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Some Simple Economics of Mandated Benefits
Via MR commentator John Chilton, here is a link (JSTOR, but free pdf here) to the classic and excellent treatment by Lawrence Summers on mandated benefits. My view is that the main case for mandated benefits is simply to note that public provision is often worse and that direct subsidy, such as a cash transfer, is not always feasible.
The case against is simple too. Say that previously unprovided health insurance would have cost the employer 60 and would have been valued by the worker at 40. You're imposing a tax of 20 on the employment relation. In the short run firms will hire less labor and during a recession is an especially bad time to produce that effect.
In the longer run, if the market is competitive, wages will fall by 20. We're forcing relatively poor workers to consume more medical insurance, and more medical care, than they wish to, at the expense of their cash income.
Do not forget the excellent words of Ezra Klein:
Indeed, the main impact of health-care reform on health may be that if it could contain costs, we'd have money to spend on things that actually do make us healthier.
He means things other than health care in the narrow sense. I don't know if Ezra opposes the mandates approach (compared to what?) but his quotation indicates a problem with it, even from the standpoint of health alone, much less considering the other pleasures of spending or saving cash.
Of course some of the people covered by the mandate would otherwise end up showing up at emergency rooms. Treating them that way would get tacked on to my medical bills, one way or another. With a mandate they are no longer my financial headache.
With this new change, who's better off? Me. Who's worse off? The previously uninsured poor person.
You might say: "We are covering more people, at a lower price, than we had thought possible." That sounds like a kind of triumph. But if you cut through to the actual analysis, your paternalism has to be a lot stronger than your egalitarianism for you to support this kind of measure.
Posted by Tyler Cowen on July 2, 2009 at 03:19 PM in Medicine | Permalink
Comments
"In the longer run, if the market is competitive, wages will fall by 20. We're forcing relatively poor workers to consume more medical insurance, and more medical care, than they wish to, at the expense of their cash income."
I'm not sure how important the mandate is besides the impact on the CBO analysis.
Workers at smaller business certainly value their health to some degree and would purchase insurance at some price. At a small business currently that price is very high compared to employees of large employers. I will speculate that many uninsured small business employees would purchase health insurance if they were offered similar premium rates to those working at large businesses. The exchange will hopefully do just that but I suspect the CBO would have a hard time determining what price the uninsured are willing to pay for health insurance.
Posted by: Mark at Jul 2, 2009 3:51:25 PM
In short I don't believe very many of the uninsured would be forced to buy insurance in the first place the creation of the exchange should attract many of the uninsured and I'm not sure about the importance of a mandate.
Posted by: Mark at Jul 2, 2009 3:56:16 PM
All the economic logic is correct.
But here in Israel, the medical treatment is simply better than in the US -- competition among providers, less bureaucracy, tiny deductibles, medication coverage, immediate access to MD's for non-emergency care, and responsive major treatment coverage.
Because it is funded through a 10% tax on income, however, this care is more expensive for high earners than it would be in the US.
Posted by: Anonymous at Jul 2, 2009 4:00:12 PM
This strikes me as incorrect, for a couple important reasons.
1. Lately I've been noticing people argue that these sorts of reforms are expensive to put in place during a recession. But these people tend to also be of the group that claim that stimulus money couldn't be effective because by the time government spends money, we'll be out of the recession. It seems like you have to pick: either government programs and spending can be put into place quickly, or they can't. You can't say that they are slow or fast to put into place depending on the argument you want to make. In the case of health care, I know of no one who believes, or any politician who has stated, that health care reforms will kick in within the next year.
2. You are (somewhat understandably, but I think incorrectly) treating insurance as the same as, say, a company car or some other durable good. I don't know of any research that claims that people are particularly good at valuing future benefits versus present benefits. People don't pay into 401k's, people tend to be hyperbolic discounters (at least in lab settings, which I am admittedly a bit suspicious of), etc. Insurance is a bet that you're going to need coverage later. My knowledge of the literature is that people are awful at making these decisions. So people may not be good at assessing what they would value insurance at if they were to end up sick, and as such, can't calculate the expected value of the insurance now.
3. Also unlike the company car case, if you end up with no car and start walking to work, the state wouldn't be morally corrupt if it just left you to walk (though admittedly I'd prefer a robust system of public transit). However, if you get into a car accident and go to the hospital, I do think that the state would be morally corrupt if it turned you away and refused treatment. Since most folks agree with me on that last point, the state will pay for those things. Which leads to free rider problems, and changes individual assessments of what insurance is worth. If I know that if I'm *really* screwed, that the state will cover my medical costs, then the price I'm willing to pay for insurance goes down. My downside risk is mitigated already. A mandate merely corrects this previously-existing distortion. I personally would be unhappy with living in a state where we didn't at least help people who are devastated, so I don't want to get rid of the previously-existing distortion. So then we are left with trying to correct it.
So, I think you are incorrect to claim that paternalism is overwhelming egalitarianism here. I think that the causal structure of the decision is that our egalitarian impulses to at least assure that people aren't dying of things that could easily be fixed are forcing us to adopt a bit of paternalism in order to better align individual and social incentives.
Because of this, the poor person is much better off under this regime, and the more well off person is also better off, since catastrophic care is much more expensive than preventative care. So socially we reduce our expenditure, insurance goods are priced more correctly, and we get to live in a society that doesn't abandon people in their worst moments. I'm happy to pay extra to live in such a society, but it looks like I'll pay less.
Posted by: Ryan Muldoon at Jul 2, 2009 4:09:58 PM
"Of course some of the people covered by the mandate would otherwise end up showing up at emergency rooms. Treating them that way would get tacked on to my medical bills, one way or another. With a mandate they are no longer my financial headache."
Yesterday or the day before NPR All Things Considered interviewed a doctor who gave the example of an uninsured patient who chose to economize by quitting her blood pressure meds. She ended up hospitalized at great cost. The example is meant to illustrate that if she'd been insured she'd have made better decisions in the sense of lowering the overall cost of her care. (That's what Obama keeps asserting as well when he repeats his diabetes example.) In short, it's at least conceivable everyone could be made better off -- although probably not without some direct subsidy of health insurance.
By the way, consider also auto liability insurance mandates. If there's a state that doesn't have one, I don't know about it. The trouble is enforcement -- the poor often don't obey the mandate. Here's an example of a mandate that's clearly not egalitarian.
Posted by: John B. Chilton at Jul 2, 2009 4:10:44 PM
Why don't we just mandate everyone get a job for a large company?
Posted by: Andrew at Jul 2, 2009 4:16:30 PM
Nobody is claiming this would be free. If a person's income is 20 percent lower but he has medical care he would otherwise not be able to afford since he would be priced out of the market, isn't that a possibly great outcome? Of course if he doesn't want it, that's a problem, but I doubt that constitutes a majority of cases.
Posted by: Brian J at Jul 2, 2009 4:32:24 PM
With this new change, who's better off? Me. Who's worse off? The previously uninsured poor person.
Can you explain how the uninsured just-above-minimum-wage earner who has a chronic health condition is worse off?
Is his having to take time off from work to wait for hours at an ER to get his health care that he doesn't pay for getting his health care for free? Wouldn't he be better off if he loses a couple of hours equivalent in pay in order to be able to make an appointment at a doctor and get care on his schedule in timely fashion, instead of losing pay while he waits at the ER, with the risk of losing his job entirely for failing to show up at work or taking off too much sick time?
Perhaps you intend to say that "the healthy single person who doesn't get employer paid health care today will be worse off."
Not many well paid jobs lack employee benefits, and the challenge for those earning good pay without an employer is finding affordable health insurance. (Just had that conversation with my dentist while waiting for Novocaine to kick in.)
Posted by: mulp at Jul 2, 2009 4:58:56 PM
Depends on how sticky wages are.
Plus, if wages fall too low, and 20% may tip things, people may just prefer welfare. They get government benefits under welfare and the marginal benefit of working (income) is falling. Granted some people may work that might not have if they had lost medicaid.
Others may see an increase in the underground economy. Low skilled workers may find more work off the books, outside of social security and all taxes. These people would still populate the ER.
The notion that preventative care will reduce health care costs is wrong, We are all mortal. We all get sick and die. Unless you want to say that we will just stop looking for cures for people past a certain age or with certain diseases. Good luck selling that.
Something like roughly 15% of people without health insurance make over $50,000 a year. Who are the uninsured and why are they uninsured.
For two income families, they could lose. Spousal coverage could be eliminated at many firms or the newly insured spouse will see a cut in pay (to pay for insurance) and the other spouse's insurance will demand that medical bills be jointly paid. On net they lose. I wonder how many WalMart employees fall into this group. i.e. having a partner who currently lacks insurance through their employer but is covered by a WalMart partner?
The government is seeking to mandate how workers are compensated. I'm not sure they have the ability to make those decisions effectively. Once they get more involved, what are the limits? Once you have the bureaucracy in place who will be it's master?
Posted by: DanC at Jul 2, 2009 5:07:24 PM
This is another example of for the guy who only owns a hammer, every problem looks like a nail. For the government, they only own a hammer (taxes and mandates).
Posted by: DanC at Jul 2, 2009 5:15:53 PM
One of the main problems with the current system is that it inhibits transferring jobs. It used to be that pensions discouraged movement. Then we got 401(k)s (not that the current system is better, just that it is more portable).
Either no jobs should offer health insurance, or all jobs should. Perhaps a system where insurance is tied to the individual, not the job, would be better. If that were the case, businesses would have 0 incremental health care costs per employee. I would think it would be a net benefit.
As for the 60/40/20 argument, why do you assume those numbers? What if they are 30/40/10(the other way)?
Posted by: Allan at Jul 2, 2009 5:19:44 PM
BTW, people that I talk to in the Midwest expect the economy to take a second dive this year. Many had tried to weather the storm, using rainy day funds, trying to hold things together. But this recession is just lasting too long for them to do anything but cutback.
I suspect some wonder how they will come up with the new taxes for energy, health care, and government debts.
Posted by: DanC at Jul 2, 2009 5:21:24 PM
...health insurance would have cost the employer 60 and would have been valued by the worker at 40.
Yeah, it's certainly possible. But employers started competing on non-wage benefits under Nixon's wage controls, and the health care benefits are pre-tax. If I, as an individual, face no excess costs because insurers need zero extra time to set a fair, no-moral-hazard premium on a stranger who's looking for insurance (hah!), I'm still buying my personal insurance with after-tax dollars. (And no, the medical expense deduction is irrelevant for -- what? the huge majority? -- of Americans.)
Then there's the minor issue that sooo many Americans assume they live charmed lives, and don't think they need coverage, until faced with a bankrupting incident. Very frequently? What are the stats: 75% of mortgage foreclosures, to apparently "established" Americans, due to uninsured medical costs? These individuals may retrospectively value that insurance at 500.
So it's more like costing the employer 60, and available in the "free" market to individuals for 120. Or at 1000.
Posted by: Walt French at Jul 2, 2009 5:49:41 PM
... employers started competing on non-wage benefits under Nixon's wage controls ...
It started decades before that, during and after WW2.
Posted by: RJ at Jul 2, 2009 6:14:34 PM
The notion that preventative care will reduce health care costs is wrong, We are all mortal. We all get sick and die. Unless you want to say that we will just stop looking for cures for people past a certain age or with certain diseases. Good luck selling that.
The cost analysis of treating hypertension shows it offers positive returns. Ditto diabetes. My dad had a doctor who was one of the early advocates, perhaps because his dad died prematurely from some hearth problem, so he was started on barbiturates to lower blood pressure. At the time, no one knew what caused hypertension or why it caused higher death rates, but the early results of lowering blood pressure by any means drove more and more research and more aggressive treatment. The evidence supporting treating high blood pressure showed a clear positive return for this even when the recommended drugs were still under patent and rather expensive. Of course, the drug companies emphasized the studies using their patented drugs, so the benefits of the unpatented and extremely cheap diuretics weren't included in studies. Independent studies have shown them to be even more cost effective, and now with all classes of hypertension treatment now available as generics, the benefits are even larger.
Again, no one quite understands what is being treated; lots of hypothesis, but the causality link between high blood pressure and premature death is not well established.
So, hypertension is not a disease; it is a symptom of something, apparently inherited at least in earlier generations, and likely inherited in many people today. "Lifestyle" doesn't "cure" the symptom.
Hypertension is actually a great example of the benefits of evidence based care based on large population studies. My dad and myself before I was 40 became part of the evidence that just lowering blood pressure leads statistically to longer, more productive lives.
The same is true of diabetes. Diabetes statistics argues a case for a broader view of health care.
Arguing "take responsibility for your lifestyle choices" is a bit problematic when you look at diabetes. Take the young adult who testing shows has diabetes. The best he can do at that point is manage his diabetes, and this is not a simple task. In many cases, this can be done by "lifestyle" but he is required to live a lifestyle that those over the age of 40 today didn't have to live.
Why?
Well, the lifestyle of the child was what is correlated with the young adult having diabetes. But we don't consider the child to be responsible for determining his lifestyle as a child. So, the young adult has inherited diabetes from his parents lifestyle choices.
In fact, I've seen studies that suggest that the tendency to diabetes is inherited in the epigenome so that a child raised with too much of the wrong foods will develop epigenome passed to the child which will act on the child from birth to effect the changes that took two decades for the mother.
Treating the cause of diabetes by reversing the trends to high salt, high sugar, high fat foods in the diets of children alone is likely to offer huge payoffs. After all, that's the biggest change in diets between my grandfather, father, my, my niece, and grand niece's childhoods.
And I won't even mention small pox, polio, mumps, measles, .... vaccinations or water supply and sewage management as health care that has positive returns on investment.
Posted by: mulp at Jul 2, 2009 6:25:23 PM
Mulp
I will make this simple.
Preventative care is a good thing. Dealing with and preventing the complications of disease is worth doing.
Improvements in sanitation gives you a big bang for your buck. OK fine.
But we remain mortal. Each generation has found ways to combat, in some cases defeat diseases. But each new generation must still confront a new set of diseases.
Unless you think that by spending some money on preventative measure we will all die in our sleep at 97 without ever spending time in a hospital or nursing home. Fewer people die of heart troubles more people develop Alzheimer's.
If you tell me that preventative care will save 3 trillion on cardiac complications I can claim that we will end up spending an additional 4 trillion on Alzheimer's care. (This is a very rough example.)
The current assumption out of Washington is that we have reached the point were it is just too expensive to fight additional battles. That we need to accept that we can never win the war against death and disease. The cost of each additional year of life is no longer worth the price.
So the only way that total spending on health care is reduced is if we just decide to go quietly into that dark night.
Posted by: DanC at Jul 2, 2009 7:24:07 PM
I have a modest proposal: count the cost of employer provided health benefits the same as cash compensation for the purpose of satisfying minimum wage requirements.
Posted by: Will McLean at Jul 2, 2009 8:32:35 PM
Even if this questionable analysis were true, we only tend to be willing to provide in-kind, not cash, transfers to the people of this country. Politically, we can provide education, health care, transportation, food--those things thought of generally as necessities--but not cash that of course would primarily be used for those things.
Posted by: David Roth at Jul 2, 2009 10:58:45 PM
There is a still simpler case against: the Declaration of Independence.
The simple idea expressed by this document was that each man should be considered as owning himself. A very basic economic concept that is either true or not. If not than all men are slaves and we should accept that safety and certainty. If so our policy must be to communicate that truth so that justice will prevail.
Happy Indepencence Day!!
Posted by: Brian at Jul 2, 2009 11:37:57 PM
Excellent points! If only we had this blog around to make them last fall, when it mattered.
Posted by: bushequalhitler at Jul 2, 2009 11:44:23 PM
Suppose someone values insurance at 40, would have to pay 100 to get it by himself on the market and his employer would have to pay 45. If the mandate lowers the cost of employer-provided coverage though elimination of adverse selection to less than 40, that person benefits from the mandate. If the costs of coverage do not go down, then clearly uninsured people would not benefit (at least in a non-paternalistic way). But a big part of the argument for mandated coverage is that it will ultimately lower the cost of coverage for people who do not currently have health insurance.
Posted by: Ricardo at Jul 3, 2009 2:37:27 AM
Allan: "One of the main problems with the current system is that it inhibits transferring jobs."
I'm not certain everyone would agree that is a problem. An employer would seek to decrease turnover, and employer-provided health insurance is one way to accomplish this.
In some cases, changing jobs may benefit the overall economy. But in other cases it will not. Employee productivity generally increases as job tenure increases, up to a point. So incentives which keep employees in jobs can increase a nation's overall productivity. One study of European firms revealed that corporations benefit from retaining employees at least as long as 13 years, and perhaps longer.
Posted by: John Dewey at Jul 3, 2009 4:01:45 AM
"But a big part of the argument for mandated coverage is that it will ultimately lower the cost of coverage for people who do not currently have health insurance"
If that's the argument, it's a lie, or at least sold as a lie, if these particular words are technically true. They are trying to get the uninsured to pay for the medical services they DO GET at the emergency room.
So, what is the argument then? That the uninsured don't get enough preventive care? But, ultimately, they want to reduce care to cut costs by (cross fingers) eliminating ineffective treatments. Tyler pointed out the irony in reducing costs by covering more people argument.
So, then, what argument is left? Eliminate the nonsensical tying of health insurance to employment? Nope. If they wanted to do that (honestly), they would have a revenue neutral tax on insurance benefits. As it is, taxing insurance benefits is just a tax increase.
Posted by: Andrew at Jul 3, 2009 5:05:35 AM
In general maybe it's a bad idea for government to act before there is consensus behind a solution. In this case, there doesn't even seem to be consensus behind any sort of logical argument.
They want to lower overall costs by increasing the usage. But on the other hand they want to decrease "ineffective" treatments by increasing 3rd party payment. I'm lost. The expert arguing for what they are doing is an octoeconomist. He has eight hands.
Posted by: Andrew at Jul 3, 2009 5:21:38 AM
As an aside, doesn't anyone else get the feeling that politics could be defined as a method to maximize really bad decisions while minimizing contemplation?
I got that feeling on the micro level dealing with Robert's Rules of Order, where for example no alternatives or priorities are compared, just yea or nay, and I get it now with the umpteen different versions of oddly named plans that even supporters don't understand but have to pass yesterday.
Posted by: Andrew at Jul 3, 2009 5:45:30 AM
