Economist Channel

My colleague Scott Atlas has a superb oped in today's (October 4) Wall Street Journal. Instead of just arguing about health insurance and how we, via the government, will subsidize and pay for health care demand, let's fix the equally catastrophically broken health supply system.

"Republicans have now failed twice to repeal and replace ObamaCare. But their whole focus has been wrong. The debate centered, like ObamaCare, on the number of people with health insurance. A more direct path to broadening access would be to reduce the cost of care. This means creating market conditions long proven to bring down prices while improving quality—empowering consumers to seek value, increasing the supply of care, and stimulating competition."

This is the kind of out of the box, out of the usual left-right mudslinging idea that might someday spark a bipartisan reform, if our legislators could someday get past scoring symbolic points and sit down to actually fix something. (I have written similar ideas, but nowhere near as clearly, or as based in lots of fact-based scholarship and detail as Scott has.)


Scott starts with the sensible idea that we need to expand people spending their own money, via high deductible catastrophic plans, and vastly expanded HSAs. True, and well documented, but just spending your own money doesn't really help as long as supply is so constrained. In the joke version, it's like spending your own money to find a cab to LaGuardia in the rain at 5:00 PM on friday pre-Uber. Supply is constrained, and competition is stifled, so the government can enforce cross subsidies, and just paying out of pocket is not really going to help until supply competition is unleashed.

Scott gets there quickly. To the view that we need more regulations forcing hospitals to post prices -- sort of like the funny prices you see posted in hotel rooms on occasion, and likely just as effective -- Scott answers the fact, obvious to us, but new to Washington,

The most compelling motivation for doctors and hospitals to post rates would be knowing that they are competing for price-conscious patients empowered with control of their own money.  

Accent on the competing. If they don't someone else can and will. Specifically,

... work strategically to increase the supply of medical services to stimulate competition. In large part, this means deregulation. Lawmakers should remove outmoded scope-of-practice limits on qualified nurse practitioners and physician assistants. ... 

Medical credentialing should be simplified, and the licensing boards should institute reciprocal (national) licensing for doctors to help telemedicine proliferate across state lines. Medical school graduation numbers have stagnated for almost 40 years.

I might add, H1B visa for any qualified doctor or nurse who wants to immigrate.  Holding back immigrant supply to keep up American wages sounds nice, until you realize who is paying those wages -- all of us.

Archaic barriers to medical technology also impede competition and raise prices. ...certificate-of-need requirements, which require health-care providers to get permission from the state to add medical technology like MRI scanners,...are still in place in 34 states, Puerto Rico and the District of Columbia. 

introduce the right incentives into the tax code. Today employees aren’t taxed on the value of their health benefits—and there is no limit to that exclusion.
Similarly, ObamaCare’s premium subsidies and the tax credits proposed by Republicans artificially prop up high insurance premiums for bloated coverage that minimizes out-of-pocket payments. 

As the last paragraph emphasizes, this is bipartisan. The same Democrats who realize that occupational licensing and zoning density restrictions are really hurting real estate and labor markets, adding to inequality, can realize the same thing of all our restrictions on the supply of health care. 

Scott's book is an excellent longer treatment of these themes, well documented with many more ideas. And best of all, it's available for free from Hoover, though you really should go out and buy one.  

Last July, as the last Republican Obamacare bill was imploding, Greg Mankiw wrote "Why Health Care Policy is So Hard" in the New York Times. For once, I think Greg got it wrong. Health care policy isn't hard at all, at least as a matter of economics. (Politics, and ideological politics, is another question, but not Greg's question nor mine.)

There are some important underlying themes uniting how Greg's piece goes wrong (in my opinion)

• A little bit of economic education can be a dangerous thing

While most opinionated people and most "policymakers" are blissfully unaware of any economics, a little bit of economics education can sometimes mislead. Economics is full of pretty fairy tales, passed on through the decades or even centuries. The day after one sees the beautiful tale of the natural monopoly, or the externality, or the public good, then like a two-year-old with a hammer to whom everything looks like a nail, one starts to see natural monopolies, externalities and public goods all over the place. Wait a moment. Just because it's in the textbook -- even Greg's textbook -- doesn't mean every single industry and case fits.

The other rhetorical error is of the type, "well, we can't have homeless people who get heart attacks dying in the streets." No, of course not, but, is every single line of the ACA and tens of thousands of subsidiary regulations absolutely necessary to provide for homeless people who suffer heart attacks? Why must your and my health insurance be so totally screwed up -- and so totally micromanaged by the Federal government -- just to solve the problem of homeless people heart attacks? I'm struggling to find just the right category for this sort of argument

• Gross disregard of the size of effects. 
• Straw man -- a theoretical problem with a completely free market justifies any regulation. 
• Disregard of the choice at hand -- it's not benevolent perfection vs. free market. 
• Using problems as talking points. If the same "problems" exist elsewhere and you don't want to or need to fix them, then you're not serious about that "problem" for health. 

Maybe we can come up with a better one sentence characterization later. (There must be a Greek word for these rhetorical tricks!)

Let's review Greg's "why health care policy is so hard" problems.

"...free market sometimes fails us when it comes to health care. There are several reasons.

Externalities abound.  Take vaccines, for instance. If a person vaccinates herself against a disease, she is less likely to catch it, become a carrier and infect others. Because people may ignore the positive spillovers when weighing the costs and benefits, too few people will get vaccinated, unless the government somehow promotes vaccination. 

Another positive spillover concerns medical research. When a physician figures out a new treatment, that information enters society’s pool of medical knowledge. Without government intervention, such as research subsidies or an effective patent system, too few resources will be devoted to research." 

Well, ok. We require vaccinations to enroll children in schools. And basic research might be under funded. But basic chemistry research might be underfunded too. Does the Federal government need to buy half of all chemicals in the country and intensely regulate the other half just to keep basic chemistry research going? There are externalities everywhere. A neighbor mowing his lawn on a Saturday morning might wake you up. Does this justify the entirety of America's exclusionary zoning codes, or make "housing policy hard?" We do have research subsidies and a patent system, by the way. People like Greg and I are paid pretty handsomely to do research!

These "problems" exist in many markets -- and the ACA, or even pre-ACA regulation, is hardly a minimalist solution to the problem of vaccination and basic research!

The logical connection from "free markets sometimes fail us" to "and therefore the Federal Government needs to take a heavy hand as it does for health care" deserves its own place in the pantheon of fallacies. We have a choice between imperfect alternatives.

"Consumers often don’t know what they need. In most markets, consumers can judge whether they are happy with the products they buy. But when people get sick, they often do not know what they need and sometimes are not in a position to make good decisions. They rely on a physician’s advice, which even with hindsight is hard to evaluate."

"The inability of health care consumers to monitor product quality leads to regulation, such as the licensing of physicians, dentists and nurses. For much the same reason, the Food and Drug Administration oversees the safety and effectiveness of pharmaceuticals."

I am surprised that Greg, usually a good free marketer, would stoop to the noblesse oblige, the cute little peasants are too dumb to know what's good for them argument. This argument applies equally to car repair, tax advice, contracting, home repair, computer setup and repair, economics teaching... and just about everything else in our economy. We purchase complex personal services from people who know more than we do. It seems to work out ok.

Rhetorically, it's a good example of an argument that isn't serious because it isn't uniform. Why haul this out just for health care?

Again, is the ACA a minimal solution? All policy is a choice among alternatives. Do you really think government run insurance systems are better for figuring out what you "need?" Does Greg think he and his family are too dumb to make medical choices, so wishes for a government bureaucracy to determine his and his family's care?

Is inability to monitor quality a central economic problem? How much of the ACA is devoted to that? How much of the ACA and surrounding regulation is instead devoted to stopping the free flow of information,  to stop competition over quality, to maintain the illusion that all doctors are equal?

Licensing.. In this age when the Obama administration started to sound like the Cato institute on the subject of occupational licensing, 70 years after Milton Friedman showed how the AMA uses licensing to restrict supply and keep their earnings up, and as London Transport brazenly bans Uber, Greg gives us this vision of the wise benevolent government licensing for our protection? Those unlicensed dog-walkers sure are a national disgrace. And let's not start on the FDA's wise overseeing of the safety and effectiveness of pharmaceuticals, like, say, the epi-pen.

"Health care spending can be unexpected and expensive. Spending on most things people buy — housing, food, transportation — is easy to predict and budget for. But health care expenses can come randomly and take a big toll on a person’s finances." 

"Health insurance solves this problem by pooling risks among the population. But it also means that consumers no longer pay for most of their health care out of pocket. The large role of third-party payers reduces financial uncertainty but creates another problem." 

Greg surely knows better than this. Spending on houses and cars is not easy to predict and budget for -- when the house burns down or the car crashes. That's why we have insurance, regulated and perhaps over-regulated, but nothing like health insurance.

"Consumers no longer pay for most of their health care out of pocket" is not a necessary consequence of insurance. Insurance, in a free market would not cover routine predictable expenses, just as car insurance does not cover oil changes. This is entirely an artifact of regulation.

Let me skip to the last, most common and most important argument, most illustrative of how a little economics education can be a dangerous thing.

"Insurance markets suffer from adverse selection....If customers differ in relevant ways (such as when they have a chronic disease) and those differences are known to them but not to insurers, the mix of people who buy insurance may be especially expensive. "

"Adverse selection can lead to a phenomenon called the death spiral. ...Suppose that insurance companies must charge everyone the same price.... the healthiest people may decide that insurance is not worth the cost and drop out of the insured pool. With sicker customers, the company has higher costs and must raise the price of insurance. ...As this process continues, more people drop their coverage, the insured pool is less healthy and the price keeps rising. In the end, the insurance market may disappear."

We have all been to that beautiful econ 1 class, where we hear Ken Arrow's asymmetric information insurance spiral, or George Akerlof's justly famous proof that the used car market does not exist.

But are these fables true of our world, or is this a case of two year old with hammer? In the fable, you know things about your health that a pure free-market health insurer, armed with your entire history, every scan and test they can dream up, cannot know. In reality, the information advantage is exactly the opposite! They know a whole lot more about you than you do. That's not the asymmetric information of this fable.

In fact, a few paragraphs ago, Greg make exactly that opposite argument! Health care must be run by the government because the poor peasants don't know how sick they are and what to do about it, but now health insurance must be run by the government because the crafty little buggers know exactly what they need and private health insurers can't tell them apart.

We do have asymmetric information and a death spiral -- because the government forbids insurers to use information they have! The government forces insurers to take everyone at the same price, so only the sick sign up.  Maybe that's good or bad, but it's not the  fundamental asymmetric information problem of the fable. And somehow life insurers, car insurers, home insurers, and carmax exist.

Greg is a careful writer. "the mix ... may be expensive... the insurance market may disappear." Yes, every fable is a possibility. But we have to think whether in fact this is a real problem, whether it is a central problem, whether we advocate the same policies uniformly when we see this problem or whether it's just a talking point for policies advocated for other reasons, and whether the ACA or other regulation is a minimally crafted solution to this problem.

"One thing, however, is certain: The existence of a federal law mandating that people buy something shows how unusual the market for health care is."

Really? Does the existence of every federal law show how unusual the underlying market is? Agricultural subsidies prove how unusual the food market is? Solar panel subsidies show how unusual the market for energy is? Tariffs and quotas show how unusual steel is?

"policy wonks of all stripes can agree that health policy is, and will always be, complicated."

As a matter of economics, this wonk disagrees. 95% (made up number) of health expenses are relatively predictable complex personal services, bought by savvy shoppers who buy houses cars and cell phones. I will agree that it always will be complicated only because our government will always be screwing it up. But not that it must be complicated.

OK, health care policy is hard. But it's hard because so few in our political and commentary class have any trust that markets actually can work, and that by and large thoughtfully getting the heck out of the way can lead to a better system for health, as it has for just about everything else where it has been tried. Allowed to do so, competitors will come in and provide better service at lower prices. People and the businesses that want to serve them will find a way to overcome econ 101 problems. CarMax does exist, despite the lemons theorem. Companies really care about their reputations.  What a lot of economics education can do -- including a bit of economic history -- is to patiently remind people of these fact, rather than to give them excuses for endless mindless dirigisme.

Greg is careful, and this is a good review of the potential theoretical problems of health care and insurance markets, as presented in a standard (his!) econ 101 textbook. Greg does not say that the ACA, or even 5% of the ACA, is a necessary solution to these problems. But Greg does not say the opposite either. That these are small, manageable problems, which a government bureaucracy will likely mismanage for health as it does everywhere else, is absent in Greg's column. The average New York Times reader will come out thinking Greg's on board with the basic architecture of the vast complex mess coming out of Washington. If Greg thinks, as he may well do, that a regulatory system about 5% of the size of the ACA could handle all of these economic problems with your and my health insurance, that the rest of the ACA is a vast mess mostly designed to cross-subsidize health care from one group to another,  maintain rents for incumbents, and hide the cost of it all, you wouldn't know it from this article. Greg is a great writer, and knows his audience and the context in which he is writing, so it is a puzzling sin of omission.

I suspect I know what happened. It sounded like a good column idea, "I'll just run down the econ 101 list of potential problems with health care and insurance and do my job as an economic educator." If so, Greg failed his job of public intellectual, to help us digest just which economic fables are actually relevant.

(The last section of After the ACA goes through all these arguments and more, and is better written. I hope blog regulars will forgive the self-promotion, but if Greg hasn't read it, perhaps some of you haven't read it either.)

Update: Greg Responds. Thoughtfully, politely, and unlike me, concisely, as one expects. Yes, there is a great question as to what the role of an economics educator should be! Do we run through the standard list of theoretical possibilities for market failure? Or do we go to the second step of questioning just how much they apply, how central they are, how much they actually drive the regulatory outcome, how effective regulations are at addressing them; making sure they aren not just turned into talking points for political outcomes and rent seeking? All in 900 words or less!

Update 2: Sometimes I'm really slow. It occurs to me only this morning that both Greg and I missed the elephant in the room. The number one lesson that econ 1 has for health policy is: The demand for health care, and health care quality, is highly elastic. And Lesson 2, the income elasticity is pretty high too.

The standard vision in the policy world, the public, and too many health “economists” is that we “need” health care and it is a homogenous good. Translated to economics, they suppose a vertical demand curve.  The hard fact is exactly the opposite. Perhaps less obviously, quality is highly price elastic too. Your back hurts. Do you “need” surgery? (and if so what kind, performed where?) steroid injections? Ibuprofen? Physical therapy (an incredibly varied and price elastic service)? Many people looking at the cost go to chiropractors.

For the world of policy, this fact is what upends all health care schemes. If the cost is low, people will expand their demand for health care services enormously. If the demand curve were vertical, the supply curve could be flat. Sadly, if the demand curve is very flat, the supply curve must rise, and if not through price, through rationing. Someone else will decide what you "need."

Income elasticity is huge. What else is there to spend your money on, if you can? Plus, like business class, people are willing to pay a lot as income rises for the ancillary parts of health care services.

Sometimes the blog posts write themselves from contrasting newspaper headlines.

New York Times

New Gene-Therapy Treatments Will Carry Whopping Price Tags
By GINA KOLATA September 11, 2017

Emily Whitehead, the first pediatric patient to receive the gene-therapy treatment Kymriah, which put her leukemia into remission. The treatment has a $475,000 price tag, raising questions about how patients and insurers will pay. ...

One drug, to prevent blindness in those with a rare genetic disease, for example, is expected to cost between $700,000 and $900,000 per patient on average,..

Washington Post

The dam is breaking on Democrats’ embrace of single-payer
By Aaron Blake September 12 at 9:39 AM

Sen. Cory Booker (D-N.J.) became the fourth co-sponsor of Sen. Bernie Sanders's (I-Vt.) “Medicare for all” health-care bill Monday. In doing so, he joined Sens. Elizabeth Warren (D-Mass.) and Kamala D. Harris (D-Calif.). 

What do those four senators have in common? Well, they just happen to constitute four of the eight most likely 2020 Democratic presidential nominees, according to the handy list I put out Friday. 

Update: Gillibrand just signed on to Sanders's "Medicare for all" bill. So now 5 of my top 8 potential 2020 Democratic nominees have now come out for the bill -- before it is even introduced. "Health care should be a right, not a privilege, so I will be joining Senator Bernie Sanders as a cosponsor on his Medicare-for-All legislation," Gillibrand said.

Hint. Budget constraints? Hint 2: get ready to start making lots of noise if you want treatment.

By the way, let us watch for the crucial buzzword question. Does "single payer" mean there is a single payer that anyone can use -- but you're free to buy and sell your own insurance on top of that, hopefully deregulated since there is no need to regulate anymore, everyone has access to medicare for all? Or does "single payer" mean there is a single payer that everyone must use -- private insurance, private practice, just paying cash illegal, to cross-subsidize the system? I fear the latter. We'll see.

The previous champion was stories on the same page in WSJ, roughly ``self driving trucks coming soon'' and ``shortage of truck drivers.'' I lost the link.

The July 13 Wall Street Journal editorial updates yesterday's ray of hope.

One remaining debate is over Ted Cruz’s “freedom option.” The Texas Senator’s amendment says that any insurer that offers at least one ObamaCare-compliant plan could also sell other types of coverage off the exchanges. The expectation is that a more competitive and dynamic insurance market will emerge outside of ObamaCare. Released from federal mandates and price controls, insurers could offer many more innovative products designed for individuals, rather than standardized coverage planned in Washington.

Mr. Cruz acknowledges that insurance markets could “segment,” meaning that younger and healthier people would gravitate to the Cruz option, where premiums are likely to be much cheaper. Older people with more health expenses would remain on ObamaCare, which bars insurers from charging higher premiums based on health risks and bans exclusions for pre-existing conditions.

The logic of the Cruz proposal is that there is a rough consensus among Republicans that government should guarantee access to coverage for people with pre-existing conditions. In that case, government should pay for this guarantee, in the form of a de facto high-risk insurance pool, rather than hiding the cost in cross-subsidies imposed on private citizens.

The virtue of this approach is transparency and honesty. In a bifurcated market, premiums would be much higher for ObamaCare plans. But they’d be offset for consumers by much higher federal subsidies that rise with premiums...

So, the solution envisioned yesterday could actually emerge. The exchanges become what they already are -- places to get subsidies. Where you go to sign up for medicare, income-based premium subsidies, and so on. [The "rough consensus" really is not all that much about preexisting conditions. It is about subsidies based on income and age.] The rest of the market can be free.

It's not perfect. If we "bifurcate," just why should insurance companies have to offer an exchange policy? You can smell a cross subsidy from off exchange to on-exchange already, together with restrictions on competition to enforce that cross subsidy.

Will the off exchange policies offer guaranteed renewability, portability from state to state, and portability into and out of employment? Not yet, I think, but that's where they need to go.

The WSJ emphasizes preexisting conditions, but let's make a distinction between people with preexisting conditions right now, the day after Obamacare destroyed the individual market, and people who get conditions next year that become preexisting the year after that.

If the point of exchanges is to be high risk pools forever, for anyone who in the future develops a preexisting condition as the WSJ seems to envision, then Sen. Cruz free market idea will be very weak. It will offer people one year worth of cheap insurance, and then the minute anyone gets actually sick they transition to subsidized insurance.

The combination of free market and exchange has to be designed to keep people out of the exchanges. The previous limits on signing up for people who, starting a year from now, do not have continuous coverage, go a step in that direction. You want people to buy health insurance not so much for this year's expenses, but for the right to be covered next year if they develop a preexisting condition, and then to stay with their individual policies.

Yes, people who have preexisting conditions now cannot jump in to the market, because the market doesn't exist. But that does not mean that subsidized exchanges should forever be an absorbing state for anyone who gets sick or old. Which is all of us.

Still, the outlines of subsidies for those who need them, and freedom for the rest of us, seems to be on the table.

Update: 

Or maybe not. Mike Cannon writes there will be price controls on the "free" market alternative, linking them to exchange policies. Together with a requirement to offer exchange policies, this looks just like a small broadening of exchange policies, cross subsidies intact.  Since the exchange policies are specific to counties, I can't see how this is portable across even county lines, let alone state lines, guaranteed renewable,  and so forth.

Kristina Peterson, covering the senate health bill in in the July 11 Wall Street Journal reports a ray of hope for our legislative and policy process:

“If we’re going to subsidize Americans who can’t afford health insurance, do it directly. Don’t do it through the premiums of others,” said Sen. Jeff Flake (R., Ariz.) 

Few wiser words were spoken.

Our government wants to subsidize some people's health insurance -- poor, sick, old, disabled, veterans, children, people with specific diseases, and so on. And, in many cases, rightly so.  But our politics are allergic to "tax and spend." So, we hide it -- we force some people to buy overpriced insurance to subsidize others.

It is financially completely equivalent to taxing and spending. To those who don't want "taxing and spending," you are fooling yourself by allowing cross subsidies instead.

Except it's far more damaging to the economy than the disincentives of broad-based taxation.

Cross-subsidies cannot stand competition.

If competition and free entry are allowed, insurers offer policies tailored to the wealthy, healthy, young, able-bodied, etc., and peel them off from the cross-subsidy scheme. The equivalent tax and spend can simply say, here is a voucher, go buy health care and insurance from an innovative, competitive, dynamic, cost conscious markets.

A health care and insurance market that subsidizes certain groups cannot be competitive. Then costs spiral, then health care and insurance are even more "unaffordable," then the need for subsidies is greater, the overpriced insurance rises to ridiculous costs, and people need to be herded ever more reluctantly into the system.

Peterson's reporting neatly captures this lovely revelation.

The biggest sticking point in recent days has centered on a provision supported by GOP Sens. Ted Cruz of Texas and  Mike Lee of Utah that would allow insurers that sell plans complying with ACA regulations to also sell health policies that don’t.

Well, that sounds sensible, no? Why ban competition and innovation in health insurance? Whatever happened to selling insurance across state lines anyway? Well,

Health analysts say that would likely lower premiums for younger, healthier people, who would buy more limited policies, while causing premiums to rise for people with pre-existing conditions, who would buy the more comprehensive plans that comply with the ACA.

And

“His proposal would lead to unaffordable rates for people with pre-existing conditions,” Ms. Collins said Monday of Mr. Cruz’s proposal.

Cross subsidies cannot stand competition.

Senator Flake has it right. We are at a crossroads. America can choose to acknowledge the extent of subsidies we wish to have in our health care system, and forthrightly tax people to provide subsidies, transparently, on budget, where we can see what we're doing, and allow a vibrant competitive health care and insurance market to emerge -- or we can continue the cross-subsidy / anti-competition spiral to its inevitable denouement.

The Cruz/Lee/Collins/Flake debate hopefully makes that choice  abundantly clear. That this little bit of freedom -- you're allowed to sell off-exchange policies again -- cannot be tolerated ought to make the choice so clear, so stark, so simple that perhaps they will all see that "muddle through" is at an end.

Michael E. C. Moss puts it well in a related blog post,

the obvious compromise, the only good solution, is to do both: free-market pricing of healthcare and insurance in order to drive down prices, coupled with government subsidies for the needy to enable them to buy care and insurance at market prices. 

Farzon Nahvi, writing in the New York Times, reiterates the tired argument that health care can't be left to the free market, because people in comas can't negotiate.

As an emergency medicine physician in a busy urban hospital, I have patients brought to me unconscious several times a day...

Well, if the Times can recirculate tired stories, I can recirculate responses. Responding to an eerily similar essay way back in 2012, I argued in "After the ACA"  (starting p. 189)

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 health-care 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 ef cient 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.

More generally, (p. 185)

There is a more general point here... 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.

(Sorry for recycling, but good prose is hard!)

This is also great example of selected sampling and the dangers of making policy by anecdote. I'm sure Dr. Nahvi is a wonderful and caring emergency room physician. But despite the vividness of his experience, that does not make him a great expert on policy. In a completely heartless free market, most of the people he describes showing up on his doorstep would have bought catastrophic coverage. They are employed, normal people who buy cellphones, life insurance, car insurance and home insurance. (That's his point -- poor people are treated for free in emergency rooms. His point is entirely the cost of treatment, for that extremely narrow group, people with assets who somehow don't have insurance.)  As a doctor, he does not see that economic counterfactual, or how cheap unregulated catastrophic coverage would be.  And emergency room physicians dealing with comatose patients are not exactly an unbiased sample of the health care system. Even if such patients need to have government support, just why does a routine dermatologist visit need to be subject to the tender mercies of the Federal Government?

And leave it to the times to deliberately confuse health care with health insurance, and to get in a gratuitous swipe at Paul Ryan,

When it comes to health care coverage, House Speaker Paul Ryan says, “We’re going to have a free market, and you buy what you want to buy,” and if people don’t want it, “then they won’t buy it.” In this model of health care, the patient is consumer, and he must decide whether the goods and services he wants to protect his life are worth the cost.

The health care debate has, apparently, become like the old joke about jokes in prison. One inmate says "31" and everyone laughs. Another says "22", and they laugh again. The new guy says "11!" and is greeted with silence. "What's wrong? he asks." "You didn't tell it right" they answer.

Well, "22" says the Times. "35" say I. We're going to make a lot of progress this way. At least people like me acknowledge and respond to their view. The bubble, apparently, is a one-way street.

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.)

***

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.

I found a lovely post on health care full of wild ideas at market-ticker.org. You may not agree with all the proposals -- wild even by my standards.  But it is full of interesting detail on what's wrong with the microeconomics of health care delivery, as opposed to the usual focus on health insurance, and who pays, ignoring the vast dysfunction of the underlying market. 

A few choice quotes to whet your appetite

All providers must post, in their offices and on a public web site without any requirement to sign in or otherwise identify oneself to access it, a full and complete price list which shall apply to every person....  

All customers must be billed for actual charges at the same price on a direct basis at the time the service or product is rendered to them.  This immediately and permanently decouples "insurance" from the provision of care.  The current system of an "explanation of benefits" that often features a "negotiated discount" of some 90% is nothing other than an extortion racket and is arguably felonious...  All medical records are the property of, and shall be delivered to, the customer at the time of service in human readable form (a PDF provided on common consumer computer media such as a "flash stick" shall comply with this requirement.)  Any coding or other symbols on said chart must include a key to same in English delivered at the same time....  

All surgical providers of any sort must publish de-identified procedure counts and account for all complications and outcomes, updated no less often than monthly. Consumers must be able to shop not only on price, but also on outcome... 

Auxiliary services (e.g. medical or dental Xrays, lab testing, etc) may not be required to be purchased at the point of use.  If you wish to buy your tests from the lab down the street (which also must post a price) that's up to you.... 

Any test or diagnostic that carries no exposure to drugs or radiation, nor is invasive beyond a blood draw, may be purchased without doctor order or prescription... 

No government funded program or government billed invoice will be paid for medical treatment where a lifestyle change will provide a substantially equivalent or superior benefit that the customer refuses to implement.  The poster child for this is Type II diabetes, where cessation of eating carbohydrates and PUFA oils, with the exception of moderate amounts of whole green vegetables (such as broccoli) will immediately, in nearly all sufferers, return their blood sugar to near normal or normal levels.  The government currently spends about 25% of Medicare and Medicaid dollars on this one condition alone and virtually all of it is spent on people who can make this lifestyle change with that outcome but refuse... 

Health insurance companies must sell true insurance to sell any health-related policy at all.  A true insurance policy is defined as one that (1) does not cover any condition you have received treatment for over the last 24 months...

And so on. For my tastes it suffers from the usual vagueness about the subject of all these sentences. Is transparent pricing, for example, a new set of regulations? Why don't hospitals already post prices, unlike airlines which do so voluntarily? Which regulations are stopping hospitals from competing on price, and maybe we should get rid of those rather than pass new regulations? But apart from the question whether this is new rules or just a vision of how things should be, it's an interesting and refreshing and totally out of the box view.

Holman Jenkins and Cliff Asness have worthy commentaries on the health insurance reform effort.

Jenkins has quite a few fresh thoughts. He also gets the incurable optimist award for viewing the bill as the "inklings of a salvation" for America’s health-care system. It's possible. Whether it is likely depends on your views of the political process.

Individual insurance:

Jenkins' freshest thought comes last:

We’ll say it again, now for the Senate’s benefit: Apply a few GOP-style fixes and ObamaCare, or something like it, becomes a solution to America’s health-care muddle. You could phase out every other federal program, including Medicare, Medicaid and the giant tax handout to employers, and roll their beneficiaries into ObamaCare.

This wisdom is exactly the opposite of most current commentary, and, here in grumpy-land, where it seems the political process may be heading.

Yes, if any memory of markets remains, the goal should be to get everyone on individual insurance -- functional, portable, individual, lifetime, guaranteed-renewable, competitive health insurance, married to mercilessly competitive innovative and disruptive health care supply. People who need help -- sick and poor -- get it by subsidies to buy that insurance. Period. (Newcomers, some of my many writings on this topic are here.)

I fear we are going in the opposite direction. I fear that the non-subsidized individual market is going to shrink more and more, to become more and more an insignificant, government run, dysfunctional waystation for a handful of unlucky self-employed and young people, on their way to employer care, a government program (medicare, medicaid, VA, etc.) or now to a miserly high-risk pool.


Most of the Obamacare expansion of coverage was into medicare, or by people getting premium subsidies on the exchanges, and by pressure for expanded employer-basded coverage. The market of people paying actual premiums for individual insurance remains tiny.  Commenters point out the apparent pathology that Congress is wasting so much time on a tiny sliver of the population, how most of us have "just fine" coverage through employers, medicare, medicaid, VA, government employee plans, retiree plans, and so on. As if this is the right way to run things.

Parts of the Republican bill do seem helpful towards reviving the individual market. The vision that we should all be there, as we are all in the individual home, auto, and life insurance market; as well as the vision that the central problem is a supply system made dysfunctional by cross-subsidies and resultant anti-competitive limitations, I don't see yet in the legislative proposals and surrounding commentary.  That is a bad sign for the politics of Jenkins' (and my) vision. It is not ignorance. My impression is that most people involved understand the promised land perfectly well, they just don't think it can get two votes in the senate, let alone 51 or 61.

Mandate

Jenkins offers equally fresh thinking on the mandate

...In a world where individual insurance is fairly priced, a mandate would be less burdensome. As candidate Obama said in 2008, with a smidgen of hyperbole, if health insurance is a good deal, nobody would need to be forced to buy it. 

...The philosophical premises of the Republican and Democratic individual mandates could not be further apart. The original Republican mandate, hatched by the Heritage Foundation in 1989, was aimed at making sure would-be free riders paid their fair share, no longer transferring their financial risk to the taxpayer or other health-care consumers. 

ObamaCare turned the mandate into a tax—a way to overcharge the young, healthy and (let’s face it) male to generate funds to subsidize voter blocs Democrats wanted to subsidize.

The economic argument for a mandate of the Heritage type is pretty strong, as we have mandates for auto insurance. Given that we are not going to allow people to die in the gutter, then a mandate protects the finances of such government-provided charity care (or government mandated cross subsidies) to require that everyone has at least bare-bones catastrophic coverage, to cover... well, whatever it is that we are not willing to say "no" to when they show up on the hospital doorstep. Which is a lot.

Even that argument for a mandate is quite limited. We don't let people die, or suffer untreated illness. But there is much less case that we should not be willing to bankrupt the improvident. Even Sweden and Denmark do that. If you don't buy health insurance and get a heart attack, the government and hospitals should happily burn through your bank account.  And then you get the care you need. The economic mandate really is really only needed for people with few resources, or who can't get around to filling out forms (a lot of us).

And, yes, the economics of insurance is ex-post transfers. Those who turn out to be healthier than expected, ex-post transfer resources to those who turn out to be sicker than expected.

But, Jenkins' great insight is, look how these valid economic arguments utterly perverted in the political system.

Neither the economic mandate, nor insurance itself, is the basis for massive, completely predictable transfers from one group to another. Under Obamacare, individual mandates, insurance mandates, and "community" rating turned in to a massive transfer from (as he put it) "the young, healthy and (let’s face it) male to generate funds to subsidize voter blocs Democrats wanted to subsidize." That is clearer in this weekend's other commentary. See Ross Douthat in the Times review section, for example), focusing on "tax cuts for the rich;" and commentary focusing on how it will "hurt old people" -- both taxes and handout to old people, only enacted with Obamacare, now apparently baked in stone. All this unitentionally makes Jenkins' point. This isn't about health insurance anymore. It's just redistribution.

Also, the trope of how millions will now be "denied access to health care" (once again confusing insurance and care). Actually, 10 million of the CBO scoring that the Republican plan would lead to millions losing coverage came down to the mandate. 5 million of that are  people eligible for Medicaid who, the CBO thinks, will simply not bother to sign up even for free insurance without the mandate.

ObamaCare went out of its way to be a bad deal for the young and healthy, who didn’t sign up. The GOP fix [5:1 premiums, much less mandated coverage], if adopted in the Senate, would go a long way toward letting individual premiums be fairly and attractively priced to these people.

It would. Sadly, coverage of what's going on in the Senate, covered say in the same WSJ issue "Senators tackle heath bill rewrite" will undo modest progress:

Among the provisions senators are tackling is one that allows insurers to charge older Americans five times as much as younger people and lets states obtain waivers that could make that disparity even larger. 

That old people are more expensive to care for than young people is not an insurable risk. Old people per se are not necessarily deserving of cross-subsidies. Old, poor people are, but because they're poor not because they're old. Most non-poor old people own a house, which they have paid off, and substantial assets.  Most wealth in the economy is owned by old people. Old people have lower expenses.  Limiting the ratio of young to old in mandated insurance is just one huge cross-generational transfer of wealth. (On top of, I might add, social security, which is an enormous transfer from the current young to the current old. The current young are not going to get such generosity when they get old.) The supreme court had it half right -- the mandate is a tax. The big tax is the "community rated" overpriced insurance.

Jenkins again: If we had universal individual insurance, and helped people by subsidizing its purchase,

Congress could start making rational judgments about whom to subsidize and whom not to subsidize. Do all seniors need a handout, or only the poor ones? [Or only the sick ones?] And surely no Congress would re-up to the current employer tax benefit, which gives its biggest handout to the highest earners while producing all the pathologies the employer-centric payment system is heir to.

Is that a typo? Surely no Congress should reup, or perhaps could, but I see no signs that no Congress  would.  The tax deduction for employer provided health payment plans seems as rooted as the equally silly and damaging tax deduction for mortgage interest.  (And kudos to WSJ for coming out against that one in the lead editorial.) The proposal to also exempt individual insurance payments from taxes at least undoes some damage by putting both on the same footing.

Why cross subsidize wealthy seniors so much? Well, they vote. And they vote Republican. Given that, it's amazing that the house even tried to put in 5:1 in favor of Bernie-Sanders voting youth.

In case you missed it, the tax deduction for employer provided group coverage, but not for employer or employee contributions to an individual portable plan, really is the original sin, or the fly that the little old lady swallowed on her way to death from horse. Preexisting conditions follow entirely from that -- who will pay for lifelong guaranteed renewable insurance if they plan to get a job and throw it away? People who get sick and leave their jobs are stuck. Well, solve that with community rating, guaranteed issue, forced cross-subsdies, limits to competition.. and here we are.

Preexisting conditions. 

In principle, this should be a transitional problem in a world where everyone has access to attractive, fairly priced health insurance. By giving new options to the states, the House bill would make subsidizing pre-existing conditions a general obligation of the taxpayer as it always should have been.

So far so good. To amplify, in a portable, individual, universal, guaranteed-renewable competitive market, there is no preexisting conditions problem. But to get there, especially after Obamacare wiped out the existing guaranteed-renewable individual insurance, people currently sick are going to need an on-ramp. In Jenkins' optimistic view, the state high risk pools are such a transitory device. Jenkins is absolutely right that we need some transitory device.  By forcing cross-subsidies to give the illusion we are not taxing and spending, we achieve less at much greater cost.

I would prefer (as he might) a vibrant unconstrained competitive insurance market; that market would have guaranteed issue, but because insurers are allowed to charge any price so they will happily serve and compete for any customer without coercion. Then high risk pools subsidize the high premiums that people already sick have to pay, until we realistically can expect everyone to have bought guaranteed-renewable insurance before they got sick.

A good principle is that transitory devices need not be perfect. Another good principle is that imperfect transitory devices should be transitory.

However, with the portable, individual, universal, guaranteed-renewable competitive market nowhere in sight, I fear that this "transitional" problem is going to be semi-permanent.

What happened to portability, the long promise that you can buy insurance across state lines?
State-based high risk pools are going to make it even harder for people to move from state to state. State-based insurance already does this to some extent. Under Obamacare the conceit was, with guaranteed issue and community rating, anyone could move, and just get insurance in the new state. That was never easy in practice. (Actually trying to buy individual insurance that covers anything, as we did for a daughter over 26, is a salutary exercise.)

In sum, I worry as advertised at the outset, that we are headed to a permanent state that the government runs ever expanding mediare, medicaid, VA, and so forth; employer-based group coverage is forever ensrhined, and the market for individual insurance of people actually paying premiums becomes completely dysfunctional, now really providing only catastrophic coverage for a tiny group of people who are essentially uninsured until they become sick, at which point they are transferred to a government provided high risk pool. The transitory has a way of becoming permanent.

Here I think Jenkins makes one tiny mis-step:

Republicans...wussed out with a semi-mandate, in which anybody who lets coverage lapse and then tries to re-enter the system will pay a penalty.

No, that is not a semi-mandate! That was one good step on the way to guaranteed renewable coverage. You buy health insurance not so that "someone else" will pay for your predictable expenses, and not so much for the chance that you might have a catastrophe this year. You buy health insurance so that if you get sick, you can still buy health insurance next year!  You should face a healthy incentive to stay insured. The imperfection of the Republican plan is that it limited the penalty (insurers would charge larger penalties for those who lapsed coverage, and could not charge more than 5:1) not that it imposed a penalty.

However, sometimes half step may not work half as well as a whole step. In a true GR system, if you drop out, and fail even to purchase the option to buy insurance later, then you get sick, you will be charged the full newly rated price. That's the only way to have insurers voluntarily cover you, without cross-subsidizing from someone else, and thus without banning competition. In that case you always have an incentive to sign up, quick, before you get even sicker. With a fixed and capped penalty for signing up again, now you have no incentive to hurry. You're going to pay the same penalty no matter how sick you get or how long you wait. So critics are right that a new group of people waiting to get really sick before they sign up again and pay the penalty will crop up.

Asness

If all of this is depressing you and you want a good old romp through free market heath care and reform, read Cliff Asness 

Myth #2:  The pre-ObamaCare system was ‘insurance’ 

It was not a system of insurance. Insurance, as practiced everywhere else but healthcare, is about catastrophes. What we had was a government-subsidized payment plan funneled through insurance companies. 

... Due primarily to the tax subsidy given to employer-provided healthcare (a bipartisan, so-far-untouchable disaster), catastrophic health insurance is not Americans’ norm. Rather, employers provide essentially all healthcare from basic health maintenance and symptom relief to the most expensive life-saving procedures, and they do it because the government massively subsidizes this approach. 

This is odd. You don’t go to your car insurer to fill your car with gas or to your homeowner’s insurance company to change a light bulb. Why do you go to your health insurance company for everyday medical services? That is not insurance, it is tax-subsidized provision of all your healthcare needs, and it causes two of our system’s biggest problems. 1) Health coverage is not portable, as it’s employer-provided, and 2) consumers are insulated from the cost of basic healthcare because they don’t pay directly for services. Educated consumers spending their own money would be far better shoppers for healthcare. ...Paying $5 for a prostate exam is demeaning to both parties. 

Myth #3: Stopping insurance companies from charging based on pre-existing conditions is the one good part of ObamaCare 

Even many Republicans fall for this one, perhaps because it polls well. In these days of horrible discord, partisanship, and uncivil discourse (actually very much like the other 200+ years of the Republic) it is nice to know we can all still get together to rally around a really dumb idea....

It goes on like this. Go read the original.

Final political thoughts

You will notice that I'm not really getting in to the weeds on the Republican plan, and you may be disappointed by a lack of close analysis.  I've written here at length about how health insurance and health care (for the last time, not the same thing!) should be fixed. There is no point in repeating that.  The plan has lots of steps in the right direction.  But to score it by economic purists' standards is unfair and unproductive.  The Republican plans are clearly crafted by what the leaders think they can get through politically. Score them as such -- and from my limited knowledge of politics, they strike me as bloody brilliant given the current situation of a narrow majority in the Senate, "resistance" close to "rebellion" from the other side, and nobody really in fear of the President or party discipline. This really isn't an economic issue at this point. If they can get a few steps in the right direction, show they can govern, and set the stage for more comprehensive reform later, there is hope.

Jenkins adds

P.S. Don’t kid yourself that Democrats have a plan other than blindly defending more and more subsidies for more and more health-care consumers. Single-payer is not a plan. It’s an invitation for the health-care industry—doctors, hospitals, the research establishment—simply to turn their full attention to serving the self-paying rich.

As so much of America, the veneer of government concern for common people leads instead to private schools, gated communities, private jets, and soon concierge doctors and hospitals for the 1%, those with connections, and the Washington elite. And lousy public schools, public transport, and coming soon lousy health care for the rest.

Whenever I advance one or another view of how a relatively free health care and insurance market could work a lot better than the mess we have now, the obvious question comes up: Well, what about the homeless person with a heart attack? You won't let him die in the gutter will you?

No. Of course not. We are a compassionate society. We will provide for poor people, very sick people, those with diminished mental capacity, the unfortunate, the incompetent, or the merely improvident. People don't die in the gutter.  Any half-reasonable health care reform proposal, including mine, provides some system of charity care; whether via medicaid, government run hospitals (VA for everyone, county hospitals), premium subsidies or vouchers, support for charity hospitals, and so forth; and in our society the government will have a big part in this; I do not appeal to private charity alone.  Such systems will also always be a thorn in our public side; as the tension between cost, effectiveness, quality, moral hazard will not magically disappear no matter how nice the promises of their architects, and the fraud, inefficiency, and bureaucracy of anything run by governments will not disappear as well.

But the great puzzle of health care policy: Just why is it, to accommodate this worthy goal, must your and my health care and insurance be so deeply regulated and so thoroughly dysfunctional? As one small example, why does a 20 minute skin check with the resident of my dermatologist generate a phoney baloney bill for over $1000, meaning a cash and carry market for such a simple, elastically demanded, and perfectly predictable service is impossible?

Why, in order to provide for the unfortunate, do we not simply levy taxes, and pay for charity care, and leave the rest of us alone?
Regular Americans  have jobs, buy houses, buy TVs, cars, and smartphones, negotiate the complexities of 401(k) and IRA plans, cell phone contracts, frequent flyer programs; hire the complex professional services of contractors, car mechanics, lawyers and accountants, and deal with the insane complexity of our tax system.

Why do we not leave such Americans (you and me) to a largely free market (as much as anything is a free market anymore) in dealing with their health care and health insurance? Dealing with a free-market health insurance, offered by companies competing hard for your dollar,  is surely no more complex than dealing with Obamacare exchanges with their constantly shifting plans and networks, and the impossibility of finding out actually what doctor takes what.

I think the answer is relatively simple. Our political system is allergic to the word "tax." Instead of straightforwardly raising taxes in a non-distortionary way (a VAT, say), and providing charity care or subsidies -- on budget, please, where we can see it -- our political system prefers to fund things by forcing cross subsidies.

Medicare and medicaid don't pay what the service costs, because we don't want to admit just how expensive that service is. So, large hospitals make up the difference by overcharging you and me instead. The poster child (though not really a cost driver) is emergency room care. The government passed a law saying hospitals must provide emergency room care for free. But money does not grow on trees, so again you and me (via private insurance) must get overcharged to cross-subsidize. The ACA tried to force young healthy wealthy (not getting subsidies) to vastly overpay for insurance, to cross subsidize the poorer and sicker.

This might seem like a wash. OK, if instead of paying taxes, it makes you feel good to pay business class prices for health insurance, what the heck. Economically, a cross-subsidy works the same as a tax. In fact, we do have Europe-size taxes and subsidies, we just hide them.

But it's not a wash. Cross-subsidies are dramatically less efficient than taxes. Choosing cross-subsidies over taxes is indeed the second original sin of health care and insurance regulation. Cross-subsidies cannot stand competition. 

If as now you and I are grossly overpaying for health care and insurance, to cross-subsidize others, a competitive market would come along and peel us off. A local skin-check clinic could offer that service for $50.

Low prices, efficiency, and innovation in the provision of services like health care come centrally from competition, and especially disruptive competition.  With no competition -- especially no entry by new doctors, hospitals, clinics, insurance companies -- costs spiral up. As  costs spiral up, the cost of the charity care spirals up. As that spirals up, the size of the cross-subsidies spirals up. As that spirals up, the need to restrict competition spirals up.

In a sensible world, government assistance lives beside a free market, where innovation and price discovery happen. That keeps the cost of government assistance somewhat in check. But when we choose assistance by cross-subsidy, then kill off competition and force us all in the regulated system, that check disappears.

We do not force you and me into government housing in order to cross-subsidize housing assistance for the poor. (Well, "affordable housing" mandates are going that direction, with predictable results.) We don't force you and me into buses to cross-subsidize public transit for the poor. (Well,... And I don't want to defend the rather atrocious public housing and public transit systems.) We don't force you and me into government-regulated grocery stores and restaurants to provide food stamps and other nutrition assistance. And housing, transportation, and food remain functional markets.

Bottom line: Much of the pathology of health care and health insurance comes from this second original sin, choosing cross-subsidies rather than straightforward taxes. Cross-subsidies require the government to stop competition, so an initially clever way of hiding taxes eventually builds into a monstrously inefficient system.  (That's a key point. Initially, it is about the same. But the cross subsidy system gets more and more inefficient over time.)

We would be far better off to admit this; raise explicit taxes enough to provide the charity end of our care, and let health insurers and care givers compete for the rest of us, as airlines, computer makers, and everyone else does. The politician's job is to explain to people that what they pay more in taxes they will more than make up in lower health care and insurance costs.

The principle goes more deeply. For example, the government wants to provide free birth control. I think that's a great idea -- given the personal and social costs of unwanted pregnancy, and the political turmoil over abortion, sure, every pharmacy should stock free birth control. It would take a very small tax to cover it, and I would gladly pay. But no, the ACA decreed that insurers must "pay" for it, from a cross-subsidy, that people opposed to birth control objected to. Are annual checkups good for public health? If you think so, tax and spend (on budget!) and send people vouchers. And so forth.

What happens in a free market to people who fail to buy health insurance? Don't we need a mandate? On economic grounds, a mandate for extremely high deductible catastrophic coverage makes some sense. People who don't buy health insurance and get some rare cancer cost a lot of money. However, such people are not really the heart of health care costs (or the government's health care costs). There is no real case for forcing such people to buy insurance with lots of first-dollar services, if they choose to pay for those out of pockets. We mandate car insurance, but not that it covers oil changes (to cross-subsidize oil changes for poor people.)

In a free but compassionate market, people who fail to buy health insurance and get sick suffer the same fate as people to fail to buy home insurance and their house burns down, or people who bet on the stock market and lose. The demands of a compassionate society are to make sure everyone gets reasonable health care. But it is not to protect the wealth of relatively well off people who choose to take risks. So, the average person with a job, house, etc. who fails to buy health insurance and then gets sick receives health care -- but also personal bankruptcy. With that stick in front of us, I'm not persuaded that a mandate is going to be necessary for average Americans like you and me. Any more than a mandate is necessary to get us to buy home insurance.

(This isn't really a new thought; it's in After the ACA, for example. But a bunch of correspondence following my last health post makes it worth punching up,.)

(And the first original sin? The tax deduction for employer provided group insurance, but not for employer contributions to individual, portable, guaranteed renewable, individual insurance. That caused the preexisting conditions problem pretty much by itself.)

Random Critical Analysis has a really interesting blog post from a while ago, on the difference between consumption and income as measures of well being.  The level of data analysis and detail on that blog is really impressive.

The narrow question is whether the US spends "too much" on healthcare. A counterargument has always been, what else should we spend money on? As a society gets wealthier, it's natural to spend more on health care, just as we spend more on art, travel, and so forth.

(The counterargument to that is, whether we spend more or less is beside the point. The point is a dysfunctional regulated oligopoly is charging way too much for what we get. It's not so bad to spend this much, it's bad to get such a bad deal.)

So, the question is not whether the US spends more on health care, the question is whether we spend more on health care relative to a measure of our standard of wealth.  Using GDP as a rough proxy, we spend a lot more on health care relative to GDP than other countries.

But, the larger point of the blog post, on which I'll focus -- consumption is not GDP (income). Americans are far better off relative to other countries than we think we are. See the graph:

Source: Random Critical Analysis

The actual standard of living -- consumption -- is higher in the US than in any of these other countries. Many of them have higher GDP. What's going on? Well, Ireland, for example, hosts a lot of international companies. These chalk up a lot of GDP in Ireland -- a lot seems to be "produced" in Ireland -- but much of it does not go to Irish people. Similarly Switzerland and Luxembourg.