Ezra Klein on HCR cost control

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

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:

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.


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.

11 Responses to “Ezra Klein on HCR cost control”

  1. 1 Not Sure
    March 23, 2010 at 18:58

    “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.”

    Nononononononononononononononono. No.

    Words have meanings. Unless you’re starting from the position that the government owns all your income from the instant you earn it, letting people keep more of what they earn (for whatever reason) is *not* a subsidy.

    • March 23, 2010 at 19:34

      “Tax subsidy” in this case is a fairly specific term. There’s no “keeping what you earn” involved here — you only get the “extra” if your employer spends it on health insurance. Money that your employer spends on health coverage is (in theory) worth more to you — because it’s untaxed — than money your employer spends on your salary. This is money that my employer’s spending on HR, not money that I’ve earned. Distortive tax incentives make “health coverage dollars” worth more as incentives to employees than “salary dollars” — thus, subsidy.

      In any case, I didn’t invent the term, and Klein (for all his faults) didn’t either. Austin Frakt also didn’t invent the term, but he explains it here.

      • 3 Not Sure
        March 23, 2010 at 20:24

        Fair enough- I’ll take your word for it.

        But if that doesn’t destroy “subsidy” by totally perverting *that* word’s meaning, I don’t know what does.

        • March 23, 2010 at 20:35

          Oh, I feel that headache. (I have a hard time with the econ meaning of “rent”, too. When I pay rent to my landlord, I’m paying for a service. Political rents are exactly the opposite.)

          I guess I think about it this way: Subsidies are things governments do to distort prices and make goods or services artificially cheap. Most subsidies (ethanol, say) distort prices by taking post-tax (“our”) money and using it to bribe producers to keep prices low. Tax subsidies do away with the middle man and use targeted tax breaks to bribe consumers into buying more of the good/service. Same effect on prices — ethanol/health insurance is cheaper than it otherwise would be — but the mechanism is slightly different.

    • 5 kneil
      March 24, 2010 at 15:46

      As long as we are talking about the meanings of words, my employer does not pay 70% of my insurance premiums. It pays both 0% and 100% of the premium. My employer writes a “check” every month for 100% of the premium but it is using my money, money I’ve already earned. If not for the perverse laws around health benefits I would have the option of receiving an extra $10,000/year or health insurance, it is just another par of compensation.

  2. 6 kneil
    March 24, 2010 at 16:08

    I was thinking that there is actually a piece of the mess that makes some sense, an exchange where you can compare insurance plans on an “apples to apples” basis. Then I remembered that esurance.com already does that and throws in some goodies like filtering out plans that exclude your current doc.

    And regarding our notional diabetic, here are some more unintended consequences:

    4. Hospitals and clinics will add staff tasked with finding more things to bill. Maybe our diabetic also high blood pressure, better treat that with 5 minute consultation while he/she is here.

    5. Patients will be sent home even sooner than they are now. Especially if they can bill the follow up visits separately.

    6. If the compensation rates are not set exactly right it is entirely possible that some patients will be wait listed while others (with the right symptoms) will be freely admitted or even recruited.

    • March 24, 2010 at 20:18

      Sorry about the delay in getting this accepted; WordPress’s spam filter wigged out on the string “esurance.com” and decided that they were trying to advertise in my comments.

      The health-care exchanges are a neat idea, yeah. I think the theory is that people will trust them more than something private like esurance, on the basis that “the gummint has no reason to lie to us”. Of course, that makes them a huge target for regulatory capture — in much the same way that NYC has a list of approved brand-name products for school bake sales, I don’t doubt that the exchanges will end up with a list of approved insurance plans that “just happen” to come from large insurers with powerful political connections. I don’t know how much entrepreneurship there is in health insurance these days, but there’s gonna be less of it in a few years.

  3. March 7, 2013 at 01:56

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