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Thread: Health care's simple economics

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    Health care's simple economics

    Donald J. Boudreaux's Economics in Many Lessons: Health care's simple economics - Pittsburgh Tribune-Review

    Donald J. Boudreaux's Economics in Many Lessons: Health care's simple economics

    One of the cherished beliefs of many Americans today is that health care can be improved only through a collective effort. As a television talking head expressed it recently, "We all have to pull together to improve health care in this country."

    Nonsense.

    Each of us has it within our power to improve our own health care.

    I can improve my and my family's health care in numerous ways, all of which are within my power. I can prepare more healthful meals; do more exercise; drink less alcohol; go to bed earlier. I can also, say, drive a less-expensive car or buy fewer consumer electronics and, with the money I save, purchase more exercise equipment, better health insurance or more visits to my doctor.

    What's true for me is true for every American. Even the poorest American is far from living at a subsistence level. That person, too, has the individual power to improve his or her health care by doing many of the sorts of things that I can do.

    Of course, no one, not even Bill Gates, can achieve "perfect" health -- if by that is meant 100 percent assurance of being free from aches, pains and the risk of dying before, say, the age of 80. And it's true that the wealthier an individual is, the greater is that person's scope to improve his or her health care.

    But it's not true that health-care improvements require a collective effort.

    In fact, steps taken to collectivize health-care provision have only made it more difficult for individuals to improve their own health care.

    Collective efforts -- which, in practice, mean "imposed by government command" -- typically allow each of us to free-ride off of each other's resources. And when I get to spend your money and you get to spend mine, it's a sure bet that that money will be spent wastefully.

    Consider Medicaid and Medicare -- huge socialized health-care programs. Funded with tax dollars, these programs allow the millions of Americans covered by them to consume medical services without paying the full cost of those services. The predictable result is that these services are over-consumed.

    To see why, ask the following question posed by my George Mason University colleague Russell Roberts. If you go to dinner with a large group of strangers and you know that the bill will be split evenly, aren't you more likely to order pricier dishes and drinks than you would order if you, and you alone, were responsible for picking up your full tab?

    The answer is surely "yes." Let's say that you'd be content to order the pork chop priced at $15, but would get even greater enjoyment from ordering the rack of lamb priced at $25. If you alone were responsible for your tab, you'd order the lamb only if it is worth to you at least the extra $10 that it costs. So suppose that you value the lamb by only $8 more than you value the pork chop. In that case, you'd order the pork chop. You wouldn't spend an extra $10 to get extra satisfaction worth only $8.

    But if the bill is evenly shared among, say, 10 diners (yourself and nine others), then if you order the lamb, your share of the higher bill will be only $1. That's $10 split evenly 10 ways. You'll order the lamb.

    You might think that this sharing arrangement is good. After all, in this example, the cost to you of getting something you valued more (the lamb rather than the pork chop) was reduced. It became sensible for you to order the lamb.

    Look more deeply, though. What happened is that society (here, the 10 diners) was led to supply something that wasn't worth its cost. The lamb was worth to you only an additional $8, but to make it available to you, society spent $10. Ten dollars were used to raise the welfare of society by only $8. (You're a member of society, so any improvement in your welfare counts as an improvement in the welfare of society.) That's a waste of $2.

    You are better off, but the group is worse off.

    Now look even more deeply. Everyone at the table faces the same incentives that you face. You're not the only person who will order excessively costly dishes and drinks. Everyone will. The entire table over-consumes. The total bill is higher -- even your share is higher -- than it would have been had the bill not been split evenly. Resources are wasted.

    Such sharing of our medical-care bill takes place now on a massive scale. It is impossible to see how expanding this sharing will reduce the bill.

    Donald J. Boudreaux is chairman of the Department of Economics at George Mason University in Fairfax, Va.
    "So little pains do the vulgar take in the investigation of truth, accepting readily the first story that comes to hand." Thucydides 1.20.3

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    Wow there are a lot of problems with that article.

    Each of us has it within our power to improve our own health care.
    not really, the majority of us might, maybe even the overwhelming majority but not all.

    What's true for me is true for every American.
    The author likes the absolutist approach, to bad it doesn't work.

    Even the poorest American is far from living at a subsistence level.
    Tell that the to mentally ill living under the bridge.

    But it's not true that health-care improvements require a collective effort.
    Then lets stop mass vaccinations

    In fact,
    ... I'll be wating for the fact...
    steps taken to collectivize health-care provision have only made it more difficult for individuals to improve their own health care.
    Remember we are looking for facts to illustrate the second part.

    Consider Medicaid and Medicare -- huge socialized health-care programs. Funded with tax dollars, these programs allow the millions of Americans covered by them to consume medical services without paying the full cost of those services. The predictable result is that these services are over-consumed.
    Wait a minute, he just said collective medicine makes it more difficult for individuals to improve their health care, now he's saying they are over improving by using the groups efforts. Not to mention he misses the point that medicare is insurance paid for by premiums.

    To see why, ask the following question posed by my George Mason University colleague Russell Roberts. If you go to dinner with a large group of strangers and you know that the bill will be split evenly, aren't you more likely to order pricier dishes and drinks than you would order if you, and you alone, were responsible for picking up your full tab?
    I bolded the you to point out the authors use of the accusatory you. He does not know my dining schedule, he assumes I would be part of a group that splits the bill evenly, or that regardless- money and not desire would rule my choice. How does he know if money matters to me or not?

    Look more deeply, though. What happened is that society (here, the 10 diners) was led to supply something that wasn't worth its cost. The lamb was worth to you only an additional $8, but to make it available to you, society spent $10. Ten dollars were used to raise the welfare of society by only $8. (You're a member of society, so any improvement in your welfare counts as an improvement in the welfare of society.) That's a waste of $2.
    Only if one of the others did not order a $12 improvement. But that is the nature of collective efforts. Insurance is a pool, we all pay in, and hopefully never need it. Of course eventually we do, some need more and some less, and a few way more. Our benefits are not capped at the value of the premiums paid to date.

    I don't know how the author missed that relevant fact but he did. Private insurance has two major flaws however. 1. People don't have to get it and 2. profit.

    If people don't have to get insurance, many won't. They are probably the fittest and youngest of the workers, or perhaps they can't afford it because they are the poorest amongst us. But life does not let people live disaster free. people age, get sick, get injured and need medical attention. By letting the healthy forgo insurance when the chance of them needing it is reduced we force everyone else to payer higher premiums because when they do enter the system life has started to add to the aches, pains, chronic conditions and diseases we all face as we age. Fewer payers plus more need to pay equals higher premiums.

    Now we have to add in profit. Mutal benefits Inc might have a nice add campaign about how they put people first, but the truth is the only people who matter are Mr and Mrs stockholder. it makes sense for them to deny as much as possible, to limit as much as possible and to charge as much as possible. To do otherwise is to violate corporate ethics to their shareholders.

    This is where the advantages of a universal single-payer mandatory enrollment show through. Everyone even the healthy have to pay for the benefits they will needs. This means the costs get spread across a wider population. Secondly with no need for operating expenses + profit costs will be lower. Plus as in a single payer system you don't have nasty little tricks like post claim under writing. The top 13 company made over $13 billion in profits according to Forbes.

    This number is misleading, its not pure profits from premiums. It also amounts to theft from taxpayers when they've taken a policy holders premiums for years and then cut them adrift once they finally needed services. The need for medical treatment does not go away with the insurance, the costs get shifted to the government. Possibly at a higher cost because of the delayed treatment, and possibly resulting in the death of a person.
    Last edited by zraver; 01 May 09, at 23:36.

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    America spends twice as much (roughly) as NZ. We have universal health care. Our level of care is lower but not substantially, our coverage is obviously a great deal better.
    Capitalism is great, but there are reasons why individuals came together to form tribes, and sharing of resources to free up effort for other enterprises was central.
    In other words there is a public good in centralised health care financing and administration just as there is in national roading systems.
    Donald J. Boudreaux has obviously never studied any system outside the US.
    In the realm of spirit, seek clarity; in the material world, seek utility

    Gottfried Leibniz

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    Much of the over-spending on health care is due to the fact that Americans don't spend their money on health care. They spend someone elses, through the form of third-party insurance that oftentimes isn't insurance (you don't buy insurance against routine events, but yet, insurance often picks up routine expenses).
    "So little pains do the vulgar take in the investigation of truth, accepting readily the first story that comes to hand." Thucydides 1.20.3

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    Quote Originally Posted by zraver View Post
    By letting the healthy forgo insurance when the chance of them needing it is reduced we force everyone else to payer higher premiums because when they do enter the system life has started to add to the aches, pains, chronic conditions and diseases we all face as we age. Fewer payers plus more need to pay equals higher premiums.
    Adverse selection really isn't a huge issue with insurance premiums. However, why can't people save towards the health issues that they know will occur when they are older? Medicare incentivizes less national savings.
    "So little pains do the vulgar take in the investigation of truth, accepting readily the first story that comes to hand." Thucydides 1.20.3

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    Quote Originally Posted by Shek View Post
    Adverse selection really isn't a huge issue with insurance premiums.
    of course it is. Look at the huge numbers of the uninsured younger workers and the high premium rates in the US. What plan did you pick? The one you might need in a few years, the one that fits your current state of health so it has a lower premium or did you decide to opt out of insurance? That is at the individual level.

    It applies on the other end of the spectrum as well. When an insurance company makes an offer to a company on behalf of that companies employees it is looking at all sorts of risk factors to determine the premium. How did the company cost the previous insurer, what type of care was provided was it mostly injury related or was there a lot of oncology indicating an aging workforce. What type of people does the industry usually attract? Is the job sticky, ie will an employee start young and pay in, or will their length of employment generally be short and so have a higher turnover. How long does the company make they wait before becoming eligible. The longer the wait the less likely someone needing insurance now for a problem will take the job.

    However, why can't people save towards the health issues that they know will occur when they are older? Medicare incentivizes less national savings.
    They have other priorities, they don't make enough for market priced insurance, saving money is a piss poor investment there could be a number of reasons. Your going after an economics Ph.D, would you simply site on $200K to cover the fact you might get cancer in the future? heck, what if you did, would that be enough? Look at how fast costs are out pacing inflation.

    Credit, not medicare incentivizes less savings. Its hard to save when your up to your eyes in debt, and you have all the social pressure to get this and buy that- spend- consume-spend-consume NOW NOW NOW.

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    Z,

    If adverse selection were such an issue, then there wouldn't be an insurance market. Adverse selection is overcome by the fact that insurance providers can screen applicants: blood pressure, blood testing, lifestyle questionnaires, etc., which allow the insurance providers to determine how much people are going to cost them over the course of a policy so that they can price the policy. For more, you can look here: Marginal Revolution: Adverse selection is NOT the problem

    In terms of saving, the average person will pay $100K in medical expenses later in life. Why can't people save that much over the course of a lifetime? For anything beyond that, then you can get insurance to prevent catastrophic financial losses. For more, you can look here: Cato Unbound Blog Archive Insulation vs. Insurance
    "So little pains do the vulgar take in the investigation of truth, accepting readily the first story that comes to hand." Thucydides 1.20.3

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    Quote Originally Posted by Shek View Post
    Z,

    If adverse selection were such an issue, then there wouldn't be an insurance market. Adverse selection is overcome by the fact that insurance providers can screen applicants: blood pressure, blood testing, lifestyle questionnaires, etc., which allow the insurance providers to determine how much people are going to cost them over the course of a policy so that they can price the policy. For more, you can look here: Marginal Revolution: Adverse selection is NOT the problem
    That study is just as flawed. How many people who have or expect to have a chronic condition will even try to get individual insurance? 133 million Americans have some sort of chronic condition. Not all of these are severe, but many are, and many more can mutate into something worse if untreated. looking only at a small segment of the population one already predisposed to self selection out of the control group is hardly the way to make wide ranging arguments about the health insurance industry in general.

    The study also does not address the employer provided health insurance questions I posed. Unlike indivisual premiums where those presenting and asking for an offer of insurance and can be screened, group plans offer little in the way of screening so premiums are inflated to cover expected losses + other operating expenses + profit. here adverse selection is very much in play on both ends in the plans being picked and the premiums being offered.

    In terms of saving, the average person will pay $100K in medical expenses later in life. Why can't people save that much over the course of a lifetime?
    1.There are two different times there, later in life and over the course of a life time.

    2. The pressure of life in America is not to save, but to consume.

    Now lets assume that in general costs for health care start going up at 50. So a male worker has to save $100 from 18-50- 32 years x 12 months= $260 a month. That is in line with the average in the study you presented, but like I said that study is flawed in its over-breadth.

    Another flaw with saving is a woman worker has less time because her costs go up quicker because of the cost of child birth. So she losses what she had saved and has to start over after her non-health and health related costs just went up due to the birth of a child. She will also now be making less since child care and rearing is time exhaustive. Either she does without, or she shifts the burden to the man(father) if he is part of the family structure so the real costs he is bearing go up. Your study had an average cost of $6000 a year for a screened healthy family. A normal family with a mix of healthy and unhealthy individuals can likely look forward to higher premiums. $6000 a year is nearly 1/7 the Average American's pre-tax pay.

    So what if your savings family has an autistic child, early onset cancer or some other disaster. Now that they've burned through their 100K, who is going to insure them and at what rates its a losing proposition. A single payer system has the benefit of everyone paying in, and no one suddenly being left out. It also encourages health management by getting people in to see their doctors before the chronic conditions become serious and thus expensive. Instead of John Doe showing up for a triple bypass on your buck because after his heart attack his insurance company cut him loose, We can get him into the doctors years earlier and get him on blood pressure and cholesterol meds.

    nationalized health care means there is no reason to avoid the doctor so check ups and maintenance can be stressed. America outspends everyone else on health care but we don't have universal coverage and those who do have coverage don't get the best care. The system is broken, not by socialism, but by capitalism. Health care is a social good and belongs in the realm of the government. In the free market the drive to maximize profits means exclusion, and money over people. In the end as our health care costs prove this only increases the costs, prevents early detection and maintence and shifts the most costly onto the shoulders of the tax payer, unless of course we want to let people die.

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    Shek, the second article has problems as well by conflating maintenance programs such as managing diabetes or high blood pressure with a culture that over overs tests. The two are not the same, but the article argues Americans go to the doctor too much, when much of the cost is because Americans do not go enough and so minor problems become major problems.

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