Tag Archives: markets

Carnival of Adverse Selection

A Canadian friend once told me that he did not understand the American political system and asked if I could explain it to him. I told him that it was basically an exercise in pest management. On the one hand you have your smarmy rats (Democratic politicians) and on the other you have your vicious rats (Republican politicians). The first kind you don’t even want near you, the second kind you just want to stomp. Either way you’ve got an intractable rat problem, so mostly you just try to ignore them as best you can and get on with your life.

Sometimes though, they crawl across the kitchen counter in broad daylight and then you have to pay attention to them. That happened to me during the last Presidential debate. I was doing my best to ignore it, but we have a radio in the garage with a power switch stuck in the ‘on’ position and the debate was playing in the background. I had it successfully tuned out until they started talking about health care and Romney, who’s turning out to be a particularly nasty little ankle-biter, came with the crazy talk.

Here’s what he wants to do about health insurance:

  • Block grant Medicaid and other payments to states, limit federal standards and requirements on both private insurance and Medicaid coverage. The state can structure a cost-share program however it wants?  It can still shift costs to the Emergency Rooms of Medicare-participating hospitals and to the Medicaid programs of richer states (a kind of internal ‘self deportation’ which already happens to a limited extent)? I can’t imagine what the states might do? These changes are supposed to lead to innovation, and they will – just more the sort of innovation that financial system deregulation allowed.
  • Unshackle Health Savings Accounts by eliminating the minimum deduction requirement and allowing people to use the account funds to pay premiums. HSA’s are a nice product for a very limited income range. If you make too much money or too little to make the tax savings worthwhile, a HSA makes no sense. The proposed changes won’t change that. So, why make the changes? Hang on a minute, I’ll get to that.
  • Allow consumers to purchase insurance across state lines. Recall this is the now minimally regulated insurance product. Watch the insurance companies gobble each other up as they try to recruit all those newly available good risks. Watch high risk people get filtered out of the broader  insurance pool as the generous benefit plans become increasingly burdened with these individuals, and the prices for those plans go up and up, in turn prompting lower risk people to leave for cheaper, less generous benefit plans. Will Romney & Co. adequately fund a reinsurance plan to keep this from happening? Not to worry, people with chronic problems can still go to the ER, right? People can preemptively accomplish this adverse selection themselves via purchasing pools, right?
  • Medicare will become a premium support program. The premium support and benefit requirements will be fixed at the current levels in Medicare. If costs go up, the market will determine how people make up the difference. And in time, like gravity takes care of shoddy construction projects (who really needs architects or building codes), the market will take care of things by channeling the high risk people into the more generous plans (Medicare), driving those plans’ costs out of sight and eventually, driving those plans and high risk  people out of the market. I can almost hear the invisible hand slapping – see adverse selection and cost shifting above. (It’s actually worse than that – Medicare has a normative effect that goes beyond its simple economic effects but that is a story too long and tangential for the moment.)

So, why make the changes if they entail all these predictable distortions? Free market fundamentalism is the answer. Markets aren’t a highly effective tool for these guys, they are a moral imperative. So in their view, markets must be good for every application. Just set up a market and have faith; it will solve any problem. Regulation and critical analysis aren’t caution, they’re apostacy. I’d usually ignore this crap, like I ignore people praying for rain, but this is more like praying that your kid gets better from leukemia in lieu of consulting an oncologist. I feel like I’ve at least got to say something.

So, for all who wondered what could be worse than Obamacare – it’s this happy horse shit. These two rats are scampering across the counter in broad daylight with this mess, and they need stomping, (metaphorically of course).

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Whatever

The healthcare reform law is still alive and the squabbling surrounding it, too stupid to live yet too overwrought to die, is reanimated. Here I go, unable to resist the smell of brains, shambling back into the scrum with the rest. In my own defense, I work in the non-systematic system this law purports to reform. I also have something more constructive to mumble than “Brains, brains!”.

Just look at the objective of the law. Its primary aim is to finalize the conversion of the health insurance industry to a healthcare financing industry. In other words, to convert it from Lloyd’s of London to GMAC. This objective is very modest, as the industry is already two-thirds of the way there. Kaiser, with its souped-up HMO model, is almost all the way there. By finalizing this transformation for the whole insurance industry, the authors of the law hope to provide universal access to healthcare and control costs. These goals are not so lofty as they first appear. In fact, the second one may not be possible by legislative means at all.

We already have universal access, just not rational universal access. Call 911, and someone will come to help you without checking your credit rating or insurance status. Go to the clinic because you have symptoms of diabetes, and you will not get the same courtesy. You must wait for the ensuing heart attack or coma.

Objections to universal access must start with what we already have, and I think these objections, since they have life and death implications, require some earnest gesture before they get serious consideration. I’d propose an opt out. If you think our polity should not concern itself with the physical well-being of its constituent individuals, please tattoo a Gadsden flag across your forehead. Then we can demand payment up front if we find you bleeding by the roadside or keeled over on the sidewalk, or we can simply choose to pass you by. Until you bear that mark, you won’t be taken seriously.

The legitimate objection regarding universal access relates to efficacy. Giving people financing, and thus access, doesn’t mean they will automatically access healthcare rationally. They will probably do a little better than they do now, but the cost control envisioned in the law depends on people doing a lot better at seeking care rationally. People probably won’t live up to that expectation.

Market forces are the problem. Efficient choices in healthcare are difficult. Even clear-cut problems often require some technical knowledge to allow for good decisions. For ill-defined problems, not even the experts can tell the consumer what he or she is buying. So, the consumer must make purchases based on emotional facts rather than physical facts.

From the perspective of emotional facts, healthcare choices break down into two broad categories: care we care about and care we don’t care about. Care we care about is reassuring care and impressive care. Reassuring care is any care that addresses illness we fear, like cancer. Impressive care is care with visible, immediate, dramatic results, like open heart surgery. Care we don’t care about is public health and chronic care, especially if it is merely preventative.

Among these two sets of choices are tests and treatments that are expensive and effective, cheap and ineffective, expensive and ineffective, and cheap and effective. The market favors care we care about, without regard to those sub-categories. Allowing people to participate in the market alone won’t help control cost, for this reason.

Agency is necessary to sort care rationally, in the light of physical facts. Physicians have been the de facto agents up to this point, but they really haven’t wanted the job and therefore serve the role poorly. A financing company might be able to act as an agent, but would be limited to guiding choices among preexisting options.

The Affordable Care Act contains some elements that gesture in the right direction, like ‘death panels’, ( guidance on end of life care). People don’t like those elements because they seek to rationalize, and thus ration care, which entails a loss of autonomy. People are loath to cede autonomy to any agent, especially a visible yet impersonal one like a panel, real or imagined. Until doctors choose to willingly alter their practice and fully embrace the role of agent, everyone will continue to get expensive and ineffective care we care about, and do without cheap and effective care we don’t care about.

To that end, the recent fights over USPSTF recommendations for cancer screening are the sort of fights we need to be having. We’ll see if the political process will allow those fights to go on and spread. As for the ACA, whatever, it’s a start. At least it doesn’t propose to expand market distortions until care is rationed by price alone or beg for a forehead tat.

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Marketing a Pig in a Poke

Everyone knows better than to buy a pig in a poke, so selling one ought to be hard. It happens everyday in clinics and hospitals, though. Marketing is the key. The seller just has to convince the buyer that nobody really knows what’s in the bag, and that it might be really good. Fortunately, the task is easy for healthcare providers, because it’s just’ telling the truth. Much of the time, both parties can take a good guess at the bag’s contents. Sometimes neither is certain. In any case, a rational price is difficult to determine.

That’s why our current system uses baseline administrative pricing. There may be equally bad ways of pricing healthcare services, but there probably aren’t any better ways. At least this way, prices are based on an educated guess about what is in each bag.

Market pricing is an alternative method. It would give very good prices for squealing bags with pig-shaped lumps in them – things like Botox treatments and laser vision correction. Prices for bags with more amorphous lumps, containing things like cholesterol medicines, blood pressure medicines and cancer screening tests, not so much. The prices for those bags which, in livestock terms, could hold a pedigreed piglet or a skunk, would vary based on the buyers’ fears, hopes and disposable income. It’s a recipe for very good, cheap Botox treatments, and very good, cheap cardiac bypass surgeries and kidney transplants. It might not result in an efficient allocation of resources, but it would present an excellent marketing opportunity for those willing to prey on others’ hopes and fears.

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