5:32:32 PM  [permalink]  comment []  

Me (April 15)

I definitely have a libertarian streak, as does just about anyone who grew up in Alaska. I was very into libertarianism in my early 20s, and to this day I find the ideal world of a purely individual world with a purely free market is a useful concept. I tend to think of it as ground zero from which to depart.

My departures from libertarianism are basically three: (1) the libertarian world they imagine doesn't even exist in the absence of government -- to enforce things like property rights, etc. Thus, a completely purist libertarian view is absurd, and it's just a question of how much or how little government intervention you want. (2) Although the free market works well for many things, there are others that really are market failures -- monopolistic behavior, common resources, etc -- where the invisible hand goes bad. (3) There is social value in coercing a certain amount of redistribution in the interest of greater equality and greater perception of opportunity, even if it comes at a cost of economy and personal liberty. Again, the question is how much is advantageous.

That said, I do tend to incline toward civil liberties and free markets. I just think the purist libertarian view, which imagines a tidy world in which everything can be reduced to a simple individualist equation, is naive. (And I don't like that Ron Paul is strongly pro-life, though I respect that he favors leaving it to the states in spite of his belief. That's the same as my position, from the other side.)

Me (April 15)

We definitely come at this from a different background, though I don't think we're all that far apart in where we end up.

I do agree with you about health care, by the way. The U.S. system is dreadful, but largely due to the fact that it is not market-driven. A single-payer would harness market forces far more effectively than the byzantine maze of indirect payments we've got here.

OK, for starters, the health care system in the United States is not a free market. A free market goes like this: Consumer wants to obtain product. Various sellers offer product at various prices. Consumer examines these and considers how well they match what he wants and what price is asked. If he finds a product which he likes at the price asked, he makes the purchase. If there is more supply than demand for a product, prices will go down and thus motivate more consumers to buy; if there is more demand than supply for a product, prices will go up and thus motivate producers to provide more supply. Prices thus become an effective mechanism for allocating resources to better meet the needs and desires of the population.

This is a good system -- not because of any metaphysical virtue, but because it works. It is utilitarian.

The essential feature in this model -- and this is a key point which I hope to get back to after a lengthy excursion -- is that the person making the purchasing decision is the same person who has the interest in the product and is going to pay for it. Every decision-maker who stands between the consumer and the purchasing decision adds inefficiency to the system. If I want to buy a car, I know best what features I care about and how much they're worth to me. I bring this information to my purchasing decision and the market is thereby informed. If I go shopping for a car and I know my Dad is going to pay for it, I'm still going to try to get a decent deal, because I don't really want to waste my Dad's money either, but I'm one step removed from an efficient buying decision. If it's going to be paid for not by a real person like Dad, but by some nebulous "the company", then I'm even further removed.

Now let's look at the market for health care. What happens when an individual makes a purchasing decision? First, he chooses a job, for reasons which have little or nothing to do with health care. Then his employer chooses an insurance company, for reasons which have little to do with the one employee's best interest. Then the insurance company chooses a medical provider, for reasons which have little do with the one employer's best interest. And then the medical provider provides the health care. We are several steps removed from an efficient market decision. Furthermore, at every step there are oodles of regulations interfering with any sort of free-market pricing or real competition among providers. This is what I mean when I say it is a "byzantine maze of indirect payments".

But even that is not the most important point. The fundamental problem with the entire debate over health care policy is that we are not properly identifying who the real consumer is. We are assuming, for the purposes of analyzing market forces, that the real consumer is the patient. To a large extent, it is not.

Let us imagine a libertarian world where there really is no government regulation interfering with health care. Suppose that John Doe decides that he isn't going to bother paying for insurance because he'd rather save his money and take his chances. Then one day he falls off the roof and breaks his neck. He hasn't saved up any money to pay for someone to rescue him, so he dies. OK. That might sound like a bad situation to you (which is ultimately my point) but it's not a market failure. John has made a rational purchasing decision. In retrospect it seems like a dumb one, but he's the buyer and it's his choice. I think a lot of people's spending decisions are stupid, but it's their decision.

Now let's take an even stronger example. Suppose that some poor family wants to have medical care, but simply can't afford it. It's not that they've decided against medical care, it's simply that they have a very limited amount of money and it's all being used up for more immediate needs like food, shelter and clothing. Now suppose the kid gets appendicitis and needs an operation. The family can't afford to pay for it. So instead the kid dies. Too bad.

This is where our different backgrounds make a difference. To you, "free market" just means greedy corporations ripping people off, so it's easy enough to conclude that this just proves how the free market doesn't work. To me, the free market is a way of describing the world, so I accept the picture and ask what is the missing information here.

The missing information is that our society is not willing to tolerate the kid with appendicitis dying, even if his family can't afford to pay for it. We're also not willing to let the risk-taker die when he breaks his neck. We might berate him for making a decision that we think was stupid, but if he insists that it was his choice and he understands that he has to pay the price for his bad luck, we still aren't willing to accept that. We will insist on having him be treated nonetheless.

The reason we insist on that is because we as a society have an interest in making sure that individuals in our midst get cured. Sure, there may be a few ingrates who say, "let all the poor people die, they're just vermin anyway," but they are the exception. The consensus of our society as a whole is that letting people die is unacceptable. Even when they can't afford to pay for it. Even when it's their own damn fault.

This is not a policy debate. This is a fact. You can argue about whether we should make people responsible for their own health, but the reality is that when it comes right down to it, we won't. A great deal of the inefficiency in our health system comes from denial of this fact. We try to give people choices, and we pretend that they're going to accept the consequences of their choices, but ultimately we step in and pay for it, and often as not we spend more money than necessary in doing so.

What that means to the free-market view of health care is that we need to let go of the illusion that the patient is the only consumer. For basic health care, the real consumer is society as a whole, and the nearest representative of society is the government. As I so laboriously pointed out above, what makes a free market efficient is the nearness of the purchasing decision to the real consumer of the product.

Now then, to refine the point, society as a whole does not have an interest in all medical care. There are a lot of things we're willing to let people do without if they are unwilling or unable to pay for them. We're willing to let people have crooked teeth, and we're willing to let people go without all sorts of marginal procedures which are nice but not essential. We're willing to let people suffer through a less comfortable procedure in less pleasant surroundings, so long as they're equally efficient in the actual curing. We're willing to let people die of rare and/or severe diseases which are extremely expensive to cure. We're willing to let people go without an expensive procedure which has only a small chance of success. And we're willing to let people who are really old and sickly die of whatever they have now when curing it just means they'll die of something else soon after.

To fix the health care system, we need to quantify what levels of medical care truly are the interest of the state and which are not. This means setting limits on what procedures we cover and what we don't. It also means separating the costs of basic medicine from added benefits that most patients might prefer to have along with it. It's an unpleasant decision which most people don't want to face, because no one wants to say, "You know, a heart transplant for an overweight 75-year-old man just isn't worth the price; I don't think we should cover that." No one wants to draw the line, so we end up with a muddle. Of course the patient wants the procedure and of course the doctor wants it, but they're not the ones paying for it. That's what happens when the purchasing decision is taken away from the entity that's paying it. Bad decisions are made, and we're stuck with the bill anyway. It's like when I buy a car knowing that Dad will pay for it. I choose to have a bunch of extras that aren't really worth the extra cost.

Once it is determined what level of medical care is the state's interest and what is the individual's, each buyer can set about buying it most efficiently. For the extra benefits, individuals can choose to buy them or not. If they don't, tough luck for them when they have to do without. Sure, it means rich people will get some things that poor people don't, but that's already true for numerous products. For the basic health care which government assumes responsibility for, the government should use its market muscle to get the best possible deal out of the medical providers. You and I agree on this. You said, "Use the leverage of the government to negotiate for better prices." I said, "A single-payer would harness market forces far more effectively."

A huge part of the problem -- ie, the market inefficiency -- in the U.S. system right now is that so much of the public purchasing is distorted by the pretense that individuals are actually paying for their own health care. That's why we get all the mess about bad risks and good risks and struggles about who is going to subsidize whom. The good risks don't want to pay for the bad risks, so they fob it off on the HMOs, who fob it off on the insurance companies, etc, ad nauseam. Once it is acknowledged that a single entity, the state, is determined to purchase a certain level of care for everyone, high-risk and low-risk alike, all the energy currently wasted on trying to pass the bill on to someone else can be conserved.

I should probably stop there, but I feel a need to address the question of health insurance. A free market in insurance is almost a contradiction. Insurance is, for the most part, obsolete. What is sold today under the name of insurance is really something else. The insurance industry today does not really sell a product at all. It is a vehicle for redistributing wealth among the population, a service it provides to the government and for which it is allowed to collect a fee. You might say that the insurance industry is permeated with government regulation, but without regulation it doesn't even exist. It's like a fossil. The regulation is the material that formed itself around the original skeleton, which was insurance. But the skeleton is gone, and all that's left is the accretions which remember its shape.

OK, so I'm exaggerating. Insurance is not completely dead, and a few forms are even still lively, but it's definitely not what it used to be. You illustrate the point when you talk about which sort of individuals "the market" wants to insure and which ones it doesn't. Your use of the "the market" as if it were a specific entity within the system is central to the confusion. Different organizations want different things -- the doctors, the HMOs, the insurance companies, etc. The system is so muddled with conflicting interests that you can't just assign a single motive to the whole thing.

But let's consider the insurance company. The insurance company does not sell health care. It sells assumption of risk. An insurance company says, "I think there's a 0.1% chance that you will contract an illness which will cost $70,000 to cure. Therefore, if you pay me $70 (ie, the price of the risk) plus this additional small fee, I will agree that if you do contract that disease, I'll pay the $70,000. Obviously, the equation is more complicated than that, but you get the point. The insurance company is making a bet with you, and because it is taking the side of the bet where the risk is harder to manage, it expects you to pay a premium for it.

This is insurance in the classic sense. The insurance company does not care who it insures any more than the casino cares whether you place your money on 7 or 22 at the roulette wheel. The odds are all worked out so that it balances out with the actual probabilities, and the house gets its cut no matter what.

Like the casino, the insurance company can only operate rationally when there is quantifiable risk. That is, there is an event which has an element of chance involved but the measure of that chance can be reasonably estimated. The premiums that the insurance company collects are the price it earns for accepting uncertainty. But suppose there is no uncertainty. Suppose that there's a new roulette wheel on which every slot is labeled "20". The casino always adjusts its payouts to reflect the odds, so the 20 will be re-priced so it pays even money. As a bettor, you can now put your chips on the 20, knowing that you'll get them right back again. There is no game, because there is no uncertainty.

In the world of insurance risks, uncertainty has not disappeared altogether, and it never will, but is much less than it used to be, and it is continuing to decrease. In theory, when an insurance company sells you a policy, it calculates the expected cost based on risk factors, and it sets the price accordingly. In reality, for most forms of insurance, the company can calculate the risk to a greater degree of certainty than its prices will reflect. For the most part, this is because of regulation. If the insurance company knows that a left-handed driver is 5% more likely to die in a car wreck than a right-handed driver it would naturally adjust its prices so that left-handed drivers pay a little bit more for car insurance. But if it were to do that, the left-handed people would raise a ruckus and the government would step in and say that's unfair discrimination and you can't do that. Then the insurance companies say, "OK, fine. If you want right-handers to subsidize left-handers, we're happy to be the institution that makes the transfer, just as long as the regulations are fair so that I don't get stuck with more than my fair share of left-handers compared to the other insurance companies I compete with." And so the state provides the additional regulations to enforce what becomes a de facto cartel among the insurance companies.

(By the way, I have no idea if left-handed drivers really are a higher risk. I've heard it anecdotally, and it serves as a good example whether it reflects reality or not. I think it's likely that there is indeed some correlation to risk, just as there is with just about any factor.)

The same sort of thing happens with medical insurance. There are an awful lot of risk factors that we have the technology to measure which the state will not tolerate as a factor in pricing. For any given applicant, the knowledge exists for an insurance company to do a very thorough examination of the individual's numerous risk factors and set a unique price for him or her which exactly matches as much of the risk as can be measured. But the state won't stand for this, because a great many of these factors are things which the state insists are private and cannot be asked, or are unfair to discriminate about. (Discrimination, incidentally, is the very essence of insurance pricing.)

So the state interferes with the natural pricing. The extent and the nature of the interference varies by state. To whatever extent a risk factor is known but is not allowed as a pricing factor, the insurance company becomes a transferer of wealth from the low-risk individuals to the high-risk ones. To the extent that the company has any say in who it can accept as a customer, it will prefer to take only the low-risk individuals. This is the cherry-picking that you complain about, and individuals care about it very much. The insurance company actually doesn't care that much. It has to cherry-pick if it can, to stay competitive. But if cherry-picking is truly and effectively prohibited, that's just as good, because the company is going to balance the risk over the entire pool regardless and charge what the market will bear. If a company has the ability to avoid the high-risk individuals and sell to only low-risk individuals, it will then end up lowering its prices to get those low-risk individuals. If another company takes the high-risk individuals, it will have to raise its prices to pay for them, and all the low-risk individuals will flee. The end result is exactly as if the risk factor were allowed in pricing all along, except that now it's achieved by different companies arranging themselves into niches. It now falls back to the state to decide whether to allow this to happen or to once again step in with regulation bringing us back to the situation where the low-risks have to subsidize the high-risks.

Where people so often misinterpret this situation is in assuming that the insurance companies have an interest contrary to the state's -- that ultimately the insurance companies want to use every price factor they can lay their hands on. Ultimately, they don't, because ultimately it diminishes their product. There is no such thing as insurance for costs which are known ahead of time. If I know exactly when I'm going to die and the insurance company knows it, too, there is no reason for me to buy life insurance. It's like betting on the roulette wheel that has only 20s.

The product that insurance companies sell is assumption of uncertainty. The advancement of knowledge and information destroys uncertainty. When uncertainty is gone, they have no product to sell. The dirty little secret of the insurance industry is that the entire business is gradually becoming obsolete. That's why insurance companies have cooperated with regulators to shift their business so that their real function is redistribute money among their customer pool according to the state's vision of fairness. They have no choice. If they don't they'll be out of business.

Postscript: Never get me started about insurance. I used to work for an insurance trade magazine, and if the topic comes up I'll just go on and on and on. The all-time least popular issue of Benzene 3 was #51, in which I wrote about ten pages about insurance regulation in California. I could have written more, too.

If I were to edit this properly, I'd probably go back and cut about half of it, but that's too much work, so I'll just let it be. Drop me a line if you actually read the whole thing. I'll be curious to know who makes it all the way through.

4:11:00 AM  [permalink]  comment []