It Starts...

For months, I've been trying to explain to everyone I know that the health care "reform" bill recently passed by Congress operates under a severely flawed premise by conflating insurance with actual health care.

One of the consequences of this is that instead of dealing with the supply of health care resources - including services provided by trained professionals like doctors & nurses - economically illiterate politicians have focused their efforts only on adding to the demand for those resources through expanded government funding and mandated insurance. One thing that economics teaches us is that if there is a good that commands a comparatively high price (like medical care), then there is significantly lower supply of that good than there is demand for it.

As much as people like to pretend that health care doesn't fit economic principles, reality says otherwise.

Consequently, it has long been obvious to me that this will all be catastrophic. The main problem here, as always, is the centralized control over the market for all aspects of health care.  For instance, the government-granted - and entirely monopolistic - control the American Medical Association has over medical licensing is a huge problem.  Of course, even if the AMA didn't do such an abysmal job predicting future demand for doctors - and thus miscalculating on medical licensing allowances - the incentives for even becoming a doctor are quickly disappearing in the United States anymore.  So when articles like this one from the Wall Street Journal come out, I am not surprised...

As I've discussed on this blog before, the United States was already looking forward to a serious shortage of doctors thanks to centrally planned medical licensing - but with the drastic increase in demand for the remaining service providers, that shortage is going to turn into a full-blown disaster.  According to the WSJ:

"Experts warn there won't be enough doctors to treat the millions of people newly insured under the law. At current graduation and training rates, the nation could face a shortage of as many as 150,000 doctors in the next 15 years, according to the Association of American Medical Colleges...

A shortage of primary-care and other physicians could mean more-limited access to health care and longer wait times for patients."

This is not only a result of medical licensing controlled by the American Medical Association, but also a result of Congress being the primary funding source for medical residencies.  Even though a handful of new medical schools have opened recently, the number of new doctors in training is will only increase by a paltry 340 per year.  More significantly, the Wall Street Journal reports that:

"...medical colleges and hospitals warn that these efforts will hit a big bottleneck: There is a shortage of medical resident positions. The residency is the minimum three-year period when medical-school graduates train in hospitals and clinics.

There are about 110,000 resident positions in the U.S., according to the AAMC. Teaching hospitals rely heavily on Medicare funding to pay for these slots. In 1997, Congress imposed a cap on funding for medical residencies, which hospitals say has increasingly hurt their ability to expand the number of positions."

Go figure.

This is fundamentally the problem with having bureaucrats & politicians, and their buddies in government-backed licensing agencies control the supply of resources.

But the nightmare hardly ends there...  The L.A. Times today provides us with a remarkably biased and mostly idiotic story highlighting the reporter's shock that even after the health care reform bill has passed, insurance companies will still be able to raise premiums.  I'm not sure what the reporter expected to happen, since - yet again - we now have an immense number of new people chasing after a decreasing supply of resources. That necessarily means prices are going to rise as goods become more and more scarce.

Perhaps more significantly, the L.A. Times article references customers of insurance companies as "ratepayers", highlighting the truth of the situation we have now.  The insurance companies are no longer private entities in the sense that matters.  Now, health insurance is run the same way as licensed public utilities.

Depressingly, the "solution" proposed by the article is a tried and completely false reliance on mandates & price controls:

"Although Democrats promised greater consumer protection, the overhaul does not give the federal government broad regulatory power to prevent increases.

Many state governments -- which traditionally had responsibility for regulating insurance companies -- also do not have such authority. And several that do are now being sued by insurance companies.

"It is a very big loophole in health reform," Sen. Dianne Feinstein (D-Calif.) said. Feinstein and Rep. Jan Schakowsky (D-Ill.) are pushing legislation to expand federal and state authority to prevent insurance companies from boosting rates excessively."

Naturally, leave it up to one of my own idiot senators from California to come up with the worst possible response to a problem of this nature.

So here's the thing... We've set up a public utility-like cartel among insurance providers with extremely limited competition and removed any incentive and ability for competitors to enter the market, and then we've handed them - according to supporters of the bill - 32,000,000 new customers who will be subject to legal action if they don't pay up and we've prevented insurers from doing anything actuarially sound like denying people .  At the same time, we've limited the number of medical residencies and imposed huge fines and new taxes on the providers of health care products such as drugs and medical technology - thereby making doctors, hospitals, drugs & everything else more and more scarce.

Price controls only make this situation worse as insurance companies who are already earning under 3% profit margins will be making <0% for their trouble. So as those companies go out of business (or get taken over by the government - which cynically speaking, may very well have been the plan all along), access to real health care and even money available to pay for that care will dry up.

This means that in reality, what we're looking forward to is not enough doctors, not enough hospitals, not enough drugs, MRI machines or flu shots - and significantly reduced incentives for anyone to make more of any of those things, much less to innovate new products... And thanks to government subsidies and mandates, there will be far too many people demanding whatever resources & professional services remain available.

Carefully consider all this... For the last 50+ years, we've been steadily destroying health care through mandates, subsidies, controls, & cartels - all of which have detached prices from consumers & producers, and eliminated competition in the marketplace.  This is really not a good thing.

So I can't see how the inevitable future will be a surprise to anyone, but I suspect that I will be reminding far more people than I'd like of exactly what I said over the last couple years for the next decade or more.

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!

Duh.

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.

Bollocks.

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.

Woohoo!

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.

The Parmenides' Fallacy in Health Care

A couple days ago, my beautiful, and extremely brilliant girlfriend was talking to me about a somewhat rarely considered logical fallacy called the Parmenides' Fallacy...

As I discovered, there is actually a blog (sort of) devoted to this particular fallacy, and the authors of that blog reference Prof. Philip Bobbitt, who coined the term.  Bobbitt's explanation is as follows:

"The Parmenides' Fallacy occurs when one tries to assess a future state of affairs by measuring it against the present, as opposed to comparing it to other possible futures.”

Elegantly said, I think.

The fallacy is probably one of the most widely employed by people in all walks of life, and one of the least discussed or known (perhaps because it was so recently coined).  It is also a bit hard to wrap one's head around, so let me provide an example of how this logical problem plays out in the real world.

...And for that there is no better example than the government's own financial prediction organization, the Congressional Budget Office.

Greek Philosopher, Parmenides

The Congressional Budget Office unfortunately (and somewhat by design) winds up employing this fallacy constantly in its cost estimates of new programs.  Take, for instance their recent cost estimates of the latest iteration of the "Health Care Reform" bill up for a vote this week.  The CBO's estimates were somewhat positive for the supporting politicians because they tentatively said that - if there were additional scheduled cuts that actually happen the way the sponsors claim - the bill will reduce deficits by hundreds of billions of dollars over ten years.  Great news right?

Well... No, actually.

One of the problems with the CBO is that they are extrapolating the future demand on the nation's health care resources based on today's demand.  But as Dan Mitchell of the Cato Institute points out, this is a very bad plan indeed:

"The CBO has a very dismal track record of getting the numbers wrong, in part because there is no attempt to measure how a bigger burden of government has negative macroeconomic effects, but also because the number crunchers do a poor job of measuring the degree to which people (recipients, health care providers, state and local politicians, etc.) will modify their behavior to become eligible for other people’s money. The problem is compounded by similar mistakes for revenue estimates from the Joint Committee on Taxation, which (like CBO) makes no attempt to capture macroeconomic effects and has a less-than-stellar history of predicting behavioral responses."

And thus, we have the Parmenides' Fallacy working right before our eyes.

The Congressional Budget Office is looking at the current state of affairs (the amount of health care resources used per person when individuals still - even to a comparatively small degree from what would exist in an actual market-based health care system - are responsible for paying for their own treatment), and assuming future conditions based on the present.

The trouble is, when health care is believed to be "free", the behavior of the average health care consumer will drastically change.

It's a fundamental principle of economics, and easily observable reality in human nature, that when something is free people consume more of it.  Now, there are often arguments made that "Well, no one plans to get sick, so the idea that they're going to just break their own legs or injure themselves so they can go to the doctor more is absurd".

True enough.  But those arguments miss the point.

What will go up, as has done already with increasing government involvement in health care over the last 50 years, is the frequency with which people go to the doctor even for unnecessary problems, the level of drugs (prescription vs. generic, for instance) they purchase, the number of tests run per visit and other activities that propel costs higher & higher each year.  When the "someone else" is paying for their health care, people - both doctors & patients - on average are much less discriminating on what they actually need to spend their money on and rather go for basically everything possible.  Someone else is footing the bill, so why not?

The problem is that this mentality puts an enormous strain on the finite medical resources of the nation, and as a result, prices rise and access becomes more and more limited.  Of course, by setting terms carefully, insurance companies can limit this behavior to a degree currently, though not that much unfortunately, as there are a lot of restrictions already on those companies divorcing price from the end consumer.  Plus, about 50% of all health care is paid by the government already, further compounding the problem...  But the new health care legislation will change that situation entirely, warping the incentive structure even further towards a disconnect between price of goods & available supply - and the CBO doesn't really take that into account.

The CBO is making a crucial error in the way they calculate costs, and to a large extent, we can't even blame them for it! The system itself leads to this very problem... Politicians don't offer a dozen different bills for the CBO to compare & contrast, they offer them one bill at a time, and deliberately ask them to compare the future with that legislation to the present... The system promotes the fallacy.

And that's not the only problem, by the way!

Politicians are doing everything they can to game the system and use accounting tricks to skew the numbers.  It's no surprise that people who have vested interests in getting bills passed will manipulate the numbers a much as possible to make the bills more tenable.  This is especially true when we're talking about legislation that adds $1 Trillion in new government spending (from what source this magical trillion dollars comes from I still haven't the slightest clue!) in the middle of a severe global economic recession.

The Congressional Budget Office has no choice but to calculate future costs based on the data presented to them by politicians writing new legislation.  And like the rest of us, the folks who make up the CBO aren't psychic and can't predict the future.  When a politician says that in the future, other programs will be cut & salaries reduced, etc. to pay for this massive new entitlement expenditure, the CBO has to take that politician at his word and include that in their analysis...  Even when the entirety of human history shows that governments the world over never makes good on such promises.

As Michael Cannon (also at Cato) discussed recently as well, there are a ton of completely obvious problems with the political math already anyway simply due to politicians using their knowledge of how the CBO process works to game the system itself.  For example:

"As former Congressional Budget Office director Donald Marron has explained over and over, the figure that Democrats consistently cite for the cost of their bills is only the CBO’s estimate of the cost of federal spending related to the expansion of health insurance coverage.  It is not the full cost to the federal government, because each bill also spends taxpayer dollars on other items.
...
Moreover, the on-budget costs of the legislation probably account for only 40 percent of the total costs.  The other 60 percent come from the private-sector mandates.  But Democrats have systematically suppressed any estimates of those hidden taxes, probably because such an estimate would reveal the full cost of the legislation to be closer to $2.5 trillion over the next 10 years."

So in truth, while it seems like I'm railing against the Congressional Budget Office, I'm really not...

I think they're doing the best they can, and probably the best job any country could hope for in the field of analyzing the future costs of government... But their job is, at root, completely impossible.  Even at their absolute best, their numbers will still always be wrong... And I think this all goes into why there can be no rational economic calculation with government.

It's not the CBO's fault, but with politicians busy playing fast & loose with the numbers and using tricks to hide the truth of how much the American citizens are going to be on the hook for in the coming years, the very nature of how our cost-estimating agency operates pushes it into accepting a pretty serious logical fallacy as the basis for it's predictions.

The thing the CBO really needs to be doing primarily is reviewing multiple courses of action and assessing their relative merits in the future against other possible futures.

What will health care cost if we do nothing based on current estimates?  What will happen to that number if so-called "Health Care Reform" is passed?  What will happen to that number if real reform happened instead?  It's useless to view the future and say it's better or worse than today - of course it will be, one way or another.  What isn't useless is trying to determine which of many possible futures are going to bring about the best results and then using that knowledge to pursue intelligent courses of action.

Of course, this actually requires people at the CBO and within the government in general think more like decent economists and weigh options - but this isn't really a possibility.  They are charged only with reviewing legislation as it comes to them, not with producing alternatives... And the political process would never give them the time or latitude they'd need to accept 100 different plans (which aren't designed simply to game their review process) and then analyze each plan and legitimately compare one future to other possible future alternatives.

The asinine thing about the current health care legislation is that even if it were true that this particular iteration would reduce budget deficits over 10 years (and believe me, it isn't), it's *not* true in any case that the bill as it is is the best possible way of accomplishing that.  Comparing a future where we reduce some deficits to the present or the results of the present course we're on may show improvement, but assessing the future based on what is currently happening is a fallacy precisely because it precludes the possibility that there are other possible futures which would be even better.

This is a common theme with government, and a huge point of contention with free market economists and myself.  Politicians claim, for instance, that bailouts have saved millions of jobs and that we should be thankful because we would have lost more than we have if we had "done nothing".  However, I would contend that had we followed the prescription set out by folks like Ron Paul, and let the artificial bubble collapse quickly and help adjustments in the market with streamlined bankruptcy proceedings, and clear processes and even-handed application of the law to prevent theft & fraud... Not only would we have even more jobs today than we do, the correction would be over by now and the country wouldn't be in the grips of a depression, and businesses wouldn't be constantly leaving the US for more easily navigable climates - such as Singapore.

But that possible future was ignored two years ago, and we are now stuck hearing the President tell us how bad things would be today if they had "done nothing" - which is a conveniently unfalsifiable statement, since we can't just travel to another universe where the government actually embraced liberty in a time of crisis - but he doesn't bother to point out how much better things would be had they done the right things...

(I feel compelled to note here that the same Parmenides' Fallacy applies to proposed climate change legislation too, by the way... But you can ponder that one on your own.)

But back to the topic at hand... One way or another, the cost savings are a lie, but politicians can point to the present state of affairs and say that in 10 years with health care, they're going to "save" $100 Billion (after spending $2.5 Trillion, of course).  Sounds great, until you realize that if they actually took a market based approach they would not only not have to spend $2.5 Trillion in the first place, but would actually wind up reducing the cost of health care around the United States significantly and save many hundreds of billions of dollars, or even trillions, for real.

However, because they employ the Parmenides Fallacy - we don't actually get presented with that option.

The way it is all presented to the public is that there is essentially only one alternative, and our choice is stay with things exactly as they are or agree to a plan that politicians would have us believe will be marginally better than the present condition.  And we're supposed to cheer our great leaders for their bravery.

It's kind of an insidious fallacy in a way simply because it's very subtle and requires a depth of thought that a lot of people don't really have to get around.  It's just not enough to be able to think "If I do X, will that make me better off than I am today in 10 years?". We must also, and more importantly think, "If I do X, Y, or Z - which of these will make me best off compared to each other in the long run?"

The CBO, and more importantly our Congress, never do this... And even if that task were remotely easy to do, the system is designed so that they can't.

A Dog's Life (Vets vs. Doctors)

From Reason.TV, Ted Balaker explains some good stuff on health care:

Do we see a pattern?

An amusing (to me) comment I read today with respect to Medicare by "Ron L" at Hit & Run:

"By the 1966 estimate, Medicare was to cost $6Bn in 1990; the actual cost was $67Bn.
Error = 50%/year
By the 1987 estimate, Medicare’s special hospitals subsidy was to cost $100m annually. By 1992, the actual costs were $11Bn.
Error = 220%/year
By the 1988 estimate, Medicare’s home care benefit was to cost $4Bn in 1993. The actual cost was $10Bn.
Error = 50%/year.

Do we see a pattern here?
...

BTW, in case anyone didn't do the sums, the average error is >100%/year. Maybe that's overstating the point; anyone got other examples?"

There are plenty of other examples, but for the time being, I think this pretty well makes the point... I guess there's not much sense in talking about health care reform anymore though, since it's basically a done-deal. Do I stick around to watch the inevitable future and say "I told you so"? I'm kind of tired of doing that.