Brad DeLong's Semi-Daily Journal (2004)

OK, fill me in, here. The Kerry plan offers to cover bills over $50k, taking the burden off of EMPLOYERS? Yes? So tax payers will foot the bill for those who have (or recently had) jobs, when the bills become large, but not for those who don't have jobs? Is there a provision for health care for those who aren't employed, or whose employers don't provide health care? I have no objection to improving the system of employer-provided health-care, as long as good health-care is not something only available to the rich and the employeed.

So Kerry wants to bail out the insurance companies, another step forward in American socialism for the rich -- feeding the sparrows by feeding the horses, as Lenin used to put it.

What this misses is that the whole point of the operation is to get rid of the insurance companies. The assumption is that sickness is a largely blameless and random event, and hence its cost should be born socially. Society is the insurer. Private companies trying to make a profit off this function should butt out: they are not needed, and hence are parasites.

There doesn't have to be any question of socializing medicine. On the Canadian "One Payer" principle, all you're socializing is the insurance function.

K Harris writes:
>
> OK, fill me in, here. The Kerry plan offers to cover bills over
> $50k, taking the burden off of EMPLOYERS? Yes? So tax payers
> will foot the bill for those who have (or recently had) jobs,
> when the bills become large, but not for those who don't have
> jobs?

I'm not sure I understand your problem here. I saw this as a pretty straightforward way to make sure that more people can get insurance through their employers than do currently. One proposal you didn't mention is the tax credit for 50% of premiums for small businesses. *That'* pretty important by itself. Then the cost of insurance (in a competitive market) will go down when insurers don't have to cover as much of the truly expensive cases as they do now. They still have some exposure to those costs (and an incentive to limit them), but the situation would be much improved. More people would have access to health insurance, and possibly access to better preventive care.

Now, I don't see this doing anything much for the unemployed, as you point out, but this really boils down to what we need to do for the poor unemployed since the rich are, well, rich. For the elderly, we have a system in place, and for the younger poor, we have the (problematic, I'll agree) Medicaid system. I think you could argue that those systems need a lot ofwork, too, but what I like about the Kerry proposal is that it doesn't require the complete solution to other very thorny problems to do some real good. And given the fact that benefits costs are a significant deterrent to hiring these days, I think you could argue that the proposal could do at least some good for the unemployed by putting them in a happier category. And one that would now be more likely to get access to insurance, to boot.

Jonathan,

The problem is the notion that health-care and employment should be linked in the first place. If I recall correctly, the move by employers to offer health insurance was an effort to assume a non-taxed cost that employees would otherwise have to pay for with after-tax money, in order to exploit the wedge between the pre-tax cost to employers and the after-tax cost to employees. It was a tax dodge.

The system became institutionalized, and also, for a considerable period of time, interfered with the feedback between the cost of and demand for health-care, which may have something to do with the rise in health care costs. Those without an employer-paid insurance benefit have to compete in the same inflated market as the employed. The unemployed have problems enough.

If linking health-care benefits to employment has caused multiple problems (lack of coverage for those who lose employment, or never had any, disconnect between costs and benefits that has led to medical care cost inflation, excessive paperwork, bureaucratic interference with the delivery of health care), then it seems reasonable to question whether we might want to consider another approach.

There is a natural tension between the government (ie, all of us) is paying for the expensive medical care and individuals' freedom of choice. IE, your smoking is my business because I will have to pay for your chemo.

At what point do I get to slap the doughnut out of a fat person's hand, or spray a smoker with a garden hose? At what point do we all wind up in our front yards, doing calisthenics at 6:00 AM to lower "everyone's" demand for medical care?

I'd like cheap health insurance as much as anyone, but how to allocate the negative externalities of unhealthy lifestyle choices needs more discussion than it has gotten.

The solution also misses a basic point of health care costs, that the catastrophic costs that he is proposing to cover is where most of the money is spent.

Around half of lifetime expenditure on health care occurs in the last 18 months of life.

The things that work best (give the greatest extension of life), proper prenatal care, vaccinations, preventative care, are relatively cheap.

It's the "dying with 20 tubes stuck in you" that is causing the cost escalation.

Economics is at its core is about allocating scarce resources, and by subsidizing the least efficient expenditures, you encourage those inefficiencies.

FWIW, I've always thought that the solution to the upcoming Medicare crisis is to make sure that any shortfall is covered by estate taxes.

Much of Medicare spending seems to subsidize generational transfer of assets, something that both the founding fathers, Warren Buffett, and I are all leery of, more than preserving quality of life.

K Harris writes:
>
> The problem is the notion that health-care and employment
> should be linked in the first place.

OK, that is also a problem. It isn't, however, a really easy problem to solve from a political standpoint. The thing I like about the Kerry proposal is that I can (easily) see how it could pass, and I think it could do some real good, especially for people in jobs that currently do not come with insurance either because those costs are too high for small employers, or because the person is too "at risk" for costly intervention.

> If I recall correctly, the move by employers to offer health
> insurance was an effort to assume a non-taxed cost that
> employees would otherwise have to pay for with after-tax
> money, in order to exploit the wedge between the pre-tax
> cost to employers and the after-tax cost to employees. It was
> a tax dodge.

And now, given the fact that health insurance is becoming less and less affordable as a fringe, a prime example of the law of unintended consequences. (By offering health insurance as a "free" fringe benefit to the employed, we end up with a system where nobody can afford insurance.)

I think you are right that the current system has some deep flaws in its conception. But I don't think we are too likely to fix those until we have programs in place that build a bit of trust in the government among the citizens. So if the program works out, more people will be insured, and those who are insured should have fewer hassles with some high-dollar interventions. In other words, the government will have made the system better. No, I don't think it's the complete answer, but it's a foot in the door, and a way to find out whether something more ambitious is also likely to work. (Or, put it this way: if the feds can't run a simple re-insurance operation correctly, I'm not sure how much confidence there would be that they could do anything better.)

I'm all for "socializing the insurance function" as David Loyd-Jones puts it. (People who want and can afford it should be free to buy any ADDITIONAL coverage they might desire, of course.)

I just think we should also VERY seriously pursue couple of other "systemic" reforms first--or, at a minimum, concurrently with that endeavor.

Surely a sizable majority of citizens (outside of the health care professions) could, would and should endorse an EFFECTIVE regime designed to "weed out" incompetent and/or unethical practicioners and to sanction and/or shut down sub-standard facilities. (If the affected professions can't or won't do that job themselves, some regulatory body or bodies should be constituted, authorized and obliged to do it for them.)

Declaring a "war" on the sense of entitlement which has infected the major drug (and medical device) makers would probably save us all some bucks too.

We MIGHT, for instance, take public advantage of the abundance of "R&D" expertise already available in publicly supported medical schools, labs and etc. by encouraging some or all of them to offer the private sector "players" some real competition in the business of developing, testing and licensing new drugs, devices, treatments & etc.

"I'd like cheap health insurance as much as anyone, but how to allocate the negative externalities of unhealthy lifestyle choices needs more discussion than it has gotten."

Make them pay more for the health care insurance just as those with bad driving records pay more for auto insurance and just as this same group of unhealthy lifestyle types pays more for life insurance.

If I have health insurance, that's a good thing. If my insurance cost more than it should (say by 25%), that's a bad thing, but it's still much far better than being uninsured.

The unhealthy person is costing me some money, but it's not like he or she is to be envied. I feel good, he or she is sick all the time.

What are the numbers? I said 25% above, wild guess. Chronically sick people are the problem, economically, and I don't know how much that correlates with unhealthy life styles. Some people are just unhealthy, and someone who dies at home of a heart attack can cost nothing at all. Type A diabetes is chronic, and very weakly related to lifestyle choices.

The connection between employment and health insurance is a historical accident rather than a logical linkage, but sometimes you've got to start from where you are.

Kerry's idea of the government picking up 75% of the tab over $50K per illness reduces one aspect of the linkage.

And the debate over how much health care one's entitled to is a WAY overdue debate.

Also, I don't consider the costs overwhelming: $257B over 10 years is $26B/year. That's 1% of this year's Federal budget. It's also dwarfed by the per-year cost of Bush's tax cuts, so it's easy enough to figure out how to pay for it.

This hits another point. Most malpractice suits are filed because the victims cannot afford the costs to repair the damage caused. For instance, OB-GYN have very high rates because, if they injure a new born, there can be a lifetime of medical bills to pay. If the govt. picks up the tab, then this should limit malpractice suits.

If nothing else maybe making a proposal of this sort can at least get some sort of reasonable discussion of this massive problem on the table.

Right now all we have is people ignoring each other while the problem gets worse and worse.

This proposal does address one of the major problems of the current system the problem of adverse selection. Insurance is suppose to be a way to pool risks. But our insurance systems is working very hard to push all the serious risk off on someone else.

Actually, the system of insurance being a fringe benefit predates the tax advantage story. It actually started in WW II when defense contracters -- and other large firms -- used insurance as a way of getting around wage-price controls and use insurance as a way of attracting labor without giving wage increases.

Is that really David Lloyd-Jones making those comments about insurance companies? I've read you post on this site with a great deal of respect over time, but those comments are off the wall.

Fire insurance, auto insurance and health insurance are all very similiar. With regulation the private sector has been pretty good at pooling risks, the economic role of insurance.

Your comments seem way out of character.

HH -- actually there is some pretty good research that smokers, over-weight people and other people with what you call anti-social life styles actually cost the health sytem less because they die younger.

If the big problem is what we spend on the last six months of life it does not matter if an individual smokes or not . 100% of the population will experience the final few months of life and a certin percentage of those will be very expensive.

I've heard for years -- but not seen the actual data -- that the tobacco companies make a fundamental flaw in their original defense of court suits against them. Rather than trying to claim that smoking was not bad, they should have admitted it at the start and showed how they saved the state & local governments money on taking care of smokers.

You don't understand how the devil is in the details until you look at a debate like this from the standpoint of a long-time healthcare employee or patient.

For example, society already pays, one way or the other, most catastrophic medical expense. The insured hasn't put enough money in the system to pay for it, and the uninsured don't usually have $3-400,000 sitting in the piggybank for a rainy day.

As for those "unnecessary tests", I've never met a doctor who ordered one. Doctors order tests to avoid mistakes, and it's not hard to do the math on that one.

This "debate", generally, seems to consist of two parts wedge politics and one part anecdotes. Anyone who actually suggests a solution seems to become a sort of sacrificial anode, and I for one am amazed that any of the policy wonks stick with it instead taking another number-crunching job they could undoubtedly get.

Almost all of the proposals that make it into the policy arena carefully avoid any discussion of several key points: 1) The monopoly of the AMA, which includes how many students are admitted to med school, 2) an American lifestyle based on cars and suburbs, and 3) An FDA that is essentially run by the industries it is supposed to regulate.

Of course, if we were really looking for a solution, Canada has one. Not perfect, but way ahead of whatever's in second place.

PS- the fire insurance, auto insurance, and health inurance industries have few similarities.

For example, fire underwriters have been working for a century to rewrite building codes and enforce them, and key rates to fire protection districts. If they ruled the roost, personal lifestyles would be regulated cradle-to-grave and almost everyone would pay a slightly different rate. On the plus side, clinics might be as common as fire stations.

Automobile insurance is entirely different. A huge portion of the business is insuring vehicles bought on time, and another large part is manditory liability coverage. The consumer has no choice about these coverages, and it shows in the way the consumer is treated by the insurance companies. For example, you pay almost twice as much to insure two cars, although you can't actually drive more than one of them at a time.

The rest of the proof is left to the reader and I'm sure it won't take most of you much time to think of more differences.

I just want the same medical insurance program Congress has.
On an additional note, I read somewhere about a proposal to allow business to write-off 100% of insurance premiums paid for employees. Is this good or bad?

Spencer,

Thanks for the kind words.

Fire and auto insurance are not the same as health insurance: 100% of everybody has a body that needs to be looked after, and pretty much everybody has essentially the same risks. In particular we are becoming more and more aware of the extent to which ill-health is a genetic inheritance, and nobody gets to choose their genes. Why should insurance companies make money off the bad luck of a few people's ancestry?

Sure there are some dopes who smoke tobacco -- but you get them to pay the costs by taxing the tobacco. (In fact tobacco smokers are probably subsidising the rest of us, because they die soon enough to help pay our pensions -- not because we pick on tobacco smokers but because we systemically pick on the poor, and tobacco is a disproportionate part of the consumption of the poor.)

Similarly the medical costs of automobile use are built into auto insurance. There may be some trades -- think lead miners or construction workers -- who overconsume health insurance in the countries which have socialised the insurance function, but it doesn't add up to a hill of beans compared to the roughly 5% of GDP that the US wastes on the sheer parsitism and blundering of its inane health insurance jungle.

Any thoughts on the impact of high drug costs on the cost of health care? I've read a number of articles recently discussing how the costs of drugs are inflated by repeat patenting of the same formulas, of public sector assumption of testing costs, and, most importantly, marketing of drugs to doctors and patients alike. Often new, more expensive drugs (still under patent) are prescribed when older drugs do as good or essentially as good a job.

I'm not an expert on this, so I always have trouble deciding which reports to believe. Generally, though, the examples make sense...

If I read this correctly, that _the whole_ (?) bill is only footed if it exceeds a certain amount, this would create a huge moral hazard.

Even if you don't know that the bill will only be paid if you run it high enough, your medical professional will advise you of that with little doubt.

avedis: "Make them pay more for the health care insurance just as those with bad driving records pay more for auto insurance and just as this same group of unhealthy lifestyle types pays more for life insurance."

The problem with this is that it comes down to arbitrary and hard to enforce (and justify) choices. As much as you will typically get a "bad" driving record for easily ticketable things like driving slightly too fast through speeding traps, and usually not for equally dangerous things like driving too slow, cutting off others' safety distance, etc., how do you distinguish between drinking a little bit and too much, casual hiking and mountain-climbing, etc. For one thing, you don't want to go by things that are easily measurable in health deterioration, as you will quickly get into the "preexisting condition" area, and you don't want to punish one supposed dangerous lifestyle (having the daily beer, extreme sports), but not equally bad behavior that is mainstream culture (working too much, sleeping too little, bad office posture, ...).

If the tradeoff is between punishing lifestyles arbitrarily (not for good scientifically proven reason) and slapping a surcharge onto everybody, I'd say I go with the latter. Otherwise, you will you make the distinction between a "fair" case (smoker) and an "unfair" one (worker in hazardous conditions, or somebody who has to work with smokers)?

CM, Point taken. However, the actuaries are damn good at what they do. If there is a statistically significant relationship between a life-style variable and increased healthcare costs, the what is the problem?

Regarding the diference between healthcare insurance and other forms of insurance mentioned in above posts.......the other forms of insurance are limited to what the purchaser can afford (his wealth level, the value of the object insured).

But with health care insurance people purchase it to gain access to goods and services they would not otherwise be able to afford. This plays hell with risk assessment and cost projections because we live in an era where consuption of health care is increasing rapidly on the intensive and the extensive margins. More people can be treated for a greater number of conditions. What is basic health care today was experimental yesterday and unheard of not long before that.

If I own a jeep wrangler that costs $23,000 and I have it insured, the insurance company knows the worst case scenario; it gets totalled and they pay me replacement value of $23k.

I purchased the jeep and the insurance because somehow I came to some utility maximizing formula and I could afford the jeep and the insurance.

If it's totalled I don't get to replace it with some vehicle that I could not afford, say a Jaguar.

Health insurance is not like that. I can pay in my premium (expected benefits + admin. cost+risk + profit) and end up collecting benefits far exceeding my income and net wealth.

This is the problem; especially when combined with rapidly increasing advances in thechnology and associated rapid increases in consumption.

Because there is more to consume and because insurance causes consumers to be able to gain access to goods and services beyond what they could normally afford, consumption increases and as consumption increases there are further increases for the financing of new technologies.....and the upward spiral of health care expenditure continues.

"If I own a jeep wrangler that costs $23,000 and I have it insured, the insurance company knows the worst case scenario; it gets totalled and they pay me replacement value of $23k."

Unless you drive it into a bus-queue. $23K won't pay the liability there..

dave,
Right. That type of insurance also has caps as to maximum payout. You pay more for higher caps. You pay more based on driving record and other personal/demographic characteristics. The actuaries can figure out the probabilities pretty well.

The point was that with most insurance you are limited to benefits that you can afford.

With healthcare insurance not only are you not limited only to coverage that you can afford, but people speciffically buy HC insurance in order o gain access to coverage they would not be able to afford...............

I haven't had a chance to look at everyone else's posts, so forgive me if this has already been covered in the thread...

Everyone (including those of my left/liberal ilk) seems to focus on insurance, and not the health care providers themselves. WHAT EVIDENCE IS THERE THAT DOCTORS ARE ABLE AND WILLING TO MAKE REASONABLE COST/BENEFIT CALCULATIONS, OVER THE LONG RUN? As far as I can tell, none.

If health care is to be reformed and made more efficient, it's not enough to look at insurance; the actual system for providing medical care must be completely overhauled.

After 30 years in one part or another of the healthcare industry, I can definitely say that doctors who take Medicare patients prescribe and treat in a reasonable basis.

Presumably this is because they are among the subset that accepts payment limitations. However, this does not mean that they look at the reimbursement tables before prescribing. In fact, I have often seen doctors prescribe what the patient needed, in spite of knowing that their institution would not be properly reimbursed.

In one sense the system must be completely overhauled. The AMA has consistently opposed single-payer, and plenty of other pigs have their snouts in the trough.

The problem, however, does not lie in the personalitities of doctors, most of who are at least as honest and reasonable as automobile mechanics or plumbers.

Your mileage may vary.

WHAT EVIDENCE IS THERE THAT DOCTORS ARE ABLE AND WILLING TO MAKE REASONABLE COST/BENEFIT CALCULATIONS, OVER THE LONG RUN?

Well, for one thing I've had several discussions with my personal physicians over the years about this, as it related to me or my children.

For another thing, I've read stuff in the science press about changing about ongoing research into which tests should be done when.

Who should have a mammogram, or whether some other test is better, is one example. What age should they start at, how frequent, etc. It's all done as a cost-benefit analysis.

In a couple years I'll turn 50, and I will have a colonoscopy (oh joy!). Why then? Because people have looked at the statistics and done a cost-benefit analysis.

All these are subject to change, as we learn more, and discover mistakes. And you might want to disagree with the assumptions of such studies. But I think the position that cost-benefit analysis isn't carried out is not supportable.

Well studies have shown considerable variations in physician standards of practice; especially from region to region. That is to say that a patients with identical medical conditions will receive greatly varying treatment from their physicians depending on where they live, what hospital they go, what doctor they see, etc, etc.

These variations of practice don't appear to have a sound scientific basis. Rather they are idiosyncratic, dependent on physicians' education, peer pressure, what equipment/technology is prominent in their facility, etc, etc.

However, the variations in practice DO COST MONEY! The variations in practice represent risk to insurance companies; again, especially with the rapid introduction of new technologies.

Risk = cost to consumers.

Now, a single payer system may or may not reduce the variations in patterns of practice. Physicians still have more than a bit of the God complex and they are loath to have anyone, let alone an insurance guy, tell them how to practice.

Even if it can be demonstrated that their practice does not pass a peer review cost/benefit analysis test. Sometimes even when an insurance guy can scientifically prove that a less costly approach is at least as good as what they have been doing.

There is much wrong with physician culture.

Finally, because insurance removes the cost of purchase at the point of purchase the patient has no incentive to perform a cost/benefit analysis. Nor does the physician. The patient wants the best and the most and the physician - living by the moto "do no harm" - prescribes.

Jay wrote,

"Well, for one thing I've had several discussions with my personal physicians over the years about this, as it related to me or my children."

I don't buy it. My own (anecdotal) evidence is mostly the other way.

One important fact is that there's very little temporal continuity in health care. If the system were rational, each individual would have a portable health care record that would include risks the individual faced (due to genetics, lifestyle, etc). What's the situation now? I, for one, have my health care record scattered all over the US.

"For another thing, I've read stuff in the science press about changing about ongoing research into which tests should be done when."

Sure, *some* people conduct such research. Whether and how quickly it becomes accepted practice is another matter entirely.

For example, there is some kind of experimental bone marrow transplant treatment for breast cancer. (I guess, but can't recall for sure, that it's for particularly nasty---metastatic?---cancer, and the transplant is accompanied by an extra huge dose of chemo.) Because it's difficult to enroll patients in well-controlled trials, it took a long time to get statistically valid evidence on this particular treatment. But when the study *did* come out and showed zero statistical benefit to the treatment (which is far more expensive than the standard chemo regimen), what did the doctors do who specialized in it? Rationalize why they should continue providing the treatment, of course. (In this case, IIRC, insurance companies were on the right side and began refusing to reimburse.)

I mostly agree with avedis's comment. I do think that having higher copays will increase the efficiency of the system, but I don't think price signals alone are sufficient---most people (and many physicians) are simply too ill-informed for the system to work efficiently.

If you mix private-pay, HMO, and Medicare in your analysis of prescribing patterns you get garbage.

Private pay docs deal with the "sky's the limit" class of consumer. The "patients" (of course, they're not patient at all) expect and receive the "best" of care.

The same doctor might also have Medicare patients who get an entirely different outlook. Because medicine is inherently dangerous, this isn't a bad thing. IMHO you'll get better care at a teaching hospital as a Medicare patient than you will at a private hospital as a private-pay patient.

You don't get anything at all if you try to generalize about single-payer insurance on the basis of private-pay prescribing practices.

"It's expensive: $257 billion over 10 years."

My, oh my! We spend that sum in merely a year when it's for something worthwhile, like a war.

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"If I own a jeep wrangler that costs $23,000 and I have it insured, the insurance company knows the worst case scenario; it gets totalled and they pay me replacement value of $23k."

Unless you drive it into a bus-queue. $23K won't pay the liability there..

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