Why Everyone’s Wrong About Fixing Health Care

Photo by: Bolshakov

Like most debates in this country, the health care debate has gone into the weeds.  People, regardless of their point of view, spout disingenuous arguments to further their cause.  Critics suggest that simply providing insurance for everyone will make everything “fair,” while their opposition makes arguments for the continuation of a broken system.  While I have a healthy skepticism of the government’s ability to solve most problems, it seems that there are telling factors that suggest that the status quo is not just unsustainable, but catastrophic.

Why Do We Need to Do Anything?

Before we move forward, this is a question many believe remains unanswered.  Why do we presuppose that something is wrong with the American medical system?  The most basic reason is that we spend more money to get worse outcomes.  While there are areas in which we excel, ultimately we spend almost double that of most industrial nations, but our infant mortality rate, for example, is signifcantly worse than almost all other Organization for Economic Cooperation and Development (OECD) member countries.1

Additionally the care and cost in America are widely uneven.  Interestingly they go hand in hand.  The Dartmouth Atlas of Health Care studied the issue nationwide and found almost a threefold difference in health care costs and an inverse correlation between costs and outcomes.2 In other words, the more I’m spending, typically the worse care I’m getting.  All of this suggests that we’re wasting a lot of money, and we need to figure out why.

Perverse Incentives

The fundamental problem in American healthcare boils down to one simple issue: perverse incentives. A perverse incentive is one in which those who are creating the incentives are creating unintended and typcially counterproductive effects.  They are essentially creating their own negative consequences.  As we’ll see almost every component of our system is rife with these types of incentives:

Overconsumption

The opponents to changes in the system constantly raise the “grim” visage of rationed care.  Americans fear loss of control when they look at other countries in which residents have to wait for procedures, even though those countries generally have better health outcomes than does America.  However the flip side to a lack of rationing tends to be overconsumption.

Everyone in the current system has an incentive to allow patients to over-consume medical attention.  Assuming a patient has insurance, it really costs him or her very little out of pocket to get an MRI — even when the doctor may consider it largely unnecessary.  Meanwhile the doctor typically makes money because the patient gets an unnecessary MRI.  The insurance company is likely indifferent as they have already priced their insurance plan assuming this kind of over-consumption.  In the end, we’ve spent considerable money on this MRI and no one’s health is any better.

As the Bear Mountain Bull points out, the structure of many current insurance plans is likely to cause overconsumption.  Because the patient has no “skin in the game,” they opt for procedures that are very unlikely to be useful.  All kinds of diagnostic tests can be taken on the assumption that it’s “better to be safe than sorry,” without taking the cost into account at all.

The Way America Rations

Even as we show such aversion to rationing, America has a different kind of rationing that is far more insidious.  In an extremely perverse incentive, the number of doctors in the United States is decided upon indirectly by the American Medical Association.  That is, current doctors decide how many new doctors there should be.  In the 90’s, despite the oncoming wave of baby boomers reaching old age, the AMA somehow decided that there were going to be a glut of doctors and actually recommended to cut the number of internships available.3 Much of the current shortage now can be attributed to this decline in the number of doctors.

It is rarely in the best interest of the consumer for the provider of a service to decide how many people should be allowed to provide that service.  Even providers with the best intentions are likely to err on the low side.  That doesn’t even take into account those who may be intentionally self-serving and trying to increase demand for their services. (more…)

1. OECD Family Database – Infant Mortality [↩]
2. Dartmouth Atlas of Health Care – Health Care Spending, Qualty and Outcomes [↩]
3. USA Today – Medical Miscalcuation Creates Doctor Shortage [↩]

Can We All Just Agree That Price Controls Do Not Work?

Photo by: ellievanhoutte

Laying some groundwork for a future post, I wanted to have a quick discussion about a topic that amazes me as a complete disconnect between reality and policy.  Price controls have been suggested as solutions for everything from food shortages, to black markets during sieges; but they have an amazing history of achieving the exact opposite of their intent.  In a recent example, Hugo Chavez has attempted price controls in Venezuela, with disastrous results.1 Before I start talking about some other policy issues, I want to make sure that we all agree that price controls simply do not work.

What are Price Controls?

Price controls are when some entity, typically a government, tries to externally set the price of something.  We most often see this in the form of price ceilings where the government tries to set the maximum price producers can charge for something.  One very common example of this is rent control.  The government doesn’t want property owners “gouging” their tenants, so they set a variety of rules on what the landlord can charge. As we will see, this never has the desired effect.

Keeping It Simple

What price controls advocates never seem to accept is that changing the price of something doesn’t affect the supply of that thing.  The government can say that all Ferraris only cost $50, but that doesn’t mean everyone can have a Ferrari.  In fact, Ferrari will immediately stop producing them.  The purpose of markets is to make sure that resources get to the people who want them the most.  Keeping prices low leads to overconsumption, inefficient allocation of resources, discrimination, and disincentive to increase supply.  Let’s look at some simple examples:

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1. BBC News – Venezuelan Shoppers Face Food Shortages [↩]

The Problem with Uncertainty

Photo by: whatmegsaid

When it comes to government policy it is rarely acceptable for politicians to do nothing.  Even if it’s only to give the appearance of doing something and instilling confidence, the government actually does have a role to play.   While there is certainly a case for stimulus and crisis management, too much government intervention can completely upset the whole purpose of free markets.  Even worse, the fear of government intervention can inject the same uncertainty in the market that it is supposed to help assuage.

The 2008 Crisis

In retrospect there is a lot of criticism about the TARP-the Troubled Asset Relief Program.1 Some politicians complain that the prices paid for the equities were too high.  This criticism is somewhat problematic, since the whole purpose of the TARP was to pay more than the market was willing to pay for distressed banks.2 Others claim that it was unnecessary, and that the market would have sorted things out itself.  These criticisms conveniently forget the abject panic that had beset the markets when the idea was put forth.  There was a tremendous amount of uncertainty as to whether the banking system was going to completely collapse and how the world would react.

With all its flaws the TARP may very well have injected some confidence into the market.  The same can be said of Obama’s sweeping stimulus.  Investors and businessmen knew that a large dose of spending was coming and had broad ideas about what it would include.  Economists may argue, but a case can be made for all these changes, particularly when they’re done quickly and in a sweeping fashion.

The Problem

The problem arises when the government becomes a first resort instead of a last resort.  When people expect the government, instead of natural forces, to correct all the ills of the market, uncertainty is sure to follow.  The government can’t do everything, so the economy becomes a guessing game of trying to determine which programs the government will implement.  Even worse it can become a hotbed of cronyism, where the supporters of those in power get bailouts and the rest watch despairingly.

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1. Wall Street Journal – Panel Steps Up Criticism of Treasury Over TARP [↩]
2. The Economist – Carping about the TARP [↩]

Is the Mortgage Crisis Over?

Photo by: respres

The mortgage crisis was clearly one of the dominating catalysts of the recent economic fiasco.  While many other factors contributed, this was one of the most visible and visceral to most people.  Thus many people, particularly homeowners, are now wondering whether they can breathe a sigh of relief.

How Did We Get Here

By now we’re largely aware of the underpinnings of this crisis.  Demand for securitized debt led to tremendous demand for mortgages.   This demand led to lowered lending standards, which led to tremendous demand for housing.   The demand for housing led to soaring housing prices.   When those with the least capacity to pay their loans, who incidentally had the most onerous terms to their loans, couldn’t make their house payments, the whole house of cards came down.  Foreclosures led to dropping housing prices, which led to more defaults, which continued the cycle.

The Subprime Crisis

During all of this we were told the mortgage crisis and the subprime crisis was one and the same.  Many people equate the end of the subprime problems with the end of our troubles in general.  This leads us to wonder if the subprime crisis is truly over.  Signs suggest that this is the case.1 After huge surges, the default rates on these loans have come down sharply, leading many to suggest that the crisis is over.  Of course, that depends on which crisis you’re discussing.

The Real Crisis

Subprime loans may very well be dropping in their defaults, however that statistic neither creates an increase in demand nor says anything about the impending wave of defaults in other types of mortgages. Falling home prices put everyone underwater increasing the chance of defaults across the board.  Although many people who bought houses during the boom bought them with subprime loans, many more did not. (more…)

1. Deutsche Bank – Subprime Chart [↩]

Debt and Moral Hazard

Photo by: Vinay Deep

For decades now the American approach to debt has been to worry about it later.  We’ve essentially kicked the problem down the road.  While some points in our history may have suggested somewhat higher debt levels, we’ve done nothing to reduce them in more booming times.  Ultimately we’ve just turned a blind eye to a growing problem and it may be too late. 

Many people are talking about moral hazard these days, but strangely they all seem to think it’s something that applies to someone else.  Bailouts of millionaire bankers strike us as outrageous, while we personally hold an absurd amount of debt.  Somehow the country got all screwed up without any of us being at fault. 

Our politicians seem to suggest that their opponents are the ones rewarding negative behavior and that they themselves would never commit such an act.  This doesn’t hold up to much scrutiny however.  Throughout the booms of the previous decades, neither Democrat nor Republican has ever used fiscal policy to “cool down” a boom.  Nor have they used any of the booms to reduce our debt to increase our capacity to deal with the next bust.

Clinton was just beginning to talk about reducing the debt when the Internet bubble burst.  Bush managed to go through a massive housing bubble while growing the national debt by over 4 trillion dollars.1  Government has simply never shown any discipline in managing its budgets.  Unfortunately, this is not only true of the government.

Short Term Myopia

Americans and people in general have a tendency to look at a very short sample space and assume that the results they’re seeing are meaningful.  Ten years is a long period of time in a human life, so if something has held true for the last decade, it must be true, the thinking goes.   Unfortunately those ten years are actually quite a short time in the life of an economy.

So many times in history we’ve been told that “things have changed.”  Something has fundamentally shifted and the old rules don’t apply anymore.  For the last decade, people watched their 401(k) accounts grow by double digit figures each year and they just came to assume that this was a sustainable result.  Similarly they’ve leveraged themselves to the hilt and assumed that since they’ve been able to sustain themselves with this massive debt they’d be able to do so in the future.  Sadly, this is an untenable ponzi scheme. (more…)

1. CBS News – Bush Administration Adds $4 Trillion To National Debt [↩]

Why Now May Be the Right Time for Green Stimulus

Photo by: andjohan

In the period leading up to the realization of the current economic crisis, Green was booming.  Solar cell companies were stock market darlings, and the whole sector looked like it may have the makings of the next bubble.  Unfortunately the crash has of course taken some of the bloom off that rose and investment has decreased to 2007 levels.1  But the crash is offset somewhat by the components of President Obama’s stimulus package that call for spending on renewable energy and other “Green” projects.

Why Green?

Generally the idea behind counter-cyclical spending is for the government to put people to work doing things that benefit the country as a whole-thus the idea of building roads, schools, or something else that will give a lasting benefit while helping invigorate the economy through the spending.  This is a win-win.  For those who are pro-Green, environmentally friendly projects seem like the perfect kind of project.  You can wean the country off oil, save the environment and fix the economy all at once.  But is this argument realistic? (more…)

1. Forbes – Venture Capital Investment in Renewable Energy Exceeds $836.1M in Q1 2009 [↩]