Marginal Revolution

Is the Senate bill fiscally responsible?

Matt Yglesias writes:

The bill contains provisions that have front-loaded positive impacts on the deficit and also have provisions that have back-loaded positive impacts on the deficit. The bill, rather intelligently, seems to balance this out well leading to net deficit reductions in the short-, medium-, and long-terms. The bill by no means solves the considerable long-term fiscal challenges to the United States, but it does improve the situation. If people want to say that on balance they think the bill is a bad idea, that’s fine, but to do so is to oppose what’s far-and-away the most politically realistic way to enact non-trivial long- and medium-term deficit reduction in the 111th Congress.

I should coin a new MR term: the retreat into the relative.  As I understand it, the apparently fiscally responsible portions of the bill come from a) eventual cuts in Medicare spending, and b) rising taxes on some health insurance plans and they come later of course.  Few Congressional representatives are willing to do these things today, so should we predict they will be done in the future?  (The same problem plagues Waxman-Markey, by the way, so these back and forth rhetorical debates are becoming quite common.)  In my view, policies structured in this manner are simply another way of doing deficit spending.

To quote Matt, he writes of: "the most politically realistic way...to enact...deficit reduction."  That sounds powerful.  and in fact I agree with his claim as it is worded.  But if all the politically realistic options make our fiscal position worse rather than better (Congress likes to spend money more than it likes to inflict pain on voters)...well, this bill still makes the deficit problem worse.  Even it is the best of the realistic worsening options.  We should be wary of the retreat into the relative because all the options may be bad.  Nor should the phrase "building a framework" be translated into anything but "we are unwilling to do this now or anytime soon and thus we are engaging in more de facto deficit spending."

The fact that Republicans can (correctly) be blamed for making the bill worse does not constitute an argument that the current bill will make things, in fiscal terms, better. 

Citing inconsistencies of bill opponents ("but he didn't scream loud enough about [fill in the blank] way back when") does not help on this score either.

Another argument I have seen in MR comments is: if we can't solve this health care costs problem it won't matter, therefore we can spend more without making the problem in net terms worse.  That's a fallacy and you would never apply such reasoning while driving over the speed limit ("I'll accelerate right now, after all at some point I've got to slow down anyway.")  Think of it as a kind of Zen-like, reverse Sorites ploy: "It is adding stones which takes a pile away."  Or "Let us add stones.  The pile must disappear in any case."

Here is a numerical style guide (SG) for identifying future arguments in these veins, because they will recur when you have an activist government which wants to be very popular, combined with an under-educated, short-term oriented citizenry:

SG1. The retreat into the relative: "All the other options are even worse."

SG2. Blame the Republicans: "They made the bill bad, not us."

SG3. The critic is evil or inconsistent: "Your views are inconsistent, or you are morally questionable, so I can dismiss your worries."

From now on in the MR comments section you can just cite the appropriate number and spare yourself carpal tunnel syndrome. 

Addendum: Megan McArdle adds relevant comments and also here.

Is this why the Senate bill has an ok CBO rating?

Because the program would begin taking in premiums immediately but would not start paying benefits until 2016, congressional budget analysts have forecast that it would generate a nearly $60 billion surplus over the next 10 years, cash that would help the larger measure's balance on paper.

Not long ago I filed this under "Department of Uh-Oh."  In the longer run it is very bad for the budget and it is simply an accounting trick.  It's a sign that fiscal responsibility will never come to U.S. health care.  And yes there is a long-term care provision in the Senate bill.  Although I have not read through its current incarnation of 2000-some pages, I am willing to bet we are getting the cost back-loaded version of the idea.

What should we do instead of the Obama health reform bill?

A lot of people think you have no right to criticize a bill unless you propose a better bill.  I don't agree (if the aforementioned bill is bad on net), but in any case I will give this a try.  These are not my first best reforms or even my second best reforms.  They're my "attempt to work with some of the same moving pieces which are currently on the table" set of reforms.  I would trade away the Obama bill for these in a heart beat.  Keep in mind people, with a "no insurance" penalty of only $750, the current bill isn't going to work (and that's ignoring the massive implicit marginal tax rates on many individuals and families, or the "crowding out" of current low-reimbursement-rate Medicaid patients), so we do need to look for alternatives.

Here goes:

1. Construct a path for federalizing Medicaid and put it on a sounder financial footing; call that the "second stimulus" while you're at it.  It's better and more incentive-compatible than bailing out state governments directly and the program never should have been done at the state level in the first place.

2. Take some of the money spent on subsidizing the mandate and put it in Medicaid, to produce a greater net increase in Medicaid than the current bill will do, while still saving money on net.  Do you people like the idea of a public plan?  We already have one! 

2b. Make any "Medicare to Medicaid" $$ trade-offs you can, while recognizing this may end up being zero for political reasons.

3. Boost subsidies to medical R&D by more than the Obama plan will do.  Establish lucrative prizes for major breakthroughs and if need be consider patent auctions to liberate beneficial ideas from P > MC.

4. Make an all-out attempt to limit deaths by hospital infection and the simple failure of doctors to wash their hands and perform other medically obvious procedures.

5. Make an all-out attempt, working with state and local governments (recall, since the Feds are picking up the Medicaid tab they have temporary leverage here), to ease the spread of low-cost, walk-in health care clinics, run on a WalMart sort of basis.  Stepping into the realm of the less feasible, weaken medical licensing and greatly expand the roles of nurses, paramedics, and pharmacists.

6. Make an all-out attempt, comparable to the moon landing effort if need be, to introduce price transparency for medical services.  This can be done.

7. Preserve current HSAs.  The Obama plan will tank them, yet HSAs, while sometimes overrated, do boost spending discipline.  They also keep open some path of getting to the Singapore system in the future.

8. Invest more in pandemic preparation.  By now it should be obvious how critical this is.  It's fine to say "Obama is already working on this issue" but the fiscal constraint apparently binds and at the margin this should get more attention than jerry rigging all the subsidies and mandates and the like.

9. Establish the principle that future extensions of coverage, as done through government, will be for catastrophic care only.

10. Enforce current laws against fraudulent rescission.  If these cases are so clear cut and so obviously in the wrong, let's act on it.  We can strengthen the legal penalties if need be.

11. Realize that you cannot tack "universal coverage" (which by the way it isn't) onto the current sprawling mess of a system, so look for all other means of saving lives in other, more cost-effective ways.  If you wish, as a kind of default position, opt for universal coverage if the elderly agree to give up Medicare, moving us to a version of the Swiss system and a truly unified method of coverage.  But don't bet on that ever happening.

Separate issues:

12. If you can tax health insurance benefits and cut a Pareto-improving deal overall, fine, but I am considering this to be too politically utopian and it's not clear what the rest of that deal looks like.  The original tax break makes no economic sense but you don't want to end up with a big tax increase and a lot more people on the public books with little in return.

13. If the current bill were voted down, you can imagine some version of the above happening, although not necessarily all at once in one big bill.

14. Commission a study of how much the Obama plan is spending per QALY saved.  I agree that more health insurance saves lives, but a) the study should adjust appropriately for the superior demographics of those who hold or buy insurance, and b) the study should adjust for the income that would be lost through mandates and the safety that income would purchase.  I worry greatly that we have never, ever seen this number presented and that if we did it would not be pretty.  In any case, do the study, scream the number from the rooftops, and reread points 1-11.  Enact.

That's my recipe.  It's better than what we are doing now.  You don't have to adhere to any extreme form of economistic or free market ideology to buy it.  It might even be politically easier than the current path, as it "sounds less socialistic."

Department of Unintended Consequences

In the face of greatly increased demand for services, providers are likely to charge higher fees or take patients with better-paying private insurance over Medicaid recipients, "exacerbating existing access problems" in that program, according to the report from Richard S. Foster of the Centers for Medicare and Medicaid Services.

Here is much more.  As I understand the broader story, if you seriously analyze the effect of the current reform package on Medicare and Medicaid, the basic story of how the whole thing will work falls apart.  Here is a further point:

In its most recent analysis of the House bill, the CBO noted that Medicare spending per beneficiary would have to grow at roughly half the rate it has over the past two decades to meet the measure's savings targets, a dramatic reduction that many budget and health policy experts consider unrealistic.

That's for a high-voting group which is growing in numbers.  And this:

The report, requested by House Republicans, found that Medicare cuts contained in the health package approved by the House on Nov. 7 are likely to prove so costly to hospitals and nursing homes that they could stop taking Medicare altogether.

The laws of economics have not been repealed.  I know fully well how hard it is politically, but until the supply side (and I mean the supply of services, not health insurance) is more competitive, the proposed reforms will make the core problems of U.S. health care worse not better.

Different rooftops

As the system gets gamed, the costs will be much, much higher than the CBO is estimating.

Arnold Kling explains his words in more detail.  Elsewhere:

If you think of the social cost of this bill it's well below $900 billion. If we could collect in tax revenues all the dollars in savings and new wages that people will get because of this bill, it would bring the cost well below $900 billion.

Jonathan Gruber explains his words in more detail.

What's actually in the health care bill

Here's a new blog devoted to that topic.

How well with the public option work?

Austin Frakt has a good post on this topic, excerpt:

I wonder how optimistic we can be about the degree of variation in spending predicted by risk adjustment models. I think the answer is “not very.” From the literature on health care risk adjustment (via this post):

Statistical models developed by scholars have relatively low predictive power. Predicting ten percent of the variation in [health] expenditure is considered good (e.g., Medicare Advantage’s risk adjustment model). That means ninety percent of the variation is unexplained by the model or chalked up to random error. An individual ought to be a better predictor of his or her health expenditures than a model that cannot include measures unobservable to the researcher. (How much better? I don’t know.)

Expenses for some specific services are more predictable. Drug expenses, for example, are persistent because individuals tend to use the same medications year after year. The best statistical models of drug spending can predict about 55% of the variation in next year’s drug expenses, leaving 45% to random error.

That puts a reasonable cap at 55%, but only for very persistent services, like drugs. Expect the best overall risk adjustment to be no worse than 10% and no where near as good as 55%.

Private insurers should not be so worried but taxpayers should. The public plan looks game-able.

The middle, double-indented quotation is also from Frakt.

I also view the public plan as game-able, though through a slightly different mechanism.  I don't think individuals are such good judges of their future health expenditures (self-deception) and in this regard the adverse selection model has been over-promoted.  That said, private insurance companies can and will find ways of keeping these people off their books -- poor service anyone? -- and many of them will end up in the public plan.  The CBO confirms that the public plan will not be a major force for cost reduction.  And if you think we will succeed in using taxes and fees to get the private insurance companies to take on their share of these people, as they do in the Netherlands, well...I believe that is a battle they will win, after the fact, when the public is no longer watching the implementation of the details of the legislation.  It's one easy way of buying them off as a lobby.

Why do other countries care more about health care cost control?

Ralph Sisson, a loyal MR reader, asks me:

Why do the other first world countries focus on costs more than we do? They also pay for care, for the most part, via insurance. Even countries with the same level of personal income focus more on costs.

Putting normative questions aside, let's focus on the positive comparison.  I can think of a few factors here:

1. Americans have the "anything I want, whenever I want it" mentality of consumer spending.  Look at Sunday closing laws in Europe.

2. Because of an accident of history, we covered old people first with government $$ and that set a precedent.  It's especially hard to say no to people who are close to dying and that got us out of the habit of saying no.

3. Americans are more likely to have a "can do" mentality than are people from most other countries.

4. Americans are more likely to have a self-image of being the richest people in the world and not facing financial limits.  We derive more of our self-esteem from this self-image.

5. Compared to some Asian cultures, the more individualistic American approach lends itself to the view that an individual life must be extended at all costs.

6. The U.S. regulatory climate tends to be more pro-business, which in this context means pro-doctor and pro-hospital.  Those people are always willing to tell us to do more and spend more and we seem always willing to listen.

7. Tying health insurance to employment makes it harder for people to see what they are really paying and how much it lowers their net wage.

You can try the cross-sectional approach but with France and Switzerland as other big per capita spenders, I am not sure where this leads.  The fully governmental systems, such as in the UK, have low expenditures but it's also an open question whether low prices and low quantities will follow from the same explanatory factors.

Any thoughts?

Why are Americans more risk averse about medicine than Europeans?

The stereotype is that Americans are more risk-loving and entrepreneurial than the less-rugged Europeans who instead seek shelter under the umbrella of the welfare state.  Yet when I talk about the FDA I point out that for many decades (from say the late 1960s to PDUFA in 1993 and perhaps again more recently) the FDA lagged behind its European counterparts in approving new drugs.  U.S. risk aversion in drug approvals is especially peculiar since the major scare which increased FDA powers and slowed down approvals was the thalidomide disaster but thalidomide was approved in Europe not in the U.S.  Nevertheless, we were the ones who got scared.

More recently, Scott Gotlieb argues that the Europeans have pushed H1N1 vaccine production forward using adjuvants and novel production techniques while the US has chosen less risky (some might say less entrepreneurial) older approaches.

The tort system is sometimes blamed for excess U.S. risk aversion but in both these cases it's mostly the U.S. government which is more risk averse than its European counterpart.  Moreover, the US government is more risk averse over medical matters and not say about sending troops abroad or about providing a safety net for other risks.

I think this is a puzzle.  Why has the U.S. government been more risk averse with regard to medicine than European governments but less risk averse in other areas?

Mandates don't stay modest

A tactic used by insurance companies to deny expensive behavioral therapy to autistic children has been deemed illegal by a Los Angeles judge.

In a preliminary ruling, Los Angeles County Superior Court Judge James C. Chalfant found that Kaiser Permanente's refusal to pay for a child's autism treatment because the provider was not licensed by the state runs counter to California's Mental Health Parity Act. That act requires insurers to cover care for mental and behavioral problems at the same levels they do for physical illnesses.

Here is the full account.  Three different (but not unrelated) takes on this story are:

1. Whatever you think of occupational licensing, as a matter of social status it seems odd to apply it to dog doctors, or for that matter toilet and sink doctors (i.e., plumbers), but not to those who treat autistic children.

2. These treatments can cost $50,000 a year or more and there is little reliable RCT evidence that they actually work.

3. Yesterday I saw two separate television ads, on two separate channels, campaigning for the Virginia State legislature on the grounds that one's opponent had opposed mandatory insurance coverage for autism treatments.  The ads simply take it for granted that such coverage would be a good thing.  (Rest assured I do not usually watch TV, or its commercials, but the first was in a restaurant at Eden Center and as for the second it was the first day of the NBA season.)