David R. Henderson  

Free Market Schizophrenia

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Galton's Demented Idea... The We in Wealth...

Ted Levy, a physician friend of mine who has often commented on this blog, sent me the following. I thought it was good enough to post. It's essentially a very sharp non-economist's way of explaining what economists call "the theory of the second best."

The Wall Street Journal recently (8/21/13) carried an op-ed by Jeff Singer, a well-known libertarian physician, subsequently picked up by Fox News and reported on the Rush Limbaugh radio show. Singer, a general surgeon, based on a personal experience he had with one of his patients, made the following points:

. Most people have pre-paid health plans, not real health insurance.

. The minority of people with actual health insurance--low-cost indemnity plans that pay out fixed amounts for specific diagnoses--could potentially save money by negotiating prices directly with doctors and hospitals.

His patient apparently saved $17,000 via such negotiations, getting an elective hernia repair for only $3,000 directly. Had he just accepted the payment his insurance company agreed to, he would have owed $20,000 out of pocket.

Yet, separately, on Facebook, several free-market supporting physicians, also have complained that Obamacare, by raising costs, is pushing employers to eliminate spousal healthcare benefits. They say that as if it's a bad thing.

Some, like Mike Tanner at Cato, argue that this spousal benefit loss puts the lie to Obama's 8/11/09 town hall meeting claim "If you like your health care plan, you can keep your health care plan." And it's always great to show Obama is lying, I guess. But in this case his lie amounts to: "If you like your current market-distorting subsidized health care plan, I'm lying when I say you can keep it. Some of you may be forced into considering less expensive, less market-distorting, indemnity policies that Dr. Singer of Phoenix says make you better off anyway."

I fail to see the logic in both complaining that it is becoming harder to get "health insurance" and simultaneously arguing people can save money by not using their health insurance. If the WSJ op-ed's free market model of direct negotiation is a good thing for patients with actual health insurance--if, to follow Singer's logic, we would be better off with actual low-cost indemnity insurance plus negotiating directly with healthcare entities for care--shouldn't we give at least one cheer to Obamacare for moving toward that result by pushing employers to eliminate spousal coverage, which is a form of the healthcare pre-payment system Singer opposed in the op-ed?

Let's step back and ask the more fundamental question: Is the spousal healthcare employee benefit an unalloyed market phenomenon, or do spousal healthcare benefits distort the market? Consider A and B, two equally productive employees of firm X. Ceteris paribus, as economists say, we would expect the market to push their pay packages to be identical as well. And let's say, on paper, they are identical. But of course if A is single while B is married, the spousal healthcare coverage benefit really isn't equal. It may be that B is getting the greater benefit by getting his spouse's coverage subsidized by the employer even while A gets nothing from this benefit. Or it may be that A is getting his healthcare subsidized by his employer while B is getting nothing because he's being covered by his spouse's spousal healthcare benefit. In either case, there is a market distortion. Either A or B would prefer a higher salary without the spousal coverage benefit.

Imagine if instead of implementing Obamacare, the federal government had changed the tax laws so that both employers and employees paid for healthcare using post-tax dollars, a neutral tax rule. That government decision is clearly a move toward a free market. It results in people feeling the actual cost of their healthcare decisions, facing proper market incentives. It is a move away from having some social groups subsidize others, eliminating the perverse incentives to over-buy healthcare coverage. But, at least initially, such a government decision would, like Obamacare, increase employer costs. If this led to some companies limiting benefits by eliminating spousal coverage, would that also elicit howls of protest from free market advocates? If not, why the anger over Obamacare for the same result?

Isn't that strange? For years some free market supporters have complained that one of the main distortions in the healthcare market is patients not appreciating the true cost of healthcare. Why? Because tax regulations push their employers to over-purchase coverage and aim for low-deductible rather than high-deductible insurance. Yet some of these same people are now upset that a few companies are, in essence, saying: "We are no longer willing to distort the healthcare purchase incentives facing you and your spouse. Now we're going to distort only the incentives facing you." I say that's a move in the right direction. Now at least some spouses will have incentives to purchase the same low-cost indemnity policies Dr. Singer said allowed his patient to save $17,000.

Bottom line: Obamacare is a huge burden on the economy and is having destructive effects throughout the healthcare industry. There is much to complain about, including, as Tanner notes, the lies. But it doesn't follow that every complaint is valid, and for libertarians to unthinkingly complain about every consequence of Obamacare's implementation is damaging. The free market schizophrenia going on here reminds one of the concluding reminiscences by Woody Allen in his movie Annie Hall. Two women are in a Catskill resort restaurant. One complains about the poor quality of the food. The other agrees and adds, "And the portions are so small." If the high-deductible healthcare pre-payment schemes we currently get from employers are such a bad deal, so poor in quality, as Singer and others argue, we should not be terribly upset if Obamacare leads to us receiving smaller portions.


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COMMENTS (12 to date)
John Thacker writes:

Regarding your example, in my experience most employers charge some kind of premium for the spousal coverage, though it does tend to still be subsidized. (Evidence of that can be seen in the increasing number of employers that have special additional surcharges for spousal coverage if the spouse is able to obtain insurance through his or her own employment, a trend that seems to be more common than simply dropping spousal coverage.) A few even pay people back money if they choose no coverage, though again probably not the full value.

If the high-deductible healthcare pre-payment schemes we currently get from employers are such a bad deal, so poor in quality, as Singer and others argue

While I agree with the general point that he's arguing, that the pre-payment insurance schemes are a bad deal, the particular plan railed against is not a high-deductible plan, but rather a sort of maximum benefit plan. High deductible plans have some aspect of "patient pays first $X, insurance coverage starts after that." The indemnity plan mentioned is the reverse: "insurance pays up to $X (based on procedure here), patient is liable for the rest." Those types of plans, all too common, are the reverse of insurance, covering minor costs but leaving the patient vulnerable in the case of catastrophe.

Unfortunately, the idea of covering routine costs is popular with people (as well as with government officials.) I think it's a mistake to lump in high-deductible plans with these sorts of plans. High deductible plans tend to be true insurance; these "mini-med" type plans tend to be pure pre-payment.

It is indeed hypocritical when libertarians or others complain about PPACA cause companies to drop these sorts of "mini-med" pre-payment plans. The tendency to attack hypocrisy is always strong, though.

ThomasH writes:

ACA was a political compromise that satisfied no one, but at least it was a step away from linking health insurance to employment. Certainly THAT is something that we can applaud. The next trick is to see if changes in health insurance financing can create incentives for consumers and providers to chose more cost effective interventions.

David R. Henderson writes:

@John Thacker,
Good points, as always.
I should probably "out" myself as someone who has been guilty of this. See my "Goodbye Mini-Meds."

Floccina writes:

IMHO the reason that we have the inefficient 3rd party payer system is because when healthcare was under 5% of our economy the inefficiency was out weighed by the good feelings and loyalty that employer would get. With healthcare now 18% of GPD a painful breakup must occur. I think that at 18% of GDP even the good feelings and loyalty that governments get from providing healthcare for the citizen like in Canada, Japan and Europe can continue to make the 3rd party payment worthwhile even for the politicians (they hate to tax). Cost may be lower in the single payer systems but they are going up as a part of GDP so expect to see more pushing even in the single payers systems toward self pay.

Also my experiences have lead me to believe that doctors do not care at all about saving money for Government or insurance companies, but they do care about saving money for their patients and so if they knew that most of their patients would pay out of pocket they would shop for price. This nullifies the objection that sick people do not want to have to shop for price when illness hits.

John Thacker writes:
If not, why the anger over Obamacare for the same result?

I generally agree with this post. Another analogy, though:

I, like most libertarians, generally think that land should be used for its most productive uses. Many local governments have tax and other laws that prefer incumbents, notably Prop 13 in California, which effectively lowers property tax rates for people who already own a house, but also a host of other similar laws that reward people who have been there. Changing those laws for more equitable taxation, would probably force long term occupants to sell and move, but on the whole that would be a good thing.

Some governments use eminent domain to force people to sell their land to a more productive use. In some cases, this arguably ends up in a more efficient use of land, a situation I normally argue for. Yet I feel free to heavily complain about the process used to reach that point.

What's different about the two situations? I'm not sure myself, since I have sympathy with the argument regarding hypocrisy you offer here, but I would strongly object to being told that my views on optimal property use were hypocritical.

MingoV writes:

The best action related to health care financing would be a law mandating purchase of catastrophic health insurance.* Such a law is similar to state laws mandating that every car owner purchase auto insurance with liability coverage above a specified value. In both cases, people with sufficient wealth could self-insure, with the required amount placed in escrow.

*The law also should end employer-offered health insurance. This would end the problem of employees with health problems being unable to change jobs because pre-existing conditions would not be covered by a different insurer.

ThomasH writes:

Mingo V,
And would low income people get tax credits if the resulting costs of realized care+cost of insurance was over x% of income? And what is "high?"

Certain answers to these two questions = ACA for the not covered by employers group.

Bob Murphy writes:

Hmmm sorry David I don't think I agree with you on this one. But, let me preface my comment by saying I appreciate that you are trying to "keep us honest." I just don't think "our side" is doing anything wrong here. Some quick points:

==> I don't think "schizophrenia" is the same thing as "split personality disorder." I realize that's a common usage, but I think it doesn't actually make sense.

==> Suppose someone wrote an op ed in the WSJ, showing how expensive it was (say) to choose the option of having the rental car agency fill up the gas tank when you returned the car, rather than you filling it up yourself. The guy writing the op ed in the WSJ argued that it made a lot more financial sense for people to just about always pick the option of filling it up before returning, unless they knew they were going to have to catch a flight really fast or something and would be cutting it close. Then, Obama the next day proposes a new federal surtax of $100 on any car rental in which the customer chooses to have the rental agency fill up the gas tank. Would you give "one cheer" for Obama for moving consumers in the right direction in a way that is financially good for them?

==> Suppose we had a very simple tax code that was 1% on consumption; that's it, no loopholes etc. In this environment, large companies would still have breakrooms for their employees with a TV. However, some employees would bring a book to work and read it at lunchtime in their office cubicle, rather than hanging out in the noisy breakroom. Would you say this is a market distortion, where the employees who don't like the breakroom are subsidizing the employees who do? Would it be good if the government tried to remedy this market failure in some way?

==> If the government tomorrow eliminated the interest deduction on mortgages, I wouldn't call that an unambiguous move toward a freer market. Yes, it would make relative prices between houses and rents closer to the free market levels, but it would also constitute a large tax increase. Only if elimination of the deduction were accompanied by a tax cut would I consider calling it a move toward a free market.

Hazel Meade writes:

Er, well the ACA effectively makes those low cost indemnity type plans illegal.
If you don't purchase a plan that qualifies under the ACA you will be subject to the tax penalty.
$95 or 1% of income the fist year rising to ... I forget what. Paying 4% of your income in penalties because you didn't have the "right" insurance is nothing to sneeze at. The effect is that those plan will disappear from the market. So the spouse isn't going to be buying a low cost indemnity plan, they are going to be buying a subsidized comprehensive plan on the exchange.

I agree in general about the stupidity of working about the "if you like your healthcare plan ... " bit. IMO, the more people get dropped from the employer-bases system the better. The problem is that they aren't likely to get moved onto anything like real insurance. Instead they will be forced into one of the ACA's regulated, comprehensive, pre-paid health plans.

Hazel Meade writes:

I should add that because insurance under the ACA is community rated, it suffers from the same kinds of perverse incentives that the third-party payment system does.

That is, because your premiums are not related to how much you individually are spending on healthcare, you have no incentive to care what anything costs or to negotiate lower fees. Premiums will be based on the *aggregate* spending of the entire class of people that your are in the same "risk pool" as you. Ergo, other people are STILL paying for your healthcare, so it's effectively the same as third party payment.

To some extent, this is actually the stated goal of the ACA's supporters. They DON'T want patients to have to know or care what anything costs. The whole point of it is to make sure that everyone gets the same treatment regardless of their individual financial means. They don't want anyone to be incentivized to forgo procedures or go with lower quality care due to cost. What we see as perverse incentives that will raise costs, they see as a desirable end in itself.


Walter E. Williams writes:

David's blog is right on the money until he writes, "But it doesn't follow that every complaint is valid, and for libertarians to unthinkingly complain about every consequence of Obamacare's implementation is damaging."

David should tell us which among the powers enumerated in Article I, Section 8 of the U.S. Constitution authorizes Obamacare.

If he can't find it, then libertarians should complain.

MingoV writes:
... people are moral in spite of the tendency of markets to corrupt their morals....
I know of no evidence supporting the claim that people are moral. Every study I've seen shows that the majority of people behave immorally when they believe they cannot be caught. Many people also behave immorally when immoral behavior is sanctioned (eg: soldiers torturing prisoners with approval superior officers).

Markets don't corrupt people's morals. They just enable some people to act upon their hidden immoralities.

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