Two Krugmans Enter, One Krugman Leaves

Paul Krugman likes to contradict himself but never have I seen it happen within a single column. Writing on health care costs, he states:

But even as Republicans demand “entitlement reform”, they are dead set against anything like that. Bargaining over drug prices? Horrors!

I agree, being able to bargain over drug prices is a good thing. Makes sense: being able to bargain and not blindly accept forced prices is a hallmark of free-markets. But later he writes:

If they were serious about deficits, they’d be willing to consider policies that might actually work; instead, they cling to free-market fantasies that have failed repeatedly in practice.

Ah, but you might say that the goal is to allow the government more bargaining power and since the government increasingly has monopsony power (like a monopoly but there're few buyers rather than few sellers), it's not a free-market. In other words, Krugman tells us that monopsonies are actually desirable, which is endorsing a law which states only Microsoft gets to hire engineers. Even non-economists should understand why that's a bad idea.

That's not the only issue with today's column--the claim that private firms apparently have no incentive to reduce costs is equally strange and the point that an underfunded voucher system won't work is equally obvious (since it's underfunded!)--but those are for another post.

Yeah I Like Free Stuff, Too

Today marks the beginning of additional provisions from the Affordable Health Care Act. Lauded as a victory for gender equal rights, insurers are now required to cover birth control.

Why gender equal rights? Because insurers have long covered Viagra. Men get coverage for their sex stuff; shouldn't women? If that's as sophisticated as you're going to get, yes it seems unfair. But you're being way too sloppy.

This isn't about religion. It's about cost.

As of 2012, 15 pills cost $332.58; that's sex every other day...in practice it's probably much cheaper.

The price for a month of birth control varies widely: from $15 to $80. Let's take the average (note I'm not adjusting for frequency of purchase for each price since I don't have that information): $47.50 a month.

Now we know the costs, how often is each cost used?

For men over the age of 40, 6.3% of men use some form of ED medication. Since 21.86% of the US is over the age of 40 (as of 2010), 1.38% of Americans use ED drugs.

For women between 15 and 44 who have had sex at least once, 82% have used the pill. As of 2010, that age range is about 20.2% of the population. Let's assume 75% of these women have had sex once (a low estimate, to be sure): that's 15.15%. Multiply that by the 82% who use the pill and we have 12.42% Americans using the pill.

Each month, assuming insurance is footing the whole bill, insurance companies pay $4.67 per person to cover ED drugs. Note this assumes their customer make-up is similar to the US population make-up; unreasonable perhaps but soon it will be required by law.

Each month, assuming insurance is footing the whole bill, insurance companies will pay $5.90 per person to cover the pill.

There are many, many complications to my back-of-the envelope calculations. For one, I'm not sure all firms cover ED drugs but since they will all have to cover contraception, you can bet that $5.90 per person is a low estimate. I also don't know exactly what they will be forced to cover--perhaps other contraception besides the pill--so that 82% might be too low.

On the other hand, you could argue that it's too high, since the number comes from a survey asking if you've "ever" used it. And you could point to the health benefits of birth control, too.

But at the end of the day, health insurance companies are profit maximizers and they can run these numbers much more accurately than I can. If they felt they could cover pills without losing money, I'm sure they would have. But they don't; we have to assume it's for a good reason.

Actually Justice, This Is How Insurance Works

From the SC hearing today:

JUSTICE ALITO: But isn't that a very small part of what the mandate is doing? You can correct me if these figures are wrong, but it appears to me that the CBO has estimated that the average premium for a single insurance policy in the non-group market would be roughly $5,800 in -- in 2016. Respondents -- the economists have supported -- the Respondents estimate that a young, healthy individual targeted by the mandate on average consumes about $854 in health services each year. So the mandate is forcing these people to provide a huge subsidy to the insurance companies for other purposes that the act wishes to serve, but isn't -- if those figures are right, isn't it the case that what this mandate is really doing is not requiring the people who are subject to it to pay for the services that they are going to consume? It is requiring them to subsidize services that will be received by somebody else.
GENERAL VERRILLI: No, I think that -- I do think that's what the Respondents argue. It's just not right. I think it -- it really gets to a fundamental problem with their argument.
JUSTICE GINSBURG: If you're going to have insurance, that's how insurance works.

That is close enough to being right that it's a forgivable mistake under most circumstances. But in this context that small distance between right and wrong make all the difference.

While you need healthy people to subsidize sick people, you don't need a group of systematically healthy people to do the subsidizing. If an illness which affects 1% of people costs $10,000 to treat, then you need everyone paying $100 for insurance to cover expected medical payments. Yes, at year's end the healthy will be subsidizing the sick but at year's beginning, you have an equal likelihood of being sick as everyone else.

But that's not what Ginsburg was talking about. To see her version, imagine some people have a 1% chance and others have a 10%. You don't need the 1%ers to subsidize the 10%ers. The 10%ers could just pay more (specifically, $1,000). In other words, you don't need an ex ante difference in expected health costs for health insurance to work. You just need to be able to tell people apart (which is why you have to fill out all those forms).

Granted, this seems mean. You can't completely control if you're a 1%er, a 10%er, a 50%er, a 0.1%er, etc. But you also have some control. Your risk is based on three factors:

D, factors that are dependent on your actions such as diet, level of exercise, how sun exposure, etc.
I, factors that are independent of your actions such as genetics, upbringing, etc.
M, factors that are mixed, such as income which comes from both luck and hard work.

p = p(D,I,M), where p is the probability of getting sick.

Forget Obamacare: ideally the government would give people enough money to buy health care, if they choose. The amount of money would be proportional to somewhere between a person's I and their I+M. Born with diabetes? That increases your expected yearly costs by $1,500 so here's $1,500. Ate poorly and became diabetic? You get nothing. Yes, this is too expensive to do perfectly, but a second-best solution would be to use existing medical records and run them through a computer to determine a subsidy. That gets us really close and is quite feasible. Plus, I'd not require people to actually use the money to buy health care. Want to spend it on ice skating clowns? Fine, but make sure they stay off my lawn.

The Value of Marketing

Latest in health care debate is this opinion in the Economist proclaiming the private sector waste from marketing expenses. Let's ignore that this is just guesswork. Yes, we know private companies spend more on marketing than public companies. But the data on this kind of thing isn't public and many other explanations for the cost difference (private companies spend much more on fraud protection, for example). Moreover these are the same century-old arguments which condemned the waste from competition without considering the waste from monopoly. But that's not what I want to talk about.

It's true that advertising has zero-sum components and when a lot of people think of the most honest ad, this is it. Some ads, notably ones for product about conveying style (I'm cool because I buy this) are just about one side trying to be cooler than the other. We'd all be better off if everyone halved their advertising costs. But ads are more than Coke yelling "Coke!" and Pepsi yelling "Pepsi!" For more practical products, for the ones where there is virtually no cool factor (air conditioners, cleaning supplies, and insurance), ads have to do something different: they have to inform you.

Yes, lots of ads are repetition (that's how we learn) but with each repetition, there's information on a new product or deal. People save money, learn what they like, and discover a product which suits them best. Save the post office, federal agencies don't advertise. That's not just because they get their revenue from taxes, but they don't have any reason to come up with anything new. It's very confusion why some think stagnation is the answer to health care costs.

Update: Administration and advertising (fund raising) expenses positively correlated with effectiveness (for charities).

Hans Rosling on Child Mortality

Prof. Hans Rosling has a new video about child mortality rates in Africa. Interesting, as always.

Not Quite a Wage Control

The Heritage Foundation issued this summary of what the Senate Health Care bill will change when. Some of these summaries looks suspiciously harsh (such as the one claiming the bill won't allow insurance companies to revoke the insurance from someone who committed fraud). Another, less obviously exaggerated, one caught my eye: In 2012, "Health insurance company employees may not be paid more than $500,000 per year."

I was curious to see how this was worded so I checked the Senate bill where it's listed under Section 9014. The section is strangely worded (of course), making references to deductions and the Section 162 of the 1986 tax code. After consulting that, I got an idea what this clause was actually about.

For one, the change doesn't occur until 2013, not 2012, but that's a minor point. Moreover, the "payment cap" isn't really a cap. It just means that if you make more than half a million a year and work for health insurance provider, you can't take any deductions relating to trade or business expenses (as allowed by the 1986 reform). I don't know how big of an impact this will have on health insurance employees making more than $500,000 a year as I have no idea what their business deductions are, but it's not a wage control.

The Burden of the Pre-existing Condition

If you were born with Asperger syndrome, should people be forced to date you? Most of you would probably say "no." It's a good answer: why should people be punished for something that isn't their fault? So why do so many believe health insurance companies should be required to accept applicants with pre-existing conditions? (Before you respond with "I don't want to date someone who doesn't want to date me," remember Asperger syndrome severely limits your ability to read social cues; you won't be able to tell they are with you only by force.)

It's not even that insurance companies won't cover pre-existing conditions. It's that they won't cover them at a particular price: a low price. In the end there are those randomly burdened with a condition that's expensive to care for and they don't want to pay for it (at least all of it). But that does not translate into forcing someone else to cover the costs.

And no, insurance companies are not sitting on lots of excess cash. Record profits are not the same thing as high profits (and even if they were, proposing a permanent change based on temporary conditions is very reckless way to make policy). Because they are barely profitable, forcing their costs up with such reforms will force prices up and making it too expensive for someone who could otherwise get it. Now we are forcing our neighbor to carry the burden of our condition. Where's the justice in that?

A Third Way: Healthcare

A friend of mine works multiple part time jobs and has a pre-existing medical condition. Not surprisingly, he supports government subsidized (though not free) health care for people like him: working full time but without benefits. Companies don't want to provide benefits and often fire a full time person to hire a pair of part time people: same work and pay, but no costs of benefits. But this firing/hiring trend is common in every recession: it seems strange to create a permanent agency to solve a temporary problem. Still, the multiple part-time jobs is a permanent fixture in the economy and is worth thinking about.

My knowledge of tax law is somewhat lacking, but my understanding is that firms give benefits instead of an equivalent amount in cash because (a) tax laws make benefits cheaper and (b) people prefer that warm feeling of someone watching out for them over cold hard cash. Besides, matters of mortality is not something people like to think about so there's benefit in having someone else handle it. But part time workers aren't paid enough for the worker to be willing to take such an income hit in exchange for benefits. Moreover, tax laws wouldn't motivate the employer and minimum wage laws would prevent people from working for just benefits.

It seems we're stuck. Either provide subsidized health care and suffer all the inefficiencies that come with moral hazard or let the working poor suffer and with it the costs of delayed care.

But suppose we re-wrote the tax laws so firms would get tax breaks for benefits of part time workers and created an exception for the minimum wage laws (or just got rid of them) allowing people to be paid an equivalent amount in benefits. That way someone working multiple jobs would have one job where they're paid exclusively (or partly) in benefits and other jobs they get cash normally.

There's surely additional complexities because I'm not familiar with all the details of the tax code. But it has the advantage of giving people access to greater health care without running into the strong case of moral hazard that spawns comes from universal health care. The only hitch is that a lot of politicians hung their hat on universal health as the only reasonable solution so a compromise in the tax code probably won't be enough satisfy their constituents.

The Futility of Equality

In Russ Roberts' conversation with William Bernstein about inequality last week, Bernstein argued that largely different salaries harm the less wealthy people. In the pursuit of status, the 2nd, 3rd, 4th, placers stress out about their lives. This stress harms their health and shortens their life span. Thus we should engage in redistribution.

It's a clever argument, but I challenge its conclusions (again...see my previous challenge here). I assume Bernstein searches for something less than full equality (where everyone makes the exact same amount) since that would be prohibitively expensive. The alternative is partial distribution, where a few are poorer and several are wealthier.

Redistributing from the wealthy to the poor still creates that ranking system, only with a smaller variance. Instead of being much wealthier, those "on top" of the status ladder are only slightly wealthier. But according to the status theory, that shouldn't matter. A runner up is still a runner up, whether by a little or a lot. They will be just as stressed out, just as prone to an early death. But society will be less opulent because of the incentive distortions. Bernstein's world is strictly worse.

Coase and Inequality

This week Russ Roberts interviews William Bernstein on inequality. Bernstein argues that income inequality has ill effects on poorer people's health--they have a lower quality of life because they know they are on "low" end, they're more likely to stress out, etc. Thus, he says, we should engage in income redistribution.

I find the big weakness to the inequality argument is its policy recommendation. I can see how a few people making lots of money makes others upset/jealous (we hear about it all the time in politics, suggesting people like to hear about how evil wealthy people are). I can also see that such anger leads to stress and leads to unfortunate health effects. In other words, I can see how one person's increasing wealth can externalize a cost onto another.

Since transaction costs are high, let's set aside the Coase Theorem. Instead, who's the least cost avoider? (Remove the wealth or remove the sadness and either way we have no problem so what's cheaper to remove?) If we ask the rich to make less money, we would lose those the benefits that the person would contribute to society. If we ask the poor to take a breath and let it slide, we likely lose much less for what we get. In other words the conclusion should not be redistribution but people dealing with it on their own terms. Bernstein should be telling people to pick up yoga, not pick pockets.

Listen to Your Mother

I have vivid memories of my mother insisting I wash my hands before dinner. I remember thinking: "What on earth does she think I've been doing that would justify all this hand-washing? I'm eating pasta, not performing surgery." But insist she did and the rule has (somewhat) stuck. I live a pretty quiet life--academia isn't exactly a dirty job.

Doctors are a different story. They expose themselves to dirt and disease with every patient they visit. But for some reason, they rarely wash their hands. Even though washing between each patient is time consuming, using ultraviolet germicidal irradiation (and wearing rubber gloves to mitigate the dangers associated with constant exposure) would cut that time down to a negligible value.

We talked about this issue and others (interns work for 24+ hours, doctors wear "sterile" scrubs to the cafeteria, aspirin before a heart attack is rarely used) during law and economics today. The existence of these deficiencies is a puzzle. They are very easy and effective ways to save lives yet in the avalanche of medical malpractice suits they are rarely employed. More puzzling, they are rarely cited as a cause of negligence--a lack of this or that test is more common.

The latter seems to explain the former (hospital's aren't willing to accommodate because no one's complaining) but that only makes the latter more puzzling. Most people who file a suit don't have a legitimate claim of harm, but surely they could secure a victory if they point out the doctor/hospital didn't take simple steps for avoiding harming. Why are doctors being sued for not ordering an obscure and expensive test and not being sued for being less hygienic than the seventeen-year-old at McDonald's?

My best guess is that people don't want to believe doctors could be so careless. This doesn't quite explain it since you'd think the possibility of infection or death would encourage people to think more carefully (rational irrationality doesn't get us far). Still it is consistent with the fact that of the people who have a legitimate case against their doctor, only about 2% sue. What a strange world we live in.

What About the Rest of Us?

There's a Breast Cancer Protection Act currently circulating in Congress to require health insurance companies to cover a minimum 48-hour hospital stay for mastectomy patients. Makes sense that women wouldn't want to be forced out of bed right after surgery, but what's that going to do to the rest of our premiums?

"No Lye" but a Lot of "Tomfoolery"

I recently picked up a copy of Tulani Kinard's No Lye, a book promoting "natural hair care" for African American women. Surprise, surprise! State regulation was advocated in the same breath as upholding tradition!

Kinard's argument is straightforward: Age-old African hair care methods are safer, healthier, and self-esteem building. In keeping with these traditions, black women today should braid, loc, and twist their hair.

"Now for the clencher": Increased demand for these traditional hairstyles require legal definitions for the techniques and certified professionals to do them.

Gee, these techniques supposedly survive today because of hundreds of years preservation by women who weren't certified. Why change all of the sudden now?

Hillary's War on Health Care

In Lewiston, Maine today Sen. Clinton referred to a time when she used her influence to get an insurance company to pay for a claimant's health care. It shouldn't take a senator to get them to do this, she argued. She called for a cap on insurance premiums yet paradoxically emphasized the importance of preventive care. Sen. Clinton desperately needs a lesson in basic economics.

Any doctor will tell you people can engage in their own preventive care through every day activities: eating healthier, exercising more, quit smoking, having regular checkups. But each of these things require initiative on the part of the patient, not the doctor, not the insurance company. But if we make it cheaper for those with insurance to ignore preventive care (by capping premiums), they won't be as interested in it.

Yet the very companies Clinton demonizes have that incentive. Non-smokers get a better insurance deal than smokers. Those in better shape get a better deal. Companies already reward those who engage in preventive care because they know such people are cheaper to care for. Despite what the Senator suggests, these firms keep their promises and they pay up often. It doesn't take a senator to get them to keep their promises. It does, however, take one to get a company to go beyond their promises and pay for another's mistakes or bad luck. With all the politicians wanting to gut these firms, it's a wonder that anyone stays in this business at all.

The Cure Is Worse Than The Disease

An FDA report will be discussed tomorrow concerning the agency's poor performance. The agency claims it simply needs more funding which it will use to centralize its work and add management positions.

It would make more sense to return the agency to an advisory status. This would drastically reduce its costs and could accomplish a handful of things really well instead of doing many things poorly.

Throwing money at a problem rarely solves it--the organization must have to have a strong incentive to use resources wisely. Companies have an incentive to make a safe and useful product. Dangerous ones will slip through, but at least the error is self-correcting. When things go bad, the drug is pulled. The FDA, however, is rewarded when it turns out most drugs--even good ones that can save lives. And this error doesn't disappear. People continue to needlessly die.

The question is not if free markets or government is perfect at screening disease. Neither is perfect; it's a useless inquiry. The question is which one is most robust against error: a single government agency or the collective wants and constraints of millions of interacting people.

To the Masses Go the Spoils

Last night during industrial organization, Alex Tabarrok told us something only an economist could truly appreciate: "People in China are now dying of cancer and this makes me very happy." It makes me happy as well. Yet we are not motivated by malevolence but a recognition of how humanity progresses.

As China becomes wealthier, its people no longer starve or work themselves to death. Instead they live longer and die of of other ills later in life. And in their wealth they gain the ability to pay to assuage their suffering. Firms the world over now have extra incentive to develop cures not just for cancer, but Parkinson's disease, Alzheimer's, and other aliments which tend to appear later in life. For most of human history, it was an extra burden to want something popular or common for everyone else wanted the same limited supply. But under capitalism, wanting what is popular often translates into getting it easier. Common diseases are rarely death sentences, a trend that is likely to intensify in the near future.

Domo Arigatou, Mr Doctoros

The laws of economics knows no borders.

As calls for universal health care fill the campaign talking points, let us take a moment to learn from other countries. Drs. Michael A. Glueck & Robert J. Cihak wrote earlier this year concerning Japan's failing health care system. It should not surprise any economist: doctors have barely a few minutes per patient, people are being denied care, resources are strained, government debt continues to skyrocket, and "[p]atients are told they¹ll never get better, even when treatments exist, and many are not even informed of their diagnoses."

When you give something away for virtually nothing, people will use more of it, even when they don't need to. It's not merely that universal health care, causes waste. It really isn't "universal" because so many people are forced out. It's not even "health care;" it kills people.

HT: Matt Huber

Cringle 2008

Bill Maher, in the most recent episode of Real Time, defended universal health care on the grounds that government isn't always a bad thing, you just need the right people. True, government is just a place where people do things--it's not good or bad. But when you don't have to rely on people volunteering payment, where do you find this amazing person who side steps paying back cronies and cuts corners? Where is this superman who knows when people are selfishly demanding care they don't need? As much as I'd like to elect Santa Claus, I don't think he's available.

Sicko, Reviewed

Mike sent me this excellent review of Sicko, noting Moore's unsurprisingly sloppy presentation of the facts. Worth a good read, though after it I'm confused why the author suggested one should pay to go see it.

The review is notably in a Canadian newspaper, the same place of the implied ideal health system.

Moore Reading, Not Less Health Care

Micheal Moore went to the Daily Show tonight promoting his new movie, Sicko, a work promoting national health care. Moore is tremendously upset because people don't have the health insurance he wants. In fact, he doesn't think private health insurance should exist it all.

If it turns out the health insurance people get doesn't cover something they think it should, why not instead encourage people to read contracts before they sign them? Then they would know what's covered and what isn't and then they could decide if they want to purchase the product. I'm sure people sign a lot of things without reading it. It's a problem. But telling people they shouldn't be expected to read things they sign isn't helpful.

But Moore doesn't merely think that people should read less, he thinks we should throw out the very contracts they should read. Moore told Stewart that it's awful companies provide insurance because they are in it to make profit. Thus, they look to not pay off claims. What Moore ignores is that if they never paid off claims, they wouldn't make any money, either. Nobody would want to buy such insurance.

Unless, of course, no one bothered reading the contracts.