Economist Channel

My little foray here into the blogosphere sometimes leaves me in slack-jawed amazement at the leaps of illogic in the commentariat.

In a recent blog post, Hoover Institute senior fellow John Cochrane likens single-payer health care to single-payer food:
...
by drawing an equivalence between health care and food, Cochrane is ignoring the long history of economic research showing that the health-care market is very different from others.  

Here I am left scratching my head. I did not, in fact, "liken single payer-heath care to single-payer food." I didn't mention health care at all. How can a post about food stamps "ignore" research on health economics? And if you spend 10 seconds googling you will find I have addressed all these arguments in other writing that is actually on this topic. You might not agree with my answers, but I don't "ignore" them.

A bit of advice to Noah: OK, you can't be bothered to do any real research before mounting a personal attack on  Bloomberg.com. But try to make it all the way through a blog post before writing a takedown.

(Or, back in the old days, before writing that "Cochrane is ignoring" something, basic journalistic ethics would demand that you contact Cochrane for comment, at which point Cochrane could point out that no, he is quite aware of Ken Arrow's work and has responded to it in detail, especially when actually writing about health care, not food. Or an editor or fact checker would require that. Some news media still practice this kind of basic journalistic ethics. Bloomberg, we see, does not.)

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However completely unrelated to the subject at hand, though, Noah does bring up some interesting issues regarding health care. I'm grateful for the opportunity to rebut, because, as a matter of fact, I have written about health care,  and the attack gives me an opportunity to recycle some great old prose to prove that point.

The issue at hand: Can markets work for health care and health insurance? Noah:

There are so many problems with the health-insurance and health-care markets that it’s little wonder that they operate differently from the markets for food or cell phones. 

That's a misleading comparison. Health care is a complex personal service. The right comparison is lawyers, accountants, tax preparers, contractors, car repair shops, architects, gardeners, interior designers, bankers, brokers. These are all cases in which people deliver a complex service, and they know a lot more than we do. We hire their expertise as much as a product.

Health insurance is insurance. The right comparison is car insurance, home insurance, personal liability insurance, life insurance, disability insurance, and more complex insurance associated with businesses, such as director liability insurance, product liability insurance, freight insurance, and so forth.

All of these we generally leave to somewhat free markets. Nobody thinks there needs to be a single-payer contractor. (Well, maybe Noah does. I can't wait to see what kinds of bathroom tiles ContractorCare will pay for.) Just what is it about health care and insurance that have an essential market failure, and these do not?

Noah summarizes a 1963 Ken Arrow essay about health care, which Noah cites as research showing that markets cannot possibly work. The objections:

.. the importance of moral norms.  People have all kinds of moral considerations associated with health care. They expect doctors to act honestly and selflessly, and not just seek profit

Any time economists start telling you to pass complex regulations to enforce morality, run in the opposite direction. The Obama administration had something with the idea of "science-based" policy. At least let's get the cause and effect science right before we start making moral claims.

Let's read economists about economics:

...incomplete markets. Can people really know all of the possible health conditions they might get, including how much they would pay to cure or treat each one? ... The answer is certainly no. 

...uncertainty -- in health care, people don’t know what they’re buying until it’s already too late to make a different choice. Unlike food, which you buy over and over, open-heart surgery tends to only happen once.  

...adverse selection. People with health problems are more likely to try to buy health insurance; and since insurance companies know this, they have to charge everyone more. 

....moral hazard. After you’ve paid for insurance, the insurance company has every incentive to deny as many claims as it can get away with denying

These are all the standard objections to markets. They are all theoretical possibilities, echoed in every econ 101 textbook. But are they true of health care and insurance? And so much so that the evident pathologies of a government run system is better? (Remember, the free market case is not that markets are perfect. It is the long and sorry experience that governments are worse.) And are they so much more true than they are of all the above listed complex personal services, that the latter can be left to markets but a vast government bureaucracy must not only provide for all but outlaw the private option?

As it turns out, I have written about these things, in "After the ACA" easily available on my website and rather relentlessly promoted on this blog, especially p. 184ff,

B. The Straw Man 

...Critics adduce a hypothetical situation in which one person might be ill served by a straw- man completely unregulated market, with no charity or other care (which we have had for over eight hundred years, long before any government involvement at all), which nobody is advocating. They conclude that the hypothetical justifies the thousands of pages of the ACA, tens of thousands of pages of subsidiary regulation, and the mass of additional federal, state, and local regulation applying to every single person in the country.

How is it that we accept this deeply illogical argument, or that anyone making it expects it to be taken seriously? Will not one person fall through the cracks or be ill served by the highly regulated system? If I find one Canadian grandma denied a hip replacement or one elderly person who cannot get a doctor to take her as a Medicare patient, why do I not get to conclude that all regulation is hopeless and that only an absolutely free market can function? Both straw men are ludicrous, but somehow smart people make the first one, in print, and everyone nods wisely


C. Adverse Selection

We all took that economics course in which the professor shows how asymmetric information makes insurance markets impossible due to adverse selection. Sick people sign up in greater numbers, so premiums rise and the healthy go without. George Akerlof’s justly famous “The Market for Lemons” proved that used cars cannot be sold because sellers know more than buyers.

Yet CarMax thrives. Life, property, and auto insurance markets at least exist, and function reasonably well despite the similar theoretical possibility of asymmetric information. Life insurance is also “guaranteed renewable,” meaning you are not dropped if you get sick.

Is the story even true? Do most people, with knowledge of aches and pains, really know so much more about likely cost than an insurance company armed with a full set of computerized health records, actuaries, health economists, and whatever battery of tests it wants to run? Or is asymmetric information market failure in health insurance just a myth passed from generation to generation, despite functioning markets in front of our eyes?

Now the real world does see a big “adverse selection” phenomenon. Sick people are more likely to buy insurance, and healthy people forego it. But the insurance company does not charge people the same rate because it can’t tell who is sick or likely to cost more— the fundamental, technological, and intractable information asymmetry posited in your economics class. The insurance company charges the same rate because law and regulation force it to do so. The insurance company is barred from using all the information it has.

Regulation seems to feel that we have the opposite information problem; insurers know too much. The centerpiece of the ACA, after all, is banning the use of information, that is, preexisting conditions, not a great regret that insurers cannot tell who has preexisting conditions in order to charge them more.

 [Like many others Noah took both sides of this. People know more than doctors so the is adverse selection. Doctors know more than people so there are incomplete markets, and people can't shop.]

This source of adverse selection is the legal and regulatory problem, not the information problem of economic theory, and easily solved. If insurance were freely rated, nobody would be denied. Sick people would pay more, but “health status” insurance or guaranteed renewability solve that problem and eliminate the preexisting conditions problem.

Adverse selection due to fundamental information asymmetry in an unregulated market is, as far as I can tell, a cocktail-party market failure. It is a nice story, but does not quantitatively account for the real world. Furthermore, the ACA is not a minimally crafted regulation to solve the problem that people know more than their insurance companies can know about their health. Once again we are subject to the logical fallacy of accepting the entire regulatory structure because of one alleged failure
of a hypothetical free market.

D. Shopping Paternalism

Defenders of regulation reiterate the view that markets can’t possibly work for health decisions:

“A guy on his way to the hospital with a heart attack is in no position to negotiate the bill.”

“One point I cannot agree with is that competition can work in healthcare, at least as it does in other markets. I cannot fathom how people faced with serious illness will ever make cost- based decisions.”

“What about those who currently don’t have the background and/or the economic circumstances to consume healthcare, (e.g. take anti-hypertensive medicine instead of [buying] an iPhone)?”

Ezra Klein trying to understand why healthcare prices are so high and so obscure, writes:

"Health care is an unusual product in that it is difficult, and sometimes impossible, for the customer to say “no.” In certain cases, the customer is passed out, or otherwise incapable of making decisions about her care, and the decisions are made by providers whose mandate is, correctly, to save lives rather than money. In other cases, there is more time for loved ones to consider costs, but little emotional space to do so— no one wants to think there was something more they could have done to save their parent or child. It is not like buying a television, where you can easily comparison shop and walk out of the store, and even forgo the purchase if it’s too expensive. And imagine what you would pay for a television if the salesmen at Best Buy knew that you couldn’t leave without making a purchase." 

 [Noah is also not being particularly original!]

New York Times columnist Bill Keller put it clearly, in “Five Obamacare Myths:”

"[Myth:] The unfettered marketplace is a better solution. To the extent there is a profound difference of principle anywhere in this debate, it lies here. Conservatives contend that if you give consumers a voucher or a tax credit and set them loose in the marketplace they will do a better job than government at finding the services—schools, retirement portfolios, or in this case health insurance policies— that fit their needs.

I’m a pretty devout capitalist, and I see that in some cases individual responsibility helps contain wasteful spending on health care. If you have to share the cost of that extra M.R.I. or elective surgery, you’ll think hard about whether you really need it. But I’m deeply suspicious of the claim that a health care system dominated by powerful vested interests and mystifying in its complexity can be tamed by consumers who are strapped for time, often poor, sometimes uneducated, confused and afraid."

“Ten percent of the population accounts for 60 percent of the health outlays,” said Davis [Karen Davis, president of the Commonwealth Fund]. “They are the very sick, and they are not really in a position to make cost- conscious choices.”

Now, “dominated by powerful vested interests and mystifying in its complexity” is a good point, which I also just made. But why is it so? Answer: because law and regulation have created that complexity and protected powerful interests from competition. And is the ACA really creating a simple clear system that will not be “dominated by powerful vested interests?” Or is it creating an absurdly complex system that will be, completely and intentionally, dominated by powerful vested interests?

But the core issue is these consumers who are “passed out, or otherwise incapable of making decisions about [their] care,” “strapped for time, often poor, sometimes uneducated, confused and afraid,” and “not really in a position to make cost-conscious choices.”

Yes, a guy in the ambulance on his way to the hospital with a heart attack is not in a good position to negotiate. But what fraction of healthcare and its expense is caused by people with sudden, unexpected, debilitating conditions requiring immediate treatment? How many patients are literally passed out?

Answer: next to none. What does this story mean about treatment for, say, an obese person with diabetes and multiple complications, needing decades of treatment? For a cancer patient, facing years of choices over multiple experimental treatments? For a family, choosing long- term care options for a grandmother with dementia?

Most of the expense and problem in our healthcare system involves treatment of chronic conditions or (what turns out to be) end-of-life care, and involve many difficult decisions involving course of treatment, extent of treatment, method of delivery, and so on. These people can shop. Our healthcare system actually does a pretty decent job with heart attacks.

And even then . . . have they no families? If I’m on the way to the hospital, I call my wife. She is a heck of a negotiator. Moreover, healthcare is not a spot market, which people think about once, at fifty-five, when they get a heart attack. It is a long-term relationship. When your car breaks down at the side of the road, you’re in a poor position to negotiate with the tow-truck driver. That is why you join AAA. If you, by virtue of being human, might someday need treatment for a heart attack, might you not purchase health insurance, or at least shop ahead of time for a long-term relationship to your doctor, who will help to arrange hospital care?

And what choices really need to be made here? Why are we even talking about “negotiation?” Look at any functional, competitive business. As a matter of fact, roadside car repair and gas stations on interstates are remarkably honest, even though most of their customers meet them once. In a competitive, transparent market, a hospital that routinely overcharged cash customers with heart attacks would be creamed by Yelp.com reviews, to say nothing of lawsuits from angry patients. Life is not a one-shot game. Competition leads to clear posted prices, and businesses anxious to give a reputation for honest and efficient service.

So this is not even a realistic situation. To be sure, some conditions really are unexpected and incapacitating. Not everyone has a family. There will be people who are so obtuse they would not get around to thinking about these things even if we were a society that let people die in the gutter, which we are not, and maybe some hospital somewhere would pad someone’s bill a bit. (As if they do not now!) But now we are back to the straw man fallacy. Once again, the idea that ACA is a thoughtful, minimally designed intervention to solve the remaining problem of poor negotiating ability by people with sudden unexpected and debilitating health crises is ludicrous. As is the argument that we should accept the entire ACA because of this issue. 

Take a closer look at Keller and Davis’s statement: “strapped for time, often poor, sometimes uneducated, confused and afraid,” and “not really in a position to make cost- conscious choices.” We are talking about average Joe and Jane here, sorting through the forms on the insurance offerings to see which one offers better treatment for their multiple sclerosis or diabetes-related complications. If Joe and Jane cannot be trusted to sort through this, how in the world can they be trusted to figure out whether they want a fixed or variable mortgage? Which cell phone or cable plan to buy? To deal with auto mechanics, contractors, lawyers, and financial planners? How can they be trusted to
sign marriage or divorce documents, drive, or . . . vote?

We have a name for this state of mind: legal incompetence. Keller, Davis, and company are saying that the majority of Americans, together with their families, are legally incompetent to manage the purchase of health insurance or healthcare. And, by implication, much of anything else.

Yes, there are some people who are legally incompetent. But—straw man again—Keller and Davis are not advocating social services for the incompetent. They are defending the ACA, which applies to all of us. So they must think the vast majority of us are incompetent.

If not blatant illogic, this is a breathtaking aristocratic paternalism. Noblesse oblige. The poor little peasants cannot possibly be trusted to take care of themselves. We, the bien-pensants who administer the state, must make these decisions for them.

Let me ask any of you who still agree, does this mean you? When you are faced with cancer, do you really want to place your trust in the government health panel, because they will make better decisions than you, with your doctor and family? Or is this just for the benighted lower classes, and you and I, of course, know how to find a good doctor and work the system? 

Choice is always between alternatives. Sure, some people make awful decisions. The question is, can the ACA bureaucracy and insurance companies really do better? Yet you would not trust them to buy your shirts? And once again does the entire gargantuan bureaucratic apparatus of the ACA follow, not from the proposition that there is some fundamental economic market failure, but because . . Americans are no good at shopping?

No. Health is not too important to be left to the market. Health is so important—and so varied, so personal, and so subjective— that it must be left to the market. If you do not trust the vast majority of people to make the most important decisions of their lives, and a government bureaucracy can make better decisions on their behalf, you are a devout patrician, not a devout capitalist.

Well, that was fun, wasn't it? You may or may not agree. You may think I go on too long. But you can't possibly write that I "ignore" Noah's arguments.

By the way, if we're going to get huffy about "ignoring" classic writings of Nobel Prize winners on health care, Noah really shouldn't ignore this classic by Milton Friedman

Noah also starts with a logical whopper:

Americans, in general, support government-provided universal health care. A Pew Research Center survey taken in January found that 60 percent say that it’s the responsibility of the federal government to make sure that all Americans have health coverage. 

This should be on the SAT reading comprehension test. "Does the evidence support the proposition?" No. "responsibility... to make sure that all Americans have health coverage" is not "support government-provided universal health care." I support the former, and  not the latter. There are lots of ways, including involving extensive deregulation combined with robust charity care, to deliver "health coverage" without "government-provided universal health care."

So this ends up, really, being another post about language and rhetoric. What is going on with Noah, and with Bloomberg, and their fellow travelers, that such gaping holes of basic logic pass muster? That you can write a personal attack without making it through a blog post, let alone doing 10 seconds of googling to find if your allegations have any basis at all? I'll leave it to you to fill out the names and analogies for the rhetorical strategy. I guess if they think so little of American's shopping competence, they think equally little of their critical reading capacity.

Update: Thanks to a correspondent who pointed it out, we can now add Brad DeLong to the list of people who can't even be bothered to link to an article they want to "smackdown," let alone show any sign of reading it. This is, however, not news.