Health Care, Pooling, and Monopsony

At a recent press conference President Obama had this to say about the public health care option he is floating as part of his proposal for reforming health care and its impact on private health care options,

Now, the public plan I think is a important tool to discipline insurance companies. What we’ve said is, under our proposal, let’s have a system the same way that federal employees do, same way that members of Congress do, where — we call it an “exchange,” or you can call it a “marketplace” — where essentially you’ve got a whole bunch of different plans. If you like your plan and you like your doctor, you won’t have to do a thing. You keep your plan. You keep your doctor. If your employer is providing you good health insurance, terrific, we’re not going to mess with it.

But if you’re a small business person, if the insurance that’s being offered is something you can’t afford, if you want to shop for a better price, then you can go to this exchange, this marketplace, and you can look: Okay, this is how much this plan costs, this is how much that plan costs, this is what the coverage is like, this is what fits for my family. As one of those options, for us to be able to say, here’s a public option that’s not profit-driven, that can keep down administrative costs and that provides you good, quality care for a reasonable price — as one of the options for you to choose, I think that makes sense.

Does this make sense? I don’t think it necessarily does. After all we don’t need a government grocery store, a government video store, or government car dealers (hmmm, scratch that last one), to keep prices reasonable and affordable (and even with cars we still don’t need the government to keep prices reasonable). So why would this government plan be able to offer the same types of coverage at a lower cost? What is the basis for this belief?

President Obama mentions lower administrative costs? Is he thinking that the plans in this “health exchange” will be like Medicare? But the question then becomes, why are Medicare’s administrative costs so low? Is it, at least in part, that Medicare doesn’t have to screen out for pre-existing conditions? If that is the case, then the overall costs might actually higher (lower administrative costs, but higher costs in terms of treating people with pre-existing conditions), this would preclude the viability of the public option since as President Obama already notes, the private options are too expensive. An even more expensive public option is not going to be anymore attractive.

If the above is true, the only way for the public option to become viable is for it to use taxpayer money—i.e. subsidies. But here we have another problem as seen by the following exchange,

Q Won’t that drive private insurers out of business?

THE PRESIDENT: Why would it drive private insurers out of business? If private insurers say that the marketplace provides the best quality health care, if they tell us that they’re offering a good deal, then why is it that the government — which they say can’t run anything — suddenly is going to drive them out of business? That’s not logical.

It is quite logical if the public option is subsidized by taxpayer money. In that case, private insurance providers who are seeking to maximize profits will not be able to compete if the public option plan is priced too low due to the subsidies.

The only other possible way for the public option to be cheaper and not rely on taxpayer money is if there health care insurance providers have market power and are engaging in some type of price discrimination when it comes to charging firms for employee benefits. However, even here there are possible alternative policies to creating a government run health care plan that would have tremendous pressure to use taxpayer money to fund. For example, if there is market power and price discrimination the solution is to promote more competition not reduce it. To do this would require identifying and removing barriers to entry into geographic regions for the health care insurance market. And it is quite likely that the barriers are a result of state, local and the federal governments. Various regulatory requirements may restrict entry and thereby grant incumbents in the market power to raise prices and restrict output.

And we have to keep in mind that there are going to be tremendous pressure on whatever entity is in charge of this new program and politicians as well. Rent seeking is how most people in DC make their living—finding ways to acquire income that they have not earned.

Now, by the way, I should point out that part of the reform that we’ve suggested is that if you want to be a private insurer as part of the exchange, as part of this marketplace, this menu of options that people can choose from, we’re going to have some different rules for all insurance companies — one of them being that you can’t preclude people from getting health insurance because of a pre-existing condition, you can’t cherry pick and just take the healthiest people.

Here is one possibility: the public option has only those with pre-existing conditions or is dominated by such people. After all, suppose we have two plans a public plan and a private plan. If you are healthy then the private plan may look okay. If you have a pre-existing condition you can’t sign up for the private plan unless it wants to go into the public option pool. So private plans might still exist, but “skim the cream” off the public pool options. This might “significantly lower administrative costs” but it will likely result in significantly higher premiums. In this case, the public option pool will provide no discipline for the private market as they really are no longer in competition. Further, the public pool option could end up being very expensive and the pressure to subsidize it will increase even more. I’d argue it would be almost certain that the government would subsidize it with taxpayer dollars. Now, a subsidized public pool very well could look more attractive to people on the private plan. Thus, it is basically a way to backdoor for a single payer system run by the government. And once there are no more private plans, then the government can start reducing the supply of health care.

Because once the government is the dominant player, possibly even the only player, it is now a monopsony. And a monopsony can dictate price in the market place. Now that might sound good at first glance, but let us go back to fundamental economics. If you set the price below the market clearing price what happens? Supply is less than demand. You have less of whatever good in question has a monopsony. The reason for this is simple and pretty much inescapable. With the price below the market clearing price firms that would otherwise be earning profits and producing no longer earn a profit and shut down, and firms that are shut down produce nothing. This should not be a shocking result. A market where there are many buyers and sellers is part of the definition of a competitive market. Competitive markets tend to have lower prices and more output than markets with less competition.

In the end, I can see all of this reducing the amount of health care people have access too, and maybe that is what needs to happen. However, I think it is dishonest to pretend that people can have more health care and pay less for it and reduce growth rates of costs all at the same time. That is not logical.

Photo by Flickr user Brooks Elliot, used under the Creative Commons License.

FILED UNDER: Economics and Business, Government, Health, US Politics, , , ,
Steve Verdon
About Steve Verdon
Steve has a B.A. in Economics from the University of California, Los Angeles and attended graduate school at The George Washington University, leaving school shortly before staring work on his dissertation when his first child was born. He works in the energy industry and prior to that worked at the Bureau of Labor Statistics in the Division of Price Index and Number Research. He joined the staff at OTB in November 2004.

Comments

  1. odograph says:

    In the end, I can see all of this reducing the amount of health care people have access too, and maybe that is what needs to happen. However, I think it is dishonest to pretend that people can have more health care and pay less for it and reduce growth rates of costs all at the same time. That is not logical.

    By this path, perhaps. But the Canadian couterfactual still exists.

  2. Ja'far says:

    A few thoughts from a non-expert:

    From my point of view, the nature of the US insurance industry insulates companies from competition. The large majority of Americans get their insurance through their employer, thus the only real competition between insurance companies exists through how cheaply they can provide coverage, not providing the best coverage. People don’t choose their insurance provider, it’s chosen for them and they are not in a reasonable position to opt for a competing company’s service if they perceive it as better. Additionally, people may not fully understand their policy or their insurance company until they have used it. This could lead to people going for years without having much information to evaluate their company on and thus there is only limited potential to provide market feedback (and this is assuming providing feedback would be viable anyhow).

    By its nature, insurance is not well suited for competition. Insurance is possible only through volume as insurance companies must pool risk. Clearly, in order to be profitable insurance companies need the amount of premiums coming in to exceed the amount of benefits being paid out. Therefore, insurance companies need a lot of people paying in so that when they do have to pay out for something expensive, it won’t terribly offend their bottom line. All of this is to say that insurance companies need to be very large and the nature of the industry creates a significant barrier to entry in and of itself. Put another way, competition is significantly limited. I would even go so far as to guess the industry is dominated by a few large firms and that there is probably a strong case for collusion to be made.

    The opposite would occur in the relationship between the consumer and the medical professional. The consumer would have a great deal of information concerning service and effect (and the ability to respond to it), but limited information concerning price since the insurance provider covers most of the cost. Therefore, the insurance companies negotiate pricing with the doctors and hospitals or they limit the choice of their coverage holders to the providers with the cheapest rates. Again, this is to say competition is convoluted and limited.

    Where is competition now?

  3. sam says:

    Clearly, in order to be profitable insurance companies need the amount of premiums coming in to exceed the amount of benefits being paid out.

    Of course. Insurance companies are in the business of collecting premiums, not paying claims. Or is that overly cynical?

  4. steve says:

    Couple of points as I am at work about to go do unnecessary, expensive procedures to keep health costs high. 🙂

    More health care is not necessarily better. There is much evidence, and good reasons to believe that evidence, that too much care provides for worse outcomes.

    Secondly, if we reduce costs with across the board cuts, your concerns may be vaild. If we cut costs by targeting not needed care, we could have better, or at least the same level of care, while reducing costs. Insurance companies are incentivized to just pass costs along. Bigger companies mean bigger salaries.

    Steve

  5. odograph says:

    More health care is not necessarily better. There is much evidence, and good reasons to believe that evidence, that too much care provides for worse outcomes.

    I gave myself a distal radial fracture mountain biking. It settled one way, off true. After a $10-20K bone graft and recovery it settled the other way, off true. Which is better? I sure don’t know.

    On the other hand, I fractured my hip (mountain biking, as it happens) but because they told me that day in emergency that it wasn’t broken, I let it heal old-school. It’s good too (99%) … for a lot less total system costs. (It was discovered later.)

  6. Steve Verdon says:

    By this path, perhaps. But the Canadian couterfactual still exists.

    What counter factual? I didn’t see anything in there saying that Canadians get more health care, at lower costs and with a lower cost growth rate. Please provide some relevant quotes.

  7. just me says:

    Personally I think the biggest problem with the US health insurance industry is that it is too closely hooked to employment. Where you are employed determines how good your insurance is more than any other factor, and this coupling of insurance to company employment makes it more difficult for those who are self employed or working for a small business to get affordable insurance.

    And while this opinion isn’t popular, I also think part of the problem is we want our insurance to cover everything and cover it at almost no cost to us-or at least obvious cost. Having every little thing covered by insurance makes it very expensive and it also tends to make us less careful consumers. I had a friend on medicaid who pretty much never went to her primary care doctor for aches and pains-she used the ER. When I asked her why she used the ER for everything, her comment was because it didn’t matter it was all free. That isn’t being a careful consumer. If it isn’t an emergency we wait until the next day for treatment simple as that.

    I think perhaps some aspects of medical care to need to come at a cost-enough of a cost to make us a little more choosy in how and when we use it.

  8. odograph, from your anecdotal evidence you are clearly better off never seeking professional health care again. Good for you.

    sam, insurance companies are in business to provide a service to their customers and make a profit while doing so. That business involves a payment from the customer (premiums) and the service provided (staying abreast of the laws, working with providers to negotiate fair and reasonable treatments and rates, evaluating claims, and yes, even paying claims). I suppose you think utility companies are only in the business of collecting payments as well? Or is government only in the business of collecting taxes? Well, raising them and collecting them anyway. Your problem seems to be the idea that it is bad to make a profit. Why is that?

    steve, it interesting to compare and contrast your plan to save money by “pooling” and rationing care as some health czar sees fit with Ja’far’s apparent complaints that insurance companies “pool” risks and charge accordingly.

    Ja’far, as someone who actually makes a decision each year rearding my company’s health care plan and reviews about ten different options from multiple vendors in doing so, your views regarding competition amongst insurance companies and providers are just plain wrong on several counts. It is true that each employee doesn’t pick their own plan, but this is where economies of scale help keep costs down. Do you really think consumers are going to benefit by negotiating with each service provider on their own? Should they try to do this before they need help or only after they need help? Or is it that Mommy Government’s one size fits all is going to produce the best answer for everyone? Do you have any real world experience with Medicare? I have a responsibility to my company and my employees to do what is best for both of them within the constraints I must live with. I somewhat resent the implication that I am not trying to do what is best for both and that I am trying to screw them whether I am in collusion with the insurance companies or not. To the extent that the health care benefit is provided by the company, the employee necessarily gives up that level of decision making. Funny, but I’ve had damn few employees come up and tell me they can get a better deal elsewhere. In fact, to date it has been one, and that is a temporary very special case.

    All, given my personal experiences with health care plan providers, including Medicare, it is astounding to me how much ideological pablum gets thrown out here that just doesn’t match reality. I’m not arguing everything is wonderful, but I have no faith that the government is going to take what is effectively a good solution for a large number of people and create a perfect solution for everyone.

    Ain’t. Gonna. Happen.

  9. Just me, COBRA is out there to deal with that to some extent. And anyone is able to get insurance on their own, albeit at higher prices as a pool of one doesn’t have much bargaining power.

  10. Dave Schuler says:

    charles austin, I’ve been in the position of evaluating competing plans for my employees’ health insurance myself and I largely agree with the points you made above. However, there’s one thing we all need to keep in mind: we’re on a non-sustainable trajectory and something must be done within the next very few years. I don’t have strong feelings about the shape that “something” should take but my intuition is that it must involve shared pain, i.e. not dump all of the pain on any one interest group, and it will be most likely to succeed if it deals with both the supply and demand sides of the equation. Since insurance company administrative costs constitute such a large proportion of healthcare dollars, they make a prime target for cutting but IMO that’s just a quick fix to a much, much larger problem we’ve been kicking down the road for a generation or more, won’t be nearly enough to solve the larger problem, and that the fight over healthcare reform will leave such a bad taste in everybody’s mouth that fine-tuning probably isn’t an option.

  11. floyd says:

    resident Obama claims that he will not “mess with” your choice if you choose private health care.
    Then he proposes a to tax health benefits as income.
    Let’s also look at what happens to retirees who carry heath insurance into retirement. With the advent of Medicare, most companies now choose to dump their retirees onto Medicare at the point of eligibility,thereby claiming to have fulfilled any obligation.
    What is to prevent the EXACT same thing from happening once the employee becomes eligible for a government provided “apple a day” program?

  12. floyd says:

    “something must be done”

    “”””””””””””””””””””””””””””””””””””””””””””””””””

    The question remains… Can an entity which has FAILED miserably to REGULATE an industry, when charged with that responsibility, then be trusted to RUN it???

  13. Brian Knapp says:

    And anyone is able to get insurance on their own, albeit at higher prices as a pool of one doesn’t have much bargaining power.

    Unfortunately, this is just not true. If you have a pre-existing condition for certain diseases, they can deny you coverage.

    It make sense of course, since the cost of coverage will exceed the sales premiums. But it doesn’t solve the medical issues.

  14. just me says:

    I’m not arguing everything is wonderful, but I have no faith that the government is going to take what is effectively a good solution for a large number of people and create a perfect solution for everyone.

    I completely agree with this. There is no such thing as the perfect plan that gives everyone everything they want or even need. When it comes to healthcare-whether it is government providing or private, there are going to be weaknesses in the system-some weaknesses bigger than others.

    And anyone is able to get insurance on their own, albeit at higher prices as a pool of one doesn’t have much bargaining power.

    Not completely true, and in the case of some individual plans, the cost is so prohibitive as to price the person out of the market. Personally, I would rather see medical insurance be separated from employment, and see medical insurance sold more like auto or home insurance where you buy what you need and assume the level of risk works best for your family.

  15. Dave Schuler says:

    Brian, that’s a perfectly good example of how healthcare insurance isn’t insurance but a pre-paid health plan. The price of a pre-paid health plan must exceed its costs but some places have limits on how high premiums can be or how much cost may be passed on to younger or healthier insurees. Consequently, you’ve got “adverse selection”.

    The real solution is lower costs. Insurance is just a sideshow.

  16. Brian Knapp says:

    Dave, that’s exactly right. And maybe revamping the system and juggling the burden of increasing costs isn’t the answer.

    Maybe the money will be better spent on medical research and medical diagnostic technology to improve the efficacy of care and thus, lower costs.

    Maybe that research will yield a breakthrough that changes the entire profile of how care is administered.

    X-prizes or other grant/award-based systems for research?

  17. It is possible in far too many cases to spend more on healthcare in one’s life than was ever earner. Not just 15% or 20% but 100% of lifetime earnings. I saw this with my maternal grandfather. There is rationing today, albeit with something of a safety net that is very expensive on a per unit of care delivered basis, but that gets into the whole argument of health care delivery vice health care insurance. There will be rationing in the future. It can be done based upon a market approach, i.e., ability to pay, or through some other means. The nature of those other means and their unintended consequences is what scares me. Do we want rationing to be based on “the greatest good for the greatest number” or political clout or what exactly? I’m almost as tired of typing this as many of you are of reading it but the perfect remains the enemy of the good.

    So much money and healthcare expenditures are on drugs and treatments that did not even exist when the patient was born. I wonder if we can get past the idea that everyone, or indeed anyone, is entitled to the best treatment available no matter what. This is a non-starter to any feasible solution but some just can’t get past that. Is it envy? Some misguided sense of “fairness?” What?

    Look at the problem another way, where has so much quality health care been delivered to so many people at any cost? Yes, some countries have universal coverage, as long as you don’t actually try to use it. Then you find out about denials, waiting lists, concerns that your lifestyle disqualifies you, etc. And please don’t quote the free riders to me.

    I have lived in England. I don’t want to live under the NHS and neither did many Britons, but they have no choice while we still do. The US drives improvements to health care far beyond what the rest of the world does because there is still an opportunity to make a profit. Remove that incentive and we just won’t see the advances or new drugs that we have come to expect and depend on for our aging population.

  18. steve says:

    charles austin- Let us put this in economic terms. What I am suggesting is not that we ration, but rather, we stop subsidizing unnecessary care. The Dartmouth study, and a couple others (Rand?), have shown that more care often leads to worse outcomes. Every procedure or medication has risks. If people are performing procedures or ordering drugs that have no benefits, then we only have risk.

    What I am suggesting, is that we look at the low expense, better outcome facilities and attempt to replicate them. I would suggest that we stop covering procedures that do not show improvements and let people pay for them out of pocket if they still want them. We need to look seriously at the end of life issues.

    I am also president of my 50 person group. Our private insurance company just asked for a 26% increase in premiums. I also review our options every year. At 26%, I have to think about letting someone go, or make people pay more of their own premiums.

    “And anyone is able to get insurance on their own, albeit at higher prices as a pool of one doesn’t have much bargaining power.”

    Not true. My wife and I were unable to get insurance for her brother from any private insurer. The high risk pool (Pennsylvania) had a waiting list that he sat on for almost a year.

    Steve

  19. sam says:

    @Charles

    Your problem seems to be the idea that it is bad to make a profit. Why is that?

    Well, that’s bullshit and you know it, Charles. But let me recount a personal story that might give you some reason to understand my cynicism re insurance companies.

    My sister and brother-in-law owned a small construction company, a very small (two-person) company. They had a company health insurance policy that covered them and, as it was allowed, their daughter. When my niece graduated from college, and began working, she was covered under another policy. So, my sister-in-law called the insurance company and asked that her daughter be taken off their policy. The insurance company said fine, but you have to send a letter, etc. She sent the letter, etc. But through some administrative effup, she and her husband were taken off the policy, and her daughter left on. Mind you, this was a policy covering her company, with the proviso of adding a family member (who didn’t work for the company). She found this out a few months later when she saw an insurance bill, payment of which was normally taken care of by her accountant. While she was trying to get this straightened out, she died, quite suddenly. The insurance company refused to pay the claim, and my brother-in-law had to hire a lawyer. (My sister-in-law had all the correspondance between herself and the insurance company re her daughter’s removal from the policy, so they had a very strong case.) The insurance company could have said, Yes, that was our error, therefore we’ll honor the policy as covering the husband and wife. But no. The SOBs refused, even though they had made the error. In the end, after the lawyer got on them, they did settle the claim. But there shouldn’t have been any “in the end.” On top of losing his wife, my brother-in-law had to sweat out paying a medical bill in the hundreds of thousands of dollars.

    So, forgive me if I’m a mite cynical when it comes to insurance companies.

  20. Brett says:

    If you set the price below the market clearing price what happens? Supply is less than demand.

    That depends on how elastic your supply is. Dave Schuler’s made a good case over on his blog that the supply – at least in terms of doctors, etc – isn’t very elastic.

    What counter factual? I didn’t see anything in there saying that Canadians get more health care, at lower costs and with a lower cost growth rate. Please provide some relevant quotes.

    Similar outcomes (and I’m not just talking about Life Expectancy and Infant Mortality) for less than half of the US’s per capita costs. I don’t particularly care about the actual supply, as long as the outcomes are the same or better. Next question?

    I’d argue, Steve, that you’re making two mistakes:

    1. You’re attributing much more elasticity to the supply of medical care than actually exists, and

    2. You’re assuming that a monopsony can’t result in good and/or better outcomes.

    The latter, in particular, is nonsense. We get good outcomes in terms of military production and equipment, even though the market for military equipment (particularly things like planes and tanks) is largely monopsonistic (particularly since production lines are largely tailored specifically for military equipment these days). We get pretty good road construction and maintenance, even though the market and demand is monopsonistic (there are state and federal highway funds, but they usually are the sole payers for maintaining their particular roads). Why not health insurance?*

    *Some of us, in fact, would argue that much of health insurance is more of a “natural monopoly” than a true free market.

  21. odograph says:

    Steve V, in your original piece you seem to accept that the goal is health, and not just more “health care.” I’d say Steve no-V concurred. Oh, and Brett got it too.

    The counterfactual is better health, at lower cost.

    (Charles: “Bene caca et declina medicos”)

  22. DL says:

    “…that’s not logical.”

    What in this zany world is logical anymore?

    Why limit your agenda to amass power with logic, when lying is so much more easier – and is so much more desired by the subjects. Tell them what they want to hear – that you’re God, (without all that commandments and Hell talk) – and Heaven began officially on January 4th.

  23. steve, I largely concur regarding eliminating subsidies — including the tax deductability of premiums, but that’s too free market for most people to sign on to. I noted above that end of life issues are, IMHO, the single biggest problem, albeit one of the toughest to grapple with. As for some sort of safety insurance net for preexisting conditions and those who have trouble otherwise getting insurance, I don’t have much trouble getting the government to step in and address it. Perhaps something akin to those states where those who have great difficulty getting autombile liability insurance can still get it because it is legally required. My experience with the increase in premiums the last few years has been much, much better than yours avergaing around four or five percet a year the last three years. No way to know why that is.

    sam, my apologies for perhaps reading too much into it, but why is everyone surprised that any person or business finds it difficult to always do the right thing, especially when the right thing may not always be as obvious to them from their perspective. I’m sorry for their problems, but anecdotal evidence doesn’t generalize well to everyone, and at least they had the ability to sue. More to the point, do you think the government doesn’t make bureaucratic mistakes? And guess what, you won’t have much recourse to sue them when they make mistakes either. I’m cynical about many things as well, but nothing so much as the idea that the government has any magic wands to fix this problem or make the hard choices disappear.

    odograph, as long as there’s the US to take care of those really tough cases, or to provide services for those unwilling to wait on the long waiting lists, or to provide beds they don’t have for neonatal ICUs, eh? Did you factor all this into the costs of delivery? Also, the US is a much more diverse country than just about any other place on earth, and a freer country too, which means people can, and do, make bad decisions. Not to mention the fact that in the US heoric eforts are made to extend life on both ends of the scale to the extent that just isn’t done in many other countries which skews the statistics somewhat. Finally, longer life isn’t necessarily synonymous with better health. Sometimes those better health per dollar statistics just don’t work the way you want them too.

  24. just me says:

    So, forgive me if I’m a mite cynical when it comes to insurance companies.

    I am sorry for what happened in your families situation. I have a whole list of horror stories with military healthcare and VA healthcare that make me absolutely not want to have my healthcare even remotely run by the government.

    Needless to say my husband has a permanent disability that wouldn’t be a permanent disability had the military doctor’s actually done their jobs instead of assuming my husbands pain was simply in his head. A tear that could have been fixed with surgery when the injury occurred is now unfixable without a knee replacement. And that’s just one problem-I have a lot more.

  25. Ja'far says:

    Ja’far, as someone who actually makes a decision each year rearding my company’s health care plan and reviews about ten different options from multiple vendors in doing so, your views regarding competition amongst insurance companies and providers are just plain wrong on several counts.

    They certainly may be wrong, but your rebuttal is short of convincing.

    It is true that each employee doesn’t pick their own plan, but this is where economies of scale help keep costs down. Do you really think consumers are going to benefit by negotiating with each service provider on their own?

    The market does the negotiating. People don’t need other people to negotiate with car dealers, convince them to buy the cheaper brand of toothpaste, or compel them to purchase the safer, more expensive car seat. In our system, we assume people are perfectly capable of making the decision that best benefit them, and thus goods and services are created and priced accordingly. Health insurance is an exception, and it insulates itself from the mechanisms of our system that regulate production, prices, and quality.

    I have a responsibility to my company and my employees to do what is best for both of them within the constraints I must live with. I somewhat resent the implication that I am not trying to do what is best for both and that I am trying to screw them whether I am in collusion with the insurance companies or not. To the extent that the health care benefit is provided by the company, the employee necessarily gives up that level of decision making. Funny, but I’ve had damn few employees come up and tell me they can get a better deal elsewhere. In fact, to date it has been one, and that is a temporary very special case.

    “Good faith” is not a sound argument for eliminating individual choice, in fact, it sounds a lot like the argument made for a government system. And no matter how unyielding you present your case, your interests in choosing a company policy are different than those who will only be using it. You may be an exception, but that is hardly comforting as the foundation of our healthcare system.

    As for the collusion comment, it wouldn’t exist between your company and the insurance company. That is nonsensical. Collusion is an effect that can be caused when few large firms are dominating a market. I would speculate that the health insurance industry is more condensed into few firms than most other oligopolies.

    And where else would employees find a better deal? Health benefits are both tax-exempt and eat up a significant portion of an employees incentives, i.e. remove the tax exemption and give the cost of the benefits to the employee in the form of income and they will be able to find a better deal. That is the basic point of my argument, there is no choice for the individual aside from finding another employer. Competition is the mechanism that keeps prices down and quality up, according to our system, yet it is removed here, as far as I can see.

  26. odograph says:

    Charles, a recurrent theme is that political ideologues cannot accept fact-sets that threaten their philosophy. It’s what makes them ideologues.

    Canada’s system might work (and I think it does pretty well) and still never be accepted by a certain set of people whose very political being depends on it not working.

    Moderates might just accept those same facts though.

  27. odograph, of course, kind of like, we meant well.

  28. steve says:

    charles austin-I lean towards doing away with the deductibility of health care also, mortgage interest too just FTR. I would have preferred a more market oriented approach, but private insurance companies have had the opportunity to compete and reduce costs for many years. They have not done so. I am tired of waiting. A monopsony has the potential for good or bad. I was in the military for eight years and did some of my training at a VA. I am aware of what can go wrong. However, as Dave pointed out above, I see the current situation as not sustainable.

    While I am glad you think American medicine is so wonderful, and it has strengths, you should read up more on outcome data. Everyone has horror stories. Politicians love them, but I have little interest in anecdotal evidence. Give me data. Looking at what data I can find, it looks as though our outcomes in cardiac care are not much different than other first world health care systems. In cancer care we may be a bit ahead, but I am still not sure (still reading on it and my research buddies think it probably true) that most of that difference comes from the way we treat some cancers very early that others do not, knowing that they are very slow malignancies that will not affect life expectancy.

    You are correct, IMHO, that we originate some of the best research. We also do a lot of me-too drugs and instruments (total joints) that offer little in the way in improvement, but drive up costs. We have very little in the way of cost effective research. I can tell you that I never see foreigners coming to my hospital for care. When I trained at my Ivy League institution (Penn) it was rare to see someone from another country. Maybe twice a year? My partners who trained at Duke and MGH report the same thing. Yes, it happens, but it is rare.

    Steve

  29. odograph says:

    It’s funny. People who don’t want “socialized medicine” “because it will be expensive” say that they don’t like Canada’s version, because it doesn’t spend enough.

    That would be fine if they could identify a strong difference in outcomes, but there isn’t really such a strong case for that. The outcomes are remarkably similar. It’s almost like we can do so much for ourselves and our own health, and medicine can do so much to improve on that, but that … “health care” is not a “cure all.”

    If “medicine” is not a “panacea” then the Canadian system starts looking less bad.

    Not only that, these “conservative” complaints that we need more “health care” because we are a bunch of fat lazy substance abusers start to look even more strange. We don’t believe in personal responsiblity anymore? If medicine can’t reduce our weight, then maybe it isn’t medicine’s problem.

  30. Steve, it isn’t just foreigners coming to the US for treatment. From my personal experience Americans abroad would almost always defer checkups and elective procedures until they were back in the US. We won’t begin to discuss dental care in this context. There can of course be many reasons for this, such as relying on a physician you know.

    Of course there is going to be some waste and abuse and really stupid stuff in any market driven system, but I expect all of that to get worse under any government led plan. If that makes me an idealogue, then so be it. If it turns out the nationalized health care does make things worse using some sort of standardized metric (and wouldn’t it be nice to see those metrics defined before we start?), how would we ever get out of it?

  31. Steve Verdon says:

    That depends on how elastic your supply is. Dave Schuler’s made a good case over on his blog that the supply – at least in terms of doctors, etc – isn’t very elastic.

    Doctors are not the complete universe of health care supply side.

    Similar outcomes (and I’m not just talking about Life Expectancy and Infant Mortality) for less than half of the US’s per capita costs. I don’t particularly care about the actual supply, as long as the outcomes are the same or better. Next question?

    Outcomes are not the same as health care resources. There may be very good non-health care reasons for similarity of outcome…or not. This is a questionable metric.

    1. You’re attributing much more elasticity to the supply of medical care than actually exists, and

    No. I think you are thinking the supply is far more inelastic than it actually is. For example, nurses. We import them. Stop paying them so much and the imports drop. Less medical care. Drugs: pharmacuetical firms are going to behave like any other firm if their ROI goes down. Less medical care via drugs. Doctors? Locally, yes the supply curve might be inelastic to a considerable degree, but take a longer time horizon and it will likely become more elastic as people who would have gone into the medical profession look elsewhere.

    2. You’re assuming that a monopsony can’t result in good and/or better outcomes.

    On the contrary, I’m arguing that monopsony will result in less competition and less health care resources. The question is will this be a good thing or a bad thing is far from clear. I think in some areas it might be good (we don’t need that many plastic boobies and such) but if it is done badly it could be worse.

    The latter, in particular, is nonsense. We get good outcomes in terms of military production and equipment, even though the market for military equipment (particularly things like planes and tanks) is largely monopsonistic (particularly since production lines are largely tailored specifically for military equipment these days).

    There is still rent seeking (weapon systems we don’t need, keeping weapon systems past their usefulness, etc.) along with waste. And health care is going to have far far more pressure to subsidize consumption vs. military spending. So I’m not sure your argument holds for health care.

    *Some of us, in fact, would argue that much of health insurance is more of a “natural monopoly” than a true free market.

    I don’t think you are familar with that term. I see no reason to conclude this.

    Odograph,

    The counterfactual is better health, at lower cost.

    Yes, that would be great, but is it possible. Everyone assumes it is, but never looks to see if perhaps it is due to other reasons. People look at life expectancy and infant mortality and use these gross statistics when even your own link points out that such comparisons are problematic.

    And that is just the outcome side of the issue. Has anyone tried to take into account the pharmaceutical aspect? Does the U.S. health care consumer subsidize the rest of the world’s consumption of new drugs?

    steve,

    I would have preferred a more market oriented approach, but private insurance companies have had the opportunity to compete and reduce costs for many years.

    I’d also point out that we don’t have a system anywhere approximating a “more market oriented” approach. We have a mixed system which makes our system somewhat like France’s just more expensive. Why? Is it waste, fraud and abuse by insurance companies? I’m skeptical that profit maximizing firms are going to do that, not because they are saints, but because they want profits and that means reducing costs. Is it due to differneces in the population? Differences in behavior? Do more, less or the same proportion of Americans die/get injured in automobile accidents as the French?

    There is alot going on here, and the rather flippant remarks I often see are often frustrating in the least.

    Odograph again,

    Not only that, these “conservative” complaints that we need more “health care” because we are a bunch of fat lazy substance abusers start to look even more strange.

    Careful. I’m not arguing we need more per-capita, but that with many of the plans floated around we’ll get more in total and possibly less per capita.

    You really need to be careful with the simplifying assumptions you make.

  32. just me says:

    Of course there is going to be some waste and abuse and really stupid stuff in any market driven system, but I expect all of that to get worse under any government led plan.

    I am willing to bet the most fraud prone insurance system at the moment is medicare.

    And just because the government runs it won’t mean it is less fraud proof.

    And like i said-my experience with military medical care and VA care leaves little to be desired with the government running the show. Thanks, but not thanks.

  33. steve says:

    Steve V- You are correct that we are not truly a free market health care system. Who has one (in a first world level health care system)? No one. Those advocating for a complete free market model have nothing to hold up as an example. Given that we have a number of states that are very solidly red, it would have been nice if one of these had decided to engage a free market model, just as Massachusetts tried its own experiment. Once again, conservative leadership just ignored a major issue. If we get a national public plan, I would support exemptions for states that want to try their own plans, BUT, they must really do something.

    As to the why, you know as well as I do that the reasons are myriad. If there were just one cause, it would be obvious and we would not be discussing it. Limiting the discussion to costs, France and insurance we know a little and can conjecture much.
    We know that France uses price controls(as does Japan I believe). We know that private insurers in the US have not held down costs. We know that we smoke less and have lower rates of alcoholism than France. We win on drugs. Are any of these enough to account for a 50% difference in health care spending? Probably cost controls. Do I want cost controls? Not especially, but I also do not want the system to go broke. France has a system that their people like, has outcomes similar to ours (better in cardiac care last time I looked) and keeps down costs. Do we copy a proven system or embark on something new? I still stand by my statement that private insurers have had plenty of time to compete and bring down costs, but have failed to do so.

    Conjecturing, I wonder if you are making the same mistake Greenspan committed. He assumed that bankers would not make decisions that ran counter to the best interests of their companies. Bankers actually made decisions in their own best economic interests, which sometimes ran counter to those of their organization. Perhaps insurance execs benefit more from passing along costs than controlling them. An exec at a $10 billion co. will earn more than one at a $5 billion co. on average.

    Last conjecture, of many possible. There is more adverse publicity in denied services in the US. Cutting costs is therefore too risky, so insurance companies here just pass on costs.

    Steve

  34. Brett says:

    Outcomes are not the same as health care resources. There may be very good non-health care reasons for similarity of outcome…or not. This is a questionable metric.

    I never said they were. However, to dismiss all of that as “possibly from non-health care reasons” is stretching belief, particularly since the report looks at things like survival rates from diseases and the like.

    Were it just life expectancy, I could believe you – America may be more accident-prone.

    I don’t think you are familar with that term. I see no reason to conclude this.

    It’s when the most efficient market structure for a product is a monopoly – sort of like how power lines and distribution tend to be monopolies, because it’s much better than having multiple, duplicate power lines.

    Doctors are not the complete universe of health care supply side.

    I never said they were. They are, however, a critical component to health care, and much of the public debate seems to center around doctor compensation rates.

    For example, nurses. We import them. Stop paying them so much and the imports drop. Less medical care.

    I’ve provided a link to my data – can you provide a link for yours?

    The reason is that there are quite a few complications in the health care market – it is far from a perfectly competitive market.

    Drugs: pharmacuetical firms are going to behave like any other firm if their ROI goes down.

    Only if you assume that

    A)companies are only going to be making drugs covered by the plan, and

    B)companies are dependent largely on the drugs that would be covered by the plan.

    Both are nonsense. Pharmaceutical companies, even under a single-payer plan, would have the opportunity to make quite a few drugs that wouldn’t end up covered under the plan, and they could sell them for whatever they want.

    Doctors? Locally, yes the supply curve might be inelastic to a considerable degree, but take a longer time horizon and it will likely become more elastic as people who would have gone into the medical profession look elsewhere.

    True, but does it significantly change both the outcomes and supply of health care? And there are other factors than straight-up compensation – you might be able to lure in many doctors by offering them subsidized tuition.

    So I’m not sure your argument holds for health care.

    What about the “highway construction” argument then?

    We have a mixed system which makes our system somewhat like France’s just more expensive.

    Our system isn’t anything like France’s.

  35. sam says:

    I think everyone should read this article in today’s Times:

    Many With Insurance Still Bankrupted by Health Crises

  36. sam says:

    And really, really read this one in the New Yorker:

    Annals of Medicine: The Cost Conundrum

  37. skew says:

    Clearly, in order to be profitable insurance companies need the amount of premiums coming in to exceed the amount of benefits being paid out.

    This is wrong. All insurance companies pay out far more in benefits than they collect in premiums. If an insurance company set their premiums ot cover benefits, their prices would be exorbiant and nobody would do business with them.

    Insurance companies get money (some of which is profit, and some of which is paid out as additional benefits) from the investment income on the premiums collected.

  38. sam, I read the NY Times article posted but I don’t think it delivers the lessons you want it to deliver. Are we really reduced now to making public policy for 300,000,000 people based on a handful of sad stories? Not that I have come to expect any better from the NY Times, but I do expect better from posters here.

    There isn’t any information in this article to indicate how big this problem is. The article does say, “an estimated three-quarters of people who are pushed into personal bankruptcy by medical problems actually had insurance when they got sick or were injured” but that begs the question of just how many were pushed into personal bankruptcy by medical problems. I’ve read in other sources that it just isn’t that many, certianly not enough to support the nationalization of health care, and frankly the NY Times effort to nuance the numbers this way kind of supports that.

    No doubt it is a tragedy for some. In the Yurdin’s case they did a poor job of selecting and buying insurance to begin with. In fact, the NY Times article clearly says that having insurance alone cannot prevent such tragedies. Do you imagine that the federal government can overcome the human condition and eliminate tragedy and suffering?

  39. Ja'far says:

    This is wrong. All insurance companies pay out far more in benefits than they collect in premiums. If an insurance company set their premiums ot cover benefits, their prices would be exorbiant and nobody would do business with them.

    Insurance companies get money (some of which is profit, and some of which is paid out as additional benefits) from the investment income on the premiums collected.

    Could you elaborate?

  40. Steve Verdon says:

    Brett,

    It’s when the most efficient market structure for a product is a monopoly – sort of like how power lines and distribution tend to be monopolies, because it’s much better than having multiple, duplicate power lines.

    No, it is when a firm can produce the total output for the market at a lower cost than multiple firms. Costs are not what determines efficiency…at least not alone. A monopolist is going to carry with it inefficiencies such as dead weight loss. This is why natural monopolies are regulated, to try and obtain the competitive level of output but at the lowest level of cost.

    I’ve provided a link to my data – can you provide a link for yours?

    It is pretty common knowledge that a significant portion of nurses in this country are imported from places like the Pilippines. This link is a bit old….

    http://www.workpermit.com/news/2006_03_06/us/us_hires_foreign_filipino_nurses.htm

    Here is wikipedia,

    http://en.wikipedia.org/wiki/Filipino_American

    Similarities in quality and structure of the nursing curriculum in the Philippines and the United States had led to the migration of thousands of nurses from the Philippines to fill the shortfall of RNs in the United States. Since the 1970s and through the 1980s, the Philippines have been a source of medical professionals for U.S. medical facilities. The Vietnam War and AIDS epidemic of the 70s and 80s, signaled the need of the American health care system for more foreign trained professionals. In articles published in health/medical policy journals, Filipino nurses comprise the largest block of foreign trained nurses working and entering the United States, from 75% of all foreign nurses in the 1980s to 43% in 2000. Still, Philippine-trained nurses make up 52% of all foreigners taking the U.S. nursing licensure exam, well above the Canadian-trained nurses at 12%.

    The significant drop in the percentage of Filipino nurses from the 1980s to 2000 is due to the increase in the number of countries recruiting Filipino nurses (European Union, the Middle East, Japan), as well as the increase in number of countries sending nurses to the United States.[38] According to the United States Census Bureau, 60,000 Filipino nationals migrated to the United States every year in the 1990s to take advantage of such professional opportunities. Other Filipino nationals come to the United States for a college or university education, return to the Philippines and end up migrating to the United States to settle.

    It is my understanding there are insitutions in the Philippines that exist for just this reason: training then exporting nurses.

    Only if you assume that

    A)companies are only going to be making drugs covered by the plan, and

    B)companies are dependent largely on the drugs that would be covered by the plan.

    No, I’m basing my comments on the notion that being a monopsonist means the Federal gov’t can force prices lower. Force them below where a firm can expect to cover its costs means you’ll get less of that drug. People have been advocating this for Medicare Part D.

    Pharmaceutical companies, even under a single-payer plan, would have the opportunity to make quite a few drugs that wouldn’t end up covered under the plan, and they could sell them for whatever they want.

    Sure, but then we are back to the problem noted earlier: rising costs. Now for drugs you want people to pay the full freight, but earlier you weren’t for it. You want to have your cake and eat it too. Free market, no free market…both at the same time.

    True, but does it significantly change both the outcomes and supply of health care? And there are other factors than straight-up compensation – you might be able to lure in many doctors by offering them subsidized tuition.

    If doctor compensation is a factor in health care costs, then we need to reduce it. Reducing compensation will likely reduce the supply of doctors. Now we could possibly get some help if we remove the barriers to entry for entering the “MD market”. Right now the number of MD entrants is highly controlled.

    What about the “highway construction” argument then?

    I don’t buy it either. Highways are public goods subject to conjestion. Medical care is largely a private good, with some positive externalities (disease vectors and such). If person A is injected with medicine you can’t take that same medicine you just injected into A and inject it into B. You’d need another dosage of that medicine–you’d need 2x the medicine. With a road you only need 1x. If you have 50 people you need 50x dosages, with a road you need 1x. Public goods are goods where one person’s consumption does not reduce another person’s consumption. Much of health care does not have that attribute. Health care is not a public good, by definition.

    Our system isn’t anything like France’s.

    Sure it is. It isn’t exactly like France’s but there is a public and private component to our system like there is in France. And interestingly, they are having problems too even though they are cheaper. Switching to the “French system” would (hopefully) mean we simply slow down as we drive towards the cliff’s edge. Maybe not a bad idea as a first step, but it wont be enough. I’m still doubtful in that various powerful intersts will still want to try and secure benefits thus possibly mucking things up so we don’t get the savings or even worse, end up speeding up as we head towards the cliff.

    Skew,

    This is wrong. All insurance companies pay out far more in benefits than they collect in premiums. If an insurance company set their premiums ot cover benefits, their prices would be exorbiant and nobody would do business with them.

    Insurance companies get money (some of which is profit, and some of which is paid out as additional benefits) from the investment income on the premiums collected.

    If they are doing this, then they are doing it way, way wrong. I’d like to seem some serious evidence backing this up.

  41. Steve Verdon says:

    Steve,

    Conjecturing, I wonder if you are making the same mistake Greenspan committed. He assumed that bankers would not make decisions that ran counter to the best interests of their companies. Bankers actually made decisions in their own best economic interests, which sometimes ran counter to those of their organization. Perhaps insurance execs benefit more from passing along costs than controlling them. An exec at a $10 billion co. will earn more than one at a $5 billion co. on average.

    No, what I’m assuming is that a priori consumers aren’t going to want to pay high premiums. That firms are going to want to maximize profits. These two things tend to do good things. Sure you might get more if you have a $10 billion insurance company, but if you have to get to $10 billion by having $5 billion in losses I’m thinking you wont run taht insurance company for very long. Either you’ll get fired or you’ll find the company bankrupt and you’ll be out of a job.

    Granted, bad incentives could lead to serious problems in the insurance industry like with the finance sector. However, that is something that is outside the scope of this post and something I don’t see Obama’s plan addressing, at least not directly.

    I still stand by my statement that private insurers have had plenty of time to compete and bring down costs, but have failed to do so.

    Sure, but we also have a system where there are incentives to gold plate. Why are things like eye glasses, routine check-ups, and such part of health care packages? To reduce costs, or is it a result of employer provided health care benefits that get preferential tax treatment. If I’m going to buy glasses, get check ups, and other things, I’d rather pay for them with pre-tax dollars than after tax. As such, I, as an employee, would rather they be part of the plan than not. Remove that tax benefit and I’m indifferent as to whether the plan includes it or not. You’ve argued that we stop subsidizing unneccessary care–tax preferred employer provided health benefits are a subsidy.

  42. Drew says:

    Dave Schuler, at least, will recognize this link:
    http://www.hoover.org/publications/digest/3459466.html

    People want to argue that “medicine” or “health care” is not subject to the laws of economics.

    Balls.

    Unless you are willing to discuss two fundamentals: the reintroduction of consumer price exposure/price driven decisions into health care, and returning “health insurance” to insurance, and not just a comprehensive health maintenance program………then you are in denial (and based upon so many posts I read here, you are) and you are just jackin’ off.

  43. Brett says:

    It is pretty common knowledge that a significant portion of nurses in this country are imported from places like the Pilippines. This link is a bit old….

    I wasn’t questioning the “nurses imported from Philippines” point – I was questioning as to the location of your proof for the elasticity you were claiming in their employment.

    No, I’m basing my comments on the notion that being a monopsonist means the Federal gov’t can force prices lower. Force them below where a firm can expect to cover its costs means you’ll get less of that drug. People have been advocating this for Medicare Part D.

    What makes you think it will force them below the production costs of the drugs?

    And you missed my main point, which was that it’s hardly as if these types of drugs are going to be the pharmaceutical companies’ only drugs produced. They produce a whole bunch of drugs that aren’t, and won’t, be covered, and for which they can sell for whatever they want.

    Sure, but then we are back to the problem noted earlier: rising costs. Now for drugs you want people to pay the full freight, but earlier you weren’t for it. You want to have your cake and eat it too. Free market, no free market…both at the same time.

    No, I pointed out that the drugs that would be covered under the plan are not the only drugs that these companies produce, which means that they have additional sources of revenues. I pointed it out because so much of that type of argument you are making seems to be “Woe is us! If we drive down drug prices on certain drugs, the companies won’t produce them in any type of worthwhile quantities, and will go bankrupt!”

    Sure it is. It isn’t exactly like France’s but there is a public and private component to our system like there is in France.

    So? The English medical system has public and private components, but I don’t you see saying that the American system is basically England’s, only with more private hospitals.

  44. Brett, what do you really know about the British (not Englich) system? I’ve lived under it and I can assure it is nothing at all like the American system.

  45. dutchmarbel says:

    What you don’t take into account is the hugh costs of administration in the US system. In 30 years of health insurance I have never had any contact with my health insurance other that the standard forms for claiming bills or changing insurers.

    The US has slightly more nurses that OECD average, but less doctors and relatively low percentage of medical students (xls file from OECD health report published today)

    I am definately not complaining about our healthcare system. My husband called our GP from work last Wednesday morning. He saw a little black spot in the corner of his eye and wondered wether he should make an appointment for a check-up. The assistant told him to come immediately so he travelled back from work. The GP checked, it wasn’t the cornea but he wanted the opthamologist to do further tests. So he sent us to the local hospital, where the eye doctor concluded that it was a detached retina, with so much fluid behind it that she couldn’t repair it with her laser. So she sent us immediately to one of the academic hospitals in Amsterdam (we live in Haarlem, 20 km from Amsterdam).

    Husband had to stay in hospital and was told to exclusively lie on his left side so the retina could naturally find the proper place. The next day he was operated on. He is now home, with eye drops. We didn’t need to have any contact with our insurer, we didn’t need to pay for anything and the only costs will be new glasses for my husband in a few months time, because he will have a slight shift in myopia in that eye, but not bad enough to have the insurance pay for it.

    We don’t have health insurance via his work, but we have it via a consumer group – interest groups usually can get the same 10% discount companies can get, so now we pay 225 euro per month for health insurance (2 adults, 3 kids)