Friday, January 12, 2007

Prescription for Disaster

Michael Tanner lays out most of the problems with Arnold Schwarzenegger’s disastrous healthcare reform plan. But I want to point out a problem Tanner doesn’t mention. Aside from the bad economic incentives created by the plan, we should also pay attention to the bad political incentives.

Any healthcare plan that requires people to buy health insurance (whether individually or through their employers) has to define a minimum set of benefits a qualifying insurance policy must cover. Ideally, the benefits package would be spare, covering only catastrophic care with a high deductible. But politically, that won’t happen. Health care providers of all varieties will have a strong incentive to make sure the services they provide will be included in the mandatory package. Psychotherapists will lobby for the inclusion of mental health services. Cosmetic surgeons will lobby for the inclusion of hair transplants, tummy tucks, and liposuction. Pharmaceutical companies will lobby for the inclusion of erectile dysfunction drugs, weight-loss drugs, oral contraceptives, ad infinitum. The list of benefits will grow longer and longer, inevitably driving up premiums – thereby encouraging more people to defy the mandate and go with no insurance at all.

This is not just a nightmare scenario – it is reality. Healthcare providers already lobby state legislatures to pass mandated benefits laws, which require that any health insurance policy sold must include certain benefits. There are literally hundreds (maybe thousands) of such laws on the books now; that’s one of the reasons health insurance is already so expensive. The incentive to push for more mandated benefits will only be exacerbated by a law that requires everyone to buy health insurance and commits both employers and the state to subsidizing it.

See here for more (including links to lists of currently mandated benefits).


Ben said...

"Aside from the bad economic incentives created by the plan"

Unless you make the weird assumption that people will somehow get sick based on monetary incentives, I don't think you can apply the "incentives" argument for health care in the same way as with other things.

Glen Whitman said...

Ben -- there are all kinds of bad economic incentives, most of them laid out in Tanner's article. Among them is the incentive for employers not to hire additional employees, the incentive for small businesses not to grow about 10 workers, and the incentive for businesses to leave the state in search of a better business climate. Even if you're focused on only health-related incentives, there is surely the issue of moral hazard to be worried about.

Anonymous said...

The government should at least pay for birth control and abortions for low-income folks. I guarantee you that will save everybody some dough. It might be a good idea to pay for poor people's cigarettes as well, to kill them off faster (assuming we don't get stuck with their medical bills, or their toxic second-hand smoke).

Ben said...

You are right about this particular system, I hadn't read Tanner's article.

I still think that basic health care is a sector where incentives have less impact than elsewhere simply because very rarely will people make themselves sick just because free treatment is available.

I think this is a strong argument in favour of universal health care. True, there might be a little more abuse by hypocondriacs ans such in universdal health care but there are a lot of economies of scales to be made when streamlining the process of paying for health care and cutting out insurance companies out of the equations. And there are benefits to everyone in being surrounded by a healthy community. I don’t know… the free market model just does’t fit health care very well. People do not _choose_ to be sick so incentives don’t work very well. Then often people end up paying for an extra layer of bureaucracy that is the health insurance industry. I know, I know, profit is the cost of efficiency. But that is only true when the gain in efficiency is greater than the cost of the profit based system that creates this efficiency. I’m not sure that this is true for free market “basic needs” health care.

Some people tend to overestimate the gains in free markets. Incentives work both ways. In a laissez faire context, everybody has to compete. The actors in this system get incentives toward two main strategies:

1) Improve yourself to be better and more valuable than others. Create value. This is where we you get efficiency gains and where the whole society benefits.

2) Destroy other's ability to compete with you or other uncompetitive strategies. This is NOT a gain to society. In fact it can be a huge cost. Some people often forget that the same incentives that bring efficiencies also promote anti-competitive behaviours. It's a sword that cuts both ways.

This happens in almost all competitive situations. Why do you think there is always a need for a referee in sports?

I once read a management story that makes a good point against using free markets all the time. Apparently, some years ago, Microsoft had adopted an interdepartmental competition system in order to motivate sectors to innovate. The most successful projects would get more budgets for the following year and the less successful would get less or get killed. The projects were judged against each other instead of on their own merits and everybody knew that. What happened is that the different Microsoft applications stopped being interoperable with each other because no team would want to help another one at the risk of losing their own budget. The e-mail client stopped interacting well with the web browser, and the word processor would not play well with internet applications etc. Microsoft had to reform quickly in order to survive. There was as much incentive to hurt other departments as to improve your own.

In the real world profitability is not necessarily proportional to value either. Competition is often over the same resources and customers so that when one product does well others fail even though they would have succeeded if it were not for the other.

I think free market incentives are an important tool for an efficient society, however, this is only true in contexts where there is a high enough level of fairness in competition and where the gains in efficiencies is greater than the costs. I’m not convinced this is the case for basic health care.

Anonymous said...

As a non-Californian, I applaud this generous effort of yours. Thanks for volunteering to be the great American socialist test market! With your guaranteed health care to all, we can send you our indigents, mentally ill, chronically ill, and illegal aliens, and in return take a good chunk of your fleeing business community and remaining productive residents.

Policy-wise, this should help us with the national debate -- perhaps when the rest of us are standing over the smoldering California wreckage, we'll wise up and at least save ourselves with rational, market based health care reform.

Glen Whitman said...

Ben -- well, I don't have time to get into a big healthcare debate in the comments, especially since I'd just be saying a bunch of things I've said on this blog before (and which, therefore, you've probably already read). But I will say it's a gross simplication to say demand for healthcare is inelastic just because "people don't choose to get sick." First, people do make choices all the time that affect their likelihood of getting sick or injured. Second, there are trade-offs to be made in healthcare as far as the extent of intervention, the variety of medicine, generic vs. name-brand drugs, inpatient vs. outpatient, etc., and all of those choices are affected by the price faced by the consumer.

As for whether a free-market system would work in healthcare, I think it could -- but rather than argue in favor of that proposition here, I'll just observe that we haven't tried it yet. The current system is rather far from a free market, and I think most of the problems in the system are attributable to the non-market aspects. Meanwhile, socialized medicine has been tried, and its many problems are well established if not well publicized.

Anonymous said...

I counted the word "lobby" three times in your post. If all this lobbying bears fruit for the special interests and is bad for the rest of us as you suggest, then I think you are opposed to lobbying. Why don't you say so explictly, because that's what you are most against, I think.