Ronald Bailey on Clinton Care 2.0

Like me Ronald Bailey at Reason Magazine isn’t all that thrilled by Hillary Clinton’s health care proposals. In fact, there is pretty much nothing in the proposed policy that he likes.

He asks the question: “Employers don’t buy auto-insurance or home owners insurance for their workers, why should they buy their health care?” This is a good questions. After all, employers pay workers wages and benefits. If the employer didn’t pay the worker benefits then it is reasonable that wages would rise by the value of the benefits if the labor market is competitive. Employers don’t care what form the compensation takes unless there are government policies that distort prices and currently there is a government policy that distorts the compensation rate for workers who receive health care benefits.

And this raises another interesting question. How come auto insurance and home owner’s insurance rates are not rising rapidly? Could it be that people who buy auto insurance often have an incentive to shop around and look for a policy that fits them best both in terms of premiums and in coverage? I think this is a question that needs more research.

Another aspect of Clinton’s plan is the verbiage about “fair prices” for pharmaceuticals. What exactly is a fair price? The concept has literally no meaning in economics and was rejected long ago. Further, it raises the possibility that Clinton is talking about price controls and/or reducing the profits for pharmaceutical companies via prices. While some might consider this a good thing in that profiting from other people’s illness is bad, it is an incredibly naive view point. If the profit rate is lowered then investors will simply take the resources allocated towards researching new pharmaceuticals and producing existing drugs into other investments with equal or higher rates of return. In short, if you want less pharmaceutical research and production then this is the policy for you.

Bailey is also skeptical of the claims of savings that will be used to finance the program.

In addition, the outline of Sen. Clinton’s plan is decorated with a number of vague promises such as reducing costs by stressing prevention and a focus on efficiency and modernization, asking providers to work collaboratively with patients and businesses to deliver high-quality, affordable care, and reducing wasteful health spending. Who could be against any of those good things? Clinton says that the $110 billion needed to pay for her plan would come from raising taxes on people with incomes over $250,000 and from $56 billion in costs savings. “Claiming that she can save $56 billion through the marvelous efficiency of the U.S. government is just absurd,” retorts Herzlinger.

Keep in mind what is being claimed here. Health care inefficiencies to the tune of $56 billion that greedy and avaricious corporations are currently paying for can be had. Uhhmmm, either there is something wrong with the assumption that corporations are greedy or that there is $56 billion in savings simply waiting for somebody to point too.

And then there is the tax like effect this policy could have,

As Harvard business school professor Regina Herzlinger notes, such a mandate is indistinguishable from a payroll tax. Currently, the big companies that don’t offer health insurance to their employees tend to be retailers and banks. Herzlinger points out that if they are required to pay an additional $5,000 for health insurance for a clerk earning $22,000, the companies will immediately start substituting capital for labor. In other words, economically vulnerable clerks would be fired and replaced by automated systems or by offshore workers. Instead of just lacking health insurance they would now be out of a job.

Also like me Bailey thinks that individual mandates could be an important part in fixing health care. By putting the money for health care into the hands of the consumer and requiring that they purchase health care would help to contain costs. Add in vouchers for those who cannot afford health care could help get a large portion of the 45-50 million people who don’t have health insurance gain access to the system. Additionally, break the barriers to entry into the medical profession and other supply side considerations. This might not solve the entire problem but it sure would be a step in the right direction. In short, Clinton’s proposed policy is using individual mandates to increase the power of government and will do little to help address the issue of rising costs.

FILED UNDER: Economics and Business, Health, , ,
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. Dave Schuler says:

    I completely agree with you on the cost part, Steve. Unless the plan is a stalking horse for price controls, I don’t see much hope for controlling costs in the plan.

    However, I think there’s another way to look at the Clinton health care plan: this is not a plan to implement, it’s a plan to run on. Note how carefully the plan avoids antagonizing interest groups that mobilized effectively back in 1993—insurance companies and healthcare providers.

    I honestly see no way that we can actually solve the problems in our present healthcare system without all constituencies (insurers, employers, healthcare providers, consumers) feeling some pain. And that’s the problem. You can never get support for such a plan.

  2. Eric says:

    Great blog! I added you to my blogroll. I’d appreciate it if you’d consider linking back.

    Most blogs allow you to enter your blog url in a special field in the comment section. If the blog doesn’t have that feature, then you will also need to put my url in the comment.

  3. Grewgills says:

    In fact, there is pretty much nothing in the proposed policy that he likes.

    except?

    Also like me Bailey thinks that individual mandates could be an important part in fixing health care.

    and

    Add in vouchers for those who cannot afford health care could help get a large portion of the 45-50 million people who don’t have health insurance gain access to the system.

    yet?

    In short, Clinton’s proposed policy is using individual mandates to increase the power of government and will do little to help address the issue of rising costs.

    How exactly does

    He asks the question: “Employers don’t buy auto-insurance or home owners insurance for their workers, why should they buy their health care?”

    seperate Clinton’s plan from any other plan offered by any realistic candidate for president or the status quo?

    These statements don’t seem to mesh

    How come auto insurance and home owner’s insurance rates are rising rapidly? Could it be that people who buy auto insurance often have an incentive to shop around and look for a policy that fits them best both in terms of premiums and in coverage?

    Re: fair prices

    Another aspect of Clinton’s plan is the verbiage about “fair prices” for pharmaceuticals. What exactly is a fair price? The concept has literally no meaning in economics and was rejected long ago. Further, it raises the possibility that Clinton is talking about price controls and/or reducing the profits for pharmaceutical companies via prices.

    What she probably means by fair is more affordable. This would likely be accomplished by the federal government bargaining with the pharmaceutical companies like virtually every other country with universal care and some without and very unlike Medicare part D. Reversing the no bargaining clause in part D and spreading that across the system would amount to considerable savings.

    In addition, the outline of Sen. Clinton’s plan…retorts Herzlinger.

    Do you or he actually individually address the areas she claims these savings come from or do you simply dismiss the possibility without bothering to do so?

    As Harvard business school professor Regina Herzlinger notes, such a mandate is indistinguishable from a payroll tax…Herzlinger points out that if they are required to pay an additional $5,000 for health insurance for a clerk earning $22,000…

    following emphasis mine

    Federal subsidies would be provided for those who are not able to afford insurance, and large businesses would be expected to provide or help pay for their employees’ insurance.

    Clinton said her plan would not require small businesses to take part, but will offer tax credits to encourage them to do so.

    You don’t address the expansion of the availability of the government employees health insurance. Do you support, oppose, or simply not care about this?

    Additionally, break the barriers to entry into the medical profession

    Here we are in agreement.

    From what you have said here, you approve of about a third of her program (mandates and vouchers/tax credits), have no opinion on another third (expansion of government insurance), and don’t address any of the rest of it that is in any way different from any other proposed plan or the status quo other than the small increase in employer mandates. Additionally you think that the inefficiency savings are less than her plan states. Correct me if I am wrong on any of this.

  4. Boyd says:

    I only feel qualified to address one aspect of this.

    “Claiming that she can save $56 billion through the marvelous efficiency of the U.S. government is just absurd,” retorts Herzlinger.

    Additionally you think that the inefficiency savings are less than her plan states.

    The second quote so severely understates the first as to twist all meaning and understanding out of it.

    From my experience and viewpoint, any savings from implementing the federal government’s world-renowned efficiency [/sarcasm] will be so small as to be effectively non-existent. At best.

    More likely, exactly the opposite would happen.

  5. M1EK says:

    “Employers don’t buy auto-insurance or home owners insurance for their workers, why should they buy their health care?”

    Because employees, largely, can’t buy cost-effective health care themselves. This is not now, nor is it likely to ever be, an efficient market for consumers given the information imbalance in favor of the insurer.

  6. Steve Verdon says:

    Grewgills,

    Your oh so clever use of selective quoting aside, I don’t think Bailey likes any proposal so far.

    Regarding this,

    How come auto insurance and home owner’s insurance rates are rising rapidly? Could it be that people who buy auto insurance often have an incentive to shop around and look for a policy that fits them best both in terms of premiums and in coverage?

    The first “are” should have been an “are not”.

    What she probably means by fair is more affordable. This would likely be accomplished by the federal government bargaining with the pharmaceutical companies like virtually every other country with universal care and some without and very unlike Medicare part D. Reversing the no bargaining clause in part D and spreading that across the system would amount to considerable savings.

    In other words price controls. So you want fewer pharmaceuticals and less research into new drugs. Thanks for that bit of information.

    Do you or he actually individually address the areas she claims these savings come from or do you simply dismiss the possibility without bothering to do so?

    Herzlinger is a well respected expert in the area of health care policy. You can review her CV at her faculty webpage on Harvard’s website.

    Federal subsidies would be provided for those who are not able to afford insurance, and large businesses would be expected to provide or help pay for their employees’ insurance.

    Unless the subsidy covers the entire cost, then while the subsidy would lessen the negative impact on employment it would not eliminate it. And further, it isn’t clear that this would do anything in terms of reducing health care costs and might increase them since the subsidy would have to paid for via taxes. Taxes come with a deadweight loss which could very well mean the plan costs more than the subsidies that are given.

    From what you have said here, you approve of about a third of her program (mandates and vouchers/tax credits),

    While I’m inclined to go with mandates and vouchers, I don’t think Clinton’s plan does it the right way. Hence I do NOT support this part of her plan.

    Additionally you think that the inefficiency savings are less than her plan states.

    Yeah, by about $50 billion.

    Because employees, largely, can’t buy cost-effective health care themselves.

    Sure they could. In an competitive labor market if firms stopped buying this (and the tax incentive for employers to provided were removed) then the employees wage would increase by the amount of the cost for health care. Thus, the employee could purchase health care if he so wanted to. Most economists, Right, Left and in between agree on this. This is why several well known economists who are not known for being Right Wingers came out in favor of Bush’s health care policy of removing that distorting tax effect.

    This is not now, nor is it likely to ever be, an efficient market for consumers given the information imbalance in favor of the insurer.

    Are you sure about that? Often the problem with insurance markets is that the consumer has the hidden information, not the other way around.

  7. Steve Verdon says:

    Dave,

    You maybe right. Maybe this plan is offered just as something to run on. Sounds great, tastes great, but in reality she has a different plan. My problem at this point is that I don’t trust any politician with this kind of strategy.

    I also agree with you that just about any reform is likely to cause pain to all constituents. And yes, that renders real and effective reform highly unlikely.

  8. M1EK says:

    Are you sure about that? Often the problem with insurance markets is that the consumer has the hidden information, not the other way around.

    Yes, in this case, the problem is information that the consumer would need to keep secret in order to obtain health care. Once pooling is no longer a factor, since you’ve made people buy individual policies, this problem, which is already bad, will get far far worse.

  9. Steve Verdon says:

    Yes, in this case, the problem is information that the consumer would need to keep secret in order to obtain health care.

    Typically this is called “fraud”. That is not telling your health insurer that you have a pre-existing condition so that you can get a lower premium/better coverage is not all that much different that stealing. For such people health insurance isn’t the issue since they are already sick…you simply can’t insure them. It is impossible.

    We can pay for the health care for such people, but you are in essence going to be paying for all their treatment, not a $5,000 isurance policy.

  10. M1EK says:

    Steve,

    The definition of “pre-existing condition” is such that it would be basically impossible for anybody but the very young and genetically gifted to get medical insurance at all. Look at how much governmental interference in this realm was required in order to support people who have jobs (and insurance) who’d like to have insurance coverage at their next job.

    In this case, your faith in the Magic of the Market is particularly ill-placed.

  11. Grewgills says:

    Your oh so clever use of selective quoting aside, I don’t think Bailey likes any proposal so far.

    You said he liked the idea of a mandate was something both you and he approved of and that you approved of some sort of voucher system for those who could not afford it. The construction of that paragraph implied he approved of the vouchers as well. This accounts for about a third of her plan.

    While I’m inclined to go with mandates and vouchers, I don’t think Clinton’s plan does it the right way. Hence I do NOT support this part of her plan.

    As far as I am aware of she hasn’t been very explicit about how she would implement the mandates she proposes. Assuming you know how she plans to do so, what is wrong with her approach to mandates and how is “your way” materially different and better?
    Her way to implement “vouchers” seems to rely mostly on tax credits. What do you find wrong with this approach?
    For those below an income level that a tax credit to help there would be an extension of Medicaid. Is this your big beef? Would you prefer that the government give vouchers to pay for a private insurer?

    Re: auto insurance
    I recently read that premiums went up an average of 9% last year. That seems pretty steep.

    In other words price controls.

    The VA uses the bulk of its drug purchases to negotiate lower prices. Do you oppose this?
    Walmart uses the bulk of its purchases to negotiate lower prices on everything including drugs. Should they pay more so the companies they buy from can put more money into R&D?
    The government is not likely to become the sole purchaser of drugs in the US, so the government using the volume of its purchases in bargaining for how much it pays for them is not price controls in any meaningful sense.
    Why should people in the US have to pay more for their drugs than any other industrialized nation?

    Herzlinger is a well respected expert in the area of health care policy. You can review her CV at her faculty webpage on Harvard’s website.

    Which in no way addresses my question.

    Sure they could. In an competitive labor market if firms stopped buying this (and the tax incentive for employers to provided were removed) then the employees wage would increase by the amount of the cost for health care. Thus, the employee could purchase health care if he so wanted to.

    Just like before health insurance mandates when a much greater percentage of the population was covered, right? Or like in other countries where there are no mandates where a much greater percentage of the population is covered like, where?
    And what is your answer for the many who would choose to pay rent or food instead of insurance? Should they still be able to get emergency care? If so how should that be paid for when they cannot pay?
    It seems to me that removing employer mandates and tax incentives without putting individual mandates in their place would grow the problem of the uninsured and increase the load on already overloaded ERs. Please explain how I am wrong here.
    If employer mandates and tax credits were replaced by individual mandates and tax credits how would this change the price inflating process you see coming from company mandates and tax credits? Without government intervention wouldn’t this lead to higher individual premiums as individuals are much less able to negotiate terms than are companies buying for a large number of people?

    BTW If taxes supporting health care is cause for increased health care costs why is it that in countries with more of the health care paid by taxes the costs are lower?

    You maybe right. Maybe this plan is offered just as something to run on. Sounds great, tastes great, but in reality she has a different plan. My problem at this point is that I don’t trust any politician with this kind of strategy.

    In short you don’t trust any politician. Here I can mostly agree.

  12. Steve Verdon says:

    M1EK,

    You seem to be opperating under some sort of delusion that I think the market would provide insurance to those who have a pre-existing condition. I don’t as I’ve already noted such people cannot get insurance since they are already sick. In that case, people would likely have to look to charity, the State or some other source of help in covering medical expenses. Hence your claim about my “faith in markets” is just simply inane.

    Grewgills

    You said he liked the idea of a mandate was something both you and he approved of and that you approved of some sort of voucher system for those who could not afford it. The construction of that paragraph implied he approved of the vouchers as well. This accounts for about a third of her plan.

    1. Yes, Bailey and myself think individual mandates and vouchers could help with the health care issue.
    2. We think Clinton’s plan goes about it the wrong way.

    Just because I like say, red, doesn’t mean I want everything to come only in the color red.

    As far as I am aware of she hasn’t been very explicit about how she would implement the mandates she proposes.

    Via employers or offering those whose employer does not offer health care benefits to opt for either the health care benefits members of Congress get or opting into Medicaid (IIRC). I see this as bad in that it removes choice from the consumer and forces them to accept a limited menu of options.

    Her way to implement “vouchers” seems to rely mostly on tax credits. What do you find wrong with this approach?

    A tax credit isn’t bad, this part I’m not so opposed too, but simply because she includes a tax credit doesn’t make me not dislike the bad parts of the plan.

    The government is not likely to become the sole purchaser of drugs in the US, so the government using the volume of its purchases in bargaining for how much it pays for them is not price controls in any meaningful sense.

    The effect is still the same, simply mitigated. Those without a government provided health plan would face rising drug costs possibly leading to overt price controls and/or more and more people under a government provided health plan. Which in effect would lead to the same result as with overt price controls.

    Why should people in the US have to pay more for their drugs than any other industrialized nation?

    Wrong question. The right question is why should the U.S. have to subsidize drug research for the rest of the world?

    Just like before health insurance mandates when a much greater percentage of the population was covered, right?

    I guess you missed the part about individual mandates. I’m not opposed to them, just how Clinton is proposing to implement them.

    Or like in other countries where there are no mandates where a much greater percentage of the population is covered like, where?

    Unless you are being sarcastic here, it looks very much like you want to have your cake and eat it too.

    And what is your answer for the many who would choose to pay rent or food instead of insurance?

    First off, there is the issue of vouchers. Just because I don’t like Clinton’s plan doesn’t mean I dislike the notion of individual mandates and vouchers along with other changes to health care in this country.

    Second of all, who are you to tell people what to spend their income on? And are they better off if they have access to health care but neither food nor a place to live? We can’t grow the world’s food supply in a flower pot and we can’t meet everyone’s demands. Trade offs are a fact of life, and it may quite possibly be more efficient to have a percentage of the population without health insurance. Obviously the current number is way too high, but do college kids really need health insurance that covers things like pregnancy, prostate exams and mamograms?

    It seems to me that removing employer mandates and tax incentives without putting individual mandates in their place would grow the problem of the uninsured and increase the load on already overloaded ERs. Please explain how I am wrong here.

    You might be right, as I’ve noted, I’m not opposed to individual mandates across the board, I’m opposed to Clinton’s plan to implement them. I don’t think it will do much of anything save possibly making the situation worse.

    If employer mandates and tax credits were replaced by individual mandates and tax credits how would this change the price inflating process you see coming from company mandates and tax credits?

    Not everyone would get the voucher. Second it could be tied to income so that as income rises the value of the voucher declines. Finally, since people would largely be paying out of their own pockets they’d have incentive to shop around for the best policy in terms of premiums, deductibles, and coverage. Clinton’s plan would prevent this by continuing to work through employers who present employees with a limited number of options or a couple of government programs. In short, Clinton’s health care proposal is not “consumer driven”.

    Without government intervention wouldn’t this lead to higher individual premiums as individuals are much less able to negotiate terms than are companies buying for a large number of people?

    This only works if the insurance industry is non-competitive and I have seen scant evidence supporting this view.

    BTW If taxes supporting health care is cause for increased health care costs why is it that in countries with more of the health care paid by taxes the costs are lower?

    There are a variety of ways the State can limit access to health care. Mandantory wait times, refusal to treat certain people. For example, how do other countries deal with low birth weight babies, or premature babies. If they consider such babies non-viable and only expend minimal resources on them, whereas here in the U.S. heroic efforts are made you’d get a very noticable disparity in expenditures and possibly lower infant mortality figures in the other country. Health care statistics aren’t easily compared. You have to take into account insitutional variations before you can make such comaprisons.

  13. Grewgills says:

    I’ve already noted such people cannot get insurance since they are already sick. In that case, people would likely have to look to charity, the State or some other source of help in covering medical expenses.

    Charity makes for a porous safety net, so that leaves a lot of people looking to the state or going without. Less of these people insured means more of them we pay for.

    Via employers or offering those whose employer does not offer health care benefits to opt for either the health care benefits members of Congress get or opting into Medicaid (IIRC). I see this as bad in that it removes choice from the consumer and forces them to accept a limited menu of options.

    Your biggest gripe with her plan is that it continues using the employer mandate framework for delivery of health care.
    Here we disagree, but even if we did not I don’t see a way that you can successfully sell and pass into law a plan that does not leave employer mandates in place. Do you disagree here?
    The option of the individual to meet the mandate would include all of the choices you list and the ability to buy insurance from a private company with tax rebates available to offset costs.
    Currently people are covered by their employer or they buy insurance from a private company without a tax rebate to help defray the costs without the option of government employees health insurance or Medicaid or they can go without. This is two additional choices (GEHC & Medicaid) and one less choice (going without). How is that a more limited menu than what we currently have?

    The effect is still the same, simply mitigated. Those without a government provided health plan would face rising drug costs possibly leading to overt price controls and/or more and more people under a government provided health plan. Which in effect would lead to the same result as with overt price controls.

    So your argument is that the government being allowed to use its purchasing power to negotiate terms for what it buys is the equivalent of price controls? Private insurers could not possibly negotiate as good a price as the government and so could not compete with the government for delivering low priced medication?

    The right question is why should the U.S. have to subsidize drug research for the rest of the world?

    How should we make them pay?
    If it involves people and food or health care the response of libertarians is usually to cut of the subsidy. Why not the same policy here?
    If you think we should be subsidizing medical research why not do it directly? If we did that way we would get a lot more vaccines and a lot less Viagra clones from that money.

    Second of all, who are you to tell people what to spend their income on?

    Remember your with me on the mandates.

    And are they better off if they have access to health care but neither food nor a place to live?

    The plan put forward offers Medicaid to those who would have to choose between food and health insurance. Again this seems like more choice rather than less. The person in this case can choose to go to a doctor before a medical condition becomes an emergency.

    We can’t grow the world’s food supply in a flower pot and we can’t meet everyone’s demands. Trade offs are a fact of life, and it may quite possibly be more efficient to have a percentage of the population without health insurance. Obviously the current number is way too high,

    We are in agreement that the number of uninsured is way too high to make fiscal sense.
    You agree that individual mandates and some form of government vouchering (possibly including tax incentives to individuals) could play a part in ameliorating this problem.
    You argue that the way in which it is delivered inhibits choice. I don’t see any common situation in which someone loses any choice that they would have under the current system other than to not be insured. As you support mandates you must not be too opposed to that choice being lost.
    Under what circumstances does someone have less choices under her plan than they currently have?
    If your argument is that it has less choice than some third way that does not mean that it takes away choices.
    Do you oppose opening government employees health insurance to all?
    I take it you do oppose extending Medicaid. If you do oppose this, how do you propose that population be served? How hard should we try to serve that population?

    …but do college kids really need health insurance that covers things like pregnancy, prostate exams and mamograms?

    How much does it really cost to insure someone who doesn’t really use it?

    Not everyone would get the voucher. Second it could be tied to income so that as income rises the value of the voucher declines.

    Already in her plan. The tax credit is scaled to income and those below the level an affordable voucher could cover are enrolled in Medicaid.

    Finally, since people would largely be paying out of their own pockets they’d have incentive to shop around for the best policy in terms of premiums, deductibles, and coverage.

    People who are getting the tax credit will still shop for the best coverage they can afford.

    In short, Clinton’s health care proposal is not “consumer driven”.

    This only works if the insurance industry is non-competitive and I have seen scant evidence supporting this view.

    In most cases larger purchasing power equals more leverage to negotiate prices. Why would this be different for health insurance?

    There are a variety of ways the State can limit access to health care. Mandantory wait times, refusal to treat certain people. For example, how do other countries deal with low birth weight babies, or premature babies. If they consider such babies non-viable and only expend minimal resources on them, whereas here in the U.S. heroic efforts are made you’d get a very noticable disparity in expenditures and possibly lower infant mortality figures in the other country.

    Is it your contention that the definition of what a living infant is in the US is broader than that same definition is in the EU and that accounts for the difference in infant mortality?

    Health care statistics aren’t easily compared. You have to take into account insitutional variations before you can make such comaprisons.

    It is true that any comparisons will be obscured by other factors. Every other Western industrialized nation has managed to implement universal care and pays considerably less for care and gets measurably better results than we do.
    The single exception to the rule of having universal health care pays more and gets less but it is not because the system is inferior, what are the odds?
    Certainly it is not a case of American exceptionalism that we cannot deliver universal health care to our populace.

    Have you seen a plan that includes individual mandates and some form of vouchering and or tax incentives that you can support or at the very least find to be better? If you have please link to it.

  14. M1EK says:

    You seem to be opperating under some sort of delusion that I think the market would provide insurance to those who have a pre-existing condition. I don’t as I’ve already noted such people cannot get insurance since they are already sick. In that case, people would likely have to look to charity, the State or some other source of help in covering medical expenses. Hence your claim about my “faith in markets” is just simply inane.

    The problem is that some very minor things qualify as “pre-existing condition” – if you think this is all about heart disease or cancer, you’re way out of touch – it’s anything which creates the moderate likelihood of a non-trivial (even if still less than premiums) cost to the insurer. And when you’re an individual purchaser of insurance, you also run the very real risk that your insurance company will just drop you the moment you start to actually need that insurance.

    That’s where you just operate on ‘faith’.

    And, no, charity can’t pick up the pieces. Get real.