Ezra Klein on HCR cost control

Here’s Ezra Klein on some of the cost-control measures in the bill:

• The five most promising cost controls in the health-care bill (Washington Post — sorry ’bout that, mind the dumbworms)

The first claim (“create a competitive insurance market” — no, really!  He actually wrote that, possibly even with a straight face) turns into “establish health-insurance exchanges” and a double helping of propaganda.  Have a look:

Right now, the insurance market’s version of competition is pretty brutal. Companies compete to avoid the sickest people and sign up the healthiest people.  Offering the best coverage for the lowest cost isn’t much of a priority, because most consumers don’t know whose coverage is best, and the ones who really do know are probably sick customers who spend their days researching this stuff.

This isn’t actually real, is it?  This has got to be some sort of parody.

There’s this superstition among people with a paper-thin understanding of economics that competition is like a magic spell.  God, or government, or the fairy fucking godmother says “Let there be competition!” — and all of a sudden products get better and cheaper all at the same time.  That just ain’t so.  Competition weeds out inefficient or substandard business models if consumers are able to and interested in picking among a set of options.  If someone was able to come up with great coverage at a low cost, and was able to convince consumers to drop their existing insurance to buy it, a competitive free market would probably select for it — but chanting “competition” at the health-insurance market won’t cause that coverage to spring into being any more than chanting “competition” at the space-tourism market will cause faster-than-light travel to spring into being.  Offering the best coverage for the lowest cost “isn’t much of a priority” for the same reason that promising to buy each patient a unicorn isn’t much of a priority.

Where does competition manifest its magical self in the health insurance market?  I’m guessing it mostly happens in the employer-pays group insurance segment, with insurers selling arcane plans with razor-thin margins to consumers just kidding, to HR managers.  (Can I get that icon in cornflower blue?)

(Klein, probably inadvertently, echoes Russ Roberts and WhiteCoat when he points out that most consumers don’t have any incentive to act like customers when choosing health coverage.  Why should they?  Unless they’re (a) sick and (b) on the individual market, they have no skin in the game.)

Outlawing the bad kind of competition while enabling the good kind, which the bill does, is more than just a humanitarian measure. It’s a cost control.

Okay, looks like I’m fisking Ezra Klein today.

Is it really that easy?  We just have to outlaw the kind of competition that makes Porsches too expensive for me to afford and enable the kind that exists only in Gran Turismo games, and the price of cars will come down?  Fuckin’ A, sign me UP! Do physics next, Ezra; I want the kind of competition that makes faster-than-light communication possible rather than the kind that needs a Large Hadron Collider to hunt for the Higgs boson.

The insurance “exchanges” imitate the market in which federal employees (including congressmen) purchase their health insurance.

Shit, you mean this magic world actually exists? Why didn’t we just open that market to the whole fucking country?  For that matter, if Aetna (or whoever) already came up with best-cheapest insurance in the federal health-insurance market (“good competition”), why didn’t they market it in the rest of the country and make a killing?

In the exchanges, insurance products have to be above a minimum level of comprehensiveness (no more insurance that doesn’t cover anything) and their benefits have to be presented in a standard, comprehensible way. The insurers themselves can’t discriminate based on preexisting conditions, will have to answer to regulators if they attempt to jack up premiums, and will be rated by their customers — a rating that everyone else will see when shopping for their insurance.

Look at all the free market competition in that excerpt!  Don’t you see all the competition that’s driving down costs?  It sure looks like regulation to me, but Klein says it’s competition and he writes for a national newspaper with layers of editorial oversight while I’m just an upstart blogger.

The engine that actually drives this charade, as far as I can tell, is the individual mandate.

If all goes well, consumers will be able to log onto the exchange’s Web site, compare insurance plans and choose their favorite. That means insurers will have to compete for customers in a more transparent market, where shoppers have more information, and where the relationship between price and quality is more obvious. As any free-market conservative will tell you, that should drive prices down and quality up.

Forget free-market conservatives: let’s ask economists what happens in a price-controlled market.  I’m all for competition among insurers in a more transparent market, but the specific effects Klein’s just-so prediction attributes to competition are actually imposed from without by regulation.  What happens when you introduce artificial incentives to a market and tell its players to go off and compete?  They game the artificial incentives, just like they gamed the natural ones.  That’s how the credit crisis came about, remember?

Austin Frakt, who’s an actual expert on the topic (as opposed to Ezra Klein and me, who’re just glib dilettantes), utterly destroys this argument with figures and citations and everything:

• Health care costs: a market-theoretic view (The Incidental Economist)

Greater competition is the source of greater market efficiency, isn’t it? The answer is, it depends on the market. The simple type of idealized market taught in Econ 101 does become more efficient (in an economic welfare sense) as competition increases. But other types of markets–in particular, so called two-sided markets, among others–do not always behave this way. And health care is one of them.Let’s first consider the best-case scenario for the consequences of greater competition in the health insurance market. About 85% of insurers’ costs are medical. The remaining 15% is for administration, marketing, management, and profit (profit itself is about 6% at the time of this writing). With additional competitive pressure insurers would compete away some of that 15%. Perfect competition would reduce profit to zero and may force efficiencies elsewhere. So, perhaps the best competition could do would be to cut in half that 15% for administration, marketing, management, and profit.

RTWT.

Okay, moving on: Klein also mentions the Independent Medicare Advisory Board, which is “independent” in the sense that it’s appointed by the President and confirmed by the Senate.  The idea is to establish a mechanism to cut costs in Medicare that won’t get bogged down by the usual Congressional rent-seeking shenanigans.

Congress can’t modify these proposals, it can’t filibuster these proposals, and if it wants to reject them, it needs to find another way to save the same amount of money. Making the process of passing tough reforms easier is the single most important thing you can do to make sure tough reforms actually happen.

It’s a start.  The idea of Medicare cost-cutting done by a panel of independently-chosen experts sends a few chills down my spine, but it beats any alternative we were likely to get.  At the very least it’s an indication that Medicare is losing its third-rail status.

Next we run into the Lexus tax, which as I’ve mentioned has turned out to be the start of a good idea.  The excise tax nibbles away at a transfer from people in general to people with generous employers, which suits me fine.  And holy shit I agree with Ezra Klein:

Today, the average employer who offers insurance pays more than 70 percent of a worker’s premiums, all of it tax-free. This amounts to an annual $250 billion subsidy for private insurance for people with good jobs. But it’s not just the size of the subsidy; it’s how we use it that matters. Because it’s only good for insurance that employers buy for their workers, people have their employers buy their health-care insurance for them. But that means individuals don’t know how much their insurance really costs and don’t have as much incentive to keep those costs down. Imagine the pressure for cost control if the 70 percent that employers pay were coming out of our own pockets, instead of quietly coming out of our wages.

Well, a bit.

The idea isn’t that people will pay this tax. It’s that they, or their employers, will evade it by choosing insurance that holds its costs down more aggressively.

It’s funny how Klein flops between an implicit assumption that costs will only come down when consumers have reason to care about costs and a big bag of talking points about how everybody but consumers ought to reduce health-care costs.  First he complained about insurance companies that aggressively held their costs down by denying expensive coverage to sick people.  Now he’s complaining about insurance companies that don’t hold their costs down aggressively enough.  But recall from earlier in the article that insurance companies will have to offer comprehensive coverage, no questions asked.  How are insurers going to hold down costs?

Looks like it’s time for another round of blame the doctors!

The most obviously illogical part of our current health-care system is that we pay doctors the way we pay car dealers: They get more money for every item they sell.

Wow, paying skilled professionals for services rendered is totally illogical.  He’s right!

The health-care bill seeds Medicare with many experiments to change this status quo, the most immediately promising of which are the “bundling” programs. Instead of getting paid for everything they do to help a diabetic, hospitals will get paid once for treating that person’s diabetes and all related conditions over a certain period of time.

Looks like an incentive for hospitals (wait, weren’t we talking about doctors in the car-dealer analogy?) to treat patients as little as they can possibly get away with.  Suppose Klein’s notional diabetic-on-Medicare goes to the hospital for, I dunno, renal failure.  Let’s think through the options:

1. Doctor/hospital continues to provide existing level of treatment and simply eat the extra cost.  Some say this already happens.
2. Doctor/hospital withholds treatment once the cost of treatment hits the bundle’s payment level.  Patient dies (significant likelihood), doctor/hospital gets sued for far more than the cost of the existing level of treatment.
3. Doctor/hospital withholds “unnecessary” treatment in anticipation of bundle payment level.  Patient dies (less likely), lawsuit, &c. Lower expected cost to the hospital than 2. but probably less than 1.

However you slice it, providers are responding to the wrong incentives.  This will continue as long as we pay doctors differently from car dealers — with other people’s money.

And finally, we close with another glaring error:

Republicans and Democrats both agree that we need more cost control in the health-care system. But politicians don’t like to actually cut costs, because those votes reduce benefits and make people angry. […]

But because the individual mandate in the bill brings everyone into the insurance market and the subsidies for those who can’t afford insurance on their own put Washington on the hook for costs, Congress will have to get serious about holding costs down in the system.

Uh.  So we’re encouraging politicians to cut costs by increasing their incentive not to? Klein points out repeatedly (and correctly) throughout the article that politicians hate hate hate cutting benefits.  This will only become more true as the number of people affected by those cuts increases.  But somehow he expects Congress — Congress! — to find ways to cut costs that don’t involve making insurance more expensive or denying people benefits:

The alternatives, for lawmakers, are high costs infuriating constituents who’re being forced to buy something they can’t afford, or yawning deficits forcing them to vote to take subsidies — and thus health-care coverage — away from people who currently have it.

Since when have yawning deficits scared off the majority party?

For the most part, I find Klein’s intellectual framework appalling.  He lives in a world where problems get solved by top-down controls magicked up by frighteningly intelligent experts; where free markets are a powerful but dangerous, unpredictable, and most of all controllable source of Clarkeian magic that can be doled out in bite-sized chunks to make the impossible happen just-so; and where ruthlessly-progressive optimism trumps the historical record.  But I have to admit that I really, really hope he’s right about this:

The days of letting inertia win the day and watching the system fall apart on its own are over.