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Tim Harford Speaks

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Patri Friedman has posted his interview of the Underground Economist himself, Tim Harford, at Catallarchy. My main quibble is when Tim says:

People who oppose the use of markets in healthcare can point to two genuine problems: illness is extremely unpredictable, and it’s hard for a layman to tell the difference between good and bad treatment. I don’t think those problems are insuperable, but they’re certainly real.

Wait a second. If illness really is "extremely unpredictable," then we've got another reason to disbelieve Tim's earlier claim that asymmetric information is the main health market failure. After all, the whole problem with adverse selection is supposed to be that consumers can predict their illnesses, at least a lot better than insurers can.


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COMMENTS (5 to date)
daveg writes:

You kind of remind me of that Harvard econommist Jeffry Sachs who adviced Russia to go capitalist fast and hard.

The result was all the asserts were aquired illegally by seven gangsters who have since fled to England and Israel and taken a good portion of their wealth with them.

Oh, and a couple are in Russian prisons.

daveg writes:

Again, comments on articles such as these would be an excellent way to educate the public on econmic issues:

Age of Anxiety

By PAUL KRUGMAN


Many eulogies were published following the recent death of Peter Drucker, the great management theorist. I was surprised, however, that few of these eulogies mentioned his book "The Age of Discontinuity," a prophetic work that speaks directly to today's business headlines and economic anxieties.
Mr. Drucker wrote "The Age of Discontinuity" in the late 1960's, a time when most people assumed that the big corporations of the day, companies like General Motors and U.S. Steel, would dominate the economy for the foreseeable future. He argued that this assumption was all wrong.
It was true, he acknowledged, that the dominant industries and corporations of 1968 were pretty much the same as the dominant industries and corporations of 1945, and for that matter of decades earlier. "The economic growth of the last twenty years," he wrote, "has been very fast. But it has been carried largely by industries that were already 'big business' before World War I. ... Every one of the great nineteenth-century innovations gave birth, almost overnight, to a major new industry and to new big businesses. These are still the major industries and big businesses of today."
But all of that, said Mr. Drucker, was about to change. New technologies would usher in an era of "turbulence" like that of the half-century before World War I, and the dominance of the major industries and big businesses of 1968 would soon come to an end.
He was right. Consider, for example, what happened to America's steel industry. In the 1960's, steel production was virtually synonymous with economic might, as it had been for almost a century. But although the U.S. economy as a whole created lots of wealth and tens of millions of jobs between 1968 and 2000, employment in the U.S. steel industry fell 60 percent.
And as industries went, so did corporations. Many of the corporate giants of the 1960's, companies whose pre-eminence seemed permanent, have fallen on hard times, their places in the business hierarchy taken by new players. General Motors is only the most famous example.
So what? Meet the new boss, same as the old boss: why does it matter if the list of leading corporations turns over every couple of decades, as long as the total number of jobs continues to grow?
The answer is the reason Mr. Drucker's old book is so relevant to today's headlines: corporations can't provide their workers with economic security if the companies' own future is highly insecure.
American workers at big companies used to think they had made a deal. They would be loyal to their employers, and the companies in turn would be loyal to them, guaranteeing job security, health care and a dignified retirement.
Such deals were, in a real sense, the basis of America's postwar social order. We like to think of ourselves as rugged individualists, not like those coddled Europeans with their oversized welfare states. But as Jacob Hacker of Yale points out in his book "The Divided Welfare State," if you add in corporate spending on health care and pensions - spending that is both regulated by the government and subsidized by tax breaks - we actually have a welfare state that's about as large relative to our economy as those of other advanced countries.
The resulting system is imperfect: those who don't work for companies with good benefits are, in effect, second-class citizens. Still, the system more or less worked for several decades after World War II.
Now, however, deals are being broken and the system is failing. Remember, Delphi was once part of General Motors, and its workers thought they were totally secure.
What went wrong? An important part of the answer is that America's semi-privatized welfare state worked in the first place only because we had a stable corporate order. And that stability - along with any semblance of economic security for many workers - is now gone.
Regular readers of this column know what I think we should do: instead of trying to provide economic security through the back door, via tax breaks designed to encourage corporations to provide health care and pensions, we should provide it through the front door, starting with national health insurance. You may disagree. But one thing is clear: Mr. Drucker's age of discontinuity is also an age of anxiety, in which workers can no longer count on loyalty from their employers.

Zac writes:

Hard for the layman to tell the difference between good and bad treatment? Its hard for the physicians, too. Beyond the obvious (this surgery was a failure because the patient is no longer living) it is very difficult to determine proper treatments (not every doctor is House, MD), and even more difficult to determine if a treatment is successful.

There is a self-fulfilling prophecy in health care regarding the difference in knowledge between doctors and patients. Doctors insist their field is so highly specialized and exact that you must hold their certification to speak on it with any authority, and patients in turn never learn anything and choose to rely on doctors. Repealing licensing requirements in medicine would go a long way in ending this mystique, as well as lowering health care costs substantially.

ptm writes:

Unpredictability and asymetrical information aren't at all inconsistent.

Think of two types of needs for healthcare - that which we know is correlated with behavior (lung cancer and smoking), and that which we don't (auto accidents).

The standard information assymetry exists in the first and doesn't in the second. While I don't know enough to really evaluate Harford's claims, they're not inherently self-contradictory.

R.J. Lehmann writes:

The advent of illness itself may be relatively unpredictable (although I don't think, in most cases, it is terribly so) but the question gets settled pretty quickly once critical or chronic conditions are diagnosed. Thus, while there may be some question about who will or won't BECOME sick in any given period, there is far less question about who the cost drivers will be -- they will be the people who are ALREADY sick.

Since insurance contracts do not run in perpetuity, but are issued for set (typically annual) terms, the natural response of the insurer is to non-renew any policyholder diagnosed with a serious condition, or otherwise only renew them at rates that are actuarially justified -- and that will tend to be far more than a typical consumer could afford.

Now, the obvious counter to this observation is that insurance ceases to have much value to a consumer if he knows he will lose it as soon as he needs it. Thus, one might imagine that consumers would demand that health insurance contracts include non-cancelability clauses that would protect them in such an instance.

Non-cancellable policies would, of course, be more expensive than cancellable ones. In order to make the system work, you need to bring young and healthy workers into the pool to subsidize the costs of older and sicker workers, and to do that, you must structure incentives to convinve them it is worth their while to buy the non-cancellable policies early in life, so that they will have coverage available to them later in life.

The problem, unfortunately, is that young and healthy workers have typically shown the systemic bias in their long-term planning for health outcomes that they show in their long-term planning for savings -- they delay making commitments that could be quite costly in the short-term when all they can lack adequate information about their long-term prospects to truly judge the likelihood that they will contract a chronic or critical illness, or that they will not have enough savings to last through retirement. The systemic irrationality is to be overly optimistic about one's long-term prospects until (or even after) some tangible piece of bad news manifests itself.

Hence, it is easy for competitors offering cancellable policies to lure young and healthy policyholders away with the promise of much, much cheaper coverage. Taking them out of the risk pool thus makes the non-cancellable coverage even more expensive for those who remain, thus prompting another layer of marginal policyholders to defect, on and on in a vicious circle.

And, of course, what makes this circle particularly vicious is the concentration of costs in the health market. 1% of patients account for 1/3rd of all costs. 5% account for half of all costs. 50% account for 95% of all costs, and the other 50% account for just 5% of costs. Trying to get any but the MOST risk-sensitive of that cheaper half of the population to take part in pooling for the more expensive half is always going to be nigh on impossible. Hence, the adverse selection.

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