Pricing Private Health Insurance

I actually do have a life outside of the Tragic Commons. When I’m not here pontificating about cows, meadows and other intractable problems, I run a business. My wife and I sell promotional products (you know, trinkets, tschatckes, swag).

It’s relatively simple. The customer tells us what he or she wants, and we find a manufacturer who will make the product. The manufacturer tells us what it will charge us for the product, and then we resell the product to the customer at cost plus a profit margin sufficient to cover our overhead, which includes our once handsome salaries. When the customer receives his or her order and pays our bill on time, we do quite nicely.

When I try to think about some of the controversies surrounding health care reform in terms of my experience in the promotional products business though, I’m completely puzzled. I know how to price an imprinted coffee mug so that we can make a profit. What I can’t figure out is how the health insurance companies will be able to price their products so that they can make a profit, if some of the key ideas in the current debate are adopted.

In the bad old days of health insurance—which, sadly, are still with us—health insurance companies could do quite a good job in pricing their products, at least as far as group insurance policies are concerned. They could take a group, figure out what its characteristics were, and then develop a premium based on the statistical risks the group presented. Because they knew, from a statistical point of view, how much money they were likely to have to pay out in claims for any particular group—in other words, like us, they knew what their costs were likely to be—they could take their projected cost, add a margin for overhead and profit, plus, perhaps, a cushion to address the risk that their projections were incorrect, and divide the sum by the number of people they were insuring to arrive at a premium.

In a totally free market, an insurer is free to specify the services for which it will pay, “cherry pick” the people it wants to insure, and “lemon drop” people who turn out to cost it inordinate amounts of money. It can limit the amount it will pay with respect to any single illness, it can establish deductibles and co-payment requirements so as to discourage overuse of coverage, and it can set lifetime caps on individuals as a way of stopping losses. Though the current insurance market is not totally free, all health insurance companies do these things to some extent.

The health insurance reforms under congressional consideration seek to do away with almost all of this. They will require all Americans to buy health insurance coverage, and, in return, they will prevent insurance companies from “cherry picking” and “lemon dropping.” They will prevent health insurance companies from considering a person’s health condition in setting premiums, and they will also ban caps on coverage. The government would be able to specify a standard menu of required coverages for any insurance company that wants to participate in the proposed national insurance exchange. According to H.R. 3200, the last of the three health insurance reform bills to pass the House of Representatives, the only criteria a health insurance company would be able to consider in setting insurance premiums are the insured’s age, family size and region (it costs more to insure somebody in New York than in El Paso simply because the cost of living in New York is higher then it is in El Paso).

Immediately after adoption of these reforms, insurance companies, particularly those who would want to participate in the exchange, would have a larger problem. Since they won’t know—and they’ll never know—from year to year who is going to sign up for coverage with them, they have to have faith that the criteria in H.R. 3200 are sufficient to allow them to figure out what their costs are likely to be.

To me, though, setting premiums under these conditions sounds like shooting in the dark. It’s like a customer asking me to quote on a coffee mug without telling me how many he wants (the more mugs the customer orders, the lower the price) or anything else about the mug (you simply wouldn’t believe the number of different kinds of coffee mugs there are out there, but that’s a topic for a future post).

As a businessman under those circumstances, I’d do one of three things. I could say, “O.K. lets assume that the customer wants a top-of-the-line mug and that he only wants a few of them.” With those assumptions, I’m going to quote him a high price to protect myself against the possibility that I’ve correctly guessed that the customer wants only a few really expensive mugs. Of course, if I’ve guessed wrong, one of two things may happen: either I’ll make an outlandish profit, or else the customer will reject my bid and go to another vender who has priced the coffee mug more aggressively.

The other thing I could do is to price the product aggressively. I can assume that the customer wants lots of cheap mugs. If I’m right, I’ll get the deal and make a profit. If I’m wrong, there are also two possibilities: I’ll honor the deal I made, but try to make up the loss that results from the fact that the customer actually wanted only a few relatively expensive mugs on future deals I do with this client or with other ones, or if I guess wrong too consistently, I’ll go out of business because my costs will exceed my revenues.

Finally, I could just decide that without more information, I am not willing to offer a quote. I can tell the client “thank you very much, but I just can’t help you.” But what if I can’t find any other clients who are willing to play the game my way?
Now, remember, I’m a liberal, and though I reflexively feel everyone’s pain, and my heart has been conditioned to bleed for anyone who is experiencing any discomfort, I’m not particularly a fan of corporate welfare. I believe that insurance companies can take care of themselves, particularly since they spend so little time taking care of anyone else.

So, if I’m not about to make a case that health insurance companies are about to become an endangered species in need of additional government protection, does this post have any point? Yes, it does. What concerns me is the mischief this pricing uncertainty is likely to instigate.

First consider an insurance company that decides to offer low prices in order to increase its market share. Eventually, the “market share” strategy will draw large numbers of people, particularly older and sicker ones who cost the insurance company more money. The only problem is that an insurance company that consistently underprices its product will end up having to accept lower profit for its investors, cut back severely on customer service, delay payments to health care providers and potentially go out of business, leaving its policy holders without the coverage for which they have already paid.

The only other thing an insurance company can do to improve its bottom line is to “redline” its clientele by marketing only to people it would otherwise “cherry pick” and by making it hard for populations who present potentially higher costs to purchase policies from it. Though, by law it would have to offer policies on a non-discriminatory basis, it could locate its offices in places that unwanted customers can’t find or access easily, maintain a sales force that actively searches only for desirable customers, and advertise in media that only the desired people normally access. The same kinds of tactics have been used within recent memory to deny African-Americans and Latinos access to housing and credit.

Consider, next, the company that tries to play it safe by giving its product a high price. The company would avoid the problems associated with underpricing its product, but, obviously, overpricing insurance coverage won’t address the fact that one of the key reasons for reform is that insurance coverage is already too expensive. Because everyone would be required to buy insurance, if insurance companies adopt this pricing strategy and argue that you get what you pay for, health insurance costs will stay high, making it harder for people to afford, requiring the government to step in with higher subsidies. If the law is going to allow this, we may as well call it the “No Health Insurance Company Left Behind Act” because we will have created a massive bonanza for the health insurance industry without solving any of the problems true health care reform requires. In that case, no reform is preferable because we will have increased health care costs instead of having decreased them as we need to do.

Finally, consider what would happen if the insurance companies decide that they just don’t want to play, and opt out of the system. This is no mere speculation because it’s already happened in several states. Insurance companies have looked at a state’s regulatory atmosphere, concluded that they can’t make enough money there, and decide to turn their attentions to other states where the regulatory climate makes it easier for them to profit. If this happens across the nation, we’d be right back to where we started: despite a federal mandate, people who want to buy insurance can’t buy it because there are no companies offering acceptable care on the national exchange. Instead, insurance companies would focus their efforts on providing coverage to groups where they can at least make a reasonable estimate of what their costs are likely to be.

I’ll be the first to admit that I don’t know a lot about how insurance companies price their products and I would be happy for someone to show me where my thinking is off base. But, if I’m right, I think these observations show why a single payer system makes the most economic sense (except, of course, for the health insurance companies), and, failing that, why a strong public option—an insurer of last resort—has to be part of the plan.

With a single payer system, the payer can know, all the time, with a high degree of statistical certainty, what the health needs of the population are going to cost. It can know this because there is annual data on medical costs and it can use that data to build a trend line showing where medical cost are likely to be if current trends continue. Once it knows what the care is going to cost in the aggregate, it can easily divide up the financial obligation in the form of a tax imposed on everyone (though, to be politic, we should call it a health premium or a user fee).

If the politics won’t allow that, we at least need to have an organization not dedicated to making a profit for investors and with low overhead available in a national exchange. If there is at least one entity in the national exchange—the “public option” sponsored by the government--it makes the insurance company strategies of “don’t play” or “overprice the product” much harder to carry out.

By opting out, the conventional insurance companies will be leaving a huge market to the public carrier. If there is a public carrier in the exchange, people who can’t find insurance elsewhere will have a place to go. Though the public carrier would face the same pricing uncertainty that I’ve just discussed, eventually, if it is alone in the market, it will know who its customers are likely to be, particularly since it wouldn’t be able to “cherry pick” or “lemon drop.” The fact that its mission would be a little different from that of a private, for profit insurance company—its job would be to insure as many people as possible while covering its costs--would help quite a bit.

At the town hall meetings this summer, one of the loudest complaints was that H.R. 3200 is over 1000 pages long and was incomprehensible for the average person. That the average person doesn’t understand the bill clearly shows. Nobody seems to understand that one of the reasons that the bill is as long and complex as it is, is that the Congress has bent over backwards to create a place in the system for private insurance companies; the level of complexity would decline significantly if we got rid of private health insurance, at least as a primary component of the individual’s protection against catastrophic costs related to illness. Unfortunately, by trying to find a place for private insurance, Congress has spent a lot of time trying to build a system that, from a business standpoint, is not likely to work.

Saints and Suckers

There are no saints or virtuous people in the Tragic Commons. In the Tragic Commons, there are only suckers and fools.

In the Tragic Commons, each cowboy always reasons that it’s in his interest to graze more cows there. Nobody pays any attention to the damage the collectively growing herds are wreaking on the resource. Though each cowboy can see the destruction that all of the cows are causing, no one individually is disposed to do anything about it. Were a virtuous cowboy to notice that together, the cowboys are collectively being fools and then, to decide unilaterally to cut the size of his herd, the other cowboys would call him a sucker. By reducing the size of his herd, the virtuous cowboy only reduces his own wealth; the other cowboys just mosey on in and start using the capacity the virtuous cowboy had abandoned. The Tragic Commons has not been preserved.

The virtuous cowboy sees this, so he tries to organize his neighbors to work, collectively to preserve the Tragic Commons. It’s a fine plan, except for three things. Suppose the cowboys can’t decide how to divide up the resource. Or, suppose that the cowboys do decide on how to divvy things up, but somebody cheats. Or, what if, after the cowboys have come to agreement, somebody new wants to use the Tragic Commons.

If you tire of the methane-filled bovine atmosphere, we can transform it. Consider the case of Dr. Tom Goodman who specializes in emergency medicine in Silver Spring, Maryland (the names have been changed to protect the virtuous). Dr. Goodman has been in practice for over 20 years and, over the years, he’s seen a great number of changes in medical practice. “Appendicitis,” he says, “used to be diagnosed by physical exam. . . now no surgeon will take a patient without a CT scan even in the most obvious cases.” Dr. Goodman notes that because it uses radiation, the CT scan “will increase cancer rates by 1% in the future.” That may not seem like a big percentage, but in a population like ours, with 300,000,000 people, an increase of 1% in the cancer rate means 3 million more people will get cancer because of unnecessary CT scans.

Dr. Goodman is annoyed by the way the system compensates the doctors involved. It will take only five minutes for the radiologist to interpret the results of the useless CT scan, and for that, the radiologist will earn $1,000.00; the surgeon who removes the ruptured appendix and provides the post-operative care will get only $300.00. He’s disturbed by the fact that the CT scan has not materially improved patient care over what was being provided in 1996 and that we’ve increased the patient’s cancer risk for no reason other than a marginal increase in the potential accuracy of the diagnosis. Read that as covering the surgeon’s rump, which he doesn’t want roasted in a malpractice suit if something goes wrong.

So what should Dr. Goodman do about all of this? Well, he could put his foot down and insist that CT scans are unnecessary when it comes to diagnosing appendicitis, but his brother doctors will tell him that their lawyers say that when most people in a profession begin to do the same thing in treating a patient, what they do sets a standard, deviance from which can set up a malpractice claim if something goes wrong. So the surgeons insist on getting the scan.

But suppose Dr. Goodman becomes the last angry man, and, armed with a black bag full of studies that prove he’s right, he still refuses to write an order for a CT scan. Chances are, the surgeons and radiologists, regardless of Dr. Goodman’s evidence, will speak to the patient about it, and since an insurance company will probably pay for the scan, they simply find another doctor to write the order. People always ask for the bells and whistles if they can get them for free.

Has Goodman accomplished anything in defiantly refusing to send his patients for CT scaDr.ns? Certainly, Dr. Goodman has demonstrated virtue, but because he wouldn’t make the referral, the patient has been moved to another doctor. The new doctor is more than glad to cover his own rump and, in so doing, help out his friend, the radiologist. If Dr. Goodman gets paid on a fee-for-service basis, he’s succeeded in reducing his own income. If he’s on salary, he’s made the first installment in building a reputation for non-cooperation that will eventually disadvantage him. He feels good and righteous about what he’s done, but unfortunately, he can’t use that good feeling to pay for his malpractice insurance. If he had recognized that the patient was going to have the CT scan with or without him, it would have been more rational for Dr. Goodman to play along.

Let’s suppose, though, that despite what I’ve just said, to the dismay of the radiology department, Dr. Goodman manages to convince the surgeons at his hospital that CT scans are not necessary for the diagnosis of appendicitis; if all of the surgeons agree that they won’t ask for scans when the patient presents with what seems clearly to be appendicitis, has Dr. Goodman won?

Emphatically not! There are three other hospitals in Silver Spring, all of which are owned by radiologists and operated by accountants and lawyers, where Dr. Goodman has no influence. In America, we want what we want, particularly if somebody else is paying for it. If patients, armed with the knowledge that many doctors use CT scans to diagnose appendicitis, begin to realize that they’re not going to get a CT scan at Dr. Goodman’s hospital regardless of the fact that their insurance will cover it, they’ll simply go to one of the other hospitals. And what will happen at Dr. Goodman’s hospital when a new hotshot doc shows up and doesn’t want to play it Dr. Goodman’s way?

My point here is not to excoriate radiologists, accountants or lawyers as being greedy or uncaring about patients. There are certainly many good radiologists, accountants, and lawyers running hospitals who care about others, at least as much as Dr. Goodman does. The point is that one virtuous person, or many virtuous persons for that matter, cannot reform a system from within it. To make systemic change you need an exogenous force with the power to regulate and enforce. For those of you who do not speak the language of academic political science, I just said you need something like a government.

Let’s go back to Dr. Goodman’s hospital. I’ve already shown that it is unlikely that Dr. Goodman, acting on his own, can do much about what he believes are wasteful, expensive, and potentially harmful CT scans. But, if Dr. Goodman can convince the state licensing board that he’s right, the licensing board can ban the procedure in all but a few carefully specified cases. In so doing, it sets a new standard of care that will protect doctors from liability for doing the right thing. Then, insurers don’t pay for it and, in a perfect world, health insurance premiums go down without a significant impact on the health care a patient receives.

In the foregoing example, what’s important is that the licensing board imposes a sacrifice or a constraint that affects everyone with an interest in a uniform way. Nobody has to calculate whether it makes sense to “disadvantage” himself by doing the right thing: the licensing board has already decided which actions are acceptable and which are not. There will be no cheating because the licensing board can punish a cheater by suspending or revoking his or her medical license. And, neither patients nor surgeons will have recourse to a second local hospital because all hospitals under the jurisdiction of the licensing board are bound by its decision and are subject to punishment for violating it.

This is why health care cannot be reformed piecemeal, doctor by doctor, hospital by hospital, insurance company by insurance company, or state by state. The reality is that while individual components of the health care system may work well, when each is allowed to make calculations based what is in its own interest, the system becomes dysfunctional.

Like it or not, what we need is systemic reform, and the only entity that has the ability to reform and control a system as big, complicated and unwieldy as the health care system is the federal government. We can argue about how it sets standards—I, for one, would like to see those standards set by physicians using scientific comparative effectiveness studies—but what we cannot argue about is the power of virtuous souls to negate the logic of the Tragic Commons.

Let's Get Fiscal

Today, I present for your consideration the most disturbing image in all of American political science (and no, it does not involve Sarah Palin standing in front of an official looking building with one hand raised and the other on a Bible).



This snapshot comes from the General Accountability Office’s (GAO) 2008 report on the nation’s long term fiscal outlook. For those of you out there who haven’t had the chance to get fiscal for a while, GAO is an independent agency charged with auditing the government’s books. The office does first class, non-partisan economic analysis and is one of the best places to look if you want to get the facts about our government and how it collects and spends our money.

I know you were expecting monsters, and so at first glance, you’re probably wondering why a simple stacked bar graph like this should be so fearsome. The answer is that packed into this little image is almost all you need to know about our country’s future, if we maintain our current trajectory. It isn’t pretty.

Each of the stacked bars is a snapshot of projected government spending at a particular year, except of course for 2008, which shows actual spending. All of the bars assume that the Bush tax cuts that benefit middle class taxpayers and the “patches,” which keep the Alternative Minimum Tax from snagging middle class tax payers, remain in effect. They do not show the impact of Obama’s fiscal stimulus package nor the current recession, and so the country's financial future is actually even worse than would appear from the graph. The bars are graphed against projected Gross Domestic Product (GDP) to take into account the fact that as GDP rises, so do tax revenues and government expenditures. By using GDP as the graph's scale, we can make meaningful comparisons over time.

The first thing to notice is the line that runs more or less horizontally across all four bars. That line represents projected tax revenues. Because the line is relatively flat, the graph shows that GAO doesn’t expect taxes to go up significantly over the period. That’s a good assumption because historically, tax revenues, currently at about 18% of GDP, have averaged between 17 and 21% of GDP, and some economists have argued that higher tax rates tend to encourage more tax evasion and avoidance which would reduce actual tax collections to the historical range. The point is that we’re more or less maxed out on the amount of taxes we can wring out of the American taxpayer.

The next thing to notice is the obvious fact that in all four snapshots, government expenditures exceed revenues. In 2008, despite all of the yelling and screaming by Republicans, who have just rediscovered the sin of overspending, the amount by which spending exceeds revenue is relatively small. It’s nothing like what happens in 2018, 2030 and 2040.

The third thing to notice is that each bar has four components and that the components are stacked in a particular way. At the bottom of each of bar is the amount the government pays in interest with respect to money borrowed to finance the deficit. After that come the entitlement programs, Social Security, Medicare, and Medicaid, and then, after that, comes “discretionary spending,” a broad category that includes everything else we expect our government to do. Debt service and entitlement programs are “have tos” in the sense that there are legally binding promises for the former and at least moral obligations for the latter; the government has no obligation to spend anything beyond these things and so, theoretically, “discretionary spending” should be the easiest thing to cut in a pinch.

Now, brace yourself for the scary stuff. By 2030, only 21 years from now, the government will collect only enough money to pay interest on its debt, to pay for Social Security and for Medicare and Medicaid. Because interest on the debt, Medicare, Medicaid and Social Security are hard or impossible to cut and will be paid before discretionary spending, money for everything else, including national defense, food and drug safety, and investments in infrastructure, science and technology will have to be borrowed.

We borrow the money we need to cover the deficit by selling treasury securities like T-Bills. Because these securities are backed by the full faith and credit of the U.S. government, investors have been willing to lend at relatively low rates of interest. But as the debt grows, investors may begin to worry, either that the U.S. can’t or won’t pay them back, or that the government will adopt inflationary policies that reduce the value of the debt to investors. If that happens, investors will insist on higher rates of interest to compensate for the additional risk of default, or they may stop buying U.S. Treasury securities entirely. If that were ever to happen, the government would have to make a choice. Does it (a) short the investors who are holding our debt and thus make it even harder and more expensive for the government to raise the cash it needs to operate; (b) short seniors who have paid into the Social Security and Medicare systems through payroll taxes all of their working lives and plunge millions of them into poverty; (c) raise taxes to exorbitant levels, perhaps triggering a major recession or depression; (d) devalue the currency; or (e) stop paying for the soldiers, weapon systems, the food inspectors, the drug inspectors and a million other things that help hold a vast and complex civil society together? My kids will be in their 40s by 2030 when those choices may have to be made. How old will yours be?

What is striking about the composition of the various bars is how the relative sizes of the categories of spending change. The category that changes the least in relative terms is discretionary spending, and that means growth in government operations is not the main driver of our fiscal problems, despite what the people complaining about “big government” are saying. The category that changes the most is interest on the national debt. It grows exponentially, doubling every 10 years, and that is why it is so urgent that we get control of our deficit sooner rather than later.

The changes in the entitlement programs are also striking. They are growing so fast in relation to everything else because our population is aging. There will soon be more people who are older than 65 than there will be people younger than 25; the fun fact is that most of us will spend more time caring for elderly parents than we spent caring for our children. There will, therefore, be fewer people contributing to these programs through employment taxes than receiving benefits under them.

Here are the some of the graph’s more ominous implications. First, when you hear people complaining about “big government,” about “excessive government spending,” or about government "welfare" programs adding to the deficit, they clearly don’t know what they’re talking about. If you use spending as a yardstick for measuring the size of government, the government is “big” only because of interest expense, Medicare, Medicaid and Social Security; if you took away those three components, discretionary government spending would amount to a relatively small 10% of GDP consistently throughout the period covered by the graph. If we weren’t spending more than the next 10 countries combined on national defense, the size of government would be even smaller.

Second, since we probably can’t increase taxes enough to bring revenues into line with expenses, the only thing we can do to avert fiscal catastrophe is to cut spending. As long as we keep borrowing, there's not much we can do about our interest expense. You could try to focus your cuts on discretionary spending, but that's not going to help much. By 2030, even if you could cut out all discretionary spending--and that means all military spending, all infrastructure spending, all student aid, all food and drug safety, all air traffic control and all other government expenditures that help hold our vast and complex civil society together--revenue would still be insufficient to pay for the other three components. That means the only thing we have left to work with are the entitlement programs.

And third, if it isn’t obvious by now, let me make it crystal clear. As a political matter, it is unlikely that we will be able to reduce the stipends paid to seniors under Social Security. There is a reason most politicians regard it as the "third rail" of American politics: if you touch it, you die. That means the only place we can look for real savings is in the health programs. And that means we have no choice but to make these programs more efficient and inclusive.

Because it accounts for about half of all money spent on health care in the United States, we cannot fix Medicare without affecting the rest of the health care system. We have to find a way to bend the Medicare cost curve downward; it won’t do to lighten Medicare’s load by shifting health care costs to non-Medicare recipients because to do so will make the system even less affordable for everyone else than it is now. There is simply no way to argue that wage earners who cannot afford health insurance and their families should be bankrolling a system that only benefits senior citizens. As they say in the South, "that dog just won't hunt."

As a political matter, and despite what the lunatic Palinistas say, no one is going to deny Grandma Medicare coverage for quality medical care she believes she paid for when she was in the work force. What we need to do instead is to figure out what care Grandma really needs and get it to her in the most cost effective way possible, figure out what care society should pay for through insurance or Medicare, and what care it's fair to expect Grandma to pay for herself.

People who rail against federal deficits and debt, and insist on smaller government ought to be at the front of the line demanding health care reform, instead of lobbing stink bombs at it from the back of town hall meetings as they have been doing this month. Further delay in reforming the health care system only adds to the growing debt and its attendant interest obligation. That is why we need health care reform and that is why we need it now.

As always, your comments are welcome.

The Bet and the Important Conversation We're Not Having

I pointed out in a previous post that despite all of the right-wing rhetoric to the contrary, our country already has “socialized medicine,” and that, in a high tech health care system like ours, it cannot be otherwise. The care we expect to receive when we’re gravely ill or in serious pain often costs far more than any individual can afford on his or her own.

Through health insurance we “bet” an insurer that, in any given year, we’ll need medical services that cost substantially more than the amount we will pay that year in health insurance premiums.Though we lose the bet more often than we win it—and that’s a good thing, since losing the bet means we haven’t gotten seriously ill that year—insurance gives us peace of mind that in those years in which we win the bet because of grave medical problems, the insurer will provide enough money to pay for the care we need.

It’s important to remember that in those years in which we win the bet with the insurer, it pays off with dollars raised from investing the amounts wagered by other people who have, that year, made losing bets with the insurer. Obviously, for the scheme to work, in any year, the insurer must win more than it loses. Otherwise, the insurer won’t have enough money to pay off its losing bets. If that ever happens, ironically, people who win their bets with their insurers will be out of luck.

This is one of the central problems of the current health care debate and it points to the crucial conversation we’re all avoiding. While it’s a lot more fun to rail against “socialized medicine,” to weep about the millions of people who don’t have health insurance or to make things up, things like Sarah Palin’s did when she infamously warned about Obama’s “death panels,” the conversation we need to have is about how to keep the insurers solvent. It matters not at all whether the insurer is a private company, like United Health Care, or a public, self-sustaining one sponsored by the government.In both cases, the issues are the same.

To guaranty that it will always be able to pay off its bets, an insurer can only do two things. The first thing it can do is to raise the cost of making the bet in the first place by making insurance premiums more costly. If it does that, it risks driving away customers who are willing to bet that they’ll end up spending significantly less on health care services then the annual insurance premium. That’s happening now. A large chunk of the “uninsured” population the President wants to draw into the health care system are young people who foolishly think they’re indestructible and can find a better use for the money. As insurance premiums increase, more and more people will be willing to make the same bet.

The other thing the insurer can do is to cut back on the services it provides by requiring larger deductibles and co-pays or by specifically excluding certain services from its insurance contract. The fact of the matter is that insurance contracts are extremely difficult for the average person to understand; very few people who have health insurance can tell you exactly what the contract covers and what it does not. Because they don’t understand their insurance contracts, many Americans have received nasty surprises when they get sick and find out that the insurer doesn’t legally have to pay for the particular care received.

Let’s assume that we want to set up a system in the United States in which everyone receives a prescribed level of medical care, and that we want to do it without significantly increasing the amount of money businesses and individuals pay into the health care system or to the government in the form of in taxes. President Obama says that we can get two thirds of the way there just by squeezing inefficiency and waste out of the system and redirecting the savings. This is probably far easier said than done, but let’s accept the assertion as true for the sake of argument.

Since we’ve already ruled out putting more dollars into the system, the only other way to close the gap is to reduce the payments flowing out to doctors, drug companies, hospitals and other health care provides. We might have used pixie dust to close the gap, but unfortunately, we’ve already blown our whole cache of it, during the Bush administration, on tax cuts for the rich that were supposed pay for themselves, and on a war of choice in Iraq that was supposed to be paid for with Iraqi oil revenues.

I can already hear my liberal friends beginning to growl at me for the implications of the last paragraph, even as the birthers, death panellers and tea partiers begin to rub their hands in anticipation of being able to claim another soul. Please. I’m a liberal, always was and always will be, but that doesn’t absolve me of the responsibility to speak the truth, even if it is bad PR for our side.

There is simply no getting around the fact that in any system of communal cost sharing, whether we call it insurance or socialism, we are dealing with a “zero sum game” in which more for me means less for you. Indeed, even if we hadn’t ruled out contributing more money to the system and agreed to get the money by raising premiums or taxes, at some point or other, we’d run out of money and be back to a zero sum game. In the tragic commons, all zero sum games lead to disaster. Because we are relying on a limited asset—in this case, a pool of insurance premiums—we have to figure out how we want to divide it up. As uncomfortable as it might be—we are literally talking about life and death--that is what we need to be talking about.

We can’t pretend, anymore, that everyone, at communal expense, should be able to have every treatment, test and procedure that might have a marginal beneficial payoff. Life is cruel sometimes, but the truth is that more heart transplants for the aged may mean fewer prosthetics for the handicapped.

I’m not arguing that prosthetics are better than heart transplants nor am I arguing that those people who can afford to pay for things insurance won’t cover shouldn’t be able to do so. What I am arguing is that it is time for serious adults to stop dodging the imperative of decision and face the issues head on. It’s time for people to stop talking past each other by using slogans and sound bites designed to create fear and rage and to start talking to each other about the real issues that lie at the core of this controversy. The discussion won’t be quick or easy, but it is necessary. We can’t simply adopt a laissez faire attitude and let the market or even fate work things out. Otherwise, the inexorable logic of the tragic commons will take over, the system will collapse and no one will be able to make a claim on that fateful day when he or she sadly wins the bet.

As always, your comments are welcome

In My America

I believe in the freedom of speech. I believe that one of the things that makes America the “shining city on a hill,” as Ronald Reagan once called it, is the right of every American to believe what he or she wants, to say what he or she wants and to try to rally other Americans to his or her cause. I believe in the Enlightenment principle that holds that we should try to encourage free and open discussion of all issues because competition among ideas in the marketplace of ideas is the best way to insure that truth wins out overall.

So great is my belief in the freedom of speech that I have no problem with American Nazis, parading down the street in an American Jewish community, so long as the march is conducted in a peaceful way. I believe that protesters should have the right to burn American flags or even to advocate, in a peaceful way, for the overthrow of the government. I also believe that Ku Klux Klan members should have the right to burn crosses on their own property so long as they comply with regulations designed to make the activity safe to others on surrounding property. However hard it may be to stomach these noxious activities, you simply cannot believe in freedom of speech unless you also believe that the freedom extends to the speech you hate.

As a political scientist, I think it is a good thing for people to become passionate about social issues and to participate in the political process. I want more people voting, more people writing to Congress, more people discussing politics, more people signing petitions and even more people taking to the streets to demonstrate their support or opposition to governmental actions or inactions. Democracy is, in the end, a fragile thing that cannot survive without constant exercise.

But what is going on right now is shocking and frightening. The New York Times reported on Friday that

The bitter divisions over an overhaul of the health care system have exploded at town-hall-style meetings over the last few days as members of Congress have been shouted down, hanged in effigy and taunted by crowds. In several cities, noisy demonstrations have led to fistfights, arrests and hospitalizations. . . At an appearance at a grocery store in Austin Tex., on Aug.1, Representative Lloyd Doggett, a Democrat, was drowned out as he tried to speak on health care change. One opponent had a mock tombstone with Mr. Doggett’s name on it . . .This week, Representative Brad Miller, Democrat of North Carolina, said he had received a death threat about his support.

Shouting down? Hangings in effigy? Taunting? Fistfights arrests and hospitalizations? Personalized tombstones of living people? Death threats? This is not my idea of freedom of speech, and it is also not my idea of America.

The health care delivery system affects every American in an intimate way. It is a participant when we are born, we look to it when we are must vulnerable, and it is present when we die. It currently accounts for twenty percent of all the goods and services our country produces in any given year, and if the government fails to “bend the cost curve “ downward, it will account for more than that in the future. It is therefore no surprise that any discussion of changing the health care system arouses high passions in the public. There is a reason it has taken over 60 years for our country to have reached a point at which the adoption of a universal health care plan has finally become a real possibility.

We should, therefore, fully expect for frightened and angry people to show up at public forums where they emotionally confront their representatives with their concerns about any change. That’s completely fair game in our system. But that is not what is going on.

Leaving aside the allegation that the people who are showing up as opponents of change at these meetings have been incited and even organized by right wing organizations with political axes to grind and by business interests that have a stake in the status quo—they’re entitled to free speech as well—what’s disturbing are the tactics these people are employing. These people are not engaging in debate. Rather than competing in the marketplace of ideas, they are trying to shut the marketplace down.

At this point, there is no single bill upon which Congress is preparing to vote. Neither Congress nor even the party that controls it have yet to come to agreement on the plan’s key elements. Legislators are doing their duty by attempting to go back to their constituents to discuss the ideas Congress is currently debating. At this point everyone should be doing a lot more listening than shouting.

But, some of the health care opponents who have been attending these meetings aren’t interested in listening: they think they already know all they’ll ever need to know about this issue. Fair enough.

Far worse, though, they don’t want anyone else to learn anything that might dispose an undecided listener to support reform. They’re not interested in fair competition in the market of ideas. It would be facile to say that they know that their ideas cannot prevail in any other way and so they seek to impose them by force or default; in fact, they probably believe that they hold a monopoly on the truth, that anyone who disagrees with them is a dissembling traitor to the nation and that further discussion is just a waste of time. They know they are right; they’re just worried that further discussion can only trick the unsophisticated masses into supporting legislation that is, in their view, clearly contrary to the common good.

So, instead of wasting time trying to enlighten their fellow citizens through reasoned discussion, these people are trying to make discussion futile. They’re trying to drown out discussion. They don’t want to know what their representatives have to say. Instead of giving people on the other side of the controversy the benefit of the doubt, they’re behaving as if anyone who disagrees with them is evil and not worthy of a public forum. Rather than seeing their opponents as citizens equally concerned about the public good who simply hold a different view of the proper means to accomplish it, some of the health care reform opponents are treating their fellow citizens as enemies who should be delegitimized, dehumanized and ultimately destroyed.

In my America, we respect our fellow citizens and their opinions even if we disagree with them. In my America, we take it as a given that all of its citizens love their country, see it as a “shining city on a hill” and want it to survive into the future, prospering in the community of nations. In my America, we believe that decisions affecting the public welfare should be based on facts and on logic discovered through careful thought and deliberation and that all decisions should be based on what is best for country at large while still giving great deference to individual rights. In my America, we don’t hide from the truth, but rather, we seek it openly and honestly using the best human means with which we have been endowed. And in my America, we trust democracy.

When a faction of our citizens believes that the best way to engage in public discourse is through disruption, threat and intimidation, tactics the world has just seen used in Iran to brutal effect, and the rest of us tolerate it, is this still America?

As always, your comments are welcome.

Why They Fear Socialized Medicine

In my last post, I made the point that those who carp against “socialized medicine” are speaking nonsense. In the modern world, many things, including education, fire protection, and food safety have already been “socialized,” and, in fact, without the “socializing” tool of insurance, our modern economy would not be possible. I made fun of the phrase “socialized medicine,” labeling it code for something else. Today I want to take that “code” seriously.

First of all, the people who oppose changes in the health care system in general and the creation of a public health insurance plan in particular aren't fighting for the right to continue paying insurance premiums to private companies. I don’t think anyone is so in love with Blue Cross or United Health Care that they’d be willing to take to the streets in defense of either company’s right to keep operating in the way it now does. I also don’t think that this is a battle about the right of individual Americans to choose between competing insurance companies. Most Americans are stuck with the insurers offered by their employers, and if we do not adopt health care reform, most Americans will have even less choice as health insurance coverage becomes too expensive for anyone but the very rich to afford.

What energizes the people at the grassroots level who are opposed to the Democrats’ health care plans are two levels of fear, one of which is rational and one of which, sadly, is irrational and the product of decades of mistrust cynically cultivated by the Republican party to advance its electoral fortunes. While the first kind of fear can be addressed with facts and logic, the second is more visceral and cannot be addressed in the same way.

The first of the fears is that the health care reform proposals, if adopted, will prevent people from getting the prompt and effective attention they have come to expect from the medical system. Let’s forget, for the moment that there is a broad swath of people who do not have adequate insurance coverage and who do not, therefore, get prompt and effective attention from the medical system. For now, let’s focus on the legitimate fears of the middle class people who are fortunate enough to have health insurance.

The President won’t tell you this, and neither will the Democratic leaders who are spearheading the reform effort, but the truth is that health care reform means that we will have to change the way in which we currently ration health care. It is a simple fact that health care in this country is already rationed; it is, however, rationed on the basis of ability to pay for it and not on the basis of need or on a generic per capita basis.

Basic arithmetic tells us that for some people to have more health care than they currently have without adding to the cost of the overall system, some people will have to have less than they have now. While comparative effectiveness research, electronic medical records, and an increased emphasis on wellness will, according to the President, free up about two thirds of the resources needed for everyone to receive coverage, the plans still have to find a way to make up the difference. Even if we assume that the political authorities are willing to raise taxes or cut other national priorities required to make this a first class system, more for some means less for others in the form of higher taxes or lost benefits. It cannot be otherwise in a communal system where limited resources must be equitably shared. The trick, of course, is to find that optimal point at which everyone receives a fair share of the limited resources.

If that optimal point cannot be found, the tragedy of the commons will rear its ugly head: in a zero sum game, nobody will be willing to reduce his or her consumption unless everyone else has to reduce consumption as well. Instead, everyone will myopically see it to be in his or her interest to consume as much of the resource as possible--until the some of all the individual consumption results in the collapse of the resource. Unfortunately, there is no way around the fact that health care reform will create, either intentionally or unintentionally, a new group of winners and losers. Obviously, nobody wants to be one of the losers.

The second fear is that of a government swollen with enormous power, able to impose life-altering choices on the people without their consent. It is a vision of a totalitarian state, a nightmare out of Orwell or Huxley, and it betrays a massive lack of faith in ourselves and in our system of government. The irony is that the great threat to our government “of the people, by the people and for the people” in the years of crisis ahead is that it will be able to do too little, and not that it will be able do too much.

Specifically, those who fear socialized medicine worry that some government bureaucrat will some day decide which doctors a person may see and what treatments a person may have, even to the extent of prescribing death to a person whose life that bureaucrat deems to be of little value. Perhaps health reform opponents would even concede that insurance company clerks already have this power; these opponents would argue, though, that in our free market system, there is at least the possibility of buying other insurance from companies whose clerks are no more accountable but potentially more lenient. Not so in a world where the government holds a monopoly over this crucial aspect of life.

What saddens me about this debate is that we are even having it on these terms. I was born in an expansive era in which we were exhorted by a vigorous young president to ask not what our country could do for us, but rather to ask what we could do for our country. It was a clarion call to community, an acknowledgement of the Biblical lesson that we are all our brothers’ keepers.

Only 20 years later, that young president’s polar opposite, Ronald Reagan, told us that the problem with our society was our communal concern for one another as manifested in our government. Government rules and regulations meant to protect the community were encumbrances on liberty, he argued. Taxes, what Oliver Wendell Holmes once described as the “dues we pay for a civil society” were not a necessary evil, but instead, just an evil. Reagan insisted that it was far better for individuals to keep their money and spend it on themselves, rather than to contribute it for the purpose of escaping from the tragic commons.

The problem is that Ronald Reagan’s selfish view of the world still resonates. It’s so much easier, after all, to provision one’s own lifeboat for a flood than to join with others to try to prevent the flood in the first place, particularly when he or she can’t be sure that everyone else will be willing to make a similar contribution or sacrifice.

Unfortunately, the key lesson to take from the tragedy of the commons is that ultimately, no one can escape the tragedy alone. To survive, it takes a community.

Who's Afraid of Socialized Medicine?

There are two good responses to people, who, when discussing the government’s current attempt to hatch health care reform, start screaming about “socialized medicine.” The first is “You don’t know what you’re talking about.” The second is “What’s wrong with socialized medicine?” Both responses are attempts to help the conversant to reach an epiphany, although, admittedly, if rendered without a touch of gentle humor, the first is likely to earn you a pop in the nose.

The people who are worried about “socialized medicine” aren’t generally scholars, political or otherwise. They are generally reacting viscerally to leftover propaganda from the Cold War. To them “socialized medicine” conjures up images of what they were told to imagine about Soviet health care: dingy offices equipped with World War I era instruments and elixirs and staffed by drunken doctors and ugly nurses. They’re mostly speaking in code to signal to others, who might be like-minded, that they never miss Sean Hannity and that they agree with Brother Limbaugh on just about everything.

What does it mean to say that something is socialized? In broad terms it means that the responsibility for something has been transferred from an individual level to a group level.

To really zero in on this concept, it’s helpful to think about the world in pure terms. Let’s start by imagining a world in which nothing is socialized. In fact, such a world did once exist in the country—about 200 years ago. In that world, each man (women weren’t discovered in this country until about 150 years ago) would, as the Great American Myth has it, go off into the vast expanse of this continent with his axe, his shotgun, and his horse. He’d find a tract of land nobody else had claimed, clear it of trees and other inconveniences, and build himself a little cabin. He’d live off the land, perhaps by growing crops, by raising livestock, by fishing or hunting. If he wanted something he couldn’t raise, kill or make himself, he’d just trade for it. In that world, there could be no tragedies of the commons because the commons was huge and the demands being placed on it would have been infinitesimal.

A small fraction of the crowd that lives in deathly fear of socialized medicine actually believes we’d all be better off if we could return to those simpler days of yesteryear. At least they’re being consistent. The guy who’s about to pop you in the nose, though, is probably not one of them.

He probably lives in a city, town or suburb just like you do, and recognizing that is how you help your discussion buddy to have the epiphany. Unlike Daniel Boone, this guy probably has kids he sends to a public school. He only bears a fraction of the cost of educating them through the property taxes he pays. Using a public school system is sensible because economies of scale make it more efficient for communities to pool their resources and provide for a centralized way of educating children. Even if he sends his kids to private school, and pays full tuition, the logic of economies of scale prevail. True, your conversation partner doesn’t have as much say over what his kids learn in school as he might have if he were home schooling them, but his costs for the service are much lower and the quality of the education his kids receive is likely to be higher. The point is that by transferring his responsibility for educating his kids to the community, he’s participated in socializing education.

In addition to education, we’ve socialized almost everything else our conversation partner comes into contact with, and, for the most part, he’ll probably be darned happy that we’ve done so. Professional firefighters, police, air traffic controllers, food and drug inspectors, soldiers, letter carriers and other people who make our lives safer and more comfortable are all the result of socializing costs, as are roads, parks, and public libraries.

http://www.flickr.com
/photos
/danaroundtown/
/ CC BY 2.0

The foregoing are examples of how we have transferred private costs to the government. The concept of socialized costs, though, extends to the private sphere as well, and the best example of this is what’s started the argument in the first place: insurance. With insurance, a large group of individuals each pay a small amount to transfer risks he or she ordinarily doesn’t want to bear to a counterparty who will bear the loss if the risk materializes. The system works because, ordinarily, the payment from each individual is small in comparison to the contemplated loss, and because the thing the individual fears may happen to him, ordinarily doesn’t. In fact, without insurance our modern economy would not be possible.

To the backwoodsman described earlier, the concept of insurance is repugnant. In his mind, your bad luck is, well, your bad luck. To him, a person should pull his own weight and not burden others. That’s a nice theory, fully consistent with the American mythic credo of self-reliance. Too bad it doesn’t really work.

Suppose our discussion buddy has a heart attack while screaming about socialized medicine. Without having socialized the risk through health insurance, he’d probably die, basically because he wouldn’t be able to afford what our system currently charges for the care required to save his life. On a broader basis, without having socialized the risk of major health problems, our medical system probably would not have been able to develop the required technologies or surgical know-how; because there would not have been enough people who could afford to utilize breakthrough medical technologies, it would not have proved profitable for doctors, pharmaceutical companies and medical equipment suppliers to develop these capabilities in the first place.

If you really press your conversation partner—gently, of course—you’ll both see that the issue really isn’t “socialized medicine” at all. Once you strip away the Cold War lore and the right-wing code, except for the survivalist crowd, everyone can probably see that socializing certain costs—and health care costs in particular--is not such a bad thing. The real issue is control, a topic I’ll turn to in a later post.

As always, your comments are welcome.