Tuesday, March 23, 2010

10 Things You Should REALLY Know About Health Care

MoveOn.Org has a wonderful list of "10 Things Every American Should Know About Health Care Reform"... I say "wonderful", not because it's a legitimate or good list, but because they've kindly taken the time to put everything in one convenient location, making my job easier right now.

Upon reading these 10 things, I feel compelled to discuss them just a little bit.  Ready?  Ok!
1. Once reform is fully implemented, over 95% of Americans will have health insurance coverage, including 32 million who are currently uninsured.
Let's assume this is true even though my guess is that - due to laziness or error, non-compliance or even protestation - it won't be.  Even if it is true, it rests on the single greatest fallacy that has framed the health care "debate" from start to finish:

Insurance ≠ Health Care!!!

I don't know how to stress this point enough, especially since it's going to become a crucial distinction progressing through the end of this list, but insurance is merely one of several different means to pay for health care.  It is NOT the doctors, hospitals, drugs, machinery, beds, linens, nurses, ambulances and asprin bottles which actually constitute health care itself.

So what, right?  If insurance is a means to pay for health care, then aren't all these new entitlements good because they allocate more money to increase the supply of those things?

I suppose if the source of government funding was capturing magic leprechauns at the end of the rainbow, sure...  But in reality... No, supply is definitely going to be declining...
2. Health insurance companies will no longer be allowed to deny people coverage because of preexisting conditions—or to drop coverage when people become sick.
This is the single biggest reason why supply will remain low, and thus why medical costs are sure to go up and real access to health care in the United States is about to plummet miserably.

I've explained all this on this blog before in an essay last year titled "Leeching the System: The false heroics of guaranteed insurance".  Here's what I said then, and what is absolutely just as true today:
"The result of such a foolish policy would be completely catastrophic as more people pass up paying the monthly fees of a health insurance plan when they are well, and instead only jump into the risk-pool when they experience the very type of emergency that we're all trying to hedge against. And because it would be illegal for an insurer to prevent them from doing this, there would be really no way to prevent such folks from draining the entire pool of money such that if and when some of us who've actually paid in got into trouble, there would be less money left to cover our needs, or perhaps none at all!"
Something that people who struggle to grasp the economic realities involved with this legislation still have yet to understand is that radically altering the policy in this way will also radically alter the behavior of ordinary people.  When governments reward certain courses of action and ply citizens with incentives to act irresponsibly, they usually do so.

Not to beat a dead horse, but in the late 1990s and officially by 1999, the U.S. government had created a housing policy that strongly encouraged new building of homes as well as bank loans - backed by Fannie Mae & Freddie Mac, as well as through the FDIC - to low-income, high-risk buyers.  As if that weren't enough, in 2002 the Federal Reserve led by Alan Greenspan pushed interest rates to as low as had ever been done in the history of the country, and the money supply - and thus the ease with which consumers could get loans & credit cards - ballooned.

So what happened?  Government officials got their wish: People built tons of houses!


Of course, we are now living with the consequences of our government's artificially created demand for housing as investors & business owners who radically misallocated their resources over the past decade now must go out of business, fire all their employees and find new lines of work.

The point is, people respond to incentives.  And the incentives in play in post-"reform" America are heavily weighted towards people paying absolutely nothing (or as little as is legally allowed) for health care until they get sick, and then to pass the vast majority of their costs onto someone else.  So that is one gigantic reason why, in fact, supply of health care resources will not be improving as a result of this bill - and an even bigger reason to fear for your health over the coming decades as a new generation grows up with this entitlement and the full behavior shift takes effect.
3. Just like members of Congress, individuals and small businesses who can't afford to purchase insurance on their own will be able to pool together and choose from a variety of competing plans with lower premiums.
Oh my, if only this were going to be true!  If we were going to get health care "just like" members of congress, we would have probably gone with a plan more similar to Rep. Paul Ryan's.  That's absolutely not what we've done here though in any meaningful way.

But this fanciful bit of fiction this is about the mythical "health care exchanges" that the government is now going to provide by 2014 which are somehow going to improve competition. Government mandates never improve competition though... That's as contradictory an idea as I've ever heard!  You can't increase competition by burdening businesses with more regulatory weights which keep out competitors and discourage anyone from ever trying to become one.

It's also amazingly naive to believe that the government is going to be able to successfully implement this kind of exchange no matter what the time frame.  In the meantime, www.ehealthinsurance.com does exactly the same thing and will always do it better than whatever the Federal government eventually comes up with.  I'm still waiting for www.recovery.gov to live up to Obama's promises, and www.recovery.org already figured out how to do their job a thousand times better in half the time.

There is no incentive for government to properly administer such an "exchange", and without market signals, no way it will be able to do so effectively regardless of how hard they might try.

What there are incentives for, on the other hand, will be the heavily politicized representation of health insurance plans where the government officials running the exchange will be essentially shilling for the most powerful insurance companies such as Blue Cross & Blue Shield (which already get special legal exemptions from the government) or Aetna.

In any case, because the health care bill doesn't allow for inter-state or international competition among health insurance companies or even prescription drugs (which is something most other countries do, by the way), the options for competition are exceedingly limited from the outset.

The lack of competition among insurers and health care providers is yet another reason supply and quality of health care will not be going up anytime soon.  And having the government run something that the market is actually already providing today is an asinine waste of resources which will, in my estimation, only ensconce the power of the existing major players in the insurance industry and further prevent smaller competitors from ever gaining traction in this sector.
4. Reform will cut the federal budget deficit by $138 billion over the next ten years, and a whopping $1.2 trillion in the following ten years.
This statement is SO absurd, I'm not even sure where to begin.

The figures in play here are based solely on the Congressional Budget Office's latest estimates which were created as a result of politicians working on the bill using their knowledge of the process to game the system.  They did this by front-loading all of the revenue streams and back-loading all the spending - so taxation begins today, but the parts of the bill that require large expenditures don't get implemented for another 4 years.  They also accomplished this by omitting other massive pieces of spending, such as the $200 Billion "Doctor Fix" to Medicare in order for it not to be reflected in the CBO's cost estimates.

The fact that $200 Billion of spending which was in the first several rounds of health care legislation but is now in a separate bill should tell you that what we're looking at is a shell game, and not a financially solvent bill.  It also wipes out the full amount of presumed deficit reduction, and tacks on $67 Billion more in deficits just for fun.

Even the New York Times noted that politicians spent the better part of a year with consultants trying to figure out exactly how best to game the CBO process:
"Congressional Democrats have spent more than a year working with the nonpartisan budget office on the health care legislation, and as they fine-tuned many of the bill’s various provisions in recent weeks, they consulted repeatedly with its number-crunchers and the bipartisan staff of the Joint Committee on Taxation."
Regardless, as I wrote about just a few days ago, the CBO is incapable of taking into account the behavioral shift that this legislation will undoubtedly cause, as Congress has just passed a bill which promises something-for-nothing to tens of millions of people.  As a result, many millions of people will be all to happy to use up limited health care resources while contributing nothing in return, all the while punishing everyone who wishes to join the market and supply more of those resources.

I couldn't think of a better way to make health care costs explode if I tried, and those costs aren't reflected in the CBO process - which is precisely why the CBO estimates on virtually every other entitlement bill over the last several decades have been way off, just as they will be on this one.

And for that matter - the CBO itself already knows this!  They have repeatedly issued statements to this effect, cautioning people to be mindful of these omissions.  Of course, as they say, it's amazing how easy it is for people to remain ignorant of some fact when their livelihood depends on it...

It is unsurprising, to say the least, that MoveOn.org seems to be unable to grasp the ridiculousness of their various claims.
5. Health care will be more affordable for families and small businesses thanks to new tax credits, subsidies, and other assistance—paid for largely by taxing insurance companies, drug companies, and the very wealthiest Americans.

According to the Wall Street Journal, the taxes & fees are as follows:
  • $2.5  Billion (and more in subsequent years) in fees to the pharmaceutical industry.
  • $8 Billion (and more) in fees to the insurance industry.
  • New Medicare taxes on single income earners of $200,000 or higher and couples earning over $250,000.
  • Increase in wage taxes from 1.45% to 2.35%.
  • New, 2.8% tax on unearned income such as dividends.
  • Excise tax imposed on the sale of "medical devices".
  • $3,000 per employee "fine" on employers of 60 people or more if they don't provide health insurance coverage to their workers.
  • $695 minimum, up to 2.5% of income fine on individuals for not purchasing insurance themselves.
  • And eventually... By 2018, an excise tax of 40% on health plans valued at more than $10,200 for individual coverage and $27,500 for family coverage.
Soooo... Unlike the folks at MoveOn, let's actually think about these funding sources for a second.

The $2.5 Billion for pharmaceuticals and the $8 Billion for insurance companies are absolutely coming out of the consumer's pocket. Contrary to popular belief, insurance industry profit margins are in general pretty low - between 2-4% typically.  So, the idea that they're going to take $8 Billion out of their profits when they could simply raise premium prices is absurd to begin with, but all the more when you consider that they've just gotten the government to give them 32,000,000 new customers who are now required to buy their products by law!  

There is absolutely NO competitive pressure to drive insurance prices down and a dozen reasons to increase prices. Do you really think that this won't apply to middle class and poor people?

What's a bit more hilarious to me personally is the fact that investors, speculators & market analysts have already figured out that insurance companies are going to be the big winners... Every time these health care "reform" bills have gotten any headway, insurance stocks have shot up.  

What's that you say?  That can't be!  This legislation is going to help the consumers of insurance, not the companies!

Oh?  Check this out:

If it were true - as so many people have told me - that health care reform will limit the power and profits of insurance companies, then why exactly are investors & speculators who stake their own money on their predictions betting otherwise?

Now.. The pharmaceutical industry has much, much higher profits (upwards of 25% in some cases), which also only stands to improve with this bill, but c'mon... They can slip a $2.5 Billion price increase into their drugs and no one would even know.  And again, even if people did realize that the price of drugs was higher because they are now also paying for new government fees, what are they going to to about it?  It's illegal to buy drugs from international companies and within the US, Merck, Pfizer and others hold extremely tight patents on most of their products so there's barely any competition for them to contend with anyway.

So yeah, all of those fees are getting passed directly onto you, me, and everyone else who will need drugs and who will buy insurance in the future - which of course, is everyone now, thanks to government.

Same deal with the excise tax on the sale of medical technology, which will be reflected throughout the health care system, starting with doctor's bills & hospital fees and ending (yet again) with an increase in insurance premiums.

Now, while all that will be passed on to consumers eventually, the rest of the funding comes immediately & directly from the American taxpayer!  There's no way anyone can look at taxes on dividends and fines for individuals not buying their own insurance plans as taxes just on the rich, unless we redefine the "rich" as anyone with a 401k or even a rental property.  I even personally think that given the state of inflation and the cost of living in many areas (such as Los Angeles), a household earning $250,000 isn't really in the rich category either...  But I suppose that's a matter of opinion.

The main point here is that everything about this bill pushes higher costs onto individual health care consumers - whether that's through fines & fees or through the increased premiums and health care costs that will be the inevitable consequence of this legislation.  And all of this means that we're  forging ahead full-throttle towards fiscal catastrophe in the United States, and making life harder on hundreds of millions of people through higher costs and taxation.

The only way anyone could think this bill is going to be paid for by "insurance companies, drug companies and the very wealthiest Americans" is by being willfully incapable of seeing any economic exchange beyond its first transaction...

Trust me, you'll be paying for all of this just as sure as you pay for the tires on the trucks bringing produce to your local supermarket.
6. Seniors on Medicare will pay less for their prescription drugs because the legislation closes the "donut hole" gap in existing coverage.
I have no way of knowing whether or not it is in fact true that seniors will pay less.  I suspect that of all the things on this list, this is the most accurate prediction... If only because seniors have what is arguably the best lobby of all time, and are an extremely powerful & wealthy interest group.

But so what?  Medicare was going to go broke by 2019 before this monstrous increase in spending was passed... Seniors today may very well get cheaper prescription drugs, but such entitlements certainly won't be around by the time I'm 65.

The fact that some people are going to benefit today is unsurprising, these things don't happen without certain interests benefiting.  In this case I have no doubt that the AARP is one of them, but the question that needs to be asked is: At what cost to our future and that of our children?
7. By reducing health care costs for employers, reform will create or save more than 2.5 million jobs over the next decade.
Great. A completely and utterly unfalsifiable piece of nonsense.  How again are we measuring jobs "created of saved"?  Oh right... We can't!

Furthermore, even if it were true (which it isn't) that this bill will be reducing health care costs for employers - which would only be possible if businesses reduce coverage for their employees but, of course, that's now illegal - then it absolutely doesn't follow logically that they would use the monetary savings to hire more people.  They might provide bonuses, raises or benefits to existing employees (perhaps they would give them some pay to make up for the widespread salary cuts of the last 2 years?).  They might renovate their offices or improve their facilities.  They might simply take in more profits and pass that along to stockholders... Perhaps, the more responsible companies might even put the money into savings accounts so that the company has more available cash in the event of future economic collapse.

There are plenty of options here that don't involve automatically hiring millions of people... And of course, since the legislation requires that employers either pay hefty fines or pay for health insurance for their employees - and because the rest of it provides huge incentives for costs to increase... This cost savings is entirely fictional and kind of silly to be talking about.

I guess you could consider the bill a "creator" of jobs because of the thousands of IRS workers & other government officials needed to administer the plan... Of course, you'd be discounting the 5,000,000 jobs estimated to be destroyed in the private sector as well.  Never forget that government spending creates nothing - it only takes from some people, wastes a huge chunk of money and then gives the remainder to someone else.
8. Medicaid will be expanded to offer health insurance coverage to an additional 16 million low-income people.
How exactly will this happen?

The Peter G. Peterson Foundation estimates that the actual national debt including all the unfunded liabilities we face in entitlement spending is $56.4 Trillion.  That's $184,000 per citizen.  We are headed for a severe fiscal disaster, and increasing entitlement programs like this only make the day or reckoning closer... When Medicare goes broke, Medicaid isn't that far behind - so how is this a solution, and how long will it last?  My guess is not long.

Of course it's important to help the poor and low-income families who need health care just like anybody else, but this method is completely unsustainable...  And what I don't really understand is that this kind of approach is combating the wrong problem.  As Thomas Sowell once noted, there's no predestined level of poverty.  Sure there's always going to be a bottom 20% - but that doesn't mean that the bottom 20% can't have a standard of living that includes regular access to health care.

But the problem isn't that they're statistically poor - the problem is that health care is too costly.  This seems like a small distinction, but it's an important one... There may always be a bottom 20%, but in America today even that bottom 20% own Televisions and have shelter, yet many don't get health care.  This is a function of high prices, and that - as I've pointed out countless times - is an issue of limited supply caused primarily by government intervention in the market!

So there are legitimately ways to help the poor, and I've written about them dozens of times on this blog.  I won't repeat myself at length here, but the only thing that is going to make health care more affordable & higher quality is if we take away the mandates and government as primary payer and we return the position of the patient as the actual consumer of health care - thus reconnecting price signals and the information provided by profits & losses to real supply and demand.

Once barriers to market entry are removed, and the consumer is actually the one paying the bill - we can watch as competitive market forces push prices down and drive quality and supply up towards equilibrium.  We see it today in Lasik and other elective surgeries not covered by insurance of Medicare and we see it in literally every area of the economy not overrun with legislated mandates and government involvement.

The point though, is that as supply of the real health care resources (not insurance) is increased, costs will come down and direct payments for service and/or insurance premiums will become immensely more easy to afford... Much like the cost of food, personal computers, televisions, cell phones or anything else that the Federal government doesn't throttle to death or pay for.  This will actually help the poor, and it's sustainable!

Anyone left who truly can't afford health care or insurance will very likely be able to either find free clinics or private charities.  But if you are still hell-bent on a government "safety net" for the cases that absolutely can't afford it, then the way to do that most effectively would be through vouchers for insurance and health savings accounts which keep the individual in charge of their own health care decisions.

This would be analogous to food stamps...  The government doesn't force people into a one-size fits all package of food, they merely supply the resources for individuals to make their own choices.  As a result, with food stamps, government involvement hasn't caused huge increases in the price of food since price signals still apply - even for low income people.

That would work... Expanding entitlements won't.
9. Instead of losing coverage after they leave home or graduate from college, young adults will be able to remain on their families' insurance plans until age 26.

I'm tempted to point out that 26 is a little old to be still considered a child and a dependent... But this really isn't the point.

There is absolutely no reason that insurance providers shouldn't be legally allowed this privately and no reason for them not to do it on their own - except that they don't. That said, I suspect (though I have no way of knowing since the insurance market is barely competitive and is mired by mandates & regulation) that they wouldn't allow this even in a legitimately free market.  This suggests to me that there is something extremely cost-ineffective about this idea.  But without an even reasonably free market for insurance - I really have no clue if this is good or bad... And more importantly... Neither do politicians.

Yet politicians are mandating something here which is very likely a losing proposition... Not surprising, considering they wouldn't have to mandate it if it was beneficial overall, but also not an example of something that's going to drive costs down - but entirely the opposite.

I don't really have a major complaint with this as it's kind of a throw-away issue in any case, but it seems a little silly to me overall, and hardly a major selling point.  In reality it seems much more like a handout to college students... I just really struggle to see the overall benefit, except to promise more free stuff to a potential constituency and buy some more votes next election.
10. Community health centers would receive an additional $11 billion, doubling the number of patients who can be treated regardless of their insurance or ability to pay.
This is really an issue of the seen and the unseen, like most of these points...

To acquire that $11 Billion, the government has to drain it from some other part of the economy.  So by doing this, they are killing opportunity in other sectors.  And in some cases, the money they are taking from the private sector may very well have been used to privately fund exactly those kinds of operations!

Unfortunately, we'll never know about that because while it's extremely easy to see 11 billion dollars worth of new free clinics, it's impossible to see precisely what the uses for that money would have been.  That's what's always going to be unseen, and the inability of many people to realize the unseen consequences of policy - even when the policy is created with good intentions (aren't they all?) - is one of the banes of my existence ...

There used to be numerous community health centers & free clinics all over the United States which were run privately by charities, religious organizations and for-profit hospitals.  Additionally, most doctors were - and probably many still are - more than happy to work with their patients on sliding fee scales where the poor would pay little or nothing and wealthier patients would have higher fees.

The trouble is, when the government drains money from the private sector to give to things like this - it's not only that they are destroying other parts of the economy to do so, but without market signals to guide it's decision making process, it has no way of knowing how to efficiently allocate resources.  On top of that, there's a huge amount of administrative loss as the revenue being collected by force has to be processed by the IRS, congressmen and whoever runs the program setting up these new community health centers.

So it's not enough merely to allocate $11 Billion to new hospitals - which is just about the only thing in this bill that will increase any aspect of the supply of medical resources - but they also have to be built in the right places... And that can't be determined by political favors & special interests, but by real demand as determined by actual health care consumers.

But that's just not possible for government to accomplish.

Even if these clinics manage to get built, which seems unlikely within the next 10 years or so, given the high level of restrictions and red tape involved in such a thing, and even if they are actually placed in areas where real people need them - as opposed to the districts of some politicians who really want their name on a hospital - they still have to manage to be run in a sustainable manner and not just become dilapidated money pits, draining local treasuries until they finally have to be shut down.

That is one of the crucial differences between charitable organizations, and government mandated entitlements... The private charity must be sustainable in order to keep functioning in accordance with it's mission.  This means there is pressure to keep service & quality high, and to run their organizations in ways that are friendly to their neighbors, and which succeed in garnering actual donations.  Government running businesses quickly devolves into the conditions most people find at their local DMV or Post Office.

So it's not that I'm against free clinics and help to the poor, I'm a big fan of both things actually, but it's that I realize that to be really successful, such things need to be privately funded. But the really important question no one at MoveOn.org has asked here is: "What will not be built or funded with that $11 Billion?"

What jobs have been lost? What companies and individuals bankrupted?  What buildings have gone unbuilt? What families were unable to afford a better school, a better house, a better life?  What kids were unable to go to college?

In economics, what is unseen is far more important and far more difficult to recognize than the surface level transaction - but throughout the entire list presented above by MoveOn.org, they consistently neglect to consider anything that happens before - or after - the one change they can see directly. They ignore where the money is going to come from, they ignore the behavioral shifts that new incentives will encourage, and they ignore the massive amount of resources that are being sucked away from people who are already overburdened with regulation & taxes.

* * * * *
I know this has been very long, so if you made it all the way through, congratulations...  But the point here is that the cheering in some circles about the passage of this health care bill is based largely on complete ignorance of economics and of the long-term effects of policy.

There is simply no way that this legislation doesn't directly result in higher costs of medical care precisely because (apart from, apparently, a few dozen free clinics paid for by magic), it drastically expands the demand for health care while crushing most of the elements of the economy that would actually improve supply.

So what if everyone is "insured", if there aren't any hospitals or doctors to go see, and no MRI machines to use when you need a test?

America is currently the world leader - by far - in innovation, and we're the world leader on treating serious illnesses and problems that most of the world simply isn't equipped to handle.  We've accomplished that via the tiny slivers of remaining freedom & competition that remain in what 60 years ago was a fairly healthy market-based health care system.  

All of that has been destroyed this week... and with it, any hope of better quality or more affordable health care in the future.

Good luck, America.


Vinson said...

You write:

"The result of such a foolish policy would be completely catastrophic as more people pass up paying the monthly fees of a health insurance plan when they are well, and instead only jump into the risk-pool when they experience the very type of emergency that we're all trying to hedge against. And because it would be illegal for an insurer to prevent them from doing this, there would be really no way to prevent such folks from draining the entire pool of money such that if and when some of us who've actually paid in got into trouble, there would be less money left to cover our needs, or perhaps none at all!"

Well, this is why the bill makes it mandatory to have health care, right? So you are completely 100% wrong about this, and in your "about section," you write that you want to be proven wrong. Well, there you have it...

Respectfully yours,
Vinson Valega
Consilience Productions

Sean W. Malone said...

I very sincerely hope that you are joking, Vinny.

Let's do a thought experiment in case you aren't though...

YES, it's now illegal to not buy insurance thus it is supposedly impossible to wait until the last minute to buy insurance and thus leech the insurance system of all it's money.

But let's say for a second that perhaps, just *maybe*, not everyone will actually follow the law.

Currently, the fine for non-compliance is $95. By I think 2014, the fine will be increased to the $695 or 2.5% of income figure.

Now imagine that buying insurance costs you $1,114.58 a month for your family (I am assuming this based on the national average $13,375 according to a recent Kaiser survey - found here: http://www.usatoday.com/money/industries/health/2009-09-15-insurance-costs_N.htm).

Now ask yourself... Which is cheaper? Pay $1,114.58 EACH month?

Or... Simply go without insurance, save $1,114.58 a month, and then if you or your family does happen to get sick, eat the $95, $695 or 2.5% fine and get them forced into an existing insurance company's risk pool after-the-fact?

I'm thinking the smarter (though perhaps illegal) course of action here is clearly to risk the government being pissed off at you\for leeching the system, but doing it anyway. The benefits are immense, the savings are immense, and the fine is a slap on the wrist.

But then of course... No one has ever broken the law before... Right?