Saturday, July 29, 2017

Health Care, Economists and Reality

The Health Care market is complex, and to understand it one must drop back and ask two questions. First, just what are we trying to accomplish with Health Care. Second, are there other examples of “insurance” that people buy which seems to work?

Let us answer these two questions quickly. First we want Health Care so that people who are sick can be treated in the best reasonable manner. Note I did not say best possible manner. It should be reasonable based on resources available. However if someone can afford more than they can personally buy more. Second, we have many examples of such an approach apart from Health Care. Namely home, auto, liability insurance.

What makes the other insurance factors work? Simple:

1. They are bought as an individual not through companies as a benefit. Every buyer gets to make their own choice.

2. Minimum levels are coverage are mandated but they really are minimal to protect third parties such as liability limits.

3. Added coverage is optional and can be purchased.

4. It is not tax deductible.

5. There is an un-insured motorist pool which can be made akin to the high risk medical pool.

6. Insurance companies are many and compete aggressively for customers.

Thus we have thousands of examples of such coverage. Then why is Health Care so crazy. Well there are many people who think they know.

In a recent NY Time article by an often self-proclaimed top economist the author states:

In Econ 101, students learn that market economies allocate scarce resources based on the forces of supply and demand. In most markets, producers decide how much to offer for sale as they try to maximize profit, and consumers decide how much to buy as they try to achieve the best standard of living they can. Prices adjust to bring supply and demand into balance. Things often work out well, with little role left for government. Hence, Adam Smith’s vaunted “invisible hand.” Yet the magic of the free market sometimes fails us when it comes to health care. There are several reasons.

Namely he contends:

1. Externalities abound. In most markets, the main interested parties are the buyers and sellers. But in health care markets, decisions often affect unwitting bystanders, a phenomenon that economists call an externality.

Now the externalities are also the unintended consequences. All too often whenever Government gets into the fray we see unintended consequences. Why? Simply because almost all legislation is written by lobbyists who serve the interest of their employers. The more legislation the more externalities. Externalities rare a result of the way legislation is created not inherent in Health Care.

2. Consumers often don’t know what they need. In most markets, consumers can judge whether they are happy with the products they buy. But when people get sick, they often do not know what they need and sometimes are not in a position to make good decisions. They rely on a physician’s advice, which even with hindsight is hard to evaluate.

Well consumers do not know what fender will get crushed by some moron trying to squeeze between you and an eighteen wheeler. You need coverage not specificity. That is the nature of insurance. When my car gets hit I do not know how to repair the fender or how to price it out. Same for dozens of other insurance markets. I am buying a policy to cover the unknown. Thus this reason is without merit.

3. Health care spending can be unexpected and expensive.

Same as the above. I cannot tell you when that moron in the black pickup tries to squeeze between me and the 18 wheeler. I was stopped to allow the 18 wheeler to safely turn. The moron in the pickup is just that, a moron! So his policy pays but mine increases my fee, perhaps because I did not have wings on my care to fly away. Why says insurance is logical.

4. Insured consumers tend to overconsume. When insurance is picking up the tab, people have less incentive to be cost-conscious.

Auto insurance customers do not, frequently. This is insurance fraud. They have adjustors for that. Now there is a corollary. Namely many people abuse themselves via obesity, alcohol, tobacco, and what we get is self-induced disease. That is the equivalent of a person having a multiplicity of moving violations. We have seen and addressed this element.

5. Insurance markets suffer from adverse selection. Another problem that arises is called adverse selection: If customers differ in relevant ways (such as when they have a chronic disease) and those differences are known to them but not to insurers, the mix of people who buy insurance may be especially expensive.

If everyone who drives must have insurance, actually it is the vehicle, then why not the same with Health Care. No exceptions. You may just have the minimum liability policy or you can get the top of the line. But you have it. Perhaps the bottom minimum is covered by a tax deductible. If people do not have the funds they great a tax credit to pay for it. But no free riders.

We had developed the details of such a plan some eight years ago. It is not hard and not overly costly. It gores a lot of oxen. From fat people charged a surcharge to companies getting rid of the benefit. It also get the Government out of telling me when to get a colonoscopy.