Charles Rowley's Blog

This column continues the discussion that I initiated in my column dated February 27, 2010.  I emphasize that the points that I raise do not reach out to comprehensive reform of the industry, something that is well beyond my competence and, I should add, well beyond the competence of any one else, most especially that of any politician.  I watched quite a bit of the health care summit proceedings, and formed a judgment, based on 48 years in the economics profession, that no one in that room, including the President, is competent to pass an Economics 101 examination. It is extreme arrogance for individuals with such limited education in economics and business  to presume that they can restructure an industry that encompasses one-sixth of the entire economy of the United States.

Here are some further thoughts focused on the cost side of the market (or rather the  non-market) in health care in the United States:

1.  Why are all cost-saving proposals in the legislation to occur after the 2012 or 2016 elections? The answer, Dear Readers, is that both the President and the Democrat majorities in Congress know that the proposed cuts in costs are politically unpopular with key electoral constituencies. The Democrats cannot and will not alienate union support. So the Cadillac policies will remain untaxed until everyone has vacated political office, or, like Senator Robert Byrd, are too brain-dead to know or care what is happening. The Democrats cannot and will not alienate the oldies, who turn out to vote for them in disproportionately large numbers.  But neither the President nor the Congress  intends to impose the medicare cuts outlined in the proposal. After all, they never have done so in the past, especially in election years.  That proposal is simply a fraud perpetrated on voters.  Because the President and the Democrat-majority do not aim to attract small business owners – they fall outside their minimum winning coalition set – those fines will be imposed well before those on the unions, if indeed the latter are ever imposed at all.

2.  Why are medical malpractice litigation costs largely ignored in discussions of cost-containment?  The answer to that question can be found in the follow-the-money theory of understanding political behavior. President Obama’s election coffers, and the coffers of most Democrats running for office in 2008, were saturated with trial lawyers’ dollars.  Those dollars were not forthcoming because the trial lawyers were captivated by the good looks of the recipient candidates.  The money was there to purchase the services of those politicians.  Cheap talk for public consumption nothwithstanding, the very idea that President Obama or the congressional Democrats will seriously consider capping the medical malpractice damages of trial lawyers is absurd.  Yet, that measure alone offers the most significant opportunity to cut health care costs.  Defensive medicine now dominates health care in the United States, exposing patients to significant unnecessary risk while lining the pockets of trial lawyers and medical practitioners for services that essentially are fraudulent.  That is the 800 pound gorilla in the room preparing  to soak up any of the pitifully small cost savings available from health care reform alternatives under consideration.

3.  Why are unwilling participants to be fined for not purchasing a product that they do not desire?  The public relations response to this question is that society is unwilling to deny any individual access to health care, should they become ill, whether they are covered or uncovered by insurance. And that such patients are imposing an intolerable cost upon the system by their easy access to hospital emergency wards. In my judgment, forcing such individuals into the insurance system  is a national socialist way of dealing with a situation that is amenable to market solution. Individuals and families that satisfy specified poverty standards have no problem in accessing the health care industry. Rightly or wrongly, they are the truly privileged group within society from this perspective.  The elderly, whether rich or poor, have no such problem either, at least while medicare funding covers most procedures.  Those who remain uninsured fall into two categories, namely those who cannot locate suitable insurance programs, and those who choose not to participate for good economic reasons. I leave the pooling issue for another time. Here I focus on the issues of moral hazard and adverse selection, issues that clearly fall well beyond the level of comprehension of President Obama and his congressional colleagues.

A significant threat to any insurance program lies in the asymmetry of information within the market place. Potential patients, in this case, know more about their current and likely future medical conditions than the providers of insurance are allowed to access. So insurance providers must price their policies accordingly, charging poor prospects less, and good prospects more, than the risk neutral, fair-market premium. Such a pricing policy deters rational good prospects from joining the scheme. They will self-insure. It attracts the poor prospects in droves. This is the problem of adverse selection.  Unfortunately, it does more than that. With comprehensive insurance now in place, the poor prospects have incentives to adjust their lifestyles to yet more health-reducing levels. The obese become yet more obese, obese to levels that now require hospitals to rebuild their wheel chairs and beds to accommodate  previously unheard of sizes and weights, and to lengthen the incision instruments so that they can penetrate ever increasing layers of fat. They encourage individuals to over-engage in high-risk sports, to eat unhealthy foods, to drink unhealthy drinks, and to avoid exercise whenever possible, reliant on the health care industry to retard the adverse consequences of such self-serving behavior. This is the problem of moral hazard. Health care reform proposals, by not addressing either of these two problems, by forcing insurance companies to ignore pre-conditions when enrolling purchasers, and by denying them the right to impose higher costs and deductibles as a means of controlling moral hazard, invite cost increases of a magnitude yet unheard of in the United States.

How would the market respond to those who choose to self-insure and then  become ill?  Such individuals would be charged regular access prices for the medical services that they seek. They would be billed in the regular way. Debts, if such arise, would be dealt with through collection agencies. In the final analysis, non-paying debtors would be forced into bankrutpcy, with all the adverse consequences of such a state. For the most part, such individuals would pay up, especially if one consequence of such bankruptcy was a denial of all non-upfront, pre- paid-for  future services from the health care industry.

Caveat emptor is the warning that I would suggest might be put in place over the health care proposals currently before Congress. Unfortunately, voters are now all but helpless to avoid the consequences of their careless voting decisions in the 2008 elections. If the proposed  reconciliation procedures are implemented with respect to the two bills currently under conference review, the game is up.  United States citizens will find themselves one more step on a road to national socialism and with it, confronting an associated loss of individual freedom. Such outcomes now look increasingly inevitable.

Tags: adverse selection, cost containments, health care reform, moral hazard, national socialism, political interest groups, reconciliation process

This entry was posted on February 28, 2010 at 11:49 am and is filed under budget deficits, economics and public choice, health care legislation, law, legislation and liberty, liberty and classical liberalism, Uncategorized. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.