et cetera.

Insurance companies aren’t supposed to fund care as an end in itself.  They provide care to hold up their end of their contractual obligations, because they buy risk from customers.  They only provide care in so much as they need to reimburse customers for unforeseen medical costs.

Generally, consumers reveal preferences that show that they are risk averse.  There are exceptions of course; people get utility from gambling, and suffer from the pseudocertainty effect.  Generally though, purchasers of insurance make a calculation in their head that they would rather pay about a hundred dollars each month than worry about paying tens or even hundreds of thousands of dollars for a treatment at some unknown point in the future.

Trade is positive-sum.  On one side of this trade, consumers sell their risk.  So, what do the insurance companies get?  Insurance companies can calculate risk for each contract and distribute that risk throughout their pool of customers.  They know that they don’t have to provide a payout for those customers who don’t get sick, but because they’ve taken money from all their customers, they can afford to fund those people who do get sick and are entitled to expensive treatments.  This is how they turn a profit.

This is just a basic description of what an insurance market is.  It applies to other kinds of insurance, not just health insurance.  There are certainly instances of injustice where insurance companies deny care inappropriately, and there are other interesting features of insurance markets that I haven’t mentioned.  My purpose is just to correct the strange assumption that the purpose of health insurance is to fund care, because it is not.  Insurance companies buy risk and manage it.

We should be especially skeptical of any public plan that the insurance companies support, because in the political realm, those companies have the opportunity to manipulate the system in their own favor, at the expense of everyone else.

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