Guest Contribution: “Health Care and John D. Rockefeller’s Dog”

Today we are pleased to present a guest contribution written by James Kwak, professor at the University of Connecticut School of Law. He is the author of Economism: Bad Economics and the Rise of Inequality, and contributor to The Baseline Scenario.

Republicans are in a pickle. Last week, the Senate and the House of Representatives passed resolutions directing their relevant committees to write bills repealing the Affordable Care Act—responding to Donald Trump’s campaign promise to “ask Congress to immediately deliver a full repeal of Obamacare.” Congressional leaders had been hoping that they could vote now to sunset Obamacare later — perhaps even after the 2018 elections—both to reduce political fallout and to buy time to develop a health care plan. But now Trump is insisting that the replacement must be passed “very quickly or simultaneously [with repeal], very shortly thereafter” — while most insiders doubt that there is a consensus behind any actual plan.

These are the surface manifestations of a more fundamental problem. As Colin Powell summarized Pottery Barn’s (nonexistent) policy before the Iraq War, “You broke it, you own it.” After stoking popular opposition to Obamacare for six years, Republicans suddenly have to do something about it. And Trump has painted them into a corner by promising, among other things, that “we’re going to have insurance for everybody” and that people “can expect to have great health care … in a much simplified form, much less expensive and much better.” Tom Price dug the hole deeper by saying, “it’s absolutely imperative that individuals that have health coverage be able to keep health coverage.”

They have to say these things, because everyone agrees on the desired outcome: high-quality care that is accessible and affordable for all people. When it comes to environmental regulation, for example, Republicans can simply deny that anthropogenic climate change is an issue. With health care, they have no such luxury; people tend to notice if they are no longer covered. And no politician is willing to say that some people should have to go without health care.

Economism and Health Care

Of course, there is an answer. For years, Republicans have been saying that free markets, competition, and incentives could solve our nation’s health care problems. As Trump said on his campaign website, “By following free market principles and working together to create sound public policy that will broaden healthcare access, make healthcare more affordable and improve the quality of the care available to all Americans.” (No, that isn’t a sentence.)

The idea that free markets are the right way to deliver any goods or services has been an article of faith among Republicans since the Reagan Revolution and among conservatives for more than half a century. After World War II, Friedrich Hayek and Milton Friedman, among others, took a central lesson of Economics 101—that competitive markets maximize social welfare—and elevated it into a universal worldview that I call economism. Over the following decades, economism became a primary lens through which many people interpret social and economic reality.

Today, “free market” principles occupy center stage in Republican health care proposals: promoting high-deductible plans, which will supposedly make people smarter consumers of health care; allowing insurers to sell policies across state lines; limiting the tax subsidy for employer-provided plans; eliminating minimum benefit requirements; and giving insurers more flexibility when setting premiums. According to the rhetoric, the choice is between command-and-control regulation (“death panels,” anyone?) and the magic of the marketplace. By allowing markets to operate with less regulation, these policies will deliver more care to more people for less money. Why? Because that’s how markets work.

Markets in Health Insurance

But here’s the problem: Few people actually want to live in a world where health care is distributed by a free market. Textbook markets allocate goods and services to the people who are willing to pay the most for them—on the assumption that this maximizes social welfare. As Paul Samuelson wrote in his seminal 1948 textbook, “John D. Rockefeller’s dog may receive the milk that a poor child needs to avoid rickets Why? … Because [supply and demand] are doing what they are designed to do.”

If you have a chronic illness that is likely to require $30,000 in treatment, the correct market price for your health plan is more than $30,000. That’s not a market failure; that’s the price at which a profit-seeking company should sell you a policy. But as Jacob Hacker wrote in The Great Risk Shift, “Most of us think it’s fine that some people can’t buy fancy clothing or fast cars. But most of us draw the line at basic health care.” In practice, health insurance markets only work because of an information asymmetry: sick people can buy coverage because they know more about their health than insurers do. Obamacare protects this asymmetry by prohibiting medical underwriting, but this introduces adverse selection, which creates the need for the individual mandate, which motivates insurers to cherry-pick healthy customers, which requires behind-the-scenes, after-the-fact risk adjustment among insurers. Take away those regulations, and sick people will be unable to buy insurance at a price within their budget—because that’s how markets work.

Obamacare is a valiant attempt to force markets to produce a morally tolerable outcome—most people can get some coverage at a price they can almost afford—through a maze of regulations. Even before the election, the system was struggling with the multi-dimensional problem of attracting insurers while keeping prices affordable. Insurers are raising prices or pulling out because the penalty for not being covered isn’t high enough to draw healthy people into the market. On the consumer side, the biggest complaint about health insurance is high and increasing out-of-pocket spending. But higher deductibles and copays are just the market trying to do what it is supposed to do: make the price of care reflect the cost of care. As the total price shifts from up-front premiums to out-of-pocket cost sharing, healthy people pay less and sick people pay more—which is how a health insurance market is supposed to work.

In short, free markets want to make health insurance and health care unaffordable for poor and sick people. Because everyone agrees that would be an unacceptable outcome, Obamacare imposes severe distortions on the market. It can only solve its current problems by distorting the market even more. The simplest way to bring healthy people into the risk pool is to force them to participate (by collecting the full price of a policy in taxes), and the simplest way to control out-of-pocket spending is to tighten the existing limits on out-of-pocket spending (currently $14,300 for a family plan, but the limit doesn’t apply to everything).

At that point, we would have something perilously close to a single payer system (while paying tribute to insurance companies’ shareholders). But when you try to constrain “markets” to produce results that markets don’t want to produce—decent health care at a price the poor and the sick can afford—something has to give. You can force everyone to pay what she can afford for a more or less standard product—what you get with single payer—or you can give up on universal access.

Right now, Republicans from Donald Trump on down are pretending that they can have both: free markets and cheap health care for everyone. At the end of the day, they are likely to find that market forces will only push more families into plans with high out-of-pocket expenses or into the ranks of the uninsured. And then we will have to ask: do we care more about markets, or about people?

This post written by James Kwak.

81 thoughts on “Guest Contribution: “Health Care and John D. Rockefeller’s Dog”

  1. Alan Goldhammer

    Excellent column and I’ll add some other considerations. Markets work when there is transparency in pricing and quality. Neither of these exists in healthcare for the most part (the one exception might be to join an HMO where the pricing issue is dealt with up front). How do you utilize health care dollars as a consumer if you don’t know how much something costs (just try to find out the price of a simple lumbar MRI). How do you determine which doctor or medical procedure will lead to the best outcome?

    Health savings accounts that conservatives routinely tout, only work well for those who are healthy and have negligible yearly expenses. I’ve read articles about the yearly $10K that goes into an HSA multiplying so that it provides all the money one might need for a lifetime of care. Lots of luck if one has a chronic condition or has an accident that requires intensive care. That HSA will vaporize as fast you can blink an eye.

    Obamacare may have been a kludge to work through some major issues but it is/was a workable kludge. I’ve known a number of millenials who have relied on the ACA to buy affordable insurance as they are independent contractors and don’t have access to employer provided insurance. I imagine non of the Republican members of Congress have any children in this category as they seem to be tone deaf on this matter.

    1. Michael Gibbons

      Transparency in pricing is only significant where demand is elastic–and a significant part of demand in health care is highly inelastic-transparencyand competition in pricing os only impactful fro elective, non-emergency health care needs-

      1. jbsay

        Apparently you are unaware how health insurance, healthcare, and HSA’s work.

        The purpose of an HSA is not and has never been to cover serious unanticipated medical costs – that is what your health insurance is actually for.

        But driven by government health insurance has morphed into something that has little resemblance to insurance. It is not there to cover the unanticipated. It is there to cover ordinary healthcare expenses.

        PPACA requires birth control coverage – just as an example.

        Our current heatlh insurance reflects atleast two of the most stupid inefficient means to deliver such services.

        First it inserts an intermediary where there is no significant value added.
        Paying an insurer to pay the doctor for routine medical visits just means making them cost more.

        But worse still modern insurance adds the moral hazard of having third parties pay for services that we consume at costs that we do not see, for services pair through intermediaries.

        Free markets drive costs down – because the lower the cost of anything the greater the demand.

        When you separate people from the cost of the services they demand you eliminate the incentive to reduce the cost of that service.

        The purpose of HSA’s is not to cover heart attacks – or event eh unlikely scenario where you develp an expensive chronic disease – that is covered by your health insurance.

        But I can try explaining this forever.

        The real world does better.

        A zero deductible cover everything plan costs per year on the average about 12,000 more than exactly the same plan with a 10,000 deductable.
        No rational person would ever chose the zero deductable plan – unless someone else was paying for it.

        Rather than parse or refute your argument directly – lets look at the real world market place.

        Please name a single price (expressed in hours of median wage labor) for any good or service that is not lower today than 10, 20, 40 years ago ?

        Outside of a few areas – such as much of healthcare and education where prices are heavily influenced or controlled by government – there are no such instances.

        I am sure there is an effect from transparency and demand elasticity.
        But whatever that effect is, it is LESS than the negative impact of government.

        We can theorize – possibly correctly all the ways that regulation in theory could make markets work better – but in practice the cost of regulation exceeds its benefits.

    2. jbsay

      Apparently you are unaware how health insurance, healthcare, and HSA’s work.

      The purpose of an HSA is not and has never been to cover serious unanticipated medical costs – that is what your health insurance is actually for.

      But driven by government health insurance has morphed into something that has little resemblance to insurance. It is not there to cover the unanticipated. It is there to cover ordinary healthcare expenses.

      PPACA requires birth control coverage – just as an example.

      Our current heatlh insurance reflects atleast two of the most stupid inefficient means to deliver such services.

      First it inserts an intermediary where there is no significant value added.
      Paying an insurer to pay the doctor for routine medical visits just means making them cost more.

      But worse still modern insurance adds the moral hazard of having third parties pay for services that we consume at costs that we do not see, for services pair through intermediaries.

      Free markets drive costs down – because the lower the cost of anything the greater the demand.

      When you separate people from the cost of the services they demand you eliminate the incentive to reduce the cost of that service.

      The purpose of HSA’s is not to cover heart attacks – or event eh unlikely scenario where you develp an expensive chronic disease – that is covered by your health insurance.

      But I can try explaining this forever.

      The real world does better.

      A zero deductible cover everything plan costs per year on the average about 12,000 more than exactly the same plan with a 10,000 deductable.
      No rational person would ever chose the zero deductable plan – unless someone else was paying for it.

      1. Asim

        Obviously, your rant doesn’t address the point of the article. I think you ignore role of technology and systemic productivity growth that comes with treatment of higher number of cases and not to mention the social surplus – you would have let Detroit fail after the financial crisis.
        Your assumption about insurance industry as a useless and expensive intermediary is also very simple minded – one that doesn’t understand a complex healthcare delivery system – Doctors are one of the very important element of the modern healthcare system.

  2. Lord

    It is time for them to put up or shut up. I disagree that everyone believes in accessible affordable care. A third of Republicans believe you are only entitled to what you can afford and blame the poor for reduced access and increased costs for themselves. They may not believe in evolution but do believe in natural selection. Another third believe in such provision only through charity, by those other than themselves, especially those in healthcare. They want the poor to know who to thank for their benevolence. Their elected officials realize these are not popular strategies and Trump won’t let them forget it. Trump will try to push on costs, such as negotiating with drug companies, but the easy way to pay less is for government to pay more.

    1. jbsay

      It does nto matter what 1/3 of republicans beleive.

      That you are only entitled to what you can secure through your own productivity – is more than a republican value.

      It is a law of nature.

      A man said to the universe:
      “Sir, I exist!”
      “However,” replied the universe,
      “The fact has not created in me
      A sense of obligation.”

      We can choose otherwise as government or society, but we can not pretend that choice does nto come at a significant net cost to all of us, and that that cost is not collected by force.

      1. Mike Huben

        What part of your expensive upbringing did you secure through your own productivity? Or did you spring forth full grown from the brow of Zeus like Athena?

        It’s sad that people accept moral fairytales such as “you are only entitled to what you can secure through your own productivity” when a moment’s look at anthropological facts that you experienced yourself reduces the fairytales to rubbish. Sadder still that they can be considered a
        “law of nature”.

        And this same fool would probably fight to be able to inherit (without taxes!) as if his productivity had caused his parent’s wealth.

  3. Anonymous

    The Republican plan, like Obamacare, will not be a good one because it does nothing about increasing the supply of medical services, and this is the result of terrible government regulation: the supply of doctors is extremely inelastic because there are massive barriers to entry to obtain an MD, which the government mandates one must have to treat people.

    Maybe an MD should be required to do surgery, but for many (most?) services there should be no/very limited educational requirement because they are not needed. Diagnosing strep throat, kidney stones, etc. is VERY easy to do and a well funded corporation could provide these services on the cheap if it were not for government regulations restricting the supply of doctors/people that can treat other people. I picture a Wal-Mart or Target having a “diagnosis” stand that anyone can go to, and the person diagnosing them has the amount of education that the market deems necessary to diagnose their ailments.

    So you are right, the Republican plan will not be good just like Obamacare was not good. But that is because of bad government regulations that have been in place for decades, not because Paul Ryan or Donald Trump can’t put together a decent bill. As is the case for most things that our country has a problem with, it is over-regulation that is the problem.

    My wife is an attorney and the law industry has the exact same problem: they get to charge more and are very expensive, and the average consumer is therefore worse off, because the government has artificially limited the supply of attorneys.

    1. jbsay

      Of course no “plan” will work – because myriads of factors effect prices.

      Actual free markets are not “planned”.
      If it is planned it is not a free market.

      What we can guarantee is that any “plan” short of getting out of the way and letting markets resolve all these questions on their own, will with certainty result in higher prices and shortages.

      No effort anywhere ever to “plan” a market has ever worked without price increases shortages, and similar disruptions.

      We can hope that some republican “plan” will be lighter and therefore less distortive than PPACA.

      Or we can accept that the best solution is to allow markets to acutally work.
      That is highly likely to increase prices – atleast initially, and result in some less than hoped for changes – but everything will result in less than hoped for changes.
      But in the long run real free markets are the only way to deliver what the vast majority of us want at the greatest value and lowest cost

  4. Ron

    If the total amount that every insurance company customer pays in premiums exactly equals the total amount that the insurance company pays for their medical expenses, the customer would be getting a fair deal and the insurance company would go do something else (like open a gambling house). To satisfy the insurance company, the total premiums must be more then the total cost of the health care, which is not a good deal for the customer.

    The insurance company does not provide health care. It only provides the bureaucracy needed to pay the actual providers. Because everyone needs health care, it makes more sense to get rid of the profit in the bureaucracy and go with a not-for-profit government entity. I.e., pool our tax dollars, insure everyone, get better outcomes, and save money.

    1. jbsay

      There is no such thing as “Fair”.

      If the insurance company offers a particular deal and you freely chose it – that is the closest thing to “fair” that there is.

      It is irrelevant whether the insurance company is making money or if you are getting a free ride.
      Only that the insurance company is free to offer whatever it chooses and the buyer is free to accept or reject as they wish.

  5. baffling

    one reason the ACA was implemented, was because the insurance company bureaucracy failed to do its job. if it cannot minimize the cost of the consumer while maximizing the profit of the medical provider, as a middle man it is failing in its function. that failure becomes a tax on the system as a whole. it needs to provide efficiency into the system to justify its tax.

    the ACA implemented reforms, such as the EMR system, to introduce efficiency into the system as a whole. insurance companies could have been proactive in trying to implement such requirements into their programs-prodding the medical providers to institute such efficiencies which result in cheaper medicine to both provide and receive. the insurer can catch that delta as profit, or reward, for their good stewardship. but they failed to innovate, so their justification for any additional profit is not completely warranted.

    there is a place for the insurers in this world, but many insurers do not seem to fully understand what their position should be in the medical world. it is interesting, the insurance companies are one of the situations where none of their customers (providers or policy holders) are happy with the current system. but the insurers work with groups (providers and policy holders) that are not well organized, so the insurer has the upper hand. my guess is pressure will continue to grow towards the elimination of this middle man, if it cannot create better value for its customers on both sides.

    1. jbsay

      Healthcare and insurance heve become increasingly inefficient because they are the most highly regulated industries in the country.

      You can not expect markets to work unless they are actually free – though they will try.
      But they will be distorted – at some cost by all your regulatory nonsense.

      There is not if the industry fails to deliver government will step in exception to the laws of economics – no matter how badly things work – more government will make them work worse.

      You seem to beleive that you can pass laws and they will work exactly as you wish.

      To the extent that they are free – markets adapt to whatever laws they are subject to.
      But not necescarly in the way that government hopes for.

      They will act to maximize efficiency – but not YOUR idea of effciency, but theirs.
      If EMR did not take off, it would be because it did not prove the value to those pushed towards that legislators hoped for. That BTW is a tautology. Markets do not ever delibately choose the less efficient (for them) choice for more than a very short time.

      You can muse that things would have worked better if pigs could fly all you want.
      It will not change that for now they cant.

      EMR is an example of a common legislative regulatory problem – timing.
      Legislation nearly always forces the market to either lead or lag on innovation.

      Either adopting some approach BEFORE it is ready, or delaying the adoption of something long past when it is ready.

      Much of what the left pushes as things that industries should be forced to do – are very highly probable inevitable. Though not always in exactly the way that legislators predict.

      But forcing something before it is really ready makes things more expensive , leaves a bad taste in peoples mouths and usually results in delayed adoption – because people are gun shy after failure.

      It is highly probable as an example that some permutation of hybrid or electric vehicle is our future.
      But numerous facets of the technology are not their yet. Batteries in particular are not yet at the safety, cost and life expectance levels necescary to be truly economic

      Contra left wing nuts money alone does nto fix problems, it often does not speed development.
      We typically have to be patient as a series of entrepeurs tackle a problem – each contributing some new imrpvement or knowledge and failing until eventually all the elements needed for success are present.

  6. Steven Kopits

    “In short, free markets want to make health insurance and health care unaffordable for poor and sick people.”

    Is it not similarly true then, then food companies want to make the poor and infirm starve? That housing providers want to make the poor homeless?

    Amazing to see this sort of thing published on an economics blog.

    1. 2slugbaits

      Steven Kopits Amazing to see this sort of thing published on an economics blog.

      Amazing to see this kind of nonsense posted by someone posing as a consultant. This reflects an almost shocking level of economic illiteracy. Food companies and housing providers have an interest in the public actually consuming what they produce. Health insurance providers are only interested in selling a product that they hope no one ever consumes. There is no strong asymmetry of information between consumers and producers in the food and housing markets. Food and housing producers do not face potential liabilities that vastly exceed revenues. Food and housing producers are typically concerned with consumers near the middle of the distribution. Health insurance providers are typically concerned with consumers near the tail of the distribution. That’s why actuaries live and die by power distributions; e.g., the Pareto distribution. The differences between the health insurance market and other markets like food and housing are (or at least ought to be) obvious to anyone old enough to vote. Apparently not.

      In their ideal world health insurers would like to have extreme price discrimination supported by the ability to exactly target individual risks, which if course completely defeats the intent of insurance. Food and housing producers live in a different world.

      Prof. Kwak wrote an extremely clear and well reasoned piece. Too bad Steven utterly missed the economic lessons. The sad thing is that Steven Kopits is one of the more intelligent folks on the conservative side of the aisle. So if he got it so awfully wrong, what hope is there for the real crazies that crawl around this blog.

      1. Steven Kopits

        All businesses would like to have revenues without expenses. All people would like to earn incomes without work. These are the fundamental principles of economics: unlimited wants meeting scarce resources. If you don’t get that, you might as well post on a sociology blog.

        If you have competitive markets–for example, buying health insurance over state lines (given this is not as easy as it sounds)–then competitive pressures will produce the best outcomes for customers. As it is, Obamacare has now effectively created insurance monopolies in a number of counties across the country. Monopolies, as we know, do not produce the best outcomes for customers.

        But only a non-businessman would say that businesses have an interest in consumers not consuming their products (although this very much was the case in communist Eastern Europe). A businessman is always looking for a way to serve the next segment over, whether that is higher or lower income. Success depends on the state of technology and economies of scale.

        It is, however, true that, in a free market economy, you have to pay for what you purchase, whether that is healthcare or corn flakes. The unwillingness of society to tolerate that perspective is what drives healthcare to be the regulated mess that it is.

        1. baffling

          Steven, a very simple question. Is the current state of medical care and insurance better than, less than or equal to the conditions of 2007?

          1. Steven Kopits

            In the unsubsidized individual market, it is much worse. If you like your doctor, well, forget about it.

            It’s also much worse in the New Jersey government/academic market. I think we’re paying perhaps twice what we paid in 2007. NJ state employees are still in an envious position, compared to the private sector.

            If you had pre-existing conditions, in many cases, you’re far better off. The other 95 people voted for Trump. (I am exaggerating, of course.)

          2. baffling

            well, steven, rates of health insurance costs have decreased over the last decade. especially parts that were directly related to the ACA. your employer/government sponsored increases were a result of the free market, so don’t blame the ACA.

            “In the unsubsidized individual market, it is much worse. If you like your doctor, well, forget about it.”

            that is a great soundbite. but it ignores the fact, if you actually needed a doctor long term, you probably could not get insurance in the first place back then. almost everybody avoids the position of buying in the unsubsidized marketplace. you are a prime example. but for those who actually need that marketplace, the insurance is much better than what was available a decade ago-when obtaining the insurance was an iffy proposition to begin with. i don’t think you fully appreciate how bad the unsubsidized group had it with respect to obtaining insurance a decade ago. but i further question, why doesn’t the purchaser of unsubsidized insurance get insurance through the workplace? and if they are not working, they probably are eligible for a subsidy. you are throwing a lot of people to the wolves to make the argument for the unsubsidized buyer.

        2. 2slugbaits

          Steven Kopits Again…UGH! Prof. Kwak was pointing out that health insurance markets are not like your standard textbook competitive markets without asymmetries of information. If you want universal access, then you have to make the insurance premiums affordable for all. Rockefeller’s dog gets milk, but the poor can’t. If you want to make insurance premiums affordable for all, then you have to limit the ability of insurers to price discriminate. But if you limit their ability to price discriminate, then you create a death spiral insurance pool because people will only buy insurance when they are sick. And thanks to asymmetries of information, the sick have more knowledge about their health than any insurance company. Unlike other markets, private insurers are at risk of catastrophic costs…that’s why actuaries rely upon special distributions (e.g., Pareto and Burr distributions) that emphasize tail risks. It’s also why actuaries focus on P-P plots rather than Q-Q plots.

          If you want to retain private sector based insurance, then you have to have something that resembles Obamacare. The other choice is single payer. Take your pick. Of course, you could always argue that universal access to health insurance should not be a public policy goal, but so far I haven’t heard any politicians make that argument.

          You are completely misinformed about insurance across state lines. There really isn’t anything in Obamacare that is a real barrier here. In fact, early on the Obama team wanted to encourage insurers crossing state boundaries; however, economists pointed to 30 years of research on this issue and explained why it was very bad economics. It’s also a dead letter because no insurance company would even want to go across state lines. Insurance companies spend a lot of effort understanding local markets and negotiating rates with local doctors and local hospitals. A New Jersey based insurance company would not be interested in insuring subscribers in Nevada. It might work with Rhode Island and Connecticut, but as a national policy it’s a non-starter. This has long been known by healthcare economists.

          I do agree with you that the public is unwilling to pay for what they want. Also, dog bites man. Healthcare is very expensive, which means health insurance is going to be very expensive. There’s no getting around it. Obamacare has shown people just how expensive health insurance really is. People with employer based insurance don’t observe the full cost. Obamacare has been a consciousness raising exercise.

          1. Steven Kopits

            “Healthcare is very expensive, which means health insurance is going to be very expensive. There’s no getting around it. ”

            Sure there is–in a deregulated market.

            “Obamacare has been a consciousness raising exercise.”

            Yes, it’s made the American voter want to overthrow the existing system.

          2. baffling

            “Sure there is–in a deregulated market.”
            and you have evidence to back this up? considering medicare and medicaid have controlled costs far better than the less regulated private sector, the evidence does not support your statement.

      2. jbsay

        “Amazing to see this sort of thing published on an economics blog.”
        The fact that we are talking insurance changes NOTHING.

        Myriads of market transactions/products work excatly like health insurance.
        At the top ot the list – is every other form of insurance their is.

        BTW the product of health insurance is not healthcare – it is financial security.
        EVERYONE hopes they do not have to use the insurance.
        One of the problems with government interventions in insurance is they distort that desire of EVERYONE to not consume healthcare.

        I have no clue what the costs are to produce food – I merely know that I need it – even more than healthcare to survive, therefore I must purchase it or produce it myself.
        I have no clue what the costs are to produce housing – I merely know that I need it.

        In every market consumers have varying degrees of knowledge and savy.
        And infact markets naturally adapt to vary levels – and desire for knowledge.
        Savy shoppers get better prices on food, and reduce prices for everyone
        While consumers that do not wish to spend the time to shop – pay more.

        What provides supply in pricing in any market is not driven by some fiction left wing nut version of the world.
        The amount of information markets provide regarding pricing and services is based on the demands of market participants and our standard of living which allows us to afford it.

        If you want to cost of things to drop – productivity must increase – that is the ONLY way we can afford more for less.

      3. jbsay

        It is irrelevant what insurance companies ideal world and wants are – just as it is irrelevant what consumers ideal world or legislators ideal world or left wing nuts ideal world or ….

        All of us operate in the real world. Insurers seek to profit in the real world.
        To do so they must:

        Provide a good or service that people want, at a price they will pay and a cost to them that they profit at.

        OR leverage government to distort the market in any number of ways such that they can profit by renting government power.

        Unless you are clueless, you grasp the later is always more expensive.

        Even in the rare event that some producer does not rent seek its way to profits but government advocates manage to push through purportedly pro consumer regulations.
        These are still distortive, in the event they push more cost onto providers – all that means is they:
        Push back to get legislative changes that solve their problem.
        Find some other way to increase prices or cut services.

        For a given level of risk market profits are very very nearly fixed.
        At that level of risk – if you legislatively reduce profits – investors will leave and businesses will close.
        Providers will ALWAYS find some way to maintain a profit/risk ration that will satisfy investors. Anything else means death.

      4. jbsay

        No Prof. Kwak’s peice was not clear or well reasoned. It is completely at odds with 200 years of economic knowledge and the laws of economics.

        This is a constant problem with left wing nut economics – it confuses shallow and simplistic with common sense. It fails to grasp that for every action in both physics and economics
        there is an opposite reaction – and on and on. This is virtually unavoidable.

    2. Bpdelia

      No those have nothing to do with each other. Its amazing you can’t see that. The profit a food company makes is completely unrelated to how hungry the eater is.

      The profit an insurer makes is DIRECTLY AND PRIMARILY related to how sick a patient is.

      Your example is completely pointless and poorly thought out.

  7. Helene Burgess

    In response to Steven Kopits. Yes, housing providers want to make the poor homeless. Just go to Berkeley, Oakland and San Francisco and see all of the expensive housing being built, all the people living under bridges and in parks and all of the low-income people being evicted out of their homes. The “want ” isn’t intent, it is the want to make profit and the collateral damage is homelessness.

    1. Steven Kopits

      I’ve been to Berkeley. It has the run-down feel I associate with pre-1990 Eastern Europe. Lots of regulations leading to insufficient capex. That’s the look.

      As for San Francisco, it has it’s $15 min apartheid law, which one could interpret as an attempt to keep young black men on the other side of the Bay Bridge.

      But SF also has plenty of zoning restrictions.

      If you want housing, go live in some place with lots of vacant housing, eg, Baltimore, Detroit, Philly. I have a friend who makes $500k per year. He lives in Oakland, can’t afford SF. Don’t know what to tell you. Go where the cost of living is cheaper.

      As for people on the street, yes, my family has commented on the number compared to what we see on the East Coast. But isn’t California nirvana? Menzie keeps telling us how bad Wisconsin, with 4.1% unemployment is, compared to California’s 5.3%. If you’re telling me California is badly governed, well, yes, I agree with you.

      1. Menzie Chinn Post author

        Steven Kopits: Hmm, you must visit a different Berkeley than I do. I go at least once a year (family). I suspect you are weighting different factors than I do.

        1. Steven Kopits

          I was referring specifically to University and Addison. Lot of marginal types floating around, too, as I recall.

          1. Menzie Chinn Post author

            Steven Kopits: Not sure what you mean; University and Addison don’t intersect, they parallel. But if you mean the blocks between those two parallel streets — well yes, particularly as you get to “the flats”, it’s not pristine. But if you mean next to the Berkeley Repertory Theater, I don’t think it’s a disaster — and I think I’d trade intellectual life for suburban ordnung. (Used to live three blocks from University and Shattuck, myself).

  8. davis petersen

    It would be an utterly different world were it that each of us woke up in a randomly different consciousness each morning. No inheritances, no family fortunes, no luck of birth – just randomness. If one day you were rolling in dough so that you had health insurance, a house, a job, etc.,, you’d have no guarantee that you’d wake up to that same situation tomorrow. Sharing would be a given, equality a standard.

    Are some so smug in their richness that they cannot conceive of being without? And are so quick to say, “Let everyone buy their own health insurance – if they can”.

    1. Steven Kopits

      Actually, I didn’t say this. I said you have to conceptually distinguish between insurance pools and health subsidies. This are two different things. You can mix them if the total amount is not a material share of total income. If the total is a material share, then you will get a premium death spiral as the healthy flee the system and the sick populate it. That’s where we are today.

    2. jbsay

      Absolutely in any hypothetical different world with entirely different circumstances, humans would make different choices reflecting those different incentives.

      But we live in the real world. What is true for some hypothetical world is NOT true for this world and not meaningful.
      Pigs can not fly.
      What is moral an what is immoral in some different hypothetical world – has zero meaning for this world.

  9. Joseph

    Keep in mind that Steve Kopits is the guy who believes that segregating insurance customers into winners and losers, healthy and sick, low premiums and high premiums somehow magically saves money.

    Segregation — it’s the Republican way.

    1. Steven Kopits

      Let me illustrate the point with an example. It is well known that 2 or 3 people in a hundred person pool will consume the bulk of the healthcare expenditures, Consider the following hundred person pools:

      Pool One – Normal Risk
      In this pool, the average person consumes $2000 of healthcare per year, paid by insurance, In addition, two people in the pool have some acute problem, with each requiring $150,000 of care. The total health expense of the pool will be around $500,000 and the average premium (assuming insurance admin costs are included) is a little over $5,000, with no deductible. This is not cheap, but the system is still workable.

      Pool 2 – 3 People with Pre-Existing Condition
      Now, let’s take the same pool, but allow that 3 of the members have chronic conditions requiring $350,000 / year each. The total pool cost is now a bit over $1.5 million per year and the average premium rises to $15,400. This system is no longer workable. The healthy members will effectively lose their low-end coverage through high deductibles, but even so, just those three high cost patients are enough to trash the system.

      That’s where we are, and you could see the problem coming a long way off. The failure to do that math created the Tea Party and ultimately brought Trump to power.

      1. baffling

        So what do you do with the people with pre-existing conditions? If you do not let them die, they you have to pay for them. You either pay for them with premiums, or higher taxes. Or you let them die. American’s have rejected that outcome.

        1. Steven Kopits

          No, Baffs. But you have to take a cost / charity approach to them. It comes down to how much you can afford. It’s a different proposition from insurance.

          1. Robert Ricketts

            Is it plausible to talk about a “cost/charity” approach when there is no observable association between the cost of delivery and price? Would there be a shortage of surgeons if, say, a single payer system restricted the surgeon’s fee to $3,000 per hour? What if a benevolent government paid the cost of medical school so that more people could pursue careers in the medical profession, thereby weakening the surgeon’s market power via increasing supply? It is simply preposterous to talk about a free market in healthcare.

          2. Steven Kopits

            Robert –

            The US government offers any number of redistributive policies.

            I suspect that, were healthcare entirely deregulated, we would achieve roughly similar outcomes statistically at 2/3 of the cost.

            As it is, we’re in the salt-in-the-coffee story, and precisely because healthcare is so politicized, rational policy is very difficult. So it really becomes all about budget constraints, rather than efficient use of societal resources.


            But at this point, we are getting well into Amy Finkelstein land.

        2. jbsay

          We all die in the end anyway. This let them die crap is nonsense.

          Nor are most pre-existing conditions fatal.
          I have a freind with issues that was unable to get insurance prior to PPACA.

          He is one of those who is happy – and I am happy for him.
          But he was nto dying before, is not dying now and will not be dying if insurance coverage of pre-existing conditions goes away.

          AGAIN insurance is about protecting assets, not about health care.

      2. 2slugbaits

        You have just made the best possible argument for Obamacare’s mandate. It’s precisely because of the risk of a death spiral that the young and healthy have to contribute. It was the failure of Tea Party types to actually do the math that is part of the problem. Tea Party types were arguing against the mandate, remember? And keep in mind, people who are healthy today may not be healthy tomorrow. Despite the name of my daughter’s favorite store, we’re not Forever 21.

        If you want to segregate the healthy and the chronically ill into two different insurance pools, then you have to tax high incomes to pay for the heath care of the chronically ill; e.g., Medicare. Unless of course you want them to die. If you don’t do that, then having two different insurance pools is the ultimate in death panels.

        1. Steven Kopits

          Public policy involves making choices, Slugs. Should we pay $300,000 to extend an 85 year old cancer patient’s life? You can ration by price or by volume, but if you don’t ration by something, well, you get US healthcare.

          By the way, you can fund pre-existing conditions with immigration reform. Lot of money available there. I have a piece allegedly coming up on CNBC. Another on the way.

          1. 2slugbaits

            Steven Kopits You’re answering a different question. The issue is universal access to health insurance. What the limit of that insurance should be is an important but entirely different question.

      3. Steven Kopits

        Let me comment here a bit on the economics of fascism.

        Trump carried the middle class — those with income from $40k to $200k — but neither the segments above or below that. The segment below is the beneficiary of spending programs; the group above $200k can afford some magnanimity. It’s that group in the middle, more or less living paycheck to paycheck but not eligible for subsidies, which voted for Trump.

        In the insurance example above, you can see that the system is being run for the benefit of the three chronic care patients. The 95 who didn’t need acute care will feel poorly treated, because they lost their routine health insurance and had to pay more.

        This shows up in other ways as well. I, for one, find the numbers of handicapped parking spots excessive. They are usually empty, and forgive me, if you are able to drive to the store and go in and shop, then you’re probably capable of walking another 50 feet to your parking spot. Once again, the impression is that the system is being run for the exceptions, not the rule.

        The point is that, if the middle begins to feel that the system is being run for a relatively small number of outliers, then tolerance will be supplanted with top-down conformity based on majority rule. I think that’s what we see today and what so greatly disturbs the left. There has been an ideological inversion. Conformity, not tolerance, is the watchword.

        Now, the dangers of a conservative society like this aren’t lost on me, but you have to be careful not to assume it’s a ‘mistake’ or voters have been ‘misled’. They simply got tired of playing by the old rules, because enough of them perceived that the game was being played to their detriment. In a number of cases, they have it right. Obamacare is a prime example.

        1. Menzie Chinn Post author

          Steven Kopits: And here I thought the $25 billion odd ag subsidies to farm households (avg income around $81K/yr) was one of the biggest per capita recipients of subsidies. I think $81K is bracketed by your $40-200K figures.

          1. Steven Kopits

            Also, populism contains critical internal contradictions: “I want free markets protected by tariffs.” I don’t disagree with that at all.

            So which way do we go? Some are out protesting. Some think dark authoritarianism is a step up. I personally hope we’ll be able to use innovative–business-like–policies to solve problems traditionally considered exclusively in the government domain. Or maybe nothing really changes. Don’t know.

          2. jbsay

            Why do we presume that there is some ideological tit for tat regarding stupid government ?

            While Ag Subsidies have become a fixture of the right – they were created by FDR and the left.

            If you are arguing that the right unfortunately often adopts stupid ideas of the left eventually – I would agree.

            Regardless, your smart enough to know your response is a fallacy.

  10. Dr. Joe

    There is no country in the world that has high quality, low cost and excellent access to health. There is no political viewpoint that can totally solve this triangle of health care.

    As a physician, Obamacare has brought me more patients. Is this a good social outcome ? Perhaps. However, the reimbursement from the subsidized plans ( Medicaid rates) are lower than my costs. As a result , I will ( for the first time in 30 years limit the Obama care patients I see. Not a good result and ethically bothersome

    Should patients have more skin in the game with high deductibles ? Perhaps this is good policy and will reduce unnessary care? However, in real life high deductibles means no pay for physicians. Our long term accounts receivables have doubled. As a result, for the first time in 30 years I will require payment in advance for every patient with a high deductible. Not a good result and ethically bothersome.

    Perhaps physicians like me earn too much? If all physicians worked for nothing, the cost of health care would drop by 8% ( physicians are 20% of healthcare budget and their 60% overhead leaves 40% profit). Since this profit /salary is taxed at about 40%( fed,state, property, sales taxes), the net savings to government, would be only 4.8%( 8%minus loss of taxes on physician salaries). Given the rising cost of health care, this would a one time savings. Not a good result as you would no longer have Physians .

    I am a fiscal conservative but my solutions sound a lot like Bernie Sanders.
    1. Universal health insurance. Insurance companies take 20% in fees. Medicare runs at 6%. Immediate savings
    1b. Absence of multiple insurance companies will reduce practice overhead. Overhead in Canada is 20-40% not 40-70% like US. Immediate savings

    2. Limit medical malpractice liability . This will immediately reduce unnessary testing.

    3. Permit balanced billing. This will enable the best physicians to charge more and still provide care to the needy as we have done for centuries.
    Take from the rich and give to the poor. I have always provided free care but as my costs skyrocket and payments drop this becomes difficult

    4. Hold off on electronic health records until systems are better and interoperative. This is a major boondoggle that has not improved health and costs billions. Perhaps in future but not ready for prime time

    1. John

      “There is no country in the world that has high quality, low cost and excellent access to health. There is no political viewpoint that can totally solve this triangle of health care.”

      This is very wrong. Switzerland has health care of highest quality, it is mostly or even 100 % free for the poor, and everyone has excellent access to health. Solution is : Trump and his cronies have to pay for all, and have to give away their wealth (to a certain extent). In exchange, Trump and his cronies get nothing. The solution for your so called “triangle of health care” is humanity. Switzerland has a 1000 year old democratic mindset, the USA still miss 900 years to get there. Or it will even never happen in our glorious country.

      1. Dr. Joe

        “Overall, the Swiss health care system is costly and has room for improvement, particularly in terms of accountability for the quality, appropriateness, and cost of health care services. ”

        New England Journal of Medicine December 3, 2015

    2. PeakTrader

      Dr. Joe, I think, universal health insurance is a good idea. Perhaps, it should be tied to auto insurance, where people pay for auto and health insurance together. That way accidents and illnesses will be paid for.

      There should also be much more competition and incentives, along with much less regulation, to reduce health care costs and reduce premiums.

      The massive savings can be used to strengthen a safety net, e.g. for preexisting conditions and catastrophic health care, along with covering the uninsured.

      1. jbsay

        why stop there ? If universal Healthcare is such a good idea – what about food ?
        And Cars ? And Jobs ?

        Contra the left there is nothing special about health insurance or health care.

        Providing goods and services through the free market assures that ultimately we get the greatest value at the least cost.

        Providing any goods and service any other way lowers our overall standard of living.

    3. efc

      You scoff at 4% savings for salaries but medical malpractice (including the lie that is “defensive medicine”, who was the PR genius who came up with a way to phrase testing for dollars as something DRs were just “forced” to do because of mean old lawyers?) is estimated to be about 2.4% of health care spending ( Zeroing that out would mean people hurt due to someone else’s negligence would be out of luck. Doesn’t seem very fair or a good way to save a relatively tiny amount.

      Though it’s weird you act as if the taxes DRs pay on their salaries (and no one pays 40%) would vanish into thin air. No one claims we can’t outsource factory jobs because the taxes the workers pay would be lost. The lower prices would free up money people pay on healthcare to be spent in other areas thus becoming taxable income for other people.

      Clearly lower salaries for all health professionals will be part of any solution. And the idea it is the costs of practice driving spending rather than Dr’s fees seems self serving.

      “the study concludes that the higher fees paid to physicians—rather than factors such as higher practice costs, volume of services, or medical school tuition expenses—are the main drivers of higher US spending on physicians, particularly in orthopedics.”

      For some reason DRs in the US have been able to basically rob the rest of us blind for decades. I was born in Australia and my family has lots of DRs from academic physicians, to heads of departments at major hospitals, to GPs. They make a lot less money yet there are still plenty of DRs. I wonder how they do it since DRs in the US would have us believe paying them more in line with the pay DRs receive in other developed nations would be the end of medicine in the US.

  11. Per Kurowski

    Just stopping the health sector from abusing those uninsured that do not have powerful insurance companies negotiating the costs of medicines and medical services on their behalf, could go a long way to solve health care problems.

    For instance, no hospital should be able to charge more than 20% higher for any of its services than what it charges the lowest paying insurance company.

    1. jbsay

      It is precisely this kind of stupidity that RAISES prices.

      Medicare requires that doctors agree not to charge any patient less than the price they charge medicare.

      That does no result in lower prices for medicare – it results in higher prices for everyone else.

      Further it prevents doctors from discounting their services as a form of chartity to those in need.

  12. Erik Poole

    I must admit that I object strongly to the wording used by the authors. Free markets do not have a soul or righteous view on optimal outcomes.

    So as y’all know, folks from outside the USA are completely puzzled by this opposition to socialized medical care. Yet at the same time American exceptionalists like Steve Kopits support massive billion dollar subsidies to the Agricultural sector which is already quite efficient and is essentially a life-style industry. Subsidies are not necessary in order to get people to farm and ranch.

    Trump and his team have hinted they would make health care more efficient. Would it not be wonderful if Trump made the federal state a unique buyer of drugs and medicine for those on socialized medical care? The monopsony power would save billions.

    On the other hand, if Trump takes away coverage from the poor, the American street will come alive and ultimately remind the rest of the world, that Americans simply do not like each other.

    1. jbsay

      And the EU has an overall 20% lower standard of living. Pays substantially more for most everything. lives in smaller homes and generally has significantly less wealth.

      That they do not understand us is not very compelling.

      Our healthcare system in the US is seriously F’d up – but primarly because we have done many of the same stupid things the europeans have done and we have proven time and again that as bad as european democratic socialism is – the US version of the same thing is far worse.

      I have not heard anyone supporting ag subsidies.

    2. jbsay

      The primary beneficiaries of PPACA have not been the poor. SPecifically with respect to the poor PPACA has been a failure. While there has been alot of criticism of flaws in the so called 10’s of millions who have gained insurance as a result of PPACA, no matter how you slice it few of them have been poor.

      We could not get the poor to sign up for subsidized medical care before PPACA.
      PPACA did not change that.

      Everyone keeps making this completely stupid assumption that health insurance ahs something to do with health.

      The insurance industry has spent 40 years trying and failing to prove that health insurance has health benefits – it has NONE.

      The benefit of health insurance is that you can pay your medical bills – you do not go bankrupt if something bad happens.

      If the harm of bankruptcy is low, or the risk is very very low – health insurance makes no sense.

      Why do we presume that people must have health insurance ?

  13. Jim Mahern

    Two years ago I attended a HS reunion. One of my HS classmates had married a fellow that attended the same college I did. He was a great student in college, and I knew he had planned on becoming a physician. I was shocked to find out that he was not a doctor, as in his words , “I could not get into a medical school”. Base on his intellect and his approach with people, he would have been a great doctor.
    He graduated from college in 1964 and went on to become a HS science teacher. While I realize that he was a great teacher, the health care system in America lost a potentially valuable asset. The shortage of physicians contributes to the high cost, and limited accessibility, of health care in America today. My advice to the American Medical Association is simple – “Physician heal thyself”.

    1. Steven Kopits

      I agree with this, by the way. I find that the medical profession has taken on a troubling commercial bent.

    2. jbsay

      This is generally true of all professions.

      Even the Obama administration has come out questioning the explosion in licensing requirements.

      Next my pet sitter will have to be licensed.

  14. Joseph

    Steven Kopits: “If the total is a material share, then you will get a premium death spiral as the healthy flee the system and the sick populate it. That’s where we are today.”

    What is this premium death spiral you speak of? The ACA exchange market has grown each year since introduction in 2014. This year it is up another million and the sign up period is not yet over.

    People really like their Obamacare and are going to be really angry at Republicans who take it away. Most of the complaining is coming from clueless people like Kopits and Stryker who aren’t even in the individual insurance market so have no idea how much better it is since Obamacare. They are just parroting mindless Republican twaddle.

    I’m so old I can remember when Republicans celebrated Mitt Romney for signing Romneycare. But you put a black Democrat in the White House and Republicans dutifully change their tune, “1984” style. “We’ve always been at war with Romneycare.” Funny how that works. Idiots — all of them.

    1. Steven Kopits

  15. jbsay

    Frankly, the article is disappointing.

    If this is what people who purport to be economists beleive about free markets they need to climb down from their ivory towers and join the real world.

    Free markets not merely allocate scare resources, but they eliminate the scarity and reduce the cost of those things that people want the most of.

    When you start a sentence with – if someone has a disease that will cost $x to treat – you have already failed to understand free markets.

    On of the primary actions of markets is to take something that is in high demand and reduce its cost from $X to something lower – often much lower.

    Free Markets do not do this instantly. nor do they do it uniformly.

    Costs of everything initially may go up. Costs of things that are not in demand will likely remain up
    But if enough of us want something – its price will inevitably come down.
    Free Markets direct our energy, our effort our creativity towards reducing the cost of those things we value the most.

    Further, this is essentially a tautology – if the professor does not understand it – he should not be teaching economics.

    Free Markets MUST function this way – there is no other way to increase standard of living.

    A rising standard of living requires, is by definition, producing more of what we value while using less human resources to do so.

    That fundimental truth should be the starting point for anyone teaching economics.

    You can not improve standard of living without producing greater value while using less human resources to do so.

    That is also important for evaluating all the moral questions raised.

    The purportedly “moral” approaches that direct resources differently than a free market – might well demonstrably improve the lot of some – but ALWAYS at the expense of others.
    Not merely the purportedly rich whom you hope to redistribute the cost from, but all the rest of us as you run afoul of the broken windows fallacy. When you direct resources to some purportedly noble moral goal – you direct them away from other goals that we the people through our vote in the market place have determined are more moral and more valued.

    1. Strat Douglas

      Dismal little religion you have there, JB. But, it seems to give you comfort and joy, and there are certainly even more harmful religions out there, so who am I to object? I like markets too, and for many of the reasons you give. But I personally don’t buy your absolutist Randian moral case for markets, and I think it’s because my value system contains some inputs besides your “economic freedom.”

      If you’ve studied economics even a little (and it seems you have) you know that the moral case for markets has an initial allocation problem, and even if you ignore that, the allocative efficiency of markets depends critically on assumptions of (among other things) perfect information, lack of market power, and excludability, all of which are lacking for health care. I lack your ability to ignore or minimize these problems.

      Take excludability. Unless you’re willing to let poor people die because they don’t have the money or credit to buy even the basic medical care they need, there’s no way to exclude them from the system. They will just show up in emergency departments, where doctors who are foolish enough to have consciences and empathy and altruistic feelings for the suffering human beings before them will not refuse to treat them. (Probably because they have not read Atlas Shrugged as carefully as you have). And you will get a death spiral of the entire system, unless it is subsidized. Putting those people into a high-risk group does not finance their care, so unless your healthcare system has true death panels you will have to find a way to do so.

  16. Strat Douglas

    Ably argued, Steven, but I am still not quite sure what your point is. You’re saying the U.S. can’t afford to care for the two expensive people in your insurance pool? You’re saying that you would vote to just let them go untreated, or get an inferior level of treatment? Or, are you saying that we should pay for them using a different payment mechanism besides insurance? If we separate them into a high-risk pool, we still have to finance their care somehow, or give them inferior care. I agree that “Public policy involves making choices.” I agree that we have to make decisions as to whether or not we should pay $300,000 to extend an 85 year old cancer patient’s life. I agree that we have to decide.

    The articles you cite don’t support your argument, by the way. They point out some reasons for skepticism of Obamacare’s future, which I think everyone agrees is an overly complex cobbled-together compromise that few Democrats prefer to single-payer, and which Republicans have attacked relentlessly simply because Democrats created it, and which has somehow endured so far anyway. Everyone agrees it needs reform, and the articles don’t point out any problems that more generous funding wouldn’t solve. Is more funding of the Obamacare beast the way to go? I don’t think so; I would prefer that we rebuild the system using the experience of the British, the Canadians, the French, and the Germans, all of which provide excellent care at a fraction the cost of the U.S. system. In other words, I think Dr. Joe is onto something.

    Your free-market solution is not convincing me yet. Try again. Maybe the immigration reform financing will work, I know that you have some cool ideas and you’re always worth listening to, but I don’t have any idea what you’re talking about in the immigration-reform-financing for healthcare.

    I think that the most likely outcome of the Republicans’ current put-up or shut-up moment is that the poor will get something that looks like insurance, that is cheap, that the Donald will declare is insurance, but that won’t provide much actual insurance coverage. The 98 in your example won’t notice this much, and the other two will be too sick to complain, so Trumpencare will be a huge, unbelievable success.

    1. Steven Kopits

      Strat –

      I am making a limited point, which is, to mix ordinary risk pools with subsidized coverage is dicey if the cost of coverage is a high percentage of total income. Insurance is a different function from healthcare subsidization.

      For those people who cannot afford care, the state should provide some level of support. I haven’t done the analysis on how much is enough, either in terms of economic health or social preferences. However, I personally doubt that a system with $5000 premiums and $6000 co-pays is politically viable. At the same time, I like the mandate and I strongly believe we should separate coverage from employment. In my opinion, saving the system may require the removal of chronic care patients to a different pool.

      Now, up until last week, the fountain of free money for the Republican Party was supposed to be the border adjustment tax (BAT), a disguised tariff with the presumed effect of strengthening the dollar sufficiently to, in effect, make US trading partners pay the tax. I personally thought this was insanity. (I believe Larry Summers called it ‘well beyond voodoo economics’). Trump dismissed the tax, and with it, essentially Republican hopes for manna from heaven.

      As a result, we face some choices. We can remain revenue neutral, Mitch McConnell’s choice. That means no new net spending. So then where does the pre-existing condition funding come from? Are we going to run up the debt? We’re at a 3.4% of GDP deficit now, and I think Menzie might agree that, on a cyclically adjusted basis, we should be running something like a surplus of 2%. So we’re more than 5% of GDP from were the cyclical balance should be. That is an enormous gap. (Menzie might have a different view, but that’s mine. We are now at the mature stage of the expansion.)

      Almost every initiative from the Trump administration — China trade war, Mexico tariffs, the wall, repealing the revenue provisions of Obamacare, reduction of corporate tax rates — is negative for the federal revenues. So where does the money come from?

      Basically, policy can go in one of three directions now. It could go plain bonkers in a really bad way. Maybe we blow out the deficit to 6% of GDP. Maybe something worse.

      We could go back to the status quo. I don’t think Trump wants to go there, and I think we can do better.

      Or we can innovate with new programs which rekindle policy as an exciting field in which the US leads (or at least is second to Singapore). That’s what I want to do. Trump as the neo-authoritarian is likely to fail. Trump the Deal Maker could be a huge success. For those of us who want the best for the country, we have both an opportunity and an obligation to push policy in a constructive direction.

  17. Joseph

    Jeez, Steven Kopits, did you even read the links your provided? Here’s what they say:

    Megan McArgleBargle says: “In other words, while reports of a death spiral may have been greatly exaggerated …blah, blah, blah”

    James Capretta, American Enterprise Institute resident fellow and former White House Office of Management and Budget director “repudiates talk of a death spiral.” If you can’t even get the AEI and Fox News to support your thesis, what good is it?

    And in your last link, Dr. John W. Rowe, who was the chief executive of Aetna from 2000 to 2006 and the president of Mount Sinai Medical Center in New York before that, predicted that “the insurance market will stabilize in two or three years … We are not in a death spiral”.

    You can’t have a death spiral if more people are signing up every year. Do you think insurers are going to quit a growing market?

    What is it with Republicans who stubbornly deny the data? They predicted that nobody would sign up for Obamacare. They were wrong. They predicted that premiums would skyrocket. They were wrong. They predicted that employers would stop providing health insurance. They were wrong. They predicted that employers would cut people off at 35 hours per week to cut health benefits. They were wrong. And now they are saying that Obamacare is in a death spiral. And they are wrong again.

    I’ll say it again. Republicans are idiots.

  18. Rick Stryker


    Your article is very-well written and honest but I think it goes very wrong in misunderstanding the free market view on health care and other markets for goods and services. You say,

    “After World War II, Friedrich Hayek and Milton Friedman, among others, took a central lesson of Economics 101—that competitive markets maximize social welfare—and elevated it into a universal worldview that I call economism.”

    First, it isn’t a central lesson of Economics 101 that competitive markets maximize social welfare. In my class at the Dept of Free Market Economics at Wossamotta University, I’d have to mark that wrong, as would any other instructor at any other University. Under ideal conditions, the first welfare theorem says that the result will be Pareto Optimal, meaning that you can’t make anyone better off without making someone else worse off. But that doesn’t mean the result is just or maximizes social welfare. Hayek and Friedman understood this.

    What they did believe is that free markets are remarkably effective at raising the standard of living in general, mostly because they provide the right incentives. As Friedman once put it, he wants a system that incentivizes bad people to cooperate and work in each other’s mutual interest rather than a system that depends on finding the good people and giving them power to make everyone do the right thing (right as defined by the “good people”.)

    Conservatives see the problems with health care to be primarily caused by intervention in the health care market. They don’t see the market for health care as being fundamentally different from any other market. They want to reduce regulation and intervention. Conservatives distinguish between health insurance and access to health care, believing you can have universal insurance but poor access to medical services. Conservatives want to increase access. They believe that by unleashing the power of competition, entrepreneurs will invent better and lower cost ways to provide access to health care, even if insurance is not universal.

    Here’s a good example of the differences in philosophy. Progressives point to people without insurance who have pre-existing conditions and argue that government needs to control health care to prevent that. Conservatives point out that that problem is mostly caused by the non-portability of insurance: insurance is tied to employment. But it is because of a prior intervention in the market–the wage and price controls imposed during WWII–that employers offered health insurance as a benefit to effectively raise salaries. But health insurance should not be tied to employment. In a free market, people would buy portable, long-term insurance that would have nothing to do with their jobs, which would substantially mitigate the pre-existing conditions problem. Financial markets would innovate and people would be able to buy options on upgrading their insurance. But none of that is possible in the highly regulated health and insurance market.

    Conservatives don’t want to solve the problems created by Liberal regulation by allowing the Left to impose even more regulation. They want to go in the other direction. For conservatives, it’s a moral imperative to go in the other direction. For conservatives, it’s about saving lives. Conservatives understand that the Left’s health care policies are responsible for countless unnecessary deaths; the Left should hang their heads in shame for what they’ve already done, but they won’t. Conservatives believe it is their moral duty to oppose the Left’s insatiable lust for more government power over health care. It’s about saving lives.

    1. baffling

      “But health insurance should not be tied to employment. In a free market, people would buy portable, long-term insurance that would have nothing to do with their jobs, which would substantially mitigate the pre-existing conditions problem. ”

      rick, we finally agree. and a lot of people, particularly younger, found this aspect of the ACA to be quite appealing. but the group approach to insurance created a problem. those individuals were not part of a cohesive group, and as such had much less negotiating power with the insurance industries. employer sponsored insurance, especially large corporations, had great leverage. hence the disparity in the quality and cost of the two cohorts of insured. but without an individual mandate, you cannot keep policy costs low enough to keep people enrolled. and if they are not enrolled, then you have a pre-existing condition issue to deal with. there is a reality that must be faced in dealing with health care and the public.

  19. llisa2u2

    Bottomline, for a state to even exist, it must have citizens. Is it in the best interest of the state to have healthy citizens? Is it in the best interest of the state to improve the health of its citizens? Is it in the best interest of the state to maintain the right for the majority, minority or minimum of its citizens to even be healthy? These questions need to be answered. These are not questions and answers of any marketplace. The marketplace does not determine the existence of the state.

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