Bryan Caplan  

You Should Repeatedly Read Cochrane's "After the ACA"

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Hayek and Hurricanes... Henderson on Stossel...
Soon after I finished my Ph.D. at Princeton, I started going to academic conferences.  When I met senior professors at these gathering, they were often surprised to discover my pedigree.  Regardless of the subject at hand, I habitually revealed exactly what I thought.  How could someone so unguarded get through Princeton econ?

When I read John Cochrane, an analogous question keeps popping into my head.  How did a guy this unguarded get tenure at the University of Chicago?  His recent essay, "After the ACA: Freeing the Market for Health Care" is a prime example.  Cochrane doesn't just present evidence; he happily tell us what he thinks the evidence means

How competition really works:
My examples share a common thread: Intense competition by new entrants, who put old companies out of business or force unwelcome and disruptive changes. Microsoft displaced IBM, and Google is displacing Microsoft. Walmart displaced Sears, and Amazon.com may displace Wal‐Mart. Typewriter companies didn't invent the world processor, nor did they adapt. The post office didn't invent FedEx or email. Kodak is out of business. Toyota gave us cheaper and better cars, not Ford/GM/Chrysler competition. When the older businesses survive, it is only the pressure from new entrants that forces them to adapt.

My examples share another common thread. They remind us how painful the cost‐control, efficiency, and innovation processes are. When airlines were regulated, artificially high prices didn't primarily go to stockholders. They went to unionized pilots, flight attendants and mechanics. Protection for domestic car makers supported generous union contracts and inefficient work rules, more than outsize profits. A look at a modern hospital and its supply network reveals lots of similar structures. "Bending down cost curves" in these examples required cleaning out these rents, through offshoring, elimination of union contracts and work rules, mechanization, pressure on suppliers, and internal restructurings.

The fact that so much cost reduction comes from new entrants, not reform at the old companies, is testament to the painfulness of this process, and the ability of incumbents to protect the status quo. The big 3 still take 40 hours to build a car relative to Toyota's 30. And two of them went bankrupt, while Toyota sits on a cash reserve. American and United are still struggling to match Southwest's efficiencies, after 30 years. The parts of Kodak invested in film simply couldn't let the company exploit its technical knowledge in optics and electronics. Chicago's teacher unions are fighting charter schools tooth and nail. And a quick look at a modern hospital, and its suppliers, suggests just how wrenching the same transformations will be.
Implications for health care competition:

So, where are the Walmarts and Southwest Airlines of health care? They are missing, and for a rather obvious reason: regulation and legal impediments.

A small example: In Illinois as in 35 other states7, every new hospital, or even major purchase, requires a "certificate of need." This certificate is issued by our "hospital equalization board," appointed by the governor (insert joke here) and regularly in the newspapers for various scandals. The board has an explicit mandate to defend the profitability of existing hospitals. It holds hearings at which they can complain that a new entrant would hurt their bottom line.
The standard adverse selection argument is just factually incorrect:
Now, the "adverse selection" phenomenon, that sick people are more likely to buy insurance, and healthy people forego it, is a big problem. But the insurance company charges the same rate, not because it can't tell who is sick - a fundamental, technological, and intractable information asymmetry. The insurance company charges the same rate because law and regulation force it not to use all the information it has. If anything, we have the opposite information problem: insurers know too much.

This source of adverse selection is a legal and regulatory problem, not an information problem, and easily solved. If insurance were freely rated, nobody would be denied. Sick people would pay more, but "Health status" insurance shows how to solve that.
How free-market health care proposals labor under an absurd double standard:
The critics adduce a hypothetical anecdote in which one person is ill served, by a straw‐man completely unregulated market, which nobody is advocating, with no charity or other care (which we've had for over 800 years, long before any government involvement at all). They conclude that the anecdote justifies the thousands of pages of the ACA, tens of thousands of pages of subsidiary regulation, and the mass of additional Federal, State, and Local regulation applying to every single person in the country.

How is it that we accept this deeply illogical argument, or that anyone in making it expects it to be taken seriously? If you can find one person who falls through the cracks, the government gets to regulate the whole market, not that we craft a minimal solution to fix that person's problem.

But wait, will not one person fall through the cracks or be ill‐served by the highly regulated system? If I find one Canadian grandma denied a hip replacement, or someone who can't get a doctor to take her as a medicare patient, why do I not get to conclude that everyone must be left to the market?
I hasten to add that at least one person does favor a completely unregulated health care market (which includes voluntary charity by definition).  Furthermore, Cochrane should take his last point more seriously: Once you realize that every system has to occasionally say, "Tough luck," you have to abandon the idea of "crafting minimal solutions" to placate everyone.  But my complaints are mere nit-picking.  "After the ACA" is a great essay and everyone interested in health policy should repeatedly read it.



COMMENTS (19 to date)
Matt R. writes:

I don't have hard evidence for the following claim, but anecdotal evidence suggests it is probably right:

Health care costs rise much more slowly and even decline for cosmetic surgery and laser eye surgery.

The obvious explanation would be that these are the areas of health care that don't have significant 3rd party payers such as government and insurance companies.


Joel writes:

Thanks for the link, that's an amazingly good essay.

ed writes:

Can you agree with everything written here and still support the ACA as an improvement on the status quo?

As he writes, under the *current* system we don't have any Walmarts or Southwests of health care. Instead we have a lot of personal insecurity, along with costs that are sky-high and rising. Cochrane and I might both like a system with radically less "regulation and legal impediments," but I don't see how we get there from here politically. I'm sure ACA is far from a global optimum, but it is not clear to me that it is worse than what we have, or what we are likely to get otherwise.

Marvin writes:

Does it strike anyone that while the straw man argument of a completely unregulated market is denounced as unrealistic, the argument that we should cover every single person regardless of cost is treated as though it's a legit position? Anyone who has worked in policy or public administration (or manufacturing, or many other production processes for that matter) knows there is a tradeoff between operational "completeness" and substantive capacity to produce effective output. The ACA isn't about helping the last person (or last 10,000 people) in the country without basic access to healthcare. It's about millions of people who currently run up costs using ill-fitting infrastructure to get subpar care. This is not a trivial segment of the population, and there are cost trajectories for the status quo and any proposed alternative. No one is saying there are no extraneous regulations, but acting as though 1) all regulations are bad because some are inappropriate, and 2) the ACA removes rather than truncates demand articulation via restrictions on the supplier side paints a dangerously misleading picture of the policy space.

Methinks writes:

I'm sure ACA is far from a global optimum, but it is not clear to me that it is worse than what we have, or what we are likely to get otherwise.

No problem. It'll become clear to you soon enough.

daubery writes:

I don't entirely agree with his view that inefficiency is the main driver of too-high costs rather than too much provision of fairly low-utility services.

For instance he says:

"Nissan is going to sell6 $3,000 cars in China and India – with no airbags. We have chosen much
better cars for slightly higher prices."

If this is indeed the only, or even just the one most notable difference, then I'd suggest we've "chosen" (airbags are mandated by law, just like needless medical testing in the US) slightly better cars for significantly higher prices. Apparently about 10x more expensive for a marginal safety feature.

I guess this is not really the source of most cost of cars, but in healthcare the analogy is quite good. Most of the spending goes on end of life care, fighting marginally treatable cancers, and, in the US, endless defensive testing to ward off lawsuits. The life expectancy per dollar return is poor.

If you are looking for a route to universal coverage, consider that the US government already spends as much per capita on healthcare as the UK, where over 90% of all national healthcare costs go on free at the point of use services provided by the government. Just abolish medicare and medicaid and set up an NHS with strict oversight by a frugal death panel (called NICE in the UK).

And then slash 75% of the budget because you don't need to pay for the people who already have insurance. Your life expectancy will go up! Well, if everyone loses a few pounds, which seems to drown out the supposed wonderful effects of healthcare spending in the developed world completely.

The problem with ACA and other incremental socialist interventions is that they won't do anything to restrain costs. They will just provide the wastefully expensive service to everyone while making it even less efficient. Maybe that is still an improvement.

Charlie writes:

"How did a guy this unguarded get tenure at the University of Chicago?"

C'mon for a libertarian at Chicago this is no cost. For a liberal, better get that extra A pub.

Floccina writes:

It seems to me that many of the problems are created at the state level so it might be best to attempt to address health care costs ate the state level.

Brian H writes:

Just a nit-pick regarding the quoted essay, but Microsoft has not "surpassed" IBM. Sure OS/2 didn't work out, and Microsoft's .NET has been giving J2EE stacks -- one of which IBM markets -- a run for there money for a while now (but has not beat them), but IBM is hugely successful in many sectors Microsoft doesn't even have a presence in (e.g., mainframes).

And heck, the Xbox sports an IBM-designed processor (as do the PS3, Wii, GameCube, and the upcoming Wii U, for that matter).

I don't have any connection to either company -- this kind of thing just irrationally annoys me.

Tom E. Snyder writes:

Brian H, you are not going back far enough. IBM developed the first PCs and the operating system--PC-DOS. The first non-IBM PCs were advertised as IBM PC-compatible. IBM was not aggressive in the PC area and lost the OS battle to Microsoft. That is what he is referring to.

Michael Strong writes:

I completely agree that this is a superb essay on health care, and that it is unusual for academic economists to be so forthright.

That said, it is interesting to me that Bryan seems unaware of the analogies between education and health care. Robin Hanson appropriately makes the case that most existing health care is signaling rather than contributing to better health. Bryan appropriately makes the case that most existing education is signaling rather than value-added human capital. In both cases I would suggest that government intervention has caused significant market distortions that result in the domination of signaling over substance. Neither contemporary empirical reality implies that authentic value-added health care and education/human capital investment are impossibilities.

Bryan's enthusiasm for this essay leads me to suspect that he believes that a market-driven health care system would result in creative destruction and disruptive innovation. Presumably the consumer criteria that would drive such disruptive innovation would, in part, be actual health outcomes rather than simply better signaling opportunities for health care consumers.

Likewise I would hope and expect that he would realize that a market-driven education system would result in creative destruction and disruptive innovation in human capital formation. Presumably the consumer criteria that drove such disruptive innovation would, in part, be actual human capital formation rather than simply better signaling opportunities for education consumers.

A free market in education would include:

1. As close to pure fee-for-service minimally regulated K-12 education as possible.

2. As close to pure fee-for-service minimally regulated post-secondary education as possible.

3. Minimal or non-existant occupational licensure.

For why even minimally regulated schools in the U.S. are not innovative under our current regime see "Why We Don't Have a Silicon Valley of Education,"

http://www.edreform.com/edspresso-shots/why-we-dont-have-a-silicon-valley-of-education-michael-strong/

Luke Carlson writes:

"In Illinois as in 35 other states7, every new hospital, or even major purchase, requires a 'certificate of need.' This certificate is issued by our 'hospital equalization board,' appointed by the governor (insert joke here) and regularly in the newspapers for various scandals. The board has an explicit mandate to defend the profitability of existing hospitals. It holds hearings at which they can complain that a new entrant would hurt their bottom line."

Anecdote: my dad is an orthopedic surgeon in Illinois. A few years back he looked into building his own surgery center. Other doctors who had built a surgery center told him he need to pay $100,000 to one Tony Rezko to get the permit (Rezko is Obama's neighbor in Hyde Park). He didn't build the surgery center for that reason.

I guess this is partly what got Rezko in jail (according to these lines from Wikipedia): "Rezko recommended many of his business associates and their relatives for positions within state government, three of whom were appointed to the state board that oversees hospital projects ... Rezko and Republican fundraiser Stuart Levine were charged in a 24-count federal indictment for allegedly using Rezko's influence with public officials to demand millions of dollars in kickbacks from companies that wanted to do business with the state."

George A Balella MD writes:

As an MD the oversimplifications are huge.

To summarize briefly, health insurance should and can be individual, portable, life‐long, guaranteed‐renewable, transferrable, competitive, and lightly regulated, mostly to ensure that companies keep their contractual promises.

Some of these provisions are NOT addressed in our current health care system and ARE addressed in the ACA. Life long? Guaranteed renewable??? Those are MAJOR government interventions that make your plan more interventionist than what currently exist. You’ve basically adopted some of the most significant things the ACA addresses. So right from the start you didn't really offer a "free-market " plan. You have all sorts of exceptions and vouchers and interventions without a real understanding of how things work in the real world of medicine.

It has to be good enough to fulfill the responsibilities of a compassionate society, and just bad enough that few will choose it if they are capable of making choices. I wish it could be better, but that’s the best that is possible.


Does anyone want to translate what this statement really means? Anyone?

My recommendation to economist is to fix your own broken profession. Free market fundamentalism is the largest bit of snake oil ever foisted onto society by any profession. My profession has many holes to fill but we still give positive results more often than not. The current profession of economics is more a tool of propaganda for the entrenched elite then it is a positive benefit to society.

Steve Roth writes:

"The critics adduce a hypothetical anecdote in which one person is ill served, by a straw‐man..."

Talk about a straw-man!

Daniel S writes:

George, I can't help but point out that guaranteed renewable and non-cancelable insurance already exist outside the healthcare industry. Cochrane is saying that even if some regulation is necessary, it's better to target individual issues than to completely discard a free market in healthcare.
And contrary to what you seem to be saying, the current healthcare system is not a free market one.

guthrie writes:

What do you mean Steve? This is exactly the argument comes up nearly every time the subject is broached with my left-leaning, mostly anti-market friends...

Joe Cushing writes:

George A Balella,

Guaranteed‐renewable is not a government intervention. It's something insurers can write into contracts.

There is nothing snake oily about free market fundamentalism. It's been proven over and over again that the smaller the government interventions into business, the faster the economy grows.

Michael Strong writes:

I completely agree that this is a superb essay on health care, and that it is unusual for academic economists to be so forthright.

That said, it is interesting to me that Bryan seems unaware of the analogies between education and health care. Robin Hanson appropriately makes the case that most existing health care is signaling rather than contributing to better health. Bryan appropriately makes the case that most existing education is signaling rather than value-added human capital. In both cases I would suggest that government intervention has caused significant market distortions that result in the domination of signaling over substance. Neither contemporary empirical reality implies that authentic value-added health care and education/human capital investment are impossibilities.

Bryan's enthusiasm for this essay leads me to suspect that he believes that a market-driven health care system would result in creative destruction and disruptive innovation. Presumably the consumer criteria that would drive such disruptive innovation would, in part, be actual health outcomes rather than simply better signaling opportunities for health care consumers.

Likewise I would hope and expect that he would realize that a market-driven education system would result in creative destruction and disruptive innovation in human capital formation. Presumably the consumer criteria that drove such disruptive innovation would, in part, be actual human capital formation rather than simply better signaling opportunities for education consumers.

A free market in education would include:

1. As close to pure fee-for-service minimally regulated K-12 education as possible.

2. As close to pure fee-for-service minimally regulated post-secondary education as possible.

3. Minimal or non-existant occupational licensure.

For why even minimally regulated schools in the U.S. are not innovative under our current regime see "Why We Don't Have a Silicon Valley of Education,"

http://www.edreform.com/edspresso-shots/why-we-dont-have-a-silicon-valley-of-education-michael-strong/

Michael Strong writes:

I completely agree that this is a superb essay on health care, and that it is unusual for academic economists to be so forthright.

That said, it is interesting to me that Bryan seems unaware of the analogies between education and health care. Robin Hanson appropriately makes the case that most existing health care is signaling rather than contributing to better health. Bryan appropriately makes the case that most existing education is signaling rather than value-added human capital. In both cases I would suggest that government intervention has caused significant market distortions that result in the domination of signaling over substance. Neither contemporary empirical reality implies that authentic value-added health care and education/human capital investment are impossibilities.

Bryan's enthusiasm for this essay leads me to suspect that he believes that a market-driven health care system would result in creative destruction and disruptive innovation. Presumably the consumer criteria that would drive such disruptive innovation would, in part, be actual health outcomes rather than simply better signaling opportunities for health care consumers.

Likewise I would hope and expect that he would realize that a market-driven education system would result in creative destruction and disruptive innovation in human capital formation. Presumably the consumer criteria that drove such disruptive innovation would, in part, be actual human capital formation rather than simply better signaling opportunities for education consumers.

A free market in education would include:

1. As close to pure fee-for-service minimally regulated K-12 education as possible.

2. As close to pure fee-for-service minimally regulated post-secondary education as possible.

3. Minimal or non-existant occupational licensure.

For why even minimally regulated schools in the U.S. are not innovative under our current regime see "Why We Don't Have a Silicon Valley of Education,"

http://www.edreform.com/edspresso-shots/why-we-dont-have-a-silicon-valley-of-education-michael-strong/

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