I recently read a thought inspiring book "The Undercover Economist" By Tim Hartford that made me question some of my strict libertarian views. Hartford believes in the fundamental power of markets. As he describes them they open up a "world of truth" because with markets people will always pay what something is worth and there will always be an incentive to correct market inefficiencies. That means that an economy is most efficient when free markets are allowed to operate. So why should governments ever get involved with free markets?
What is the government’s role in limiting pollution?
Pollution is an example of a market failure because markets cannot account for what economists call externalities. Whenever you drive your car for example you are polluting, adding to traffic congestion, and noise pollution. Who pays for the external damage being caused by your actions? In the free market system I have a built in incentive to efficiency, while here I do not have a built in incentive to limit externalities like pollution. Is it therefore the role of government to compensate for these externalities by taxing gas to pay for them?
Why does the UK government spend less on health care than ours does?
Here is a statistic that I found alarming: The US government pays more per citizen on health care than the UK. That is paradoxical because we have a “private” system and they have a “socialized” system. Actually, our system is about half private and half socialized. In 2004 the US spent $5,267 per capita (55% is private spending) on health care; in UK they spend $2,160 (17% private). So the US government spends $2,370 while Britain spends $1,792 per capita. If we are spending so much more on health care is our health care that much better? Here are the 2004 results:
| UK | US |
| Life expectancy | 78.1 | 77.1 |
| Infant mortality (per 1000) | 5 | 6.8 |
| Physicians (per 1000) | 2.0 | 2.7 |
| Nurses (per 1000) | 9.0 | 8.1 |
| Hospital beds (per 1000) | 3.9 | 2.9 |
(Statistics can be found here: http://www.nybooks.com/images/tables/20060323img2.gif, excerpts from the book where these statistics were quoted: http://www.nybooks.com/articles/18802)
Adverse selection
The paradox in American health care is that as more medical technology is invented to save lives the more the price of medicine increases (adversely, in other industries technology drives down costs). While this is a good thing for the richest it raises the price of insurance so that the poorest can no longer afford it. So paradoxically the more advanced and expensive medicine gets less people are helped by these advances so Americans as a whole are actually hurt rather than helped. This is because of an economic principle called adverse selection that is especially severe for the health care insurance industry. A normal insurance plan works something like this:
Cost of insurance = (total number of claims + profits)/(total number of people on policy). Of course if someone poses a higher risk they pay a little more. Because of adverse selection when this formula is applied healthy people think the policy is to expensive and unhealthy people think it’s a great deal. But a health insurance plan with only unhealthy won’t make money so insurance companies try to determine the risk of each individual. 80% of current health care costs come from 20% of the population (80 – 20 rule). The process of risk determination is a great inefficiency in and of itself. So health care is unaffordable for the sick who need insurance the most, making insurance available only to the healthy middle class, or sick wealthy. I would not argue with this result if health care was like buying shoes or a car, the wealthy should be able to afford nicer things but I believe that everyone should have access to some form of basic health care. It simply makes more financial sense for insurance companies to use the most expensive procedures and therefore charge more for medical insurance letting those who can’t afford insurance fend for themselves. In other words in a private system medical care is a luxury that the lower middle class on down cannot afford. The wealthiest Americans do get better health care here than in Brittan, but overall it costs more and the standard is about the same while some are left out entirely. The problem is that there is gap between the poor who can’t afford insurance and the poorest that can apply for Medicaid. Since our system is half public and half private the public uses the private services and since the private system is so expensive it means that we pay more on the public side which is why our pubic half costs more than UK’s public whole.
Also, in a private system bad health is fundamentally encouraged because the less healthy people are the more money the medical companies get. That is why America is less focused on preventative medicine which is economically more feasible. Is medicine in a public system more efficient then a private system controlled by the markets?
In his book Hartford advocates a system that is implemented by the government but still utilizes the power of the markets. Since Americans are taxed about $1,000 each year to pay for medicine why not cut taxes by that amount and forces each of us to put that money into a medical savings plan. The government would also require all citizens to have catastrophic medical insurance. We could spend our $1,000 on medical expenses as we saw fit. That way people would have an incentive to shop around, allowing the market to lower the prices of medicine. During the first 35 years statistically people have fewer medical problems so for most by the time a medical emergency came up they would have money saved for it. I think that this plan makes sense except for one thing. I don’t trust the government to follow through with their end of the bargain because they are too corrupt. We already trusted they to save for our retirement (social security) and they just spent the money instead. Social security will go bankrupt; it is just a matter of time. The sad thing is that it could have been avoided if we would have invested the money when there was a surplus. In conclusion I think that the power of the free market should be harnessed in most cases. When the free market doesn’t cut it such as the examples outlined above I wish that the government could step in and help out, unfortunately because power corrupts I don’t trust them too, even though it seems to be working in England.
18 comments:
"I would not argue with this result if health care was like buying shoes or a car, the wealthy should be able to afford nicer things but I believe that everyone should have access to some form of basic health care. It simply makes more financial sense for insurance companies to use the most expensive procedures and therefore charge more for medical insurance letting those who can’t afford insurance fend for themselves."
Interesting post. I am interested to think more about what you wrote, but immediately this paragraph jumped out to me.
In the fist place, don't forget that it is almost always an option for the poor people to get a job at a grocery store or somewhere else that that offers health benefits, so it's not like they don’t have an option, although I’ll admit, it is a crappy one. This is an example of the free market dealing with that issue. Certain businesses have found a way to be attractive to people that normally would have no interest whatsoever in that job.
It doesn't make sense what you said about it being financially smarter for the insurance companies to pay for the most expensive medical procedures, so they can charge more. In a free market that does not exist. The financially sound way of doing things is offering expensive products in addition to cheaper products, which are lower quality, and therefore benefit from what the poor man and rich man can pay you. Perhaps you could elaborate on what you meant there. I think on of the reasons why we see that trend sometimes is because of the many regulations that the government already do put on health care, such as the FDA, medical licensing, and specific inflation for the healthcare market. Sometimes those eliminate some of the “cheaper alternative” options.
I also disagree with your inference the rich and poor should have the right to the same healthcare. Why? Who has the right to take property from the rich and give it to the poor? Since it is the property of the rich person, he should have the right to decide how it is spent. Because of the attitudes that socialism distills on a people, it is easy to not want to trust the rich guy, but if we had less dependence on the government, it would be amazing how people's attitude, work ethic, and charitableness would change for the better. If people had more money, free of the extra $1000 tax, and all the other taxes that the government puts on you, and saw that it was their own responsibility to solve problems, then they would decide just and noble causes to charitably give their money to. People would realize that the good of their own community and nation was in their hands, instead of saying, "well, the government will take care of it." If, on the other hand, a nation is so evil, as to not care about the welfare of their fellow men, or so lazy, as to not care about the welfare of themselves or their family, such a nation will eventually fail, with or without a social safety net.
The problem with socialism is it encourages this kind of thinking: just to not care. Some have argued, and I would argue as well, that FDR's New Deal (which was done in blatant defiance of the constitution), is one of the worst things that has happened to this country for that reason. Self dependence has taken an extremely hard hit since that time, and attitudes have changed. We really need to consolidate our losses, and start moving the other direction.
Hyrum,
Very well said my friend! Great comments!
As for the paragraph from Sparrow's article (is Sparrow Paul, by the way?) concerning having the government raise taxes on gas, um....whoa! Tax the oil companies more? You do know who really ends up paying that tax right? If you couldn't guess, the answer would be US. Oil companies slapped with higher taxes = higher gas prices for the consumer. Very simple math.
Brandon, good to see a post by you!
So Sparrow, (who is Paul Andrews by the way), were you talking about higher oil taxes, or justifying the existing taxes? I guess either one poses the same questions: Should the government take money from the drivers to take care of the pollution they cause? Pollution is an interesting issue to bring up regarding the free market. The problem that I have is that to my knowledge, we haven't seen any examples of pollution being much of an issue to be handled by the free market. Ever since pollution has been a real issue or concern, America has not had a free market in that sector (nor any other country that I know of). Your right, it is hard to imagine the free market taking care of it, but who knows, with all the green friendly trends, I can see a lot of the market trying to appeal to those ideas. We will never know how much though, because since we do have the taxes, and the government is supposed to be taking care of it, we don't really need to think about it much. So we pay our taxes, and then go home and see what Brittany Spears is up to. Hence an influence that might otherwise be in the market is dampened by government intervention.
We don't know. In all fairness, we do have to consider that the free market might not be able to handle everything on its own. I do think the comment you made earlier (in a previous post) about the catalytic converter was probably pretty accurate.
I love this post Sparrow! Well done.
Here are my responses to Hyrum and Brandon:
H: "In the fist place, don't forget that it is almost always an option for the poor people to get a job at a grocery store or somewhere else that that offers health benefits, so it's not like they don’t have an option"
P: There are not unlimited jobs available that offer health benefits. Why? Because health insurance is too expensive for some employers to offer and stay competitive, it costs employers about 10k a year on average: 1/3 the salary of a Wal-Mart employee. Coincidentally most Wal-Mart employees don't get health insurance and Wal-Mart employs more people than anyone else on the planet.
H: "It doesn't make sense what you said about it being financially smarter for the insurance companies to pay for the most expensive medical procedures, so they can charge more. In a free market that does not exist. The financially sound way of doing things is offering expensive products in addition to cheaper products, which are lower quality, and therefore benefit from what the poor man and rich man can pay you."
P: In a normal market situation this is the case. This does happen in health care i.e. catastrophic coverage plans vs. full coverage plans that include doctor’s visits. Catastrophic plans however are out of the price range of many, especially those with pre-existing conditions that need health care the most. The only two options these people have are A: quit there jobs so that they can apply for Medicaid, or B: go bankrupt trying to pay medical bills. In case A: the lazy but more enticing choice that individual will not contribute to the society and will also be a drain. Wouldn't it just be better to pay for the expenses that they cannot afford, so that they will be able to keep their job and at least contribute and be a drain? The reason that health care insurance needs to be expensive is obvious: whoever gets insurance is entitled to medical care for serious health problems = it will be expensive. The insurance companies cannot just deny such claims or they will be sued. That is why we can't just have "cheap" insurance for poor people.
H: "I also disagree with your inference the rich and poor should have the right to the same healthcare. Why? Who has the right to take property from the rich and give it to the poor? Since it is the property of the rich person, he should have the right to decide how it is spent."
P: I never inferred that the rich and poor should have a right to the same health care, just that everyone should be entitled to a basic level of health care. If someone needs medical care to live and no one has agreed to voluntarily pay for that care I think the government has the responsibility to "take from the rich to give to the poor". I don't believe that government has the right to take property just to make someone more comfortable.
H: "Because of the attitudes that socialism distills on a people, it is easy to not want to trust the rich guy, but if we had less dependence on the government, it would be amazing how people's attitude, work ethic, and charitableness would change for the better. If people had more money, free of the extra $1000 tax, and all the other taxes that the government puts on you, and saw that it was their own responsibility to solve problems, then they would decide just and noble causes to charitably give their money to. People would realize that the good of their own community and nation was in their hands, instead of saying, "well, the government will take care of it." If, on the other hand, a nation is so evil, as to not care about the welfare of their fellow men, or so lazy, as to not care about the welfare of themselves or their family, such a nation will eventually fail, with or without a social safety net."
P: Well put Hyrum. It is noteworthy that most of the charitable institutions, private universities, and hospitals were founded before the New Deal, this lends credence to your argument. Although under a non-intrusive government volunteerism would be enhanced I still think there would be some cases were simple medical treatments would not be available to save or greatly improve some individuals lives. The extent of these “instances” is debatable and the core of the argument. If you notice I wrote "some market problems that the government COULD correct", emphasis on could. They could if they were not so corrupt. I think it would be better if the government could just tax us $1,000 per year to implement this plan. Unfortunately, that is not a reality. They would waste the money on other things and use this intervention as an excuse for more intervention that would do more harm than good.
H:"I think on of the reasons why we see that trend sometimes is because of the many regulations that the government already do put on health care, such as the FDA, medical licensing, and specific inflation for the healthcare market. Sometimes those eliminate some of the “cheaper alternative” options."
P: You are right again; the system that we have now half public, half private is worse than all private or all public. I think that all private is not a reality even though as I discussed in the response above it might be better. So that leaves us with all public, like Brittan’s system that is better than our half and half system.
B: "Tax the oil companies more? You do know who really ends up paying that tax right? If you couldn't guess, the answer would be US. Oil companies slapped with higher taxes = higher gas prices for the consumer. Very simple math."
P: I never said that we should "tax oil companies". Obviously taxing oil companies or taxing gas directly does the same thing, discourages and compensates for the negative externalities of driving.
Sparrow, so Paul Ellis brought up a good point on his gun control comment, and I was wondering how the book you were reading or that plan addresses this question:
If we are only doing partially socialized medicine right now, and still paying more per capita than England and other countries, what is to say that by completely switching over to socialized medicine, our cost would not be still more than theirs (like it is right now), if not several times higher?
Hyrum the whole point of your argument is that a private medical system is cheaper even though you haven't shown me any data to prove it. I think this is a moot point because a truly private health care system is impractical in a modern society because we aren't just going to let people die if they don’t have a way to pay for an expensive medical treatment. On the other hand I have shown statistically that public health care systems are less expensive than our public/private one with similar results. That is the whole point of my/ Hartford’s argument. If our system was truly like the British system it would not be more expensive because if you look at the facts their system is cheaper than ours. It would be less money than what we are paying now, not "several times higher". I know that is hard to stomach for someone like you or me that have been brought up to believe that market systems are always superior but the data speaks for itself. It is important to view things objectively even if that means going against what you were taught or believed before. If we aren’t willing to change our views then what is the point of learning in the first place?
Although the British socialized system is superior (cheaper with the same end results) Hartford argued for a public solution that capitalizes on the power of markets (not UK’s solution). I outlined that proposed solution in my original post.
Hyrum, you don't really need to show me data to prove that in general free market systems are more efficient than government controlled markets because I think this is obvious. However, like I said... since health care is an individual necessity not a desire I don't think that a true free market solution to health care is a realistic option.
That is the common argument for a socialized government. We need a social safety net, or else people will fall through the cracks. Many, including Milton Freedman, would argue the contrary, that more people slip through the cracks with a large, inefficient, impersonalized government taking care of everything.
Do you think there was really so much of a problem with people dying for lack of health care before our half socialized medicine system? It is interesting to hear Ron Paul speak about that issue. For years, he used to volunteer at a private, completely free, hospital (free to people that could not afford to pay, and they knew it). Countless charities have been phased out because the government started regulating and taking over things. Can you imagine the hoops and hurdles that would have to be taken care of to start up a charity hospital today? Plus there would be no point or money, after you had to pay your taxes. In our modern society, I would argue that except for a VERY few, who might slip through the cracks, everyone would get the basic healthcare they needed to stay alive. We have a very prosperous and generous society. Also, in a totally public system, there is a lot of people that slip through the cracks. In Canada, you will notice, 30% of the spending was private. So if they have a public system, why are so many paying for private healthcare? They probably didn't want to wait 3 years for a surgery, I'll bet. So what about the people that can't pay for their surgery, and end up dying while on the waiting list? Those people would slip thorough the cracks. Horrible world we live in, I guess.
Your right, though, there is no data to back up what would happen in a private healthcare system. Some would argue that I have too much faith in people, but to me the trends and history are obvious.
One point about your data: Although the source of the data sounds credible, I'm not sure I trust the people that compiled it. (The books in your second link) It is quite easy to find specific data that proves a point that they are trying to make. The data, however, in the fist place, is taken for only one year (2007), smaller samples are more prone to error.
Also it doesn't address a lot of healthcare questions and issues, like how long people had to wait for basic health care and surgeries. I’d be willing to bet a lot of those numbers are similar for lots of places in the world. (Michael Moore would say Cuba is even better, right? … that was a joke!). I’ll do some research and let you know.
My point about the question of cost is this:
I'm not sure why our government spends more on healthcare than England. I just cannot fathom the idea of allowing our government to do more, and end up paying less for it. I don't think that the fact that England spends less is enough evidence to defy the normal trend that we always see with our government. There is likely more to it then that. I also don’t think it is valid to say that the system just won’t work for our government because it is too corrupt. Comparatively speaking, our government has very little corruption. That is just the way that governments work. If there is surplus money, votes to be won over, and an almost unlimited amount of power, like there is now, we will always see this trend. So how do we limit the politician’s power? Leave the problems up to the states, communities, or people to handle. Force them to abide by the constitution they swear to uphold. That’s how it was framed in the first place. Of course socialized medicine wouldn’t work for our government. It is blatantly against the constitution in the first place. So how can you expect politicians to go against the constitution on that issue, but then stop there?
I really am trying to see this as objectively as I can. Whether or not I have a "tainted" view of the subject matter because of my upbringing is kind of a silly argument. Throughout my schooling, all but one of my teachers have been very liberal, and at certain times of my life, I have thought much more liberally than I do now.
SPW: "Since Americans are taxed about $1,000 each year to pay for medicine why not cut taxes by that amount and forces each of us to put that money into a medical savings plan."
M: That's an average isn't it? For me I think it was about 200 bucks. For most people who don't have healthcare it's probably closer to $0. The only problem with tax incentives, see, is you gotta pay taxes to get 'em.
Just an idea, I wonder what would happen if the hospitals themselves offered insurance plans? That way, hospitals with better equipment could charge more. They would also compete with eachother on price and quality, like Target and Wal-Mart. This would also take the inflation factor away from insurance billing. The government (hopefully state rather than federal) could buy insurance for the poor from the lowest bidding hospital. I'd like to hear what ya'll think.
Good point Morgan, but the argument still remains. The average american now pays $1000 a year for the public portion of american health care. You don't pay for any of that, wealthier people pay for more than their share. So of course more money will come from wealthy people than from the poor in the current system or in the system that was proposed.
One more problem about that idea though. I can imagine that same thing being said about Social Security when it came about. "The government already pays "x" amount of dollars on the elderly, why not put that "x" amount away in a government fund, and then use it to pay for the elderly after retirement. Now there is social security, Medicare, and countless other funds being spent on the elderly. There are too many dependent people (and too many votes) wrapped up in the existing funds that the government already pays. Therefore, the government would have to keep most of those, and add to it with the $1000 dollars per person as stated before. I think we all admitted to this earlier, but the idea is very idealistic and out of touch with the way our government is run.
I think that is actually a very interesting idea that you have, Morgan. Why not let the hospitals, (aka: expensive health care that people can not individually afford) offer health insurance plans, and then the routine doctors visits would not have insurance and could fight over your business.
I still think that the main problem that our system has though is the FDA and mandatory certified doctors. People should be allowed to take their own risks, and consumer reports would pop up everywhere to provide people with information about credentials and doctor reliability.
It seems like Paul is making a strong argument that goes nowhere. You are the one who does the best research, quotes books and statistics, yet in the end what is your point? You say the Government COULD help, but it is too wasteful and corrupt. You showed how American HC is overpriced for all and unaccessable to some, but you offer no alternative.
There is also a point of your argument I don't understand,
P: "It simply makes more financial sense for insurance companies to use the most expensive procedures and therefore charge more for medical insurance letting those who can’t afford insurance fend for themselves."
Really? Does it make more financial sense to use more expensive procedures? If I owned a Health Insurance company, I would try to keep my costs low. And why would I want people to fend for themselves? That is not capitalism. I would be looking to serve the biggest customer base possible. So I don't see how the free market is to blame here.
So if the free market is supposed to drive costs down, why are they so high? Ron Paul gave his answer on CNN. You can go to youtube and watch: Ron Paul on American Morning- June 15, 2009 - Reforming Healthcare . It is very informative.
Let me just say that in the end, nobody should be looking for the perfect healthcare solution. It simply doesn't exist. People get sick, people die. Some people are rich, some are poor. The world isn't fair. However. I would like to see the best we can come up with. When I was 19, I almost drowned, and got charged over $500 for an ambulance ride and $3000 for one night in the hospital. That price is rediculous. I couldn't afford it, but the hospital put me on payment plans and it took me a long time to pay it off. A close friend of mine is having health problems. She's stuggling to go to school full time while working part time. She has no family to support her, and she can't afford to pay for the bills by herself. No, I don't think Government should spend other people's money to help us. But there's got to be a better way.
-Morgan
One more thing. At the airport a few months ago, I met a nurse from the UK. He said there is a huge growing shortage of healthcare workers because of government pay caps vs. the cost and time requirerd to go to school. He personally worked for a private hospital, which payed much better and offered better care, but was only accessible to the wealthy... From time to time I catch sessions the UK parliment on TV (it's much more entertaining than US congress, if you get a chance to watch it). A lot of UK politicians are claiming that the country is going bankrupt, crying that the current system is unsustainable. There is also a big movement to drastically limit immigration, since a lot of foreigners come for the "free" programs. I have a hard time seeing America ever closing it's borders. Our open-border tradition is another reason we need a system that is both practical and sustainable. It needs to actually make sense, even if *gasp* that means some people get better treatment than others.
Morgan,
Yeah, I hear that from people a lot: "Look at Europe, they have socialism and it's working fine." Actually, they are right on track for bankruptcy because of an unsustainable system -- just like America. We are ALL just REALLY good at borrowing. Smoke and mirrors.
In the fear of sounding overly pessimistic and these words being used against me if I ever run for president: Could it be that democracy is failing? Apathy and complete irresponsibility plagues this nation. John Adams prophetically stated that democracy ONLY works for a moral and responsible people. Think about it. The communist Chinese regime seems to be the only that is financially savvy right now. They don't have any stupid, short-sided voters to pander to.
Did I just cross the line?
Morgan, it’s true that I’m making an argument that’s going nowhere because I’m not convinced of what to do myself. In my opinion the main purpose of this blog, or political conversation in general is to learn from others and critically examine different viewpoints that are debatable. I didn’t do this post to explain definitively what the best health care system would be, but to share some ideas that I think have merit so that I can get feedback and learn from others. And to give others the opportunity to consider information that might be counterintuitive to their current ideas.
I find it inspiring that after Newton’s landmark discovery of gravity he flatly admitted that he didn’t know how the force of gravity was generated. That he didn’t come up with some hypothesis or intriguing theory is the opposite of how we are taught to react when we don’t know something. Instead of simply admitting ignorance the majority will sound off with their ideas that are based on little or no factual evidence. In politics and in general it’s considered weak to not have a firm stance on an issue. One of the things that I enjoy about economics, philosophy, and politics is that there are a lot of good ideas, and good data that contradict each other so it’s fun to explore both sides of an issue. I don’t know if government run HC or private HC would be better but I do think that we need to explore alternatives to our current system.
Here is a point of my argument that you didn’t understand:
"It simply makes more financial sense for insurance companies to use the most expensive procedures and therefore charge more for medical insurance letting those who can’t afford insurance fend for themselves."
Explanation: Unlike other technologies with the advent of new HC technologies the overall price of HC is rising. This leaves HI companies with an option: Pay for the latest state of the art technology and charge more for premiums to cover the costs or don’t pay and charge less for premiums. Financially the first choice holds more incentive for them for three reasons:
1. They make more money by tailoring their service to the wealthy.
2. They will get sued if they don’t pay for a procedure that can help a client no matter how expensive that procedure is.
3. Since HC is so important to everyone (especially for people that pay for it) most people would prefer not to purchase “discount” HC.
Thank you Morgan for the link to the video, I haven’t had a chance to watch it yet but I plan to. I also really like what you wrote about that there is no perfect HC solution, which is very true. Like you I agree that there has got to be a better way but am not sure of the right solution. I do think that despite its problems making it mandatory to purchase HC if you can afford it, and then forcing HI companies to cover everyone might be a step in the right direction. That way the free market is still involved but adverse selection is thwarted.
Hyrum, those are some interesting comments. I'll reply to that later.
Hyrum,
To address your comments regarding China’s financially savvy machine that you suggest could be superior to our own flawed political system. From a communalistic perspective Chinas amassment of wealth is a good thing for their country. Just like a frugal individual who has money but saves it instead of spending it. However, this saving spree while perhaps good on a national level is not good on an individual level because instead of being able to spend money most Chinese are forced by their government to save while they live in poverty. It’s the classic comparison of individualism vs. communalism should decisions be made by the individual for the individual, or should they be made for the best of everyone? It’s a complicated question that I’m not 100% sure of. However, given the choice I’d rather live in a system where I can make my own stupid decisions rather than forced by my government to make the correct ones as illogical as that might be.
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