Limiting health insurance plan choice is harmful to consumers

A significant component of the Affordable Care Act is the forced standardization of health care coverage through prescribed components that must be carried by insurance plans. Ultimately, this approach has been tremendously disruptive and has moved millions of people off of the plans that in the previous market paradigm they were happy to buy. I refuse to call it a free market since it really has not been that for decades. This disruption is the impetus behind much of the lampooning of Obama’s language, which later proved to be an astoundingly incorrect bit of marketing and hype, that if you had a plan that you liked you could keep it.

Standardization of plans ostensibly removes buyer searching costs for complicated products. Such as approach would only make economic sense if the searching costs were higher than the benefits obtained from the selected product. The challenge is that this sets a remarkably paternalistic precedent – if we dupes in America can’t be trusted to buy health coverage that suits our needs, perhaps we can’t be trusted to buy financial instruments or real estate either. It also has the perverse effect of cutting off product innovation that caters to individuals and unique segments of the healthcare market. Something to consider and question: can government possibly keep up with the changing demands of consumers as well as the unpredictable emergent order that drives market-betterment ideas and innovations? Even if government might be approximately right on the first iteration of defining product standards, it would be impossible for them to keep up with the pace that a free market comprised of consenting adults engaging in commerce could drive. Furthermore, a significant philosophical challenge is that such an approach mandated by government significantly violates an essential freedom of consumers to choose for themselves what is best for them. Finally and perhaps most perniciously, such an approach allows government to enact their own views of desirable social policy through diktat. The Supreme Court case of Burwell vs. Hobby Lobby  is an example in which a private employer was forced to provide contraceptives against their own religious beliefs. Whether one believes Hobby Lobby is outside of the societal norms in their stance on contraceptives is quite beside the point. The point is really whether we believe government should be powerful enough to be able to force anyone in society to choose which product to purchase and what it should contain. This is the first-order principle freedom-loving citizens should be concerned with.

In the book The Future of Healthcare Reform in the United States, Richard Epstein, of the NYU School of Law, pens the following compelling narrative on the challenges with the elitist assumptions of government needing to protect consumers through standardized plans:

Any decision such as that made in healthcare markets – to require given firms to offer a particular type of contract with predetermined coverage – does not facilitate competition but thwarts it by restricting the dimensions over which innovative firms can compete. To be sure, it is unlikely that either midsize firms or ordinary consumers can canvass the entire market. But they can make a series of initial cuts to focus on the market segment they care about most. At this point, one of the key drivers of good competition is the ability to offer a particular configuration of goods and services that make sense to some segment of the overall market. The standardization of service packages thus prevents innovation along certain key dimensions, which hardly improves the overall competitive market. Put otherwise, product differentiation is the great and beneficent spoiler because it allows rapid and discontinuous changes in the market such as the rise and fall of BlackBerry and the now possible decline of Apple in the face of potential disruptive technological developments from a host of competitors. In my view, these large gains dominate any negative effects. Indeed the constant use of product differentiation, both large and small, in market after market, suggests healthcare regulators engage in a dangerous gambit by limiting product choice to a few set choices in order to reduce the buyer’s costs of search. People can truncate searches using sensible strategies. They do not have similar ways to expand market options.

Imagine if government decided that our smartphone choices were overwhelming to consumers and determined that we should all have certain features based upon some government committee’s determination of a rightful specific set of requirements. I suspect the product so described by the committee in the duly published 500 page document would prescribe usage of something resembling the BlackBerry more so than the iPhone. And despite Hillary Clinton’s fondness for this device, we obviously would be immediately worse off as consumers. Further imagine that the government decided that we could no longer buy the phones at Apple stores or Best Buy, but purchasing of these devices had to occur at government licensed locations. Behold the entirety of the healthcare market: a market in which there is an inherent paternalistic assumption that consumers are too ignorant and overwhelmed to make their own choices. The government committee decisions on what we can buy and where we can receive our products described in the smartphone analogy is precisely the kind of marketplace we have allowed our government to create in healthcare. Perhaps it is time to step back and ask ourselves why and whether we are getting good outcomes out of this approach.

 

Three simple rules to live by

Do not take what does not belong to you.

Keep your promises.

If you fail to abide by the first two, then you must make just compensation for what you took or what you failed to deliver.

Try to do some good in life.

Within two separate Free Thoughts podcasts on the topic of the philosophical underpinnings of the U.S. Constitution, Dr. Roger Pilon does as remarkable and scholarly of a job as anyone I have ever heard on the topic. He discusses in great depth the intellectual traditions embodied in the Constitution as well as how that has evolved from its originalist and natural law construct over time to something much more expansive and interpretative that has moved significantly away from the original guiding principles of a federal government that is a necessary evil that should be deliberately kept small. It was so small in fact, that in the move from Philadelphia to the new White House in Washington D.C. in 1800, all of the federal government files could be transferred in just 12 boxes. Imagine that! The most salient moment for me is when Dr. Pilon distills all of the Constitution and the philosophy behind it into four simple rules for us to live by, which are quoted above.

The first rule is the concept of property rights and rights to be free from physical harm and is embodied most visibly in the opening words to the Declaration of Independence. The second rule is the concept of rights of contract and enforceability of contracts that are freely entered into by citizens. The third rule is based upon the concept of remedies and justice and is essential in upholding the first two as general principles, allowing us to retain trust in the good of fellow man and of just redress if they happen not to be good. The fourth rule is something that Dr. Pilon indicates is entirely optional. If we are to retain our essential freedom and a true good and virtuous nature, we can’t be compelled to do good. However, a preponderance of people doing good seems to be the most secure way in which to uphold a free society and thus ensuring that government does not grow in scope inexorably. As Benjamin Franklin indicated – we have a Republic, if we can keep it. It increasingly seems to be appropriate, given how large and arbitrary our federal government has become, to say that we had a Republic, and we have the blueprint for how to get it back, if we want it bad enough.

 

Let’s repeal Obamacare and replace it with something more consumer-centric

At long last, Republicans have started to coalesce their various one-off healthcare reform ideas from the past 6 years into a semblance of a comprehensive Obamacare repeal and replace proposal. There is much to appreciate in this proposal, which includes oft-repeated catchy taglines of, “a better way,” “patient-centered,” and my personal favorite, “backpack.” I will discuss more on the backpack later. The whole presentation, which I have linked above, can be watched in a recent AEI video.

What this proposal does not promote is my own personal preferences of a drastically reduced role for health insurance, a product that should be beaten back into its proper place for coverage of catastrophes only. The price-obfuscating impacts of coverage for every service and the price-decreasing impact that would ensue if consumers were able to see prices and outcomes more transparently by paying more directly out of their pockets is not part of this proposal. Nor does it address the supply-side needed reforms such as lifting the competition stifling (and therefore price increasing) impacts of the various regulatory mandates and rent-seeking political lobbying of regional monopoly hospitals that prevent new hospitals and clinics from opening. Finally, while it promotes Medicare and Medicaid reform, it leaves Medicare, which is mostly a middle class welfare and wealth transfer that has a naturally price inflating impact, largely intact. These are my caveats for why I don’t consider this a perfect proposal. That being said, the main themes presented certainly stanch the government takeover of healthcare bleeding and presents significant and politically feasible patient-centric reforms in place of the current construct of byzantine, dizzying, and unsustainable complex web of government controls and mandates. For this fact alone, this substantial reform proposal should be applauded and supported as a significant improvement to the status quo that just might get enough electoral support if Americans pay attention to it and can keep from being distracted by the ongoing Trump/Clinton circus. As a former boss of mine used to tell me, “don’t let perfect be the enemy of good.”

The focus is clearly on consumer choice, portability, decentralization of decisions to state and local levels, and sustainability of Medicare. It is this concept of portability that is referenced as a backpack of items that will allow consumers to move across companies and states and maintain their same coverage and access to health services. Paul Ryan opened the session indicating that Obamacare is singularly focused on quantity of people insured, while ignoring the staggering costs in the system that Obamacare caused that are, in his words, causing the act to collapse under its own weight. Not to mention the tremendous loss of individual freedom and choice that resulted from centralized decision making and mounds of mandates arising out of D.C. Allowed to blossom, these are salient points that I believe will resonate with a public that has been remarkably skeptical and loathing of Obamacare. The marketing pitch is clear – consumers, take back your choice and freedom to choose the health plans that are right for you and not dictated by a government bureaucrat. Perhaps it is more appropriate to say take it back from thousands of bureaucrats, as one Congressman indicates in the video, there are fully 159 agencies and commissions currently involved in interpreting and implementing the dictates of Obamacare.  Several congressmen, including Budget Committee Chairman Tom Price (R-GA), Education and the Workforce Committee Chairman John Kline (R-MN), Energy & Commerce Committee Chairman Fred Upton (R-MI), and Ways & Means Committee Chairman Kevin Brady (R-TX) took turns articulating the proposal once Ryan got off the dais. Below, I have summarized the important components of the proposal, ranked in order of my opinion on which are the most important to least important.

  • Extending the health insurance tax break to individuals that businesses currently receive, and capping the amount that businesses can receive tax breaks. This concept will sever the link that causes Americans to be solely dependent on their employer for health insurance and promotes portability and accessibility of insurance. Hopefully, it results in more people taking the initiative to get insurance on their own and subsequently bargaining for higher direct compensation from their employers. The capping of tax breaks for businesses is intended to serve as a cost inflation and “over-insurance” containment provisions. Coupled with the ending of specific coverage mandates, also part of the proposal, this could go a long way towards incenting people to get more affordable coverage that makes sense for their life situation and promote innovative models such as high deductible plans, insurance coupled with wellness programs that promote actual health and wellness, and insurance that covers catastrophes only complemented with health savings accounts. These forces could make a major dent in insurance cost inflation and concomitantly overall health cost inflation.
  • Free up insurance purchasing across state lines – this simple and sensible act will drive up competition and will do much more to drive consumer choice and put downward pressure on prices than the continually failing exchanges and insurance co-ops (most of which have declared bankruptcy by now) could ever do, even though that was their ostensible original purpose. The challenge is that it is impossible to drive choice and cost containment when you also force standardized minimum levels of coverage and mandated cross-subsidization of high risk individuals.
  • Promotion of Health Savings Accounts – Provisions of Obamacare amazingly and wrong headedly penalize HSAs through the tax codes. This proposal would wisely end those disincentives and work to actively promote their use. HSAs are popular despite their government created disadvantages.. Furthermore, usage of HSAs promotes pricing transparency and healthcare service usage portability and flexibility.
  • Medicare Reform – The proposal kills off the unpopular and unaccountable Independent Payment Advisory Board and promotes consumer choice through expansion of the popular Medicare Advantage Program.
  • Provide state block grants for Medicaid – this will provide greater flexibility at the state level to craft cost saving programs at the localized level.
  • Provide for ability of Small Business Group Purchasing Associations – the proposal would allow for small businesses to band together for group purchasing of insurance coverage. While I prefer a high degree of an individualized market(which hopefully the tax breaks to consumers will promote), the fact is that most employees now expect and HR departments like to offer health insurance as a hiring incentive. Allowing small businesses to band together and to receive the same tax incentives as larger businesses will promote further consumer access with the nice boon to small business employment. Currently, Obamacare punishes small businesses through a web of complex rules that force them to either cover employees on increasingly expensive and bloated plans or pay a tax penalty per employee that they do not cover.
  • Protection of Pre-Existing conditions coupled with state incentives to create risk pools. While I would submit that a free-market system that promoted insurance for catastrophic conditions only would solve for this without the need for regulatory enforcement, this provision that is currently part of Obamacare is one of the few things that is actually politically popular. Thus, it is important from a politically feasible standpoint to keep it. One way of potentially holding down cross-subsidization amongst premiums and spiking premium costs for the average holder is to also create risk pools for certain conditions as a backstop to insurance coverage. The concept of risk pools is also promoted in the proposal.

These are simply the highlights. I will need to dig into the documented details of the plan to provide additional thoughts, but I certainly appreciate the direction this is heading.

Trump versus Clinton – a diabolical choice

Far-Side-Damned-if-You-Do-Dont_2

I am reminded of this Far Side cartoon every time I think of the Trump versus Clinton election circus we are doomed to endure for the next few months, followed by 4 years of whatever we get on the back-end of it.

On principle, I believe that voting for the Presidency should never have become, nor is it currently, a binary choice between lacklustre candidates put forward by two parties. I say this only to make the point that the Far Side cartoon, while humorous and somewhat appropriate, isn’t entirely accurate given that we can freely vote for other options or choose not to vote at all. Much of my actual lament today is that the office is as powerful as it currently is in the first place. If the executive office was relegated to its proper constitutional role, this would be far less consequential of an exercise.  It is the legislature, through reasoned and deliberative process, that was established with the preponderance of governmental powers and placed in the pre-eminent Article I of the U.S. Constitution. This was a wise decision by the founders, who intended to promote the durability of individual liberty through due process of deliberative and participatory government, as I indicate in another post. This legislative responsibility has been eroded greatly through various executive branch usurpations (i.e the vast proliferation of unaccountable executive agencies) as well as a judiciary that has strayed beyond its boundaries of interpreting law as devised in the Constitution and through laws promulgated through the legislature to a modern-day role in actively creating their own laws out of the judge’s’ own political and personal preferences.

All that being said, my ideological principles don’t matter much when the reality is that one of these individuals will become President of the United States, a fact that I can only find comic relief in the Monty Python scene in which the “Constitutionalist” peasant indicates to King Arthur, “well, I didn’t vote for you…”  I picture myself in the next four years as an increasing malcontent who mutters throughout the day, “well, I didn’t vote for you…” every time a poor decision is made or every time something else surfaces that demonstrates their unsavory characters. Actually, upon re-watching the entire scene, I think there is a good deal one could use out of the clip as a parody of modern American government.

And while I don’t agree with the enthusiasm in which the author takes in not ever voting, as I still believe that it is an important right to cherish, there is much in a recent commentary in which he quotes David Boaz posted on the Cafe Hayek blog  that I think is spot on. I quote the main points that I agree with below:

I’ve heard libertarians say, “We know how bad Hillary is, so the mysterious Trump is a better bet.”  But we do know much about Trump.  He’s been clear and consistent on a few issues: banning and deporting Mexicans, building a wall around America, banning Muslims, and taking a sledgehammer to the world’s most important trading relationship (between the United States and China).  He’s indifferent to federal spending and against entitlement reform.  He thinks he doesn’t need advisers or policies or principles.  He has no earthly idea what he thinks about taxes, abortion, minimum wages, debt, health care, or most other issues.  Most disturbingly, he shows disdain for Congress and the Constitution.

A few libertarians have said that war is the greatest threat to life and liberty, and Trump is less hawkish than Clinton and most of the other Republican candidates.  True, he has criticized the Iraq war and nation building and even read a speech proclaiming that “unlike other candidates for the presidency, war and aggression will not be my first instinct.”  But he has also promised to “bomb the s– out of” ISIS and “take out their families.”  And his ignorance, anger, and impulsiveness about trade and immigration would surely make for rocky international relations.

 

 

We are from the government, and while we created this mess, we are here with a 900 page dictate to help

Price is high

Health and Human Services, ever so helpful, is now taking aim at simplifying patient billing, a problem largely of the government’s own creation due to decades-long healthcare meddling (thanks to my friend Bob for the picture above). A HISTalk post on the hypocrisy of HHS taking this challenge on has a quote that captures the essence of the true underlying reasons for the mess in the first place:

This is the height of hypocrisy. Does CMS think providers on their own created the insane billing requirements and processes? It started with Medicare Part A, then B, then D. Co-payments, deductibles, out of network, referral approvals, contractual allowances, UC charges, and on and on. Next, billing systems will have to deal with VBP, P4P, bundled payments, MACRs, and more. Providers never asked or suggested any of these — they just have to figure out how to carve up charges/costs and services and put it all on a one-page bill. A 1995 analysis found that the Federal Register contains 11,000 pages dealing with an IRS 1040 submission, but hospital billing required 55,000 pages to describe. If CMS really wants to simplify the patient bill, they need to go to a single-payer system. Until they do that (not likely), the patient bill will continue to be the mess it has been for the last 50 years. Who do I call to collect my $5k?

Of course, I wholeheartedly disagree with the author’s prescription to create a single-payer health system as a result. He is inviting the wolf that created the mess in the first place farther into the hen-house and proposing making them even more all-powerful and monopolized. Does he really believe that they will somehow suddenly find sagacious angels to run the system at that point? The real answer is market-based and comprehensive demand and supply side reforms of the kind I captured in a separate blog post.

Here is what I predict: HHS will view a few isolated reform proposals that might work in certain settings but not all, decide that it is something that should be centrally mandated and in fact applicable to all, follow that with the creation of a 900 page unreadable document that hospitals and clinics, in despair, are forced to hire a team of consultants to figure out, but which gets the actual needs of patients and consumer transparency on pricing and outcomes precisely wrong.

 

 

How I would vote on the Brexit referendum

Vote Counter: 'Okay,DONE! It's settled! The NEIGHS have it!'

I must confess to some amount of ambivalence overall on the Brexit topic over the last few months. When it comes to the UK, I tend to pay more attention to the latest production coming out of the BBC Masterpiece Mysteries than I do their raucous politics. I can say that I can certainly identify with elements of the Leave camp.  I am highly suspicious of large supranational bodies such as the EU and it certainly has its downsides and serious flaws in centralization of unaccountable bureaucracies and loss of direct democracy at the local level. The EU could have a far more effective and durable institution if it focused less on political and regulatory union fronted by unaccountable bureaucrats and more on the common market and defense aspects of the treaty. This orientation seems to fail on the basis that there are not common taxing and banking decisions and regulations, resulting in the political strife that tends to become inevitable when largely successful and thrifty economies such as Germany and the Nordics have to incessantly bail out profligate economies such as Greece. On top of all of this, the moralizing hectoring and scorn heaped upon the leave camp has the emotional effect on the cynic in me of wanting to cock a snook at the seething elitism and fear mongering that undergirds much of what is coming from the Remain camp. Matt Ridley makes a compelling and succinct case in an op-ed for the Leave camp.

All that being said, a recent Wall Street Journal podcast on the issue forced me to seriously think through how I would vote if I happened to be British, and I have come down on the side of tilting towards the Remain camp. The challenge seems to be that most of the Leave side of the aisle seem less worried about abstract political theories of national rights of self-determination as it relates to the rule of law and much more concerned with populist beliefs and a desire to more directly impact immigration, usage by immigrants of public services such as the NHS, skyrocketing rents and home prices, and to limit free trade. The challenges of usage of expense related to public services and high housing prices due to immigration are a result of failed statist policies and restrictive housing regulations that are Britain’s fault alone and for which leaving the EU will do nothing to solve and one could argue (as the hosts of the podcast, Bret Stephens and Mary Kissel do) is purely a political distraction from the challenges that they should be solving. An insular Britain, while it may rid itself of the supranational and undemocratic elements of the EU, will not be charting a course to some economic laissez-faire dreamland. It would seem that if the leaves have it, then it would be hard to ignore the concomitant electoral mandate to promote economically harmful protectionist policies and to shut the doors to economically beneficial immigration. Protective nationalism would be the result.

As a Bret Stephens WSJ op-ed indicates, the ideal scenario and supranational construct would be one built upon foundations of common markets, contributions to defense, and promotion of free trade spread out across countries that have common views of free-market principles and the rule of  law. Given that this is not on offer and we don’t collectively have the political leadership to bring it about while Britons are staring at the immediate prospect of a smaller and less globally engaged and protectionist England (Scotland would surely finally carve off of the UK and join the EU on their own), I hope for a remain vote. At least for now.

In defense of liberty and deliberative self-government

BenFranklinDuplessis

A Republic madam, if you can keep it

– Benjamin Franklin

Have we not already seen enough of the fallacy and extravagance of those idle theories which have amused us with promises of an exemption from the imperfections, weaknesses, and evils incident to society in every shape? Is it not time to awake from the deceitful dream of a golden age and to adopt as a practical maxim for the direction of our political conduct that we, as well as the other inhabitants of the globe, are yet remote from the happy empire of perfect wisdom and perfect virtue?

Where is the standard of perfection to be found? Who will undertake to unite the discordant opinions of a whole community, in the same judgment of it; and to prevail upon one conceited projector to renounce his infallible criterion for the fallible criterion of his more conceited neighbor?

I never expect to see a perfect work from imperfect man. The result of the deliberations of all collective bodies must necessarily be a compound, as well of the errors and prejudices, as of the good sense and wisdom, of the individuals of whom they are composed… [A] common bond of amity and union, must as necessarily be a compromise of as many dissimilar interests and inclinations. How can perfection spring from such materials?

– Alexander Hamilton, Federalist Paper Number 6

The defining ideals of the American Republic, as expressed in the Federalist Papers through the pseudonym Publius, which was comprised of Alexander Hamilton, John Jay, and James Madison, was fundamentally an unprecedented quest to demonstrate the power and durability of a self-governing Republic built on a Constitution that above all valued deliberative process and based upon a moral foundation and virtuous society. These ideals were in marked contrast to other contemporary democratic philosophies then taking shape, notably in France, which favored the immediate supremacy and wisdom of the collective man through elections and plebiscite-based majority rule. In contrast, the American experiment was intimately crafted to be by design incrementalist and deliberative through the separation of powers and checks and balances inherent in the Constitution, as well as the diffusion of various powers across federal and state governments. This uniquely designed separation and diffusion is why Benjamin Franklin, during the closing days of the Constitutional Convention of 1787, gave the response in the first quote above to the question asked by a woman out in the street, “Doctor, what will it be, a monarchy or a republic?”

This methodical and deliberative process was above all meant to protect the rights of the governed and uphold individual liberties. If anything unified the Founding Fathers as a guiding principle, it was a fear and skepticism of immediate majority rule and mob mentality, a risk of democracy that French philosopher and political scientist Alexis de Tocqueville would later coin as “the tyranny of the majority.” This ideology is markedly different that the origins of progressive ideology based on humanist rationalism and an idealistic belief that majority rule and decisions should reign supreme and democracy in action should be rapid and responsive, all in the efficient pursuit of achieving egalitarian equality.  It is this vain quest for individual equality in outcomes, this naive notion of human Utopia, and the endless government usurpation of individual rights that stem from it, that the Founding Fathers were greatly fearful of and undergird both the Hamilton and Franklin quotes above. Greater elaboration on these political and philosophical points are wonderfully discussed in a recent Imaginative Conservative article from which I was inspired to lift the Hamilton quote. One quick point to make is that the Founding Fathers preferred deliberation over even elections themselves. The author of the article contends that incessant focus on elections and score settling between sides leads to a breakdown in unity and social cohesion in ways that discussion and deliberation do not. I believe we have completely lost sight of the art of deliberation and consensus in American politics of today. We are constantly myopically focused on what election cycle we happen to be in and the scores that we are trying to settle and tearing down those who stand in our way. Meantime, government power and tramping of rights of the individual continue to grow apace.

My own personal observation and grievance is that the one deliberative and long-term focused institution that we had at the outset of the American Republic, the U.S. Senate, which was originally populated by individuals appointed by state legislatures, became much more captive to short-term whims of the majority when the 17th Amendment created direct election to the Senate. In other words, the indirect election method to the Senate enumerated in Constitution by the great sagacity of our Founding Fathers was replaced with direct election by the population. This in essence made the Senate really nothing more than a smaller extension of the House of Representatives. I believe the model in which there was both a relatively insulated deliberative body coupled with a directly elected body more responsive to the population served America quite well. Unfortunately, I don’t think repealing the 17th Amendment is going to become a rallying cry anytime soon.

School choice in America – what are we waiting for?

This podcast on school choice, in which Jason Bedrick is interviewed on the landscape and philosophical rationale in support of school choice, is highly informative and I highly recommend the full listen. Some highlights that I found insightful are as follows:

  • University of Arkansas School Choice Demonstration Project has several studies demonstrating the positive impact school choice has, including a meta-analysis (a study of studies) that showcases the beneficial impact of school choice and school reform at statistical levels of significance. The volume of positive results rolling in from a growing number of localities and states where there are pockets of school choice is becoming harder to refute and ignore. It is time for individuals to start looking at their own localities and asking why their own school choices are so restrictive.
  • While school vouchers are the funding option that is most discussed in policy circles, they are not the only or even perhaps the best option available to school reform advocates. Education savings accounts and tax credits are alternatives that present compelling economic benefits as well as possessing legal characteristics that allow for circumventing the Blaine laws that exist in many states. On the former, vouchers have one economics limitation in that their actual dollar value is recognized and known across the education system and thus can be gamed by school providers as a price floor, which can spur cost inflation and undermine the desired impact of providing better education options to disadvantaged communities as they get priced out of the market. Contrast this with savings accounts that can accumulate and can be spent in a more flexible manner across a wider range of education activities, which present economic forces that mitigate inflation. The Blaine laws that exist in many states was originally a muddle-headed approach in the late 1800s to prevent Catholic schools from receiving federal dollars. Nowadays the laws are now widely used to prevent any religious school from receiving government funds. My own aside to this is that we should always be extremely cautious when promoting government power at the expense of someone else’s individual liberties, even if we firmly believe it is in our own personal and parochial interests. Indeed, the Blaine laws were fomented by Protestant Christians concerned with immigrants from Catholic-dominant lands, such as Ireland and Italy, setting up their own Catholic schools and not assimilating into American culture. Ill-founded xenophobic concerns unfortunately often lead to using government power to coerce our fellow man and trample on their rights. Nowadays, it is these same largely Protestant Christians fighting Blaine laws in the hopes of clawing back their tax dollars to use on the private Christian schools of their own choosing. The fact that our Protestant forebearers created this anachronism is a cruel irony.
  • One common attack against one form of school choice reform, public charter schools, is that in some cases they have not outperformed their traditional public school peers in the same area. Mr. Bedrick indicates that if one goes beyond that surface level point-in-time comparison one quickly realizes that in most cases, the fact that there was competition forced the public school to increase their performance; in essence the mere fact of school choice and competition created a rising tide that lifted all boats. Furthermore, qualitative surveys and interviews with parents in these districts point to much higher satisfaction amongst parents on the responsiveness and customer service aspects of the pre-existing public schools. In short, options and competition made everyone better off and forced the previous public school monopoly to be far more responsive to their customers.
  • There is a common fear that school diversity will wind up breaking the common societal bonds that we idealistically believe we benefit from as communities out of common public schools. Mr. Bedrick points out that private school students actually achieve higher scores on civics and in their support for other views and pluralism than their public school peers.

What prevents greater school choice and diversity? What keeps us captive to the school of the zip code we happen to live in? One commonly maligned enemy are the teachers unions. While they certainly seem to be a roadblock, I sincerely believe that the real enemy is our own individual and collective inertia. Public schools are the status quo and represent how it has been done for generations, so why should we change? I would submit to you as parents, grandparents, and students, that the world could be a great amount brighter if we have school choice and schools innovating and diversifying their curriculum. Picture all of our collective laments on how the public schools fail to deliver on the arts, liberal arts, STEM, trades, or how they are prone to centralized dictates such as common core. Imagine how that might change if we could take our highly creative child to the new school started in our area that focuses highly on the arts, or if we could take our burgeoning engineer to the school focused on STEM.  These innovative and diverse models would blossom and grow if only they were allowed to.  Aside from all of that, it would seem to me that freedom of choice of where to spend your dollars and where to send your kids to school, while also allowing the poor and children captive to failing school to escape them, is the right thing to promote as a policy in of itself.

 

 

A brief history of how the American healthcare system became high cost and low performance

In two separate but connected articles posted on the Mises Institute website, Part 1 covering the pre-World War II construct of American healthcare and Part 2 covering the explosion in healthcare costs and our current system development post World War II, Dr. Michael Accad, a Cardiologist with an impressive resume and who has a tremendously insightful blog, provides a remarkable yet succinct overview of how we got to where we are today, which can be briefly described as a costly and underperforming health system.

In just a few minutes, the reader will witness the 100+ year descent into the 7th layer of hell that is our healthcare system and all the errors and paternalistic hubris that got us there. Begin with the status of healthcare in the 19th century, which while far from ideal (this is the era when bloodletting, blistering, and toxic purgatives were common, after all), was beginning to witness the emergence of competitive and innovative medical reforms under a scientific and competitive basis under the guide of the free market invisible hand. For example, germ theory and surgical advancements, and the formation of high-performing health systems such as Mayo Clinic that practiced care on these scientific foundations, were beginning to blossom in the late 19th century without the meddling hand of government agencies and regulations that are prevalent today. But then everything changed when in the early 1900s, a sensational report on the inadequacies of the health system penned by Abraham Flexner resulted in reforms in more onerous physician licensing and health education that remain largely intact to the modern-day. The offshoot was a tremendous narrowing of diversity in medical approaches and education models and medical practices. Everything outside of the Flexner dogma was ostracized and shunned. The challenge with this paternalistic approach is that licensing led to self-serving restrictions on the supply of physicians, leading to spiked costs.

Part 2 of the series covers the evolution of the American health system into what we know today. With increased costs came a decrease in demand. With excess hospital and physician capacity, leaders in healthcare began crafting strategies to increase collective payment models that would blunt the direct cost impact on consumers and thereby increase demand in line with existing capacity. While a European national health system seemed politically out of the question, pilot models in which employees of a Dallas school system were part of a collective payment system seemed to offer the best model to emulate more broadly in order to bring up hospital service demand as well as mitigate adverse selection of the sickest patients opting into insurance plans. Intuitively, people who are able to work are typically healthier than the average American. Legislation promoting insurance plans duly followed, with favorable reserve requirements for Blue Cross and Blue Shield Programs compared to other types of commercial insurance as well as tax exemptions for employers who offered health insurance coverage through the 1942 Stabilization Act. My own editorializing is that the reader should bear in mind that this legislation was a compounding error in the sense that it was meant to address a challenge with employers being able to compete for employees given pricing and wage controls that were persistent in that era. Allowing employers to de facto increase their wages by offering health plans was a backdoor sop allowing them to more effectively compete for labor. The unintended consequences that we are still living with today is that we are collectively highly dependent upon employers for health coverage, which has its own perverse effects of holding people hostage to jobs as well as decreasing our direct take-home pay. The more immediate impact of this in the mid-century was a rapid increase in medical utilization and price inflation. I wish a magic time machine would allow me to just go remove the insidious price and wage controls in the first place.

Dr. Accad focuses heavily on the paternalism of the system that drove us inexorably towards the vicious cycle conclusion that government must take an active role in providing insurance, at great risk and ignorance of the ensuing moral hazards of over-using healthcare services that such an approach entails, which further leads to a whack a mole approach of controlling costs. Better to have not created the holes and brought in the moles in the first place, but I digress. Through a Question and Answer method, Dr. Accad elaborates on two aspects of moral hazard and how this most important of economic concepts impact health care:

Q:  What are the two aspects of moral hazard?

A: The first one, which matches the negative connotation of the term, is the aspect imported from other insurance settings. For example, in the case of car insurance, the term moral hazard refers to the fact that someone with car insurance might drive less carefully than someone without coverage. In a way, that person may be “taking advantage” of the insurance company.

In health care, that aspect of moral hazard probably exists, but may not be very important. For example, it’s conceivable that people who have insurance are more likely to engage in more dangerous sports activity. But this kind of moral hazard can probably be accounted for by the insurer and be factored into the actuarial analysis to determine premium prices.

The other aspect of moral hazard stems from the fact that every single medical encounter or medical act can be said to be ordered toward the preservation of life or toward the well-being of the person. This by itself presents a strong incentive to use medical services, and the behavior should not have the same negative connotation as in the first aspect of moral hazard. In fact, economist John Nyman has argued that the behavior by which insured people would use more health care is a social good.

The bottom line is that one does not need to be sick to utilize medical services and that all that is needed is a plausible argument that if a medical action is taken, life may be prolonged or enhanced. Such plausible arguments are not hard to come by, especially in a health care system where doctors and hospitals are largely paid on a fee-for-service basis. There is no objective limit on what can be considered “desirable care,” and if cost is not a consideration, more medical actions will be taken.

Of course, when consumers are shielded from direct costs, there is little to stop inflation. Insurance premium inflation has consistently outpaced general inflation since the 1950s. Stop and think about how remarkable that factoid is. Dr. Accad addresses this as well, and I love the comparison of health insurance to a harmful drug:

Q: Didn’t the increasing cost of insurance hurt employers?

A: To the extent that it did, there was not much employers could do about it. With rising medical prices, the need to have health insurance would become more and more acute. Employee discontent would have been too great to abandon health insurance as a benefit. Executives themselves also benefited from the group rate, so the idea that health insurance should be abandoned could not be entertained seriously.

Q: People were hooked!

A: Health insurance is a seriously addictive and harmful social drug.

Once medical price inflation occurs for those who are covered, those who are not covered begin to get priced out of the market. During those times, it tended to be the poor, the aged, and unemployed who were left in the lurch, and that brings us to Medicare and Medicaid:

Q:  How was the situation addressed?

A: With the enactment of Medicare and Medicaid in 1965. The government provided generous health insurance benefits to the most politically influential class, the elderly, which also happens to be the class whose needs for medical care are naturally the highest.

The terms of Medicare insurance were also very generous to physicians and hospitals since, to secure their cooperation, the government decided to pay them their “usual and customary rate,” which means that, for a time, the government had no way of controlling costs.

Q: I can see things spiraling out of control…

A:  As a matter of fact, once Medicare was introduced, medical prices became completely “unhinged.” Within a few years, Medicare expenditures were quadruple what had been anticipated.

The demand for medical services was so high there was an acute shortage of doctors. Immigration laws were adjusted to allow a rapid influx of physicians from abroad. There was a boom in hospital construction. Incredible facilities and health care complexes were built.

Naturally, with skyrocketing medical prices, insurance premiums had to increase correspondingly. This began to really affect employers.

The rest of Dr. Accad’s journey through the American health system history concludes with the modern-day challenges to restrain the predictable cost increases that ensued with Medicare – from the Managed Care Organizations that were designed in the 1970s to the various pay for performance schemes, Accountable Care Organizations, and shifts from fee for service that we see today. Some of these are likely steps in the right direction, and it is certainly better to pay physicians based upon outcomes and quality rather than volume of services. That being said, with all of the recent mandates and focus on payments for an entire episode of care that has and will incent mergers and consolidation, I am not sure the incentives will truly be great for newly minted local monopolies to increase quality and pass on cost savings to consumers.

It would be far more effective to implement policies that end onerous licensing and task performance restrictions (i.e. by allowing nurses to perform tasks they are perfectly capable of), end supply side restrictions (it is near impossible to open a new hospital in an area due to hospital political lobbying and political connections at the local and state level), end reliance on insurance that covers everything, which obfuscates health care prices, provide individuals with the same tax advantages that employers receive for health service coverage, shift employer based coverage to portable and widely usable health savings accounts, and replace health insurance subsidization for the poor with directly funded health savings accounts similar those enjoyed by their better off peers. Such a model would drive greater innovation, better customer service, and more transparency around outcomes and costs. All of these combined would tame cost inflation while at the same time increasing health outcomes.