For all of the rhetoric about reforming health care in the United States, Senator Baucus' proposal—like the other Democrat bills—is striking in how little reform it incorporates, at least in the right direction.
The root cause of many problems facing American health care today is the reliance on third party payment for medical expenses. Currently the government pays for about half of U.S. medical expenses. Roughly forty percent is paid by employers and insurance companies. Only about ten percent comes directly from health care consumers.
At the time of care, patients on average bear only about a tenth of the cost directly—the rest of the episode's cost comes from others: the insurance company to which the patient pays premiums or the government. Spending other people's money on oneself does not diminish a patient's concerns about quality, but incentives to be cost-conscious are weak. The result is excessive consumption of marginally useful or even potentially harmful procedures.
While risk sharing is an appropriate strategy for unexpected and potentially catastrophic care episodes, such insulation from having to confront the costs and benefits of alternative options systematically biases patients towards accepting more expensive and risky procedures with little or no net benefit than they otherwise would.
Would the Democrats' proposals help to properly realign the incentives facing consumers? No, they would make the problem worse.
Compelling all Americans to purchase insurance either through an employer or individual mandate—especially when combined with guaranteed issue, community rating, and minimum benefit requirements—would further entrench this overconsumption cost death spiral, as would more explicit government takeovers such as single-payer, government insurance, and co-ops. And since medical services would no longer be rationed by price, they would ultimately have to be rationed by quality degradations like long waiting times and denial of care.
When politicians and bureaucrats direct the allocation of resources, they are spending other people's money on other people, which gives them insufficient reason to monitor quality or cost as carefully as private actors spending their own money.
Another approach would empower consumers to make their health care decisions with full knowledge of the relevant costs and benefits. They would be free to choose the kind of plan that best fits their preferences, whether that would take the form of fee-for-service, prepayment (the health maintenance organization model), or catastrophic insurance with out-of-pocket payment for routine and expected care. After all, ‘government funds’ come from taxes, and ‘employer contributions’ mostly come out of employee compensation, so why not just let individual consumers control the money that funds their medical needs?
Two major (and many minor) obstacles prevent this consumer-driven market from becoming a reality: the preferential tax treatment of employer-provided health insurance purchases and poorly designed government programs.
Since employers can deduct health benefits from their taxable income but individuals cannot, workers are pushed into accepting whatever plan their employer happens to offer. Giving individually purchased health coverage the same tax treatment as employers receive would allow workers who prefer a different type of plan to cash out the portion of their compensation that employers currently divert into the so-called employer contribution to their workers’ health care. Policymakers have several options: tax credits, tax deductions, or, even better, large HSAs.
Government programs fail to give their beneficiaries ownership of the funds that finance their care. Giving Medicare recipients the option to choose a health-status-adjusted voucher and allowing states more flexibility in serving needy populations would further develop an individual insurance market.
Removing barriers to interstate competition in health insurance could also spur lower costs, more innovation, and more regulatory competition between the states.
Unfortunately none of the Democrats' proposals would empower health care consumers in these ways or much otherwise. They would instead consolidate the status quo of third-party payment for routine expenses and further concentrate the power of the political class.
Sunday, September 20, 2009
Sunday, July 5, 2009
Palin Case Highlights Need for Tort Reform
Today's Washington Post has a very fair article about Sarah Palin's resignation from Alaska's office of governor. For the most part, she was sick of the attacks on her and her children. What a shocker: a decent, small-town person gets thrown into the national political spotlight and recoils at the viciousness of the modern political arena.
What jumped out at me though, is that her new-found fame or notoriety (depending on your perspective) has attracted a series of lawsuits that have put her family $500,000 in debt. I can't speculate on the merits of those lawsuits, unfamiliar as I am with the details, but suppose they're all frivolous and the Palins are exonerated in every case. They win, but they're still out hundreds of thousands of dollars in legal fees. Is that justice?
The need for tort reform couldn't be clearer. The answer is for states to switch to a loser-pays rule, where the victor has no liability for his/her legal fees (and the federal government should stay out of it). Alaska has taken steps in this direction. Virtually every other developed nation has rightly adopted this rule. It would discourage frivolous lawsuits, while ensuring that injured parties can still obtain justice.
Some--like the trial lawyers associations--will claim that this would prevent legitimate cases from being undertaken. Not so. Where loser-pays exists, a competitive market for tort insurance is available at premiums that depend on the potential size of the payout and the probability of success. Most of the time, the law firm--not the plaintiff--will cover the premium.
It doesn't make sense to clog the courts with cases that lack merit or to subject innocent parties to ruinous legal fees because someone doesn't like their politics. If the Palins are found to be liable in one or more cases, they should justly pay. But if they are found to have no culpability, for them to be saddled with debt from legal fees will be a miscarriage of justice.
What jumped out at me though, is that her new-found fame or notoriety (depending on your perspective) has attracted a series of lawsuits that have put her family $500,000 in debt. I can't speculate on the merits of those lawsuits, unfamiliar as I am with the details, but suppose they're all frivolous and the Palins are exonerated in every case. They win, but they're still out hundreds of thousands of dollars in legal fees. Is that justice?
The need for tort reform couldn't be clearer. The answer is for states to switch to a loser-pays rule, where the victor has no liability for his/her legal fees (and the federal government should stay out of it). Alaska has taken steps in this direction. Virtually every other developed nation has rightly adopted this rule. It would discourage frivolous lawsuits, while ensuring that injured parties can still obtain justice.
Some--like the trial lawyers associations--will claim that this would prevent legitimate cases from being undertaken. Not so. Where loser-pays exists, a competitive market for tort insurance is available at premiums that depend on the potential size of the payout and the probability of success. Most of the time, the law firm--not the plaintiff--will cover the premium.
It doesn't make sense to clog the courts with cases that lack merit or to subject innocent parties to ruinous legal fees because someone doesn't like their politics. If the Palins are found to be liable in one or more cases, they should justly pay. But if they are found to have no culpability, for them to be saddled with debt from legal fees will be a miscarriage of justice.
Sunday, March 29, 2009
Another Problem with Employer-Provided Health Insurance
As my wife and I prepare for the birth of our first child, we've become familiar with some of the truly marvelous technology that has emerged over the last few decades.
Among the most astonishing and promising possibilities is the harvesting of blood from the umbilical cord just after the baby is born. The stem cells contained in the cord blood already have the potential to treat or cure a host of diseases, not only for the child, but also for the mother and her close relatives.
The price of collecting the blood typically exceeds $1000 with an annual storage fee of over $100. Considering their potential benefits, investing in preserving these cells strikes me as a heck of a bargain.
Since the potential to save money in the long run is quite substantial, you would expect health insurers to pick up part of the tab.
I was surprised to learn that my wife's employer-based health coverage does not include this, except in the limited circumstances where a potential beneficiary already has an applicable condition.
In other words, unless a close relative is afflicted by something nasty at the time of the infant's birth, the parents get to pick up the full tab or go without. And should the cord blood not be preserved, the insurance company could later be on the hook for a more expensive alternative.
Businesspeople are not stupid (or at least they don't leave money on the table). If health insurance companies actually expected to save money on cord blood therapies, they would doubtless cover and even promote it.
What's going on? Is the potential effectiveness of cord blood exaggerated? No--the current benefits are quite impressive--but that's irrelevant.
Young workers typically change jobs every few years, which means their health insurance coverage changes as well. If the chances of coming down with something (the sum of the probabilities of cord-blood-treatable ailments over the remaining years of coverage) and the resulting savings from cord blood therapies outweights the cost of cord blood collection and storage, insurers will cover it.
That they don't suggests that the benefits do not exceed the costs to the insurance companies over the time horizon they expect their beneficiaries to be with them.
What's to be done? Mandating coverage of this option would solve this problem, but only by increasing costs to other people and introducing other unintended consequences.
Perhaps the emergence of additional treatments would push the insurance cost-benefit estimation over the tipping point, making a policy response irrelevant.
In the final analysis, however, the linkage between employment and health coverage prevents insurance portability, which prevents the insurers' incentives from being aligned with our long-term health status. Equalizing the tax treatment of health care for all purchasers and removing other institutional barriers to a more competitive health insurance marketplace would go a long way towards getting our insurers to worry about preventive measures.
In our current world of distorted incentives, however, my wife's insurance won't cover this potential life-saver. So we will. After all, it's our baby.
Among the most astonishing and promising possibilities is the harvesting of blood from the umbilical cord just after the baby is born. The stem cells contained in the cord blood already have the potential to treat or cure a host of diseases, not only for the child, but also for the mother and her close relatives.
The price of collecting the blood typically exceeds $1000 with an annual storage fee of over $100. Considering their potential benefits, investing in preserving these cells strikes me as a heck of a bargain.
Since the potential to save money in the long run is quite substantial, you would expect health insurers to pick up part of the tab.
I was surprised to learn that my wife's employer-based health coverage does not include this, except in the limited circumstances where a potential beneficiary already has an applicable condition.
In other words, unless a close relative is afflicted by something nasty at the time of the infant's birth, the parents get to pick up the full tab or go without. And should the cord blood not be preserved, the insurance company could later be on the hook for a more expensive alternative.
Businesspeople are not stupid (or at least they don't leave money on the table). If health insurance companies actually expected to save money on cord blood therapies, they would doubtless cover and even promote it.
What's going on? Is the potential effectiveness of cord blood exaggerated? No--the current benefits are quite impressive--but that's irrelevant.
Young workers typically change jobs every few years, which means their health insurance coverage changes as well. If the chances of coming down with something (the sum of the probabilities of cord-blood-treatable ailments over the remaining years of coverage) and the resulting savings from cord blood therapies outweights the cost of cord blood collection and storage, insurers will cover it.
That they don't suggests that the benefits do not exceed the costs to the insurance companies over the time horizon they expect their beneficiaries to be with them.
What's to be done? Mandating coverage of this option would solve this problem, but only by increasing costs to other people and introducing other unintended consequences.
Perhaps the emergence of additional treatments would push the insurance cost-benefit estimation over the tipping point, making a policy response irrelevant.
In the final analysis, however, the linkage between employment and health coverage prevents insurance portability, which prevents the insurers' incentives from being aligned with our long-term health status. Equalizing the tax treatment of health care for all purchasers and removing other institutional barriers to a more competitive health insurance marketplace would go a long way towards getting our insurers to worry about preventive measures.
In our current world of distorted incentives, however, my wife's insurance won't cover this potential life-saver. So we will. After all, it's our baby.
Friday, March 20, 2009
Obama's Fresh Start with Iran
I've been less than impressed with President Obama's approach to economic issues, but there may be some hope for him yet on foreign policy.
CNN reports that Obama "reached out to Iran on Friday -- the start of the Iranian New Year -- in a video message offering 'the promise of a new beginning' that is 'grounded in mutual respect.'"
Of course, no one wants Iran to possess nuclear weapons--the major recent impediment to normalizing relations--but can we live with it? Do the U.S. Army, Navy, Marine Corps, Air Force, and nuclear arsenal represent a sufficient deterrent to bad action?
And while most people don't want a nuclear Iran, we do want a peaceful and prosperous democratic republic to emerge in the heartland of the former Persian empire.
Most of that task falls to Iran's leaders, but U.S. policymakers can make a difference.
If normalizing relations reduces their fear of U.S. military action, they'll be less likely to elect hardliners and focus on other issues, the economy first among them. Robust cultural exchange can help promote understanding and economic partnerships. Reducing trade barriers (to zero?) would enhance bilateral commerce and facilitate both of our economic growth.
Obama's on right track with Iran. Let's hope he follows through.
CNN reports that Obama "reached out to Iran on Friday -- the start of the Iranian New Year -- in a video message offering 'the promise of a new beginning' that is 'grounded in mutual respect.'"
Of course, no one wants Iran to possess nuclear weapons--the major recent impediment to normalizing relations--but can we live with it? Do the U.S. Army, Navy, Marine Corps, Air Force, and nuclear arsenal represent a sufficient deterrent to bad action?
And while most people don't want a nuclear Iran, we do want a peaceful and prosperous democratic republic to emerge in the heartland of the former Persian empire.
Most of that task falls to Iran's leaders, but U.S. policymakers can make a difference.
If normalizing relations reduces their fear of U.S. military action, they'll be less likely to elect hardliners and focus on other issues, the economy first among them. Robust cultural exchange can help promote understanding and economic partnerships. Reducing trade barriers (to zero?) would enhance bilateral commerce and facilitate both of our economic growth.
Obama's on right track with Iran. Let's hope he follows through.
Thursday, March 5, 2009
The Ever Expanding Backpack of State
It strikes me that government is something like a backpack.
If you're planning to take an all-day hike, you'll want to take some essentials: a Swiss army knife, some snacks, a compass, and a few other things, depending on where you are and how long you'll be out.
But if you're only going to be out for a day, there's no need to bring a tent, sleeping bag, cooking gear, and waders (unless you're going fishing). That stuff would just weigh you down.
There's a sweet spot between carrying too little and too much, depending the nature of the trip and what the hiker is willing to risk lacking versus unneccessarily lugging around. Too little can leave you in a bind, while too much slows the hiker down and makes the journey less pleasant.
So too with government and the productive sector. The core functions are right there in the Constitution: national security, courts for adjudicating disputes, regulating money, preventing restrictions on intrastate trade, and so forth. The benefits far outweigh the burdens for these.
Corporate welfare, earmarks, and the criminalization of just about everything represent the dead weight. The benefits for the few special interests are dwarfed by the burdens for the rest of us.
You can also get too much of a good thing--like a hiker with 50 pounds of food or a government that maintains armaments far greater than necessary to ensure self-government and the protection of vital interests. And there's the grey area.
But as the government burden increases, the private (productive) sector strains more and more under the weight, its (metaphorical) steps slowing. Hong Kong becomes the United States, which becomes Germany, which becomes India, which becomes Zimbabwe, Haiti, or North Korea, each of which is in almost utter collapse.
No wonder that the markets continue to tank: accumulating burdens with no prospects of relief in sight.
If you're planning to take an all-day hike, you'll want to take some essentials: a Swiss army knife, some snacks, a compass, and a few other things, depending on where you are and how long you'll be out.
But if you're only going to be out for a day, there's no need to bring a tent, sleeping bag, cooking gear, and waders (unless you're going fishing). That stuff would just weigh you down.
There's a sweet spot between carrying too little and too much, depending the nature of the trip and what the hiker is willing to risk lacking versus unneccessarily lugging around. Too little can leave you in a bind, while too much slows the hiker down and makes the journey less pleasant.
So too with government and the productive sector. The core functions are right there in the Constitution: national security, courts for adjudicating disputes, regulating money, preventing restrictions on intrastate trade, and so forth. The benefits far outweigh the burdens for these.
Corporate welfare, earmarks, and the criminalization of just about everything represent the dead weight. The benefits for the few special interests are dwarfed by the burdens for the rest of us.
You can also get too much of a good thing--like a hiker with 50 pounds of food or a government that maintains armaments far greater than necessary to ensure self-government and the protection of vital interests. And there's the grey area.
But as the government burden increases, the private (productive) sector strains more and more under the weight, its (metaphorical) steps slowing. Hong Kong becomes the United States, which becomes Germany, which becomes India, which becomes Zimbabwe, Haiti, or North Korea, each of which is in almost utter collapse.
No wonder that the markets continue to tank: accumulating burdens with no prospects of relief in sight.
Wednesday, March 4, 2009
Fairfax Budget Blues & School Choice
The County of Fairfax in which I now live is facing large budget deficits. I've just started to go through the Proposed FY2010 Budget, but I was struck by this image of proposed expenditures.
Spending on schools is a huge portion of the budget: $1.79 billion, or 54% of 3.31 billion, and that figure may exclude some relevant costs.
The projected enrollment for the current 2008-2009 school year is 168,384. If enrollment doesn't change that much, that works out to almost $11,000 per student per year.
Some have touted vouchers and education tax credits as the silver bullet to education quality problems, but they seem to be overlooked in budget discussions. We usually assume that spending less gets you less--and shortchanging our children's futures is obviously unacceptable--but isn't it possible that at least some of the spending isn't adding much to their education?
Andrew Coulson over at Cato crunched the numbers to see what would happen if Illinois, Texas, Wisconsin, and New York adopted an education tax credit, and he finds massive cost savings.
If savings in Fairfax County are anything comparable, something like this could take care of the budget crunch, improve choice, and enhance educational quality all at once. At least it's worth a look.
More budget analysis to come...
Spending on schools is a huge portion of the budget: $1.79 billion, or 54% of 3.31 billion, and that figure may exclude some relevant costs.
The projected enrollment for the current 2008-2009 school year is 168,384. If enrollment doesn't change that much, that works out to almost $11,000 per student per year.
Some have touted vouchers and education tax credits as the silver bullet to education quality problems, but they seem to be overlooked in budget discussions. We usually assume that spending less gets you less--and shortchanging our children's futures is obviously unacceptable--but isn't it possible that at least some of the spending isn't adding much to their education?
Andrew Coulson over at Cato crunched the numbers to see what would happen if Illinois, Texas, Wisconsin, and New York adopted an education tax credit, and he finds massive cost savings.
If savings in Fairfax County are anything comparable, something like this could take care of the budget crunch, improve choice, and enhance educational quality all at once. At least it's worth a look.
More budget analysis to come...
Sunday, March 1, 2009
Free Market Environmentalism
Utah Governor Huntsman has been calling for Republicans to be more moderate on environmental issues, apparently putting him at odds with the bulk of his party.
What is it about environmental issues that so turns off conservatives? After all, many of them are outdoor recreationists, and all of us value clean air and water.
Most likely, conservatives recoil from the redistributionist, anti-market, anti-corporate, and collectivist strains within the modern environmentalist movement that impose bureaucratic micromanagement on private decision making.
Current environmental statutes impose heavy burdens on the private sector, but some of them have significant public benefits as well--especially those that reduce air pollution.
Is it possible to have more effective protection of air, water, soil, biodiversity, and climate while reducing the costs of those efforts? Absolutely yes.
What to do:
- Transfer control over local problems to local authorities. It makes no sense to restore land to agriculture quality (as Superfund requires), when it's intended to be redeveloped into a factory, a shopping center, or a parking lot. When 'federal' money is at stake, no one cares about the cost, but more local decisions would better weigh costs and benefits.
- Replace current pollution control requirements with a pollution fees. This allows emitters to decide how best to reduce pollution and gives them a continuing incentive to reduce emissions. To maintain international competitiveness, the funds from these fees should be used to reduce taxes on investment.
- Address climate change first through 'no-regret' policies, then through emissions fees that pay for reduced taxation of savings and investment. No-regret policies are good economic policies that have the side benefit of reducing greenhouse gas emissions. These include ending all subsidies for agriculture (including fishing and forestry), energy (fossil AND alternatives), and rural and coastal development; removing all trade barriers; encouraging adoption of tradable water permits, especially in the West; and moving towards privatization of transportation infrastructure.
This list is hardly comprehensive, but it's a good starting point. Current laws to protect the environment are horribly inefficient and counterproductive, and many bear the stamp of political opportunism rather than sober policy analysis. Environmental protection can also be fiscally responsible and economically wise.
Governor Huntsman is quite correct if he means that Republicans would be wise to adopt a free market environmentalism.
Democrats could keep their political edge on those issues by beating Republicans to the punch on adopting incentive-based environmental policies. Of course, that would mean giving up micromanagement of the private sector.
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