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Cross-posted from Critical Condition on National Review Online.
This afternoon, Senators Tom Coburn (R., Okla.) and John Barrasso (R., Wyo.) released a 27-page report entitled “Grim Diagnosis: A Check-Up on the Federal Health Law.” The piece reviews some well-known criticisms of Obamacare, especially its impact on the deficit. But the report’s point of emphasis—one that deserves broader mention—is the law’s impact on jobs and unemployment.
For example, Coburn and Barrasso point us to the Congressional Budget Office’s August economic outlook, in which CBO estimates that the law’s Medicaid expansion and insurance subsidies will shrink the labor market by approximately one half of one percent. That is the equivalent of around 780,000 jobs: about 50 percent more than are sponsored by GM, Ford, and Chrysler combined.
Another point in the report that deserves further attention is the Ponzi scheme known as the CLASS Act: a new assisted-living entitlement that is almost certain to add hundreds of billions to the federal debt. As Sens. Coburn and Barrasso write:CBO determined that the “CLASS program could be subject to considerable financial risk in the future if it were unable to attract a sufficiently healthy group of enrollees.” Unfortunately, CBO also found this is a likely outcome, saying “attracting healthy enrollees could be challenging for several reasons.” Because the law requires the CLASS program to enroll all eligible individuals who apply, CBO said it is “likely that some enrollees would be people who were unable to obtain coverage in the private market because of their poor health status.” So, with a higher percentage of the CLASS program participants consisting of individuals who are sicker and more needy—and therefore cost more to care for—CBO concluded the “relatively small enrollment would increase the risk of adverse selection and could undermine the long-run stability of the program.”
I’ve posted a more extensive summary of the Coburn/Barrasso report over at ObamaCare Watch.
Cross-posted from The Agenda on National Review Online.
Earlier this week, I posted a lengthy critique of Ken Arrow’s thesis that health care is fundamentally different from other sectors of the economy, and therefore incompatible with free-market principles.
Ezra Klein mistakenly cites the points of agreement between another writer and me (i.e., the ways in which free-market sectors of the economy are similar to health care) as describing why health care is different. Klein then goes on to say:First, if you don't get good health care, you might die. That makes it hard for individuals to say no to things, it makes it hard for insurers to resist the backlash that comes when they say no to things, and it makes it hard for government to say no to things. And second, most health-care costs are subsidized by a third-party (employers for most of us, taxpayers for seniors and the poor), which means the people receiving the benefit aren't feeling the cost.
Klein’s second point was addressed in my earlier post, and also in Arrow’s original paper: third-party payment is a significant distortion, one that we would do well to reduce. Unfortunately, PPACA makes this problem worse.
That brings us back to the point that Klein and other liberal writers raise: health care is different because it involves life and death decisions. Yes, that is an unusual feature of some elements of health care, but not all: indeed, not most. For example: going to the dentist is rarely a life-or-death decision. Getting a hip replacement isn’t a life-or-death decision. Using a branded blood pressure drug, instead of an older generic one, is rarely a life-or-death decision. Getting an allergy shot to get through the spring pollen season is rarely a life-or-death decision.
A patient diagnosed with hormone-resistant prostate cancer, for which there is no cure, is going to die no matter what. Should that patient be given a $90,000 therapy that might extend his life by an average of four months? This, too, is not a life-or-death decision. It’s a death-or-death decision.
It turns out that the true range of life or death decisions in health care is rather narrow. If a poor woman gets hit by a bus and is sent to the ER, we all agree that America should come together and pay for that woman’s care: and, in fact, we do pay for it. If a physician makes a mistake, causing a patient to die or suffer disability, we have malpractice litigation for that—i.e., this is a problem upon which government-subsidized health care has no impact.
It would benefit those who believe that health care is incompatible with the free market to refine their arguments. A stronger liberal argument for socialized medicine would be: let’s let the free market reign in those areas of health care that are most like the rest of the market economy (i.e., non-catastrophic and elective care), and instead focus on socializing the aspects of the system that are most unlike the rest of the economy (i.e., catastrophic care).
Such an argument would begin to converge with conservative calls for consumer-driven health plans. CDHPs seek to achieve something quite similar to what I describe above: they put cash, in the form of tax-free health savings accounts, in the hands of individuals to pay for routine health expenses, while still insuring against catastrophic illness or injury. CDHPs continue to be refined, and are prevented from innovating further by unwise regulation, but they represent the best attempt thus far to segregate the most market-oriented aspects of health care from the least market-oriented. I would welcome liberal thoughts on how to achieve the same.
Cross-posted from Critical Condition on National Review Online.
Austin Frakt helpfully points us to several posts by Princeton economist Uwe Reinhardt on the topic of Ken Arrow and his influential paper on health care economics, “Uncertainty and the Welfare Economics of Medical Care,” published in 1963 in the American Economic Review. Arrow’s paper, which endorses the view that “the laissez-faire solution for medicine is intolerable,” is widely considered to have founded the field of health care economics, and continues to be celebrated, especially by those to the left of center. If one were to assemble a New Testament of liberal health care policy, Arrow’s paper would be the Gospel According to Matthew. But what is truly remarkable about the gospel according to Kenneth, from today’s perspective, is its antique unsophistication about modern financial concepts and the modern regulatory state.
Arrow’s paper argues that the delivery of health care deviates in fundamental ways from a normal free market, and, therefore, that government intervention is necessary to correct for these deviations. It therefore can’t be considered surprising that modern liberals, who believe that the free market leads to unjust and suboptimal outcomes, celebrate the work of an economist who argues that a free market for health care…leads to unjust and suboptimal outcomes.
All of us, right, left, and center, are tempted to gaze uncritically upon those works by others that reinforce our own worldview, while ignoring contrary perspectives. No one exhibits that tendency more than Paul Krugman, Reinhardt’s fellow Princetonian, who once wrote that “ever since Kenneth Arrow's seminal paper, [economists have known] that the standard competitive market model just doesn't work for health care...to act all wide-eyed and innocent about these problems at this late date is either remarkably ignorant or simply disingenuous.” (Then again, pretty much everything Krugman knows proves that those who disagree with him are ignorant or disingenuous.)
So let’s examine Arrow’s catalogue of health care’s market distortions, by category (for those who have read my National Affairs piece on the subject, this will be old hat):
- Unpredictability. Arrow points out that people’s needs for health care are unpredictable, unlike other basic expenses like food and clothing. But while we can skip the occasional meal or sale at Old Navy, our need for health care can be far more urgently necessary.
- Barriers to entry. Arrow notes that you can’t just set up shop on the side of a road and practice medicine: you must have a license to be a physician, and gaining that license requires years of expensive schooling and training. As a result of this constraint on the supply of physicians, there is a constraint on the supply of medical services.
- The importance of trust. Trust is a key component of the doctor-patient relationship; if a surgeon makes a serious mistake during an operation, for example, the patient may die or become permanently disabled. The patient must trust that the surgeon knows what he’s doing, and can’t test-drive the surgery beforehand.
- Asymmetrical information. Doctors usually know far more about medicine than do their patients. Therefore, the consumer of medical services (the patient) is at a serious disadvantage relative to the seller (the doctor). Patients are therefore vulnerable to exploitation. In addition, third-party payors of medical bills, such as insurers or the government, are that much more removed from the particulars of a given case, and unable to effectively supervise medical practice.
- Idiosyncrasies of payment. Unusually, patients pay for health care after, not before, it is received (that is, if they pay for health care at all). Because patients don’t see the bill until after the non-refundable service has been consumed, and because patients are given little information about price and cost, patients and payors are rarely able to shop around for a medical service based on price and value. Compounding this problem is the fact that patients rarely pay for their care directly.
Arrow isn’t wrong to point out these distortions. Where he is wrong is in believing that they are unusual, and that government intrusion is required to correct them. Indeed, the phenomena that Arrow identifies are widespread throughout the economy, and are made worse by government policy. Let’s take them one by one:
Unpredictably is hardly a remarkable phenomenon. In the half-century since Arrow’s paper came out, a large industry has emerged to address it. Extended warranties, overdraft protection, traveler’s insurance, etc. etc. are all products designed to smooth out the unpredictability of life. Most of these products have managed to function well with minimal government intervention.
Barriers to entry remain a problem in medicine, but again, this is a problem that is hardly unfamiliar to anyone who has ever tried to start a car company or an airline. We require licensure of lawyers, but so far as I know, no one is fretting about market distortions in the legal industry. Indeed, our economy is suffused with, and possibly suffocating from, the over-credentialization of everything.
It is true that trust is important in medicine. But so, too, is it important in many other commercial transactions. We trust that airline pilots, and airline mechanics, are competent. We trust that the manufacturers of car brakes have thoroughly vetted their products. Markets are capable of assigning value to such things, as are lawsuits.
There certainly are asymmetries of information in medicine, but again, is this unique to medicine? How many people, when taking their cars to the shop, are able to argue with the mechanic about the need to repair the transmission? How many of us rely on a financial advisor, because we feel incompetent to make investment decisions entirely on our own?
Indeed, nearly every economic transaction involves some asymmetry between the buyer and the seller. The ancient Latin aphorism, “caveat emptor” (let the buyer beware), has been enshrined in property law for centuries as a way of reminding people that sellers know more about the defects of what they are selling than do buyers. Nonetheless, we hold buyers responsible for understanding what they are buying, so long as the sellers haven’t engaged in fraudulent misrepresentation.
The internet has done much to democratize medical information. I speak to physicians all the time who say that their patients know more about new drugs than they do. A parent whose child has Lyme disease is likely to know as much, if not more, about available treatments than is your garden-variety family practitioner. That isn’t to say that going to medical school doesn’t matter—but it is to say that there are ways in which the gaps in information are narrowing. Electronic medical records, and on-line postings of medical prices and costs, will do even more.
Finally, we get to the most important of Arrow’s concerns: that the way we pay for medical services, especially via third-party health insurance, cannot function as an efficient market. On this point he would get wide agreement. But Arrow’s favored solution—government-sponsored health insurance—makes this problem worse by further removing patients from the price and value of the care they receive.
The real solution is to increase the degree to which patients pay directly for non-catastrophic health care, so that health insurance can function as insurance does in other fields: as a way to protect people from catastrophic financial and medical loss. A related, but equally important, reform would be to increase the degree to which patients buy insurance for themselves, as opposed to having it purchased on their behalf by employers or the government. A true individual market for health insurance would help rectify many of the distortions in our current system.
Ken Arrow and his disciples in government have done much to exacerbate, rather than correct for, the inefficiencies in our health care system. Obamacare is a prime example of this. One can only hope that we eventually learn from Arrow’s mistakes, and finally move in the right direction.
Cross-posted from The Agenda on National Review Online.
In today’s New York Times, Ross Douthat takes on Rand Paul and paleoconservatism on the Civil Rights Act and other issues. “Like many groups that find themselves in intellectually uncharted territory,” writes Douthat, “they have trouble distinguishing between ideas that deserve a wider hearing and ideas that are crankish or worse. (Hence Ron Paul’s obsession with the gold standard and his son’s weakness for conspiracy theories.)”
Douthat is being a bit unfair here. Paleoconservatism isn’t intellectually uncharted territory; whatever its faults or merits, its acolytes built the philosophical foundations of Cold War conservatism. But I don’t want to digress into a pedantic discussion of the intellectual foundations of paleoconservatism. Rather, I want to take on the idea that advocacy of the gold standard is a crankish obsession, one that is intellectually (and perhaps morally) on par with opposing the Civil Rights Act.
If the gold standard is merely a crankish obsession, then the ranks of obsessive cranks include not only Ron Paul but also Friedrich Hayek, Robert Mundell, Jude Wanniski, Robert Bartley, Jack Kemp, and Steve Forbes. That is to say, most of the leading exponents of supply-side economics. (Note that this roll call includes two Nobel laureates.) Indeed, sound-money policies have been at the core of conservative monetary policy from the beginning. It wasn’t too long ago that opponents of the gold standard, like William Jennings Bryan, were thought of as the cranky ones.
It is true that the gold standard is an unfashionable idea in Washington, but it is a mainstream one within the financial community. This is unsurprising on both fronts. The financial community is the consumer of government debt, and is therefore intensely attuned to the relationship of monetary policy to the value (i.e., default risk) of that debt. Investors see over and over again the pattern by which governments depart from hard-money policies (such as the gold standard) in order to engage in deficit spending, and then devalue their currencies in order to reduce the value of the debts they then incur. It is a story that all too frequently ends in credit default and economic collapse. The financial community sees no reason why the United States should be immune from the laws of economics.
On the other hand, the political class is attuned to the value of increasing government debt; that is, of building and rewarding political constituencies with high state spending and low taxation. So it is natural that a return to the gold standard is considered eccentric in Washington.
This is not to say that there aren’t thoughtful, disinterested critiques of the gold standard; there are (Milton Friedman comes to mind). But if we continue on our present fiscal course, it is only a matter of time before the bond vigilantes now ravaging Greece make their way across the Atlantic. When that happens (if not before), countries like China and Russia will take concrete steps to dissociate themselves from the U.S. dollar. Given that few other currencies are ready to take the dollar’s place, don’t be surprised if their next move is a transition back to a metals-based monetary system.
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