Some ideas to guide your thoughts on health care

This post is meant to help my non-economist friends think more clearly about how we pay for health care. I’ll talk about markets, but the truth is that the American system is built of deeply bastardized markets. If our car markets worked like our health markets, most of us would walk to work. I’m trying to focus on the essential logic of the situation which is going to sound Utopian because Congress isn’t going to give us any sort of logical policy any time soon. But we aren’t going to get a logical solution until we as voters understand the logic of health care finance.

I’ve got a few big points to make:

  1. Trying to health insurance also work like charity is bound to end poorly for everyone.
  2. A single-payer system has a lot of nice features for individuals, but a lot of systemic problems.
  3. It’s fundamentally impossible to insure pre-existing conditions. Insurance is about sharing risk, not unavoidable expenses.

(This post is longer than I’d like, so thanks for your patience!)

Markets and Charity

I’ve said it before, and I’ll say it again: we don’t have to ruin markets to do charity.

The essence of markets is that they aggregate knowledge about the relative costs and benefits of different goods based on the preferences of the real people involved in producing and consuming those goods.

The demand side of markets provide information by giving you (as a consumer) a choice between more of something you like and more money to spend on other stuff. On the supply side they give you (as a supplier–probably of your own labor) the choice between providing more of what people are willing to pay for or having less money to buy the stuff you want. Markets crowdsource cost-benefit analysis.

Prices also give suppliers an incentive to produce things that consumers want while trying to save resources (i.e. cut costs). In other words, a price is a signal wrapped up in an incentive.

So what about fairness? The bad news is that markets are a system of “from each according to their ability, to each according to how much other people are willing to pay for the product of their ability.” (Not very catchy!) It’s mostly fair for most of us, but doesn’t do much good for people who are just unlucky (e.g. kids born with genetic defects). Here’s the good news: we can use charity alongside markets.

We can debate how much role government should play in charity some other time. For now, let’s whole-ass one thing instead of half-assing two things. We have to appreciate that interfering with markets interferes with the ability of those markets to function as sources of reliable information. It doesn’t matter how good our intentions are, we face a trade off here… unless we do something to establish a functioning charity system parallel to the health care finance system.

Single Payer

Anecdotes about the merits of a single-payer health care system are powerful because they shed light on the biggest benefit to such a system: individual convenience.

Part of the appeal has to do with the general screwiness of the American system. It’s a cathedral built of band-aids. But even in an idealized market system, a single-payer system has the advantage of not making me go through the work of evaluating which plan best suits my needs.

A single-payer system is, from an individual perspective, about as ideal as having your parents pay for it. But we don’t really  want our parents buying our stuff for us.

Single payer system sacrifice the informational value of markets (probably even more so than America’s current system of quasi-price controls). Innovation would be harder as long as new treatments had to be approved by risk-averse bureaucrats (and again, we already face a version of this with Medicare billing codes and insurance companies).

Essentially, a single payer system creates a common pool problem: each of us gets the individual benefit of being able to be lazy. But then we’re left trusting bureaucrats, special interest groups, and think tanks to keep an eye on things. It could be an improvement over the current American system, but that’s like saying amputation is better than gangrene.


Premium = expected cost + overhead

Consider two alternatives. In scenario A you start with $150, flip a coin, and if it comes up tails you lose $100. In scenario B you get $90. The expected value of A is $100, but most of us would still prefer the sure thing.

Here’s how insurance works: You start with $150, give $60 to the insurance company, then flip the coin. If it comes up tails, you lose $100, but the insurance company gives you back $40. You’ve just gotten the sure thing. And by taking on thousands of these bets the insurance company is able to make enough money to pay their employees.

But here’s the thing: the premium they charge is fundamentally tied to that expected value. Change the odds, or the costs (i.e. the claims they have to pay for) and you’ll change the premium.

(BTW, Tim Harford did a nice ~8 minute podcast episode on insurance that’s worth checking out.)

Pre-existing conditions are the equivalent of changing our thought experiment to a 100% chance of flipping tails. No amount of risk sharing that will get you to the $90 outcome you want. You can’t insure your car after you’ve been in an accident and you can’t insure a person against a loss they’ve already realized. If you’re Bill Gates, that’s no big deal, but for many people, this might mean depending on charity. That’s a bummer, but wishful thinking can’t undo that.

If we insist that insurance companies cover pre-existing conditions* the result can only be higher premiums. This is nice for people with these pre-existing conditions, but not so great for (currently) healthy poor people. Again, charity matters needs to be part of the debate, but it needs to be parallel to insurance markets.

Covering more contingencies also affects premiums. The more things a policy covers, the higher the expected cost, and therefore the higher the premium. We each have to decide what things are worth insuring and what risks we’re willing to face ourselves. Politics might not be the best way to navigate those choices.

High deductibles and catastrophic care

Actuaries think about the cost of insuring as a marginal cost. In other words, they know that the odds that you spend $100 in a year are much higher than the odds that you spend $1000. So the cost of insuring the first dollar of coverage is much higher than the cost of insuring the 5000th dollar. This is why high deductible plans are so much cheaper… they only pay out in the unlikely situation where something catastrophically bad happens to you. This is exactly why most of us want insurance. We aren’t afraid of the cost of band-aids and aspirin, we’re afraid of the cost of cancer treatment.

For those of us firmly in the middle class, what we really need is a high-deductible plan plus some money in the bank to cover routine care and smaller emergencies. (Personally, my version of this is a credit card.) Such a plan has the added benefit of encouraging us to be more cost conscious.

A big problem with our current system is that it’s set up like an all-you-can-eat buffet. You pay to get in (your premiums) but once you’re in the hospital, any expenses are the insurance company’s problem (read: everyone else on your health plan). The logic here is the same as with pollution. When I drive my car I get the benefits of a quick and comfortable commute but I also suffer a little bit more pollution. But I don’t have incentive to think about how that pollution affects you so I pollute more than would be ideal. Multiply that by millions of people and we can end up with smog.


If I were trying to put together a politically palatable alternative to our current system, I’d have an individual mandate with insurance vouchers for the poor (it’s not very libertarian, and it’s far from my Utopian ideal, but I think it would be a huge improvement over what we’ve got now). I would also expand the role of market competition by encouraging high deductibles plus flexible health savings accounts.

Reality is complicated, but I’m trying to get at the fundamental logic here. We don’t have a properly functioning market system. To get there we need competition, transparency, and a populace with the mental tools and mathematical literacy necessary to understand what their insurance can and can’t do. That’s a tall order, but it doesn’t mean we shouldn’t keep trying to move in that direction.

To have a fruitful debate we need to understand what we want from our healthcare system: help for the poor (charity), convenience, and efficiency from an individual and social perspective. By trying to lump all these things together we muddy the waters and make it harder to understand one another.

*I don’t know what the deal is with the idea that the AHCA will treat rape as a pre-existing condition. Some webpages give a bunch of random tweets as evidence of this, and others call bullshit. Let’s just leave it at this: in a competitive market this would be considered terrible marketing and savvy companies wouldn’t do it. The lesson then is to keep calling companies on bad marketing, and avoid protecting politically powerful companies from market competition.

A Note on Trump, Immigration, and Healthcare Reform

Hopefully, the US election will start getting out of the he-said-she-said of assassination attempts and badmouthing parents of military personnel and start being about actual policy issues. Unfortunately, that isn’t going to happen at all, but in a minuscule and futile attempt to help get us there, I’m going to blog about some policy issues for a minute.

Trump’s campaign released a brief memo about his healthcare positions recently. For the most part the positions—though not quite detailed enough to really call a “plan”—are fairly decent. They contain most of the reforms free-market analysts have been proposing for decades such as opening insurance competition across states, allowing for Health Savings Accounts, and streamlining Medicaid funding. Notably missing was abolishing the employer mandate to reduce price fragmentation, as Milton Friedman proposed, although Trump proposes taking steps in that direction by introducing a tax deduction for individual insurance plans.

But what stuck out to me was that Trump, surprise, surprise, made xenophobia an element of his health care proposal by furthering the myth that immigrants are a further drain on our healthcare and welfare programs:

Providing healthcare to illegal immigrants costs us some $11 billion annually. If we were to simply enforce the current immigration laws and restrict the unbridled granting of visas to this country, we could relieve healthcare cost pressures on state and local governments.

Meanwhile in reality, undocumented immigrants actually contribute more to Medicare than they withdraw. It is unclear where Trump is getting his $11 billion figure, but he is ignoring the increased payroll taxes undocumented immigrants pay into these programs. A 2015 study found that, in fact, between 2000 and 2011 immigrants paid up to $3.8 billion more into Medicare than they took out. From the results of the study:

From 2000 to 2011, unauthorized immigrants contributed $2.2 to $3.8 billion more than they withdrew annually (a total surplus of $35.1 billion). Had unauthorized immigrants neither contributed to nor withdrawn from the Trust Fund during those 11 years, it would become insolvent in 2029—1 year earlier than currently predicted. If 10 % of unauthorized immigrants became authorized annually for the subsequent 7 years, Trust Fund surpluses contributed by unauthorized immigrants would total $45.7 billion.

Poor immigrant children, both legal and illegal, are also less likely to be enrolled in Medicaid or CHIP than citizens.

Thus Trump’s campaign is being factually dishonest by claiming that restricting immigration will help fund government healthcare systems, it will actually make Medicare go insolvent sooner. Which is especially concerning given that, until this memo, Trump has shown no interest in any meaningful entitlement reform.

This refrain—that immigrants are a fiscal drag on America’s welfare programs—has been among the most common refrains from Trump, and has even been popular among libertarians who are otherwise sympathetic towards immigration. But, as I’ve argued extensively in the past, it is completely false. Almost every major study shows that immigrants, at worst, pay as much into welfare programs as they get out of them.

Health Insurance is Illegal

Health insurance is a crime.  No, I’m not using a metaphor.  I’m not saying it’s a mess, though it certainly is that.  I’m saying it’s illegal to offer real health insurance in America.  To see why … (more)

A Free Market in Medical Services

There are two directions for the reform of the U.S. medical services systems. One is towards welfare statism, the control of the medical system by the federal government, and the other is towards economic freedom, providing individuals and families a free choice in medical care.

Economic theory points to a pure free market providing the most productive and equitable economy and therefore medical services. Central planners lack the knowledge to efficiently allocate resources, and politics skews the outcome towards special interests.

Here are the reforms need to have a really free market in medical services: Continue reading

Health Care Reform: Paradise Lost

I have been struggling for three days to swim back to the surface and breathe again. Since the monstrous health care bill reform passed on Sunday, furor and something approaching despair have made me numb and mute. As people begin actually reading the 2700 pages, bad news cascade after bad news. I have been looking for the silver lining and found only one: It looks like the portability of health insurance will become a fact. That’s good. It was intolerable that people stayed in jobs they hated and refrained from entrepreneurship because they were too afraid to lose their health coverage. I think that’s all.

The rest of it is a disaster for our future. Note that every other political defeat does not make me feel the way I do now. Alternance in power is a good thing. When the other guys get their way with something I don’t want, I figure it’s the price I pay for stable and peaceful government. Certainly, I don’t want to live in a country where the losers routinely stage coups or start revolutions.

I don’t like most of what I know is in the law. I fear what else is in there that I will only discover later. I am sure the cost of the programs the law creates will undermine severely our future economic development. I suspect hardly anyone one will benefit. Instead, the overall quality of health care will decline. Most of all, I am aggrieved by the process by which the law became law, against clearly expressed majorities of opinion. The process smells of fascism and of the twisted parliamentary (ostensibly legal) methods by which the Communist Party gained control of Czechoslovakia in 1948. Continue reading

Around the Web: ObamaCare Edition (Part 2)

There is a lot of great stuff out there on the recent ruling. Here are a few I found interesting:

I think I’m done blogging about this whole mess…phlegh!

ObamaCare and the Long Game

The Supreme Court’s ruling yesterday has garnered a number of ideas for me. I’ll admit that I was a little bit shocked when I heard that ObamaCare had been upheld. The lawyers who argued against ObamaCare were very, very good ones, and the pummeling that they administered to the Obama administration’s lawyers was so thorough, I thought, that I wasn’t even sure that the court would split along the traditional 5-4 line.

Alas. You can read the whole thing here (and I encourage you to do so).

I wonder about Roberts’s political calculations here. What I think happened is that Roberts took a two-pronged approach to the issue. Instead of calling it a mandate, the court ruled that ObamaCare is tax. This is not going to bode well for the Obama administration’s upcoming campaign once the dust settles. The second line of attack is actually a defensive one: the SCOTUS already issued Citizens United in 2010 and if the SCOTUS had struck down ObamaCare a mere two years later the Left would have been electrified. Roberts is playing the long game.

ObamaCare is now actually seen for the huge tax increase that it is. If Republicans are smart (and they are, despite the Left’s attempts to portray them as otherwise), they’ll go after Obama on this, and they’ll go hard. ObamaCare is by no means permanent, either. The Congress could very well dismantle it before it takes effect in 2014.  Continue reading

A Real Town Meeting in the People’s Green Republic of Santa Cruz

Tuesday night, I took in, in person, two and a half hours of town hall meeting with the same congressman, Sam Farr, in my own town of Santa Cruz, this time. Now, it’s important to understand that Santa Cruz is, overall, a seventies throwback, left-liberal to communist anti-American. To give you an idea, on my long street, downtown, there are only three American flags, two of which belong to me. When I make conservative noises in public, in spite of my considerable expressive talents, people think I am kidding.

I went to the meeting with my wife, under my own power. The only prompt I got is that one local radio station gave the time and place of the meeting on the air. It did so several times. It’s seen as a conservative station. (Full disclosure: I [used to] have a talk-show program on that station, KSCO 1080 AM, every Sunday 11AM-1PM.) Rush Limbaugh did not send me. The local Republican Party was pathetically absent in every respect. If there was any conservative or right-wing organization present, it escaped my attention and I was looking for one. There were no right-wing thugs in sight, with the possible exception of myself, and especially, my wife, Krishna. My wife is in very good shape indeed but, she is slight of built. She has never really divulged her age too me but her hair is all white. The only humans she has ever physically threatened were our children, when they were teenagers, and me, of course. I can’t tell you why she threatened me because I don’t like to brag.

I insist on the unorganized nature of the event in a spirit of helpfulness. The main problem most Democrats, including Congressman Farr and including the President face, is that they cannot conceive of a genuine grass-root movement of revulsion. George Beck, the Fox News-appointed liberal, of all things, said on television that he does not believe that the opposition to Obamacare is “spontaneous.” He is not a dumb man. He is associated in some fashion with George Washington University. I have heard him before and never caught him even in a white lie. Those people can’t conceive of spontaneous political action because it seldom happens on their side. Instead, they rely on tax-subsidized ACORN, and on a variety of radical front organizations.  Continue reading

Whining Instead of Sex and the Better Use of Health Insurance: A Testimony

I know how detestable it is for older men to speak about their health. First, the odds that they are going to come out alive are not good. Second, it’s true that many old geezers replace sexual pleasure with the joys of whining. I am not one of those. I have a legitimate, didactic reason to speak about my health, at least, briefly. It has to do indirectly with the underpinning of the on-going debate on and disgust with health care reform.

About five months ago, I started suffering from carpal tunnel syndrome. In a way, CTS is a happy illness. It’s the illness of writers who actually write. It come from spending too much time intensively using the keyboard. Yet, the pain was intense enough to wake me up at night. The neurologist prescribed Aleve. Then, at my insistence, he described the appropriate surgical intervention. It’s a routine operation; it does not require anesthesia; it works almost all the time. Having little patience, in my mind, I was immediately sold on the procedure.

Then, I started looking at cost. I am on one of the Bush-era, smart versions of Medicare. It’s designed to give me all that I need but not much more. I knew this in an abstract way but I had not thought it through because, frankly, who does not have something more exciting to do than reading insurance companies fine print and wooden language? So, I was shocked that my share of the cost for this simple, small operation would come to almost $2,000. I put off the decision because putting off the decision rather than making lemonade, is often the most rational thing you can do when life serves you lemons. Continue reading