[ExI] Healthcare and governments thinking long range/was Re: those damn greedy workers

Stathis Papaioannou stathisp at gmail.com
Thu Jun 18 13:04:23 UTC 2009

2009/6/18 <dan_ust at yahoo.com>

> First, the government portion of funding of the US system is larger than any other healthcare system.  So, one could argue that the government footprint in healthcare is larger in the States than in Europe -- even if in terms of percentage the government funds only about 45% of the total here, whereas in OECD countries that figure is, IIRC, more like 70% or 80%.

That's right, the government money in the US is wasted. People without
insurance are not provided adequate health care throughout their life,
so they are sicker when they finally claim Medicare or end up in
hospital emergency departments, which can't turn anyone away. Having
free or cheap universal health care, especially primary health care,
would prevent some of this.

> Second, the US healthcare system is heavily regulated -- and mostly so in terms of having more layers of management.  This goes for the private sector -- not just the public sector.  (I needn't mention, I hope, too that the US system has a monopoly -- the AMA -- in charge of delivery of most medical services.  I believe, however, this is not something that the OECD countries lack.)

Also correct, the medicos control their numbers and therefore their
incomes. It happens in the US and in Australia, but I believe in some
European countries such as Germany they have too many doctors.

> Third, the US method of funding private healthcare money is really a four party system mandated by the federal government.  This involves patients (the consumers of healthcare services), the medical professional (the providers of healthcare services, who typically only directly pay for a fraction of these), insurers (who directly pay for most of healthcare services), and employers over a certain size (who, because of tax laws, pay for healthcare services).
> This particular system, mandated by law, has worked to increase healthcare costs even apart from direct government subsidies (the 45% mentioned earlier) and tends to dilute market effects.  Why is that?  The consumer of the service is decoupled from paying for the service.  The employee, e.g., does NOT experience any increase in her income should she use her healthcare money wisely.  (In other words, the consumer isn't able to gain anything from doing things to spend less on healthcare; there won't be more to spend on anything else -- things she might expect were she paying directly for healthcare without any government interventions manipulating her spending.)

Couldn't an employer offer the employee the money instead of the
insurance, even if due to tax benefits this would be less money than
the insurance would cost to buy independently of the employer?

> This four party system also creates perverse incentives.  The consumer has little incentive to control prices, but the insurers and employers do, while the providers generally have an incentive to increase their price.  Imagine if we used the same method for purchasing iPods or food.  Would you expect costs to go up, down, or remain the same under such a scheme?  Would you expect the quality of food to rise, fail, or remain the same under ditto?

The insurer wants to charge as much as possible while the employer
wants to pay as little as possible to the insurer. The health provider
wants to charge as much as possible and the insurer wants to pay him
as little as possible. The employee wants the employer to charge as
little as possible since that would mean more money for salaries or
other benefits. Maybe if you cut out all the middle men and had the
patient paying the health provider cash this would increase
efficiency, since at the very least it would remove a layer of
administration and profit-skimming (one of the main economic benefits
of single payer insurance schemes), as well as making the patient more
responsible for his health and more sensitive to overservicing.
However, this is a general argument against insurance.

> Finally, given the perverse incentives created by this system, the direction of reform in the US is unlikely to work in favor of lower costs and increasing quality.  (This is leaving aside the pollyanna view that one can have lower costs, high quality, and universal coverage all together -- i.e., without any tradeoffs.  Private individuals could, of course, decide how to allocate their resources and make personal decisions on healthcare, but the present system AND the likely direction of reforms is more in terms of an unrealistic approach that stifles personal choice while pretending to lower costs, raise quality, and bring more people into the system at low cost and with high quality.)

Apparently the "pollyanna view" is what in fact happens, since most
OECD countries have cheaper, universal systems which result in better
overall outcomes. The only real argument against this that I have
heard is that the US population are an intrinsically unhealthy lot
compared to the rest of an OECD, so they need higher health care
spending just to keep up.

> >> Governments and large bureaucratic companies like GM
> >> (without a real
> >> owner) have not the right incentives to manage
> >> rationally the costs and
> >> to plan rationally for the future. Their personal
> >> future horizon is 3-5
> >> years, not decades. Why do sacrifice today when the
> >> profits will be
> >> reaped by others? Why do not enjoy today and leave the
> >> bill to be footed by others tomorrow?
> >
> > You have this the wrong way around: private enterprise
> > generally only
> > looks a few years into the future, while governments
> > undertake
> > projects that might not show a reward for decades.
> Were this true, one would expect to see all governments running surpluses instead of deficits.  Instead, we see most governments running deficits.  Why is that, if they have such a long range view over private individuals?  It's because government officials don't directly experience the cost of bad policies.  They can usually direct the immediate profits of a policy -- usually to themselves, their supporters, their friends, and to persons or groups that need to be bought off -- but they do this by socializing the costs of these policies.

Remember that in the recent financial crisis it was *private*
indebtedness that was the root cause. Shareholders don't look more
than about five years into the future; they hope to make a killing in
the short to medium term, and then bail out if it looks like the
current enterprise is going to run out of steam.

> A case in point in the US was the prescription drug benefit program signed into law under the Bush Administration (and, IIRC, when his party had the majority in the Congress).  The original program was billed as only costing so much and quickly ballooned.  Why is that?  Because the government had such a long range outlook, but merely lied to the media and the people?  Or because they really don't have much of an incentive to keep costs low or even monitor them in the first place?

But competent governments do look ahead even when in the short term it
seems that there would be a political backlash. What incentive is
there for a country like Norway or Kuwait to save money in their
sovereign wealth fund against the day when the oil runs out when they
could just use that money for handouts? Why did the Australian
government increase the retirement age for government pension
eligibility in expectation that an aging population would result in
funding shortfalls, when this is unlikely to have an impact for

> > For example,
> > governments may take measures to mitigate global warming,
> > assuming it is believed to be a problem,
> > which private corporations would have no
> > incentive to do anything about.
> > At best, a private corporation may
> > invest in enterprises that would benefit from global
> > warming, provided
> > that the investment was going to show a return in a few
> > years;
> > otherwise, the shareholders would sack the board of
> > directors for wasting money.
> You're merely pointing out that governments can often adopt policies without worrying about the costs.  Yes, there might be such policies that, happily, are beneficial in the long run -- meaning their costs are lower than their benefits.  But this would be by chance -- not by the incentives of any government.

You may not agree that global warming is a problem, but if it is a
problem, then what would private enterprise do about it?

It certainly isn't my experience working in a public health service
that governments don't care about costs and do things that they know
are a waste of money. We have managers constantly scouring the balance
sheet looking for cost savings, comparing our hospital with other
public and private hospitals, liable to be sacked if they are found
wanting. Do you think you could come and explain to them that, as a
government enterprise, we deserve more staff, fewer patients, higher
salaries, and longer lunchtimes?

> And private individuals and firms do long range planning too.  People plan for retirement, for instance.  Firms often get 99 year leases.  (Of course, these days this doesn't happen as much because of the kind of perverse incentives created by government interventions.  For instance, inflation, which has been the major feature of money systems during the 20th century and is likely to remain so this century, creates a disincentive to long range planning -- whether in the form of an individual saving long-term (why save if the value of money is falling, often at an unpredictable rate, over the long run?) or firms making long range plans.)

A 99 year lease is an asset, like owning the property. A private firm
would not invest in something that was not expected to show a return
for 99 years.

> >> Private markets punish people that don't plan well and
> >> reward people
> >> that planned well. The alternative is, like today, to
> >> punish people for
> >> good planning and rewarding people for bad planning.
> >
> > It certainly looks like you are opposed to insurance. To
> > the extent
> > that adverse events are under anyone's control, insurance
> > consists of the careful subsidising the careless.
> I don't think that's necessarily so.  The problem is when insurance is mandated -- i.e., someone is forced to pay for insurance or an insurer is forced to insure someone.  In those cases, the market for insurances is distorted and all kinds of unintended consequences (unless we presume that the interventions were designed to cause the problems, which might be the case sometimes*) arise.

Whether you've paid for insurance privately or through taxes, the
effect is the same: you are less worried about the adverse event
against which you have insured.

Stathis Papaioannou

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