Another Example of the Washington Post's Decline

If this is journalism, The Washington Post should just pack it in. Here is the opening sentence in an article from yesterday's paper on recent Trump Administration policy, by Amy Goldstein and Juliet Halperin:

President Trump is throwing a bomb into the insurance marketplaces created under the Affordable Care Act, choosing to end critical payments to health insurers that help millions of lower-income Americans afford coverage.

Note the incendiary language, "throwing a bomb." Paragraph nine of the same article reads as follows:

The cost-sharing reductions — or CSRs, as they are known — have long been the subject of a political and legal seesaw. Congressional Republicans argued that the sprawling 2010 health-care law that established them does not include specific language providing appropriations to cover the government’s cost. House Republicans sued HHS over the payments during President Barack Obama’s second term. A federal court agreed that they were illegal, and the case has been pending before the U.S. Court of Appeals for the D.C. Circuit.

I presume that the reporters knew the information they wrote in paragraph nine before writing the first sentence. Yet they characterize ending payments that a federal court has deemed illegal as "throwing a bomb." I expect more from professionals, so why, other than the fact that my local paper reprinted this, would I seek out The Washington Post?

I wouldn't. By contrast, read this post at Powerline by John Hinderaker. It provides a legal background, it quotes from the judge's decision, and links to another source about the likely effect of the policy change. If the amateurs can do a better job than the professionals, then it is no surprise that traditional news outlets are in decline.

How Successful Was the Tea Party Movement?

Over Dartmouth's recent spring break, I made some lunchtime remarks at a meeting of the Dartmouth Club of Dallas. The theme of my remarks was that we have recently seen, or will soon see, the poor outcomes of trends that have been a long time in the making. I used some examples that have been the subject of blog posts -- the depopulation of urban areas in the Midwest that put Wisconsin, Michigan, Pennsylvania, and even Ohio in play for the Republicans in 2016; the chronic underfunding of state and local pension plans; and the impending financial consequences of the Baby Boom generation shifting from being a large, productive cohort of contributors to old-age entitlement programs to being a large cohort of program beneficiaries.

On this occasion, I added a new outcome that we should have expected based on recent events. The election of Donald Trump represents the culmination of the Tea Party movement. Here's what I said:

As much as the media fomented stories about discord between the Trump campaign and the Republican establishment, Steve Bannon and Reince Priebus – reflecting the insurgent and the traditional elements of the Republican Party – were working together on Trump’s campaign since at least August 15^th.

In light of this, I think we have to acknowledge that the Tea Party is one of the most electorally successful political movements in our lifetimes. I say electoral success – this does not necessarily imply ideological or policy success. And it has achieved its success without much formal, top-down mobilization. Recall that this movement began in February 2009 in opposition to Obama’s early policies, particularly his announced plans to give financial aid to bankrupt homeowners but also including the stimulus bill and eventually Obamacare. Some elements appear to be for a smaller public sector and lowering the public debt, but others have shown up to town hall meetings with, shall we say puzzling, slogans like, “Keep your government hands off my Medicare.” (In fairness, though, we do refer to Medicare as an “entitlement program,” so eventually people might start believing that.)

As an aside, lest you think it matters as much to Trump supporters as it does to his critics, you may have been reading in newspapers this week articles with sensational headlines that contend that Trumpcare or Trump’s budget will disadvantage areas that voted for him. This is more misunderstanding of the phenomenon. Recall the origin of the movement – in opposition to a government handout that would have sent money to some of these same areas. I would argue that “nothing is the matter with Kansas” – it just doesn’t always vote its pocketbook. (We might even note that there are some positive social aspects of that approach.)

The Tea Party’s first victory was to strongly influence the outcomes in the 2010 midterm elections, flipping the House back to Republicans, which the Republicans have held since. The House turns over every two years, the Senate every six. In the first three Senate elections following the Tea Party’s formation, the Republicans picked up 13 seats: +6 in 2010, -2 in 2012, and +9 in 2014 to regain control before giving 2 back while retaining the Senate in 2016.  Given how many seats the Democrats will have to defend in 2018, the Democrats are unlikely to retake the Senate, despite what we are observing in Washington these days. 

And in 2016, the Tea Party elected a president. Much of what Trump considers to be his agenda – national security and sovereignty, economic nationalism, and (using Steve Bannon’s language) the deconstruction of the administrative state – appeals to the Tea Party movement. I don’t see how the other elements of the Reagan coalition – pro-business, libertarian, evangelical – can find their way back to power until, first, the Trump coalition organized around these nationalist themes surrenders its narrow Electoral College majority to a Democratic administration and, second, the population is ready to move on from that administration.

I made these remarks on March 17, before the debacle of the failure to move the AHCA the following week. What I take from that episode is that 2016 is this culmination of the Tea Party movement is also the peak of its electoral success. The rhetoric of criticism of the Obama administration was ill preparation for the realities of governing. Conor Friedersdorf describes the unraveling in riveting detail in the Atlantic yesterday. Save for appointments to the Supreme Court, President Trump is unlikely to accomplish anything fundamental that requires the Congress to participate. That includes the budget, walls on the border, and many other planks in his campaign platform. And the reason isn't that the Democrats refuse to cooperate -- it is that the Republicans will be unwilling or unable to move these initiatives along.

 

My Frustrations with the Health Insurance Debate, In One Paragraph

Outsourced, as it often is, to Ezra Klein:

That leaves the United States with the worst of both approaches: Prices aren’t set by the market, but they also aren’t set by the government. Consequently, Medicare’s negotiating power is weakened by the threat that drug companies or hospitals will opt to do business only with higher-paying private insurers. We simultaneously miss out on the efficiency of a purely private system and on the savings of a purely public one.

Read the whole thing.

If the Constitution Is a Living Document

Then we should expect it to be imperfect, like all other living things.  I think we could do a world of good for our mental health if we simply recognized that in a very small number of cases, the Constitution is simply not crystal clear on what is permissible and what is not.  A subset of those cases make their way to the Supreme Court, and the Supreme Court basically acts as a super-legislature.  And, along two dimensions, this week's ruling on the Affordable Care Act is a fine piece of super-legislating by Chief Justice Roberts.

The first is the question of a mandate to engage in commerce taken separately from the way it is enforced.  There is no way that I want the federal government to have that power.  That is a very different power from the power to regulate commerce conditional on an individual choosing to engage in commerce.  The question of law has nothing to do with the pigsty that is our method of delivering and financing health care to individuals at the margins of the system.  Regulating and requiring commerce are two different things.  I applaud Chief Justice Roberts for the decision to keep them distinct.

The second is the question of whether what is being legislated in the ACA with regard to enforcement of the mandate is something out of the ordinary that should be forbidden.  As I have written before, if paying higher taxes in the absence of favored behavior is not permissible, then the tax preference for IRAs and 401(k) contributions is not permissible.  Neither is the home mortgage interest deduction.  The so-called mandate is no more of a mandate than the mandate to contribute to a pension plan.  If you do it, you pay lower taxes.  If you don't do it, you pay higher taxes.  I applaud Chief Justice Roberts for simply calling it what it is and acknowledging the difference between mandating behavior and simply taxing the opposite behavior.

So where are we today?  Basically, the same place as we were after the Senate passed the bill in late 2009.  Here are my reactions at the time.  Going forward, Governor Romney would be a fool to expend political capital on trying to repeal the main pieces of the law if he should become President.  He won't have the votes in the Senate to make any progress, and there are welfare-improving elements of the law (particularly with regard to pre-existing conditions).  Should he have the opportunity as president, he should focus on the cost of the additional health care that the federal government is now obligated to support.  It won't take him long to figure that out, regardless of how the campaign plays out.

Concentration in Health Care Markets

This Policy Study by Barak Richman at AEI is well worth your time.  We purchase our health care in markets with a lot of potential (and actual) monopoly power.  For example, a large hospital system basically enforces collusion among what might otherwise have been many small, competing providers.  It is not a surprise that the prices are high, rising, and disproportionate to customer satisfaction.  Markets in which high fixed costs and monopoly are so pervasive invite government regulation, for good or ill.  Richman discusses any number of anti-trust strategies to address the problem. 

I have written on a related issue of insurer market power in earlier blog posts, here and here.

Another Look at the ACA and the Federal Budget

Chuck Blahous is on the case.  In one chart:

 His main point:

Why are these dire fiscal consequences not more widely understood? A great source of confusion lies in government scorekeeping methods, which compare the effects of legislation to a hypothetical baseline scenario rather than to enacted law. To understand the difference, it is necessarily to go briefly into the weeds of Medicare trust fund accounting.

The ACA contains many provisions designed to slow the growth of Medicare spending. This matters here because the federal Medicare program is financed in a particular way – from special, separate trust funds. The Medicare Hospital Insurance (HI) Trust Fund in particular is governed under law by certain rules. Medicare HI is only permitted to spend money on benefits as long as there is a positive balance in its trust fund. If that trust fund is depleted, then under law benefit payments must automatically be cut to the level that can be financed from incoming tax revenues.

This is relevant to an evaluation of the ACA because the CMS Medicare Actuary has projected that had the ACA not been passed the Medicare HI Trust Fund would have been depleted in 2016. If that were allowed to happen, Medicare HI payments would have been sharply cut in that year.

Due to the ACA’s Medicare cost-savings provisions, however, these automatic spending cuts are no longer projected to begin in 2016. Medicare HI is now projected to remain solvent until 2024, postponing forced outlay reductions until then. In other words, the ACA’s Medicare provisions decrease the level of Medicare HI spending prior to 2016, but then increase it from 2016-2024 relative to previous law. Considered separate and apart that would be a good thing, but it has inescapable fiscal ramifications in the context of the ACA’s other spending expansions.

Here’s a simple way to think of it: under law Medicare is permitted to spend any proceeds of savings in the Medicare HI program. If we cut $1 from Medicare HI spending in the near term, then an additional $1 is credited to the HI Trust Fund as a result. The Trust Fund thus lasts longer and its spending authority is expanded, permitting it to spend another $1 in a later year.

A core fiscal problem with the ACA is that the same $1 in Medicare savings that expands Medicare’s future spending authority by $1 is also assumed to finance the creation of a large new federal health program. Taken together, these two expansions of spending authorities – the new health program and Medicare’s solvency extension – far exceed the cost-savings in the legislation.

Read the whole thing.

Update:  Jonathan Chait has done so and concludes the study is bogus, since the more reasonable assumption is that Medicare Part A spending would have been authorized at projected levels even after the Trust Fund is exhausted.  The claims in Chait's post that "If Blahous’s assumptions are right, then we don’t really have an entitlement problem at all. Medicare can’t exceed its trust fund, so problem solved!" technically only apply to Part A.  Parts B and D are funded primarily out of general revenues and secondarily out of premiums, and their costs will continue to grow.

Handicapping Obamacare at the Supreme Court

This Opinionator blog post by Linda Greenhouse takes issue with the claim by the opponents of the Affordable Care Act that it is "unprecedented."  She describes the opponents' case as weak and wonders what all the attention -- six schedule hours of the Court's time -- is all about.

If I had to guess, I would say that the law will be upheld with 6 or more justices concurring and that the majority opinion written by Chief Justice Roberts will work very hard to narrow the legal scope of the ruling -- this law is okay but no others like it.  The extended hearings are to gather enough testimony to do that as well as possible.  Just my conjecture.

I am not a constitutional lawyer or any kind of lawyer.  I find myself in the position of thinking that there should be universal coverage but not through this law.  Even opponents of the law who have prosecuted these cases acknowledge that the government could have used its budgetary powers to obtain universal coverage.  My own suggestions were expressed in this post from December 2009 after the Senate passed its bill:

Specifically, I'd like to see everyone enrolled in Medicaid via the tax return as the default, unless they can prove that they had alternative coverage. They could then be charged an income-related premium for Medicaid on the tax return. I think this gets us to universal coverage more directly -- there is no need to separately impose penalties for those who violate the individual mandate and no need to provide a complicated system of incentives for those of modest means to be able to afford coverage through traditional markets.

That arrangement is no less constitutional than giving a tax deduction for a contribution to a 401(k) plan.  With a sufficiently steep income-sensitivity for the premium, it wouldn't cost much either.  The trouble is that the Congress didn't pass and the President didn't sign this bill.  They passed and signed one that relies on the government's regulatory powers to achieve universal coverage.  And that seems to me to be the reason why this case has gotten to the Supreme Court.

The Need for Efficient Public Institutions

I'll score this column by David Brooks, "Midlife Crisis Economics" as a win.  His thesis:

In the progressive era, the economy was in its adolescence and the task was to control it. Today the economy is middle-aged; the task is to rejuvenate it. 

He offers three pieces of evidence, which I'll summarize as:

1. Our economy is not prone to creating jobs as much as it is to boosting productivity to grow without rapid job creation.
2. Our government today has the tools to confront social challenges, but it lacks the institutional effectiveness to make progress against them.
3. Our moral culture has deteriorated, requiring government institutions to carry a larger burden than in prior eras.

I think he is correct on all three.  You can read and judge for yourself.  The one that offers the most straightforward opportunities for better public policy is #2.  He mentions specifically:

The United States spends far more on education than any other nation, with paltry results. It spends far more on health care, again, with paltry results. It spends so much on poverty programs that if we just took that money and handed poor people checks, we would virtually eliminate poverty overnight.

Spending a lot to achieve paltry results is inefficiency on a large scale.  These three issues (and one other) -- health, education, the environment, and poverty -- are the big issues in domestic public policy.  More and more, they appear to be ones that our political system is incapable of handling.

There will always be an element of each one that remains in the public realm.  Our political system is set up for a split-the-difference approach among two factions that share a common belief that the policy outcomes should be improved.  That approach has broken down (and, in prior posts, I have laid the blame on the political right's connectedness problem.)  In its absence, the quality of the public institutions that are invariably tasked with addressing them has declined, leading to the inefficiency that Brooks is observing.

Insurance for the Nation's Health

Mark McClellan will be on campus tomorrow to deliver the Rockefeller Center's first lecture in a series commemorating the 100th birthday of Nelson Rockefeller. (Read more here.) Mark's will lecture on "Universal Health Care," a topic that Governor Rockefeller championed more than four decades ago and that remains a leading policy issue today.

In doing some research for the event, I came across this Nixon-era article in Time magazine from May 11, 1970. Here's the big finish:

While every American may be entitled to at least adequate health care, he is not getting it, and will not, until a momentous national debate reaches election-year levels of acrimony and is somehow resolved.

The issue has already been injected into this year's elections by Democrat Theodore C. Sorensen, campaigning for the U.S. Senate from New York, who last week announced his own plan for "universal health insurance." Apart from such standpatters as the A.M.A. and its arch-conservative Republican allies, there is a growing consensus that some national insurance blanket must be thrown over the ailing body of health care.

It may prove to be more of a patchwork quilt, with multicolored squares for sections covered by contracts with a variety of private insurers. If administration is not made too cumbersome, that would be far better than the present non-system with its huge gaps. Walter McNerney, president of the Blue Cross Association and head of a task force soon to report to the President on the nation's health needs, believes that a monolithic system operated by HEW would be wildly inflationary—and not sufficiently innovative. He wants a flexible, pluralistic plan.

But when? The principal difference between proponents of progress is over whether to put the cart of medical-care delivery before the horse of manpower resources, and let the resources catch up with the overburdened cart—or to take the time to breed more medical horses. That means waiting years for the country's health education system to produce many thousands more doctors and tens of thousands more paramedical personnel. Secretary [of Health, Education, and Welfare Robert H.] Finch sincerely believes that the modest expansions of federal health programs that he has submitted to Congress are important steps in the right direction, but will not commit himself to true national insurance. His chief assistant for health affairs, Under Secretary Roger O. Egeberg, thinks that some such plan may very well evolve in "six to seven years." His prognosis is as good as any.

Read the whole thing, to get an idea of what has changed and what has remained the same in this debate, and be sure to stop by Mark's talk tomorrow evening if you are on or near campus.

Health Care 2008

This new page at HealthCentral compares the Presidential candidates' positions on health care, including reform, the uninsured, drug prices, prevention, technology, and stem cells. It also has an interesting graphical representation of the candidates, where you can plot your own views.

Enjoy!

Looking Ahead to Today's GOP Debate

I've got the DVR all set for today's Republican candidates debate. John Harwood of CNBC and the Wall Street Journal has his preview here. As this debate is about the economy, he is looking for three big issues: taxes, spending, and trade.

I don't blog much about trade. I'm a free trader. Economic exchange by mutual consent is one of the things that ties the world together in a positive way. In the absence of some identifiable non-pecuniary externality, Republicans have no business restricting free trade.

I've gone off on the Republicans for their budget policy a number of times. (Here's a good one.) If any of these candidates are going to sway me on budget policy, they are going to have to do two things. First, do not say that tax cuts pay for themselves. Second, say that you are going to balance the budget without reference to a Constitutional amendment. And I'll have to believe them. That's a tall order, given what we've seen so far.

But the most important issues of budget policy are going to come in the form of budget priorities. I hope they all get asked the question of SCHIP funding vs. war funding. That will tell us something about their leadership potential. For very good commentary, see this post at SnowDahlia.

Perhaps Michael Moore Should Run a Taxi Service

I don't know which of the following statements is more surprising. From the AP:

A 35-year-old Canadian woman has given birth to rare identical quadruplets, officials at a Great Falls hospital said Thursday. Karen Jepp of Calgary, Alberta, delivered Autumn, Brooke, Calissa and Dahlia by Caesarian section Sunday afternoon at Benefis Healthcare, said Amy Astin, the hospital's director of community and government relations.

The four girls were breathing without ventilators and listed in good condition Thursday, she said.

Wonderful. And this part:

The Jepps drove 325 miles to Great Falls for the births because hospitals in Calgary were at capacity, Key said.

"The difficulty is that Calgary continues to grow at such a rapid rate. ... The population has increased a lot faster than the number of hospital beds," he said.

For those of you unclear on the geography, their trip looked something like this and would take about five hours at the posted speed limits. About halfway through the trip, they would pass through Lethbridge, which is home to Chinook Regional Hospital, which claims to offer a "high level neonatal intensive care unit." Not good enough? No beds there either? When they were in Lethbridge, they were about an hour away from Medicine Hat, home to this fine institution and its NICU, or two and a half hours plus a border crossing away from Great Falls. They chose the latter.

UPDATE (8/20): At the prompting of a commenter, I found that the doctor's statement about them driving the 325 miles is incorrect, and so too is my travelogue in the last paragraph of the original post (now italicized). Here is a report from the BBC that explains:

A medical team and space for the babies had been organised for the Jepp family at the Foothills Medical Centre in Calgary but several other babies were born unexpectedly early, filling the neonatal intensive care unit.

Health officials said they checked every other neonatal intensive care unit in Canada but none had space.

The Jepps, a nurse and a respiratory technician were flown 500km (310 miles) to the Montana hospital, the closest in the US, where the quadruplets were born on Sunday.

My apologies for the hasty and incorrect post, though this notion that "every other neonatal intensive care unit in Canada" had no space is more of an indictment of the system than my original remarks.

Achieving Universal Health Insurance

If I had to come up with the basis of a plan to achieve universal health insurance coverage, here is what it would be:

1) All people under age 65 would be presumed to be enrolled in Medicaid unless they show on their tax return that they have coverage elsewhere. Premiums for Medicaid coverage would start out at zero for those with the lowest incomes and increase with income to some multiple of the poverty level, after which the premium is high enough so that there is no taxpayer subsidy. The premium is collected on the annual tax form. That's universal health insurance as a base.

2) On a state-by-state basis, all people under age 65 would have the opportunity to enroll in the plan that is offered to state employees. It is not clear whether this would increase or decrease per-participant costs in the plan. Higher per-participant costs would have to be made up by the taxpayers. The purpose of this buy-in option is to give middle class workers access to a more generous plan than Medicaid if they pay (most or all of) the additional costs.

3) Those nearing age 65 (say 55 - 64) would be able to buy into Medicare (Parts A, B, and D together). This is reminiscent of the Clinton Administration's plan. However, the premiums would be set so that there is no taxpayer subsidy (not even for Parts B & D).

4) As a matter of law, private insurance contracts would not be permitted to discriminate based on pre-existing conditions.

5) Employers who sponsor a health insurance plan would have to offer the plan to all workers.

6) Premiums paid to all of these options would have the same tax treatment (preferably modified as I have previously discussed).

I think that the virtues of this plan are that it achieves the objective of universal coverage with minimal external funding and without eliminating choice and thus the possiblity that competition could lead to better outcomes for consumers. I expect the private group and individual markets to shrink but not to disappear. It's also a bit simpler than other plans that have been proposed.

A Great Strides Thank You

It was a fantastic weekend in Grand Rapids for the annual Great Strides walk for Cystic Fibrosis. Here's a picture of Ally's Allies. Allison is sitting on her grandmother's lap near the middle, next to her parents, all with purple shirts on. The picture was taken at the conclusion of the walk, in Calder Plaza. My son and I are on the upper right. My wife and daughter are on the upper left.

I would like to say a heartfelt "thank you" to everyone who contributed through this appeal. I'll keep the link to Allison's page and Cystic Fibrosis in the sidebar, for those of you who are interested in how she's doing and in how the treatment of this disease is improving.

Great Strides for Cystic Fibrosis

In what is now an annual event in the Samwick household, the four of us make a trip to Grand Rapids, Michigan, to participate in the Great Strides walk for Cystic Fibrosis. CF is a devastating genetic disease that affects tens of thousands of children and young adults in the United States. Research and care supported by the Cystic Fibrosis Foundation are making a huge difference in extending the quality of life for those with CF. Those of you who conduct or follow the health outcomes literature, or who are curious about how to improve medical treatment in this country, will find this article in The New Yorker from 2004 to be of interest as well.

We walk for the Woodhouse family, dear friends whose daughter Allison has battled this disease every day since birth (and even before). We've learned a lot about courage from her story. If you would like to support us in our efforts to raise money to help children and families like them, then please make a pledge here.

Targeting Medicaid Access

Robert Pear writes in today's New York Times that "Citizens Who Lack Papers Lose Medicaid." His opening paragraph:

A new federal rule intended to keep illegal immigrants from receiving Medicaid has instead shut out tens of thousands of United States citizens who have had difficulty complying with requirements to show birth certificates and other documents proving their citizenship, state officials say.

I'm going to comment first on the policy and then on the reporting. I think it is crazy that the rule was implemented without a provision that presumed that all children were citizens until a fairly long window elapsed during which their parents or guardians could formally establish their status. Pre-natal care should always be included, for the same reasons. There's no reason why the rule has to have the sort of impact during its phase-in period that Pear's subsequent report documents. Say what you like about illegal immigration, Medicaid, or poverty--none of them are the fault of these kids.

Now go back to how Pear wrote that sentence. I don't think his reporting justifies the use of the word "instead" in that sentence. To do so requires him to show that the policy is not making illegal immigrants ineligible for Medicaid. He has not done that. Here are three excerpts from the article that come closest:

“The largest adverse effect of this policy has been on people who are American citizens,” said Kevin W. Concannon, director of the Department of Human Services in Iowa, where the number of Medicaid recipients dropped by 5,700 in the second half of 2006, to 92,880, after rising for five years. “We have not turned up many undocumented immigrants receiving Medicaid in Waterloo, Dubuque or anywhere else in Iowa,” Mr. Concannon said.

[...]

“We’ve seen an increase in the number of people who don’t qualify for Medicaid because they cannot produce proof of citizenship,” said Albert A. Zimmerman, a spokesman for the Florida Department of Children and Families. “Nearly all of these people are American citizens.”

[...]

Wisconsin keeps detailed records listing reasons for the denial or termination of benefits. “From August 2006 to February of this year, we terminated benefits for an average of 868 people a month for failure to document citizenship or identity,” said James D. Jones, the eligibility director of the Medicaid program in Wisconsin. “More than 600 of those actions were for failure to prove identity.” In the same period, Mr. Jones said, the state denied an average of 1,758 applications a month for failure to document citizenship or identity. In 1,100 of those cases, applicants did not provide acceptable proof of identity.

The last one simply shows the policy is having an effect. It does not identify whether the effect is the intended or (presumably) unintended effect. In the first two, claims are made that the effect is largest among the largest population of Medicaid recipients. The effect may even be disproportionately large among the citizen group. But there is no evidence that it is confined to that group. There is no information in the article about California or Texas or even the paper's home state of New York, where we would expect the largest populations of illegal immigrants to be applying.

The fact that a rule is having unintended consequences does not by itself mean that it is not also having its intended consequences.

Is It Really Adverse Selection?

Tyler Cowen of Marginal Revolution weighs in with a very thoughtful post challenging the notion that it is adverse selection, driven by informational asymmetries, that plagues the health insurance market:

To be sure, this is a real point but it is not adverse selection. Adverse selection requires asymmetric information, namely that I know more about my brain tumor than does my potential insurance company. The more likely problem is that the tumor is common knowledge, or would be if I applied for insurance, and the company won't sell a policy for any price cheaper than the costs of treatment. There is no asymmetry of information, rather insurance simply is no longer possible. In the limiting case, imagine that a predictor-demon could forecast your lifetime medical expenditures with certainty, and then blog them by your social security number. Such a person, no matter how healthy, couldn't buy insurance either.

Scream all you want, but that is not inefficient per se (don't complain in the comments about the limits of the efficiency concept, and the cruelness of economists, I'm already on that one, scroll down to #7 under "microeconomics", alternatively you might make a complicated Rawlsian argument.) Covering these people, by the use of government policy, is a transfer, not an efficiency improvement, with an added caveat for imperfect capital markets.

Defenders of the adverse selection argument in reality believe the following: if someone is going to face death, or a very bad medical outcome, and can't buy their way out of it, government should put up the money, at least within limits.

Maybe yes, maybe no, but now we are comparing competing investments and which will bring the greatest utilitarian good and the greatest moral good. I'm far from convinced health care access wins that race or even comes in second.

Why does this matter? Because if it's adverse selection, that leads very quickly to a policy argument for a mandate on coverage and, in this market, a single payer system. Not so fast, say the bloggers at MR, and I think they are right.

Jon Gruber on Health Insurance Reform

Via the Economic Research Initiative on the Uninsured (ERIU), here is an interview with Professor Jon Gruber of MIT, who played a key role in the recent Massachusetts health insurance reform. Here's his assessment of the recent proposal by the Administration (with my emphasis added):

Bush's proposal is a step forward and two steps backward. He's rightly drawn attention to the largest hidden expenditure on health care, the $200 billion a year that we spend on subsidizing the provision of employer-provided health insurance. Basically, people who get paid wages get taxed on those wages, but individuals who are paid in the form of health insurance don't get taxed on that compensation. And if they were, we would raise about $200 billion more a year in tax revenue. This is a very inefficient use of money for several reasons. First, it's very regressive; the richer you are, the bigger tax break you get. Secondly, it's what we call a marginal subsidy; every dollar an employer spends on health care is cheaper than that spent on wages, leading to excessively generous, even gold-plated, health insurance. The third problem is that it props up the system of insurance being tied to employers, extending a number of inefficiencies and distortions in how the labor market works.

However, what the president has done is say 'let's blow up the existing system by taking away the entire employer exclusion and rededicating it to an individual tax break where every person, as long as they were insured, would get an individual tax break of $7,500 or $15,000 per family.' The reason that is two steps backward is that it doesn't address the two things you need to address to get rid of this employer exclusion: 1) he doesn't acknowledge that this system is devoting most of the money to the rich. Under his proposal, the system becomes even a little more regressive than the existing one; and, 2) even more importantly, if you're going to blow up the employer-based system you need someplace else where people can go. Bush doesn't do that, and that's the fundamental flaw. Overall, he has raised an important issue, but he chose to do it in a dangerous context.

I remain convinced that the first reform is to remove the tax exclusion for health insurance premiums. Phase it in over time if you like, but sunset it in any case. Use the money saved--$200 billion a year according to Gruber--to start fixing the gaps in coverage.

How Long Does It Take for the Long Run To Arrive?

Some of the discussion from the last two posts has carried over to Mark Thoma's blog. Krugman responded to Mark as follows:

Aha - I was wondering if anyone would raise that. I was taking it as true to a pretty good approximation that the long-run supply curve for medical services is horizontal. Unless you think that there's permanently limited supply of medical education, or something, why should we think otherwise?

And I would guess that very few people would read Bush's statement to mean that it's bad if other people have extensive insurance, because it drives up doctors' paychecks.

So in a comment, I noted:

Based on Krugman's response (must be nice to have him on speed dial), we're now in the much more comfortable environment in which this is a few economists talking about the magnitude of various key parameters.

One could point out that if he was "wondering whether anyone would raise this point," then he seems to realize that he was going a bit overboard in claiming that "no economic analysis I'm aware of says that when Peter chooses a good health plan, he raises Paul’s premiums."

On the substantive point, one could assert that almost any market has a long-run supply curve that is flat. Exceptions would be made for markets like diamonds--there is a finite quantity available to be mined. At this juncture, it becomes quite relevant how long we think it will be before we are in the long run.

As evidence against this happening any time soon, I don't think the AMA is going to give up its near-monopoly on certifying medical practitioners. Licensed practitioners will be in short supply for a long time even if wholesale medical prices rise. In order to get more services when prices change over this long run, we have to build a lot of buildings--medical schools and hospitals--and fill them with really expensive equipment. I'm guessing that long run will take a while to get here.

A commenter on Mark's blog noted that we could allow more immigration of medical personnel, a policy to which I don't object. Chiming in, Brad DeLong posts his views:

It's not clear to me that Paul Krugman is wrong. It is also not clear to me that Paul Krugman is right. One of the things patients are buying with more expensive health-care plans is the freedom to choose their own doctors, and that gives the doctors they choose some monopoly power in their bargaining over reimbursement rates with the insurance companies.

I don't have a handle on how big this effect might be, however.

I think that makes four of us. I also think that Krugman's larger point about the key market failure being adverse selection rather than moral hazard is right, and I would like to stop having policy makers focus on the tax code to try to improve the health care market. As for constructive solutions, I hope to have more in future posts.

Pecuniary Externalities

For what it's worth, I think Paul Krugman makes some good points about the problems inherent in using the tax code to encourage or discourage the purchase of health insurance in his column today (original here, reposted here). I obviously don't sign on to his characterizations of "Bush and his advisers," and he stops short of his usual call for a single-payer system, so there's no reason to get into that today.

Were it up to me, I'd completely eliminate the exclusion of health insurance premiums from taxable income. That levels the playing field between premiums and other expenses (as the Bush plan tries to do), but it does so without forcing the tax code to be the arbiter of whether something was a legitimate health expenditure or not. It also raises tens of billions of dollars in additional tax revenue that can then be directed to all the other things the government needs to pay for.

However, I found this statement (highlighted in bold) in Krugman's column to be odd:

While proposing this high-end tax break, Mr. Bush is also proposing a tax increase — not on the wealthy, but on workers who, he thinks, have too much health insurance. The tax code, he said, “unwisely encourages workers to choose overly expensive, gold-plated plans. The result is that insurance premiums rise, and many Americans cannot afford the coverage they need.”

Again, wow. No economic analysis I’m aware of says that when Peter chooses a good health plan, he raises Paul’s premiums. And look at the condescension. Will all those who think they have “gold plated” health coverage please raise their hands?

Is he kidding me? That is almost the definition of a pecuniary externality. Wikipedia describes it as follows:

A pecuniary externality is an externality which operates through prices rather than through real resource effects. For example, an influx of city-dwellers buying second homes in a rural area can drive up house prices, making it difficult for young people in the area to get onto the property ladder.

This is in contrast with real externalities which have a direct resource effect on a third party. For example, pollution from a factory directly harms the environment.

Both pecuniary and real externalities can be either positive or negative.

So in the President's defense, there's a very simple argument to be made here. When one person feels inclined, for whatever reason, to purchase more health care services, that puts upward pressure on the price of health care services (if the supply curve is not flat) and thus the cost to everyone else in the market. Normally, we don't pay any attention to this, because that is precisely the mechanism by which a competitive market achieves economic efficiency.

The President is referring to the pecuniary externality generated by a tax distortion in the treatment of health insurance, which interferes with a market achieiving economic efficiency and thus should concern us. It goes as follows. Premiums are fully excludable from income tax, but out-of-pocket expenses are not tax advantaged. That favors health insurance arrangements in which there are low deductibles and high premiums. Such arrangements can lead to higher utilization of health services, since the insured faces no financial cost at the margin once the low deductible has been met. (This is just a standard moral hazard argument.) Krugman may not believe that the relevant behavioral effects are large here, but he's on shaky ground with his "Wow ... no economic analysis ..." comment.

For more on pecuniary externalities, I came across this source.