"nothing ... will require you .. to change" and other ruminations

Topics: foreign policy
06 Oct 2009

From: Ervan Darnell


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In Obama's speech [1] on health care he said:


> , nothing in this plan will require you or your employer to change the
> coverage or the doctor you have.
>


In the very next paragraph, he said that pre-existing condition limits,
dropped coverage, lifetime caps, and unlimited out-of-pocket expenses
will all be banned. That's a huge change in my current insurance,
making it much more expensive, and removing many of the levers that
insurance companies compete on to keep cost under control.

Of course he promised "it will slow the growth of health care costs "

The economic utility of medical insurance is not just spreading risk,
but rationing resources as efficiently as we can manage. It's a bargain
that says "before I'm in desperate need and irrational I'm binding
myself to these limits and foregoing some exotic procedures", in
exchange you get coverage you can afford. As an individual, you get to
move that line where it suits you. Unfortunately, the tax code has
already greatly harmed that model, but the Obama plan more or less
destroys it.


> "By locking in these flaws, the mandates will inhibit precisely the
> innovation needed to reform U.S. health care. Ultimately, as
> government seeks to rein in costs, it will curtail access to
> health-care services by erecting barriers between patie...nt and
> health-care provider." [2]


This makes me wonder how bad the government "option" is. It's a ruse of
course. There are two possible outcomes from it: either it does nothing
(because it cannot compete on a level playing field), or it is
subsidized and destroys private insurance. But, the government is hell
bent on regulating insurance into irrelevance. The senate bill
prohibits insurance companies from taking anything into account except
age, smoking, and family composition [3]. And the rate differences for
those are regulated. Meanwhile the procedures that must be covered are
also regulated. What's left for insurance to do? I guess it can still
bargain with providers and seek some efficiency there, but this is
already almost as locked down as the government "option".

Meanwhile, Rockefeller in his bill on the government option wrote "It
participates on a level playing field with private plan choices." and
Obama said about his plan "And they'd be right if taxpayers were
subsidizing this public insurance option. But they won't be." Boucher
is at the same time (ref my previous post) taxing private plans that
offer more than the default government option. While the Rockefeller
amendment died, it was clear that it was a lie from get-go, as was the
Obama plan. Any bill that is passed will tilt the playing field and no
court would have dared to invalidate the "public option" on that basis.
Similarly, the Obama plan is not letting you keep your current insurance
even though he says he intends that.

Back to the speech,


> We'll do this by creating a new insurance exchange ... As one big
> group, these customers will have greater leverage to bargain with the
> insurance companies for better prices and quality coverage. This is
> how large companies and government employees get affordable insurance.

This represents a frightening lack of economic understanding. I hear
many liberals making the argument that all we need to do is squeeze the
profits out of insurance and health care will be affordable. That's
ridiculous on the facts. Insurance company profits are somewhere around
1-2% of the total medical cost (and profit is just a way of rationing
capital to future versus current consumption and is necessary
regardless). But more subtly it reveals the zero-sum fallacy, that all
productivity is fixed and it's only a matter of distributing the spoils,
that price signals are irrelevant. Obama is stepping into that fallacy
here and saying if we can squeeze the profit out by negotiating harder
we can solve the problem. No, we can't. Yes, hard negotiation keeps
wasteful players off the field and that serves a purpose, but "big is
better" is not the same thing. It's only transferring the cost to
someone else. As Eric noted a long time ago here, Medicare is not an
expandable model exactly because it's doing that. Neither is Obama's
cooperative. It wouldn't be able to get a substantially better price.
Even the small amount that it gets is a chimera. Anybody can already
start a meta-insurance company to do exactly this kind of pooling. They
don't because the overhead of running the meta company is greater than
the saving to be achieved (as best anyone can tell). The government
cannot beat that logic. All it can do is subsidize the operation of the
pool, so much for the level playing field.


[1]
http://www.huffingtonpost.com/2009/09/09/obama-health-care-speech_n_281265.html
[2]
http://online.wsj.com/article/SB10001424052970204488304574426872264215790.html
[3] http://finance.senate.gov/sitepages/legislation.htm
[4]
http://www.opencongress.org/articles/view/1260-The-Rockefeller-Public-Option-Amendment

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In Obama's speech [1] on health care he said:


, nothing in this plan will require you or your employer to change the =
coverage or the doctor you have.



In the very next paragraph, he said that pre-existing condition limits, dro=
pped coverage, lifetime caps, and unlimited out-of-pocket expenses will all=
be banned. That's a huge change in my current insurance, making it m=
uch more expensive, and removing many of the levers that insurance companie=
s compete on to keep cost under control.

Of course he promised "it will slow the growth of health care costs &q=
uot;

The economic utility of medical insurance is not just spreading risk, but r=
ationing resources as efficiently as we can manage. It's a bargain th=
at says "before I'm in desperate need and irrational I'm binding mysel=
f to these limits and foregoing some exotic procedures", in exchange y=
ou get coverage you can afford. As an individual, you get to move tha=
t line where it suits you. Unfortunately, the tax code has already gr=
eatly harmed that model, but the Obama plan more or less destroys it.


"By locking in these flaws, the mandates will inhibit precisely th=
e innovation needed to reform U.S. health care. Ultimately, as government s=
eeks to rein in costs, it will curtail access to health-care services by er=
ecting barriers between patie...nt and health-care provider." [2]


This makes me wonder how bad the government "option" is. It's a r=
use of course. There are two possible outcomes from it: either it doe=
s nothing (because it cannot compete on a level playing field), or it is su=
bsidized and destroys private insurance. But, the government is hell =
bent on regulating insurance into irrelevance. The senate bill prohib=
its insurance companies from taking anything into account except age, smoki=
ng, and family composition [3]. And the rate differences for those ar=
e regulated. Meanwhile the procedures that must be covered are also r=
egulated. What's left for insurance to do? I guess it can still=
bargain with providers and seek some efficiency there, but this is already=
almost as locked down as the government "option".

Meanwhile, Rockefeller in his bill on the government option wrote "It =
participates on a level playing field with private plan choices." and =
Obama said about his plan "And they'd be right if taxpayers were subsi=
dizing this public insurance option. But they won't be." Boucher=
is at the same time (ref my previous post) taxing private plans that offer=
more than the default government option. While the Rockefeller amend=
ment died, it was clear that it was a lie from get-go, as was the Obama pla=
n. Any bill that is passed will tilt the playing field and no court w=
ould have dared to invalidate the "public option" on that basis.&=
nbsp; Similarly, the Obama plan is not letting you keep your current insura=
nce even though he says he intends that.

Back to the speech,


We'll do this by creating a new insurance exchange ... As one big group=
, these customers will have greater leverage to bargain with the insurance =
companies for better prices and quality coverage. This is how large compani=
es and government employees get affordable insurance.


This represents a frightening lack of economic understanding. I hear =
many liberals making the argument that all we need to do is squeeze the pro=
fits out of insurance and health care will be affordable. That's ridi=
culous on the facts. Insurance company profits are somewhere around 1=
-2% of the total medical cost (and profit is just a way of rationing capita=
l to future versus current consumption and is necessary regardless). &=
nbsp; But more subtly it reveals the zero-sum fallacy, that all productivit=
y is fixed and it's only a matter of distributing the spoils, that price si=
gnals are irrelevant. Obama is stepping into that fallacy here and sa=
ying if we can squeeze the profit out by negotiating harder we can solve th=
e problem. No, we can't. Yes, hard negotiation keeps wasteful p=
layers off the field and that serves a purpose, but "big is better&quo=
t; is not the same thing. It's only transferring the cost to someone =
else. As Eric noted a long time ago here, Medicare is not an expandab=
le model exactly because it's doing that. Neither is Obama's cooperat=
ive. It wouldn't be able to get a substantially better price. E=
ven the small amount that it gets is a chimera. Anybody can already s=
tart a meta-insurance company to do exactly this kind of pooling. The=
y don't because the overhead of running the meta company is greater than th=
e saving to be achieved (as best anyone can tell). The government can=
not beat that logic. All it can do is subsidize the operation of the =
pool, so much for the level playing field.


[1] peech_n_281265.html">http://www.huffingtonpost.com/2009/09/09/obama-health-=
care-speech_n_281265.html
[2] 6872264215790.html">http://online.wsj.com/article/SB10001424052970204488304=
574426872264215790.html
[3] http://=
finance.senate.gov/sitepages/legislation.htm
[4] er-Public-Option-Amendment">http://www.opencongress.org/articles/view/1260-=
The-Rockefeller-Public-Option-Amendment



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