The problem (with health care) is the prices

So says Sarah Kliff in a piece up at Vox that does a good job of reminding us that the fundamental problem with the American health care system is that health care services are very expensive and pricing is incredibly opaque.

It’s important to understand the basic contours of the health insurance system to be able to make a judgement on just how much bullshit is in any politician’s health care plan. So let’s take a quick, 10,000 foot view of the health care system.

Health care transactions have three parties: the consumer, the provider, and the insurance company. The provider prescribes services to the consumer, who then purchases them. Mediating this transaction is the insurance provider, who pays (or doesn’t) some portion of the cost based on arcane criteria.

It’s probably better to think of health insurance less as insurance than as cost sharing. With that in mind, we can imagine all of the people with health insurance being divided into several cost sharing pools, each with slightly different agreements as to what costs will actually be shared. The largest pools are run by the government: Medicare, and 51 state Medicaid pools. Then there are the private insurance pools within each state. Most people are entered into a pool via their employer provided insurance plan, with the ACA markets intended to cover the rest.

To a first approximation, the average cost of health insurance to a person in a given pool is a function of the price of health care, quantity consumed by people in the pool, and number of people in the pool.

C=(P*Q)/n

The ACA was primarily aimed at extending insurance coverage to the approximately 20% of Americans who were without health insurance. Why were 20% of Americans without coverage? People fell into one of two camps: 1) They didn’t want health insurance, because their expected benefit was less than their expected cost; if you were young and healthy, insurance was going to cost more than you would get out of it. 2) They wanted health insurance, but couldn’t afford it because their expected costs to the insurer exceeded what they could pay. So the end goal was to get that C down to a point where people category 2 people could afford insurance.

Again, to first approximation, what the ACA did with the marketplaces was increase that n. By making a pool larger, average costs could be driven down for any one person. However, there is a complication. Increasing n will also increase Q some amount; quantity of health care consumed is a function of the number of people in the pool, i.e. Q=f(n). So you need to add in more people who will consume less health care, people whose costs are lower than average. Cost sharing only works if some people incur less costs than others. That’s why the individual mandate to purchase health insurance was necessary to get those category 1 people from above into the pools. Inevitably, you had to make some people worse off to make others better off. In essence, it’s just simple redistribution. Average costs go down, but the per unit price of health care is unaffected.

If you take prices as given, then, the optimal solution to reducing average cost would be to have the biggest pool possible; it really doesn’t make sense to have hundreds of smaller, regionally based pools, especially when there are fixed costs to running an insurance pool (administration, billing, etc). That’s the idea behind single payer; put everybody into one big pool and call it a day. But the insurance lobby is large, and that would put a lot of people out of jobs, so the ACA kept the private insurance system.

To make this system work then, a series of subsidies was necessary, especially since the ACA also mandates that all plans must cover a minimum set of benefits (i.e. an insurer cannot offer a product worth less than this defined minimum). This would drive up prices again, so the other necessary pieces were 1) tax credits, so the cost of insurance to low income families is shared by the universe of taxpayers, and 2) cost sharing payments to insurance providers, where the government directly pays them if they stand to lose money on such plans (also paid for by the universe of taxpayers).

(As an aside, this means that Trump’s decision to end cost sharing payments to insurers merely shifts the locus of redistribution; since these companies will now just charge higher prices for their plans to be able to turn a profit, that means the money that would have been paid to insurers is now…paid to them via the tax credits to consumers.)

So again, if the main goal is to decrease the average cost of health care, putting everyone in one big pool would seem to be way simpler and more efficient, taking prices as given.

But should we take prices as given? Of course not. Let’s say prices are a function of quantity of health care consumed, market power of the provider, bargaining power of the insurer, and insurer overhead.

P=f(Q,MP,BP,O)

An increase in consumption will drive up price in the short run, so there’s the potential that increasing access to health care will end up increasing prices if people consume lots more. The key here is elasticity of supply; how much and how fast can the supply of medical services respond to increases in price? We’ll return to this later.

What is the market power of the provider? In many rural areas, there simply aren’t very many health care providers; maybe there is one hospital, which is a monopoly, and monopolies can charge above market rates. I think this is a key fact as to why the price of health care in the US is so much higher than every other developed country; we are a very large country, with lots of people living in not very dense areas, so there are lots of regional health care monopolies.

Then there is the bargaining power of the insurer. Larger insurers can demand lower per unit prices via volume. It’s the same principle as buying at Costco: in bulk, you can get a lower unit price. This can act to countervail monopoly power. A secondary idea behind the ACA was that the exchanges would force insurers to compete on price, and hence drive down health care costs. Part of that would come in the form of reducing overhead (more efficient insurers could charge less), and part would come from that increased bargaining power (from larger size from forcing people into the exchanges).

 

Even with the subsidies, in a lot of places insurers simply don’t find it worth their while to offer plans on the exchange. The mandate was not strong enough to get everyone into the exchanges, so mostly sicker people were buying the plans, meaning they cost too much. Other elements in the ACA actually encouraged the consolidation trend in health care services, meaning the market power of regional health care providers has continued to increase. Low enrollment in rural areas with monopoly health providers isn’t a recipe for profits for most of these insurers.

The ACA is not inherently doomed, but requires tweaks to get the right levels of cost sharing and subsidies in place. But again, you should ask yourself, why do it this way? And again, the simplest way to get average costs down would seem to be to put everyone into one big pool; if size leads to bargaining power, then one big pool will have the most bargaining power to negotiate lower prices.

Okay, so maybe that wasn’t so quick; who knew health care could be so complicated?

So what’s crazy to me is that almost nobody of prominence talks about any sort of plan to directly get prices down. Prices are the key, as the Vox piece highlights; if the cost of health care is cheap, then maybe we don’t have to worry about any of this crazy cost sharing business. Maybe the reason nobody talks about it is because nobody has any clue how to do it, but it seems that there are some rather obvious fixes, which I’ll get into next time.

 

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Is SCOTUS a Court?

A strange question, perhaps; how could the Supreme Court not be a court? But this article argues just that. What the author means is, if we think of a court as a body that “resolves disputes in accord with some pre-established set of legal rules”, the modern Supreme Court doesn’t fit that definition; it’s something else.

Rather than the usual tired charges of ‘legislating from the bench’, complaints which boil down to ‘the court did something I don’t like’, this argument uses the very history of the court to provide evidence of the evolution of the role of SCOTUS from a regular court into a policy making body. It’s a quick read and excellent food for thought.

I have to take issue with the concluding thought, though: “The Court does not engage in the judicial task of resolving disputes in accord with some pre-existing set of legal rules; it engages in a somewhat different task of issuing legal pronouncements that other courts will then use to resolve disputes. There are other bodies within our political system that perform that task as well.  They are called legislatures.”

Obviously, the legislative branch of the United States does not perform that task well any longer, in particular the Senate. I believe the increasing stakes surrounding Supreme Court nominations are partly driven by this legislative dysfunction; since high stakes legislation is nearly impossible to pass, the increased power of the Court has become a substitute. My instinct is that this is a response to a power vacuum, rather than an usurpation, but others may have more informed interpretations.

A Note of Caution in Myanmar

The news coming out of Myanmar is not good. The military is waging a brutal campaign against the Rohingya, a long marginalized ethnic group of Muslims in a majority Buddhist country. There’s a great deal of moral outrage among observers, and rightly so. But much of that outrage is partially directed towards Aung San Suu Kyi, the de facto leader of parliament, for not speaking out.

I’m reminded of a story from awhile back, probably several years ago at this point. A story was making the rounds about a woman suing her nephew for breaking some bones from hugging her too hard. How disgusting! Such an easy target for a five minute hate!

Of course, when you dug a little deeper, the story turned out to be something else entirely. The reason the woman was suing was because she had to, because the homeowner’s insurance refused to pay out for the accident. The whole thing was driven by legal technicalities; the woman wasn’t actually suing a 12 year old boy.

Likewise, in Myanmar, it’s important to keep in mind that despite the reforms that opened the country to democracy in the last year, the military is still very much in charge. Now, it could be that Suu Kyi really doesn’t care about the Rohingya; that’s a possibility. But even if she does, she has to walk a fine line lest the military simply decide to take back power (as has happened in Thailand several times whenever the civilian democracy ‘got out of hand’). This could be one of those issues you should stand up for, no matter the stakes; that’s a valid argument. But the discussion around Suu Kyi’s part in this probably requires more nuance than is being given in many places.

 

Neoliberalism Link Roundup

The past week or so saw a number of pieces on neoliberalism, many in reaction to this Jonathan Chait piece. Like ‘hipster’, neoliberalism has become a term thrown about with such abandon that for many (like Chait) it’s become almost meaningless. But that may speak more to how the ideas in neoliberalism have become so commonplace, particularly among the elite, that they are now the ‘default’ view of how to organize society. This is one of the most active fault lines in the Democratic Party; while both parties once embraced neoliberalism, the Republican Party under Trump is retreating into reactionary territory.

One of the better reactions was this by Karl Smith at the Niskanen Center, the libertarianish think tank whose brand of politics I’ve become increasingly enamored with.

Further left was this response from Corey Robin at Jacobin, and this Vox piece from Mike Konczal of the Roosevelt Institute, both of which are also good perspectives.

Finally, on the more academic side is this excellent bibliographic review of neoliberalism.

In general, it’s hard to find defenders of neoliberalism these days (though there is this reddit community). Most of the enthusiasm in the Democratic Party is further on the left, and again the Republicans are becoming a party that rejects many of the basic principles of the (classical) liberal consensus. Neoliberalism is (fairly or not) associated with the entrenched political class and associated policies that led to the Great Recession.

While I can’t say exactly where I stand in all of this as yet, I can say that I am concerned with the possibility that both parties end up rejecting liberalism (again, classically; the American political use of liberal and conservative is often not helpful). Even if neoliberalism, however properly understood, has problems, it shouldn’t follow that the broader ideas of liberalism are rejected as well.

Immigration and Integration in Canada

While most of the Western world has seen a backlash against immigrants (and diversity more broadly) in recent years, one country stands apart in maintaining robust national support for immigration: Canada. Yes, Canada, that mild mannered nation we Americans love to poke fun at, has somehow discovered the secret to integration that the rest of the West lacks. What’s the story?

One attempt at explanation can be found in this excellent article here (alas, I can’t remember how I came across it). I’ll run through the arguments, but first, some stage setting.

Most of us have heard the analogy of America as a ‘melting pot’ of peoples. This is supposed to conjure a vision of many diverse peoples coming together and becoming something altogether new. We’ve probably also heard that this is a bad analogy, at least for the short term, because it implies a cultural homogeneity that simply isn’t the case. Something like a salad bowl or a mosaic is more accurate analogy, because immigrants retain many aspects of their prior identity for at least a few generations, but we’re all in the same ‘bowl’. The question is, how mixed are the ingredients? If all the tomatoes and cucumbers are clustered at the bottom of the bowl, that’s not much of a salad.

In the US we do a far better job of integrating our immigrants than, say, France, where immigrants remain cloistered in ethnic enclaves for generations and have poor labor market integration; a contributing factor, no doubt, to the recent spate of terror attacks. Still, the election of Trump partly on a campaign of demonizing immigrants, and the increasing number of Republicans with hardline positions on immigration suggests a growing problem.

Canada, by comparison, manages to bring in a greater fraction of its population from across the world with no political backlash.  In the main, the author argues that “what Canada has been very successful at doing is integrating immigrants into the basic institutional structure of society”, without requiring them to integrate culturally as well. What does this mean?

In Western society, we generally can separate out the rules of governance from cultural norms. The process of filing a tax return or registering a vehicle is neutral with respect to culture (unless you happen to be a sovereign citizen). This is part of our liberal political tradition (not to be confused with the current American meaning of liberal), where the ideal government respects the beliefs and practices of the individual. In a theocratic society, compliance with the law is synonymous with adherence to religious law.  

Despite this ideal, it’s quite difficult to achieve in practice. Even our laws against violence and killing have cultural bias; in a number of countries, honor killings and such are culturally and legally acceptable. Obeying our laws around violence is potentially an instance of requiring cultural assimilation while integrating into our institutional structure (though thankfully in this instance, probably very minor). To take France as an example again, they have laws prohibiting face coverings or headscarves in public spaces, which means that Muslims are required to assimilate culturally to integrate institutionally. (For an exploration of what a truly neutral liberal society might look like, check out this SlateStarCodex post).

Canada’s comparative success lies in designing their institutions such that they are minimally obligatory towards cultural assimilation. The example given in the article is that of Canada altering the Mounty uniform so as to allow Sikhs to wear turbans. It’s a small thing, but as such Sikhs who wish to serve are allowed to maintain an important aspect of their cultural identity while also contributing to the larger nation.

Now that being said, there are some other factors that contribute to Canadian success; after all, I don’t think the United States places an especially heavy institutional burden towards cultural assimilation either. One striking difference is that Canada has basically no illegal immigration. To an extent, this is beyond their control; Canada lacks a long border with a considerably poorer nation, as we do here. But what is under their control is the policy of favoring permanent migration over temporary work visas; in the United States much illegal immigration is actually instances of overstaying visas, and not illegal border crossings. When people feel that the new people around them ‘deserve’ to be there, there’s more buy in than if there is a widespread sense that the immigration process is uncontrolled.

Another factor is that Canada deliberately selects its immigrants to be as diverse as possible, which means there is no single large minority group as in most other Western countries. If you’re at the wedding of a family member, you’ll probably spend most of your time talking to your own folks rather than seeking out the other family. But at the wedding of your spouse’s friend, with no in group fallback, you’ll be forced to engage with the wide variety of guests (or, if you’re like me, nobody at all…maybe not the best example but you get the idea).  A large concentrated minority group makes an ‘us vs. them’ mentality easy to come by.

And most interesting to me is the idea that Canada has institutionalized protection of the majority culture clear from the start, which stems from the Quebec situation. The argument goes like this: French Canadians are a minority nationally, but the majority in Quebec. Large scale immigration would dilute the power of French Canadians even within Quebec if most immigrants chose to integrate with the Anglophone majority.

“Because of this, the only way that it has been possible to have something resembling a national immigration policy has been to offer a set of very explicit protections for Quebec, and in particular, for the French language. These same protections, however, have been extended to the English majority as well. So, for instance, Canada is far more explicit with immigrants about the importance of language-learning than many other countries are, in part because we have an ‘official languages’ policy that sets out very clearly the privileged status of English and French.”

The result of this is that there needn’t be any anxiety about immigrants ‘taking over’, since the English language is protected. I think this is a really powerful insight. Language and culture have a powerful connection; being surrounded by people who look different but speak your language is considerably less threatening than the alternative.

So we can see how the United States fares comparatively on these counts. We have a large chunk of the immigrant population that’s ethnically homogeneous, often perceived as coming here without restraint, and who are linguistically apart from the rest of America. The rhetoric of fear coming from many anti-immigrant activists is directed towards Latin American peoples; you just know that people complaining about immigration don’t mean Slovenians. Problems around Mexican immigration end up clouding the broader issue of immigration for many Americans.

It’s possible that what we are going through right now in terms of immigrant backlash is the national version of what happened in California in the 90s (and with the Irish and Italians and Germans in the 19th century); if so, this sentiment will pass with time. Still, if we want to prevent such pain the in future, there are steps we should take.

One is to increase the perception of border control. The reality is right now illegal border crossings from Mexico are at historic lows, but many people are still stuck in 2000 (and the majority of those border crossings are actually people fleeing violence in Central America). I really don’t know the best way to do this; Trump’s wall is functionally a giant waste of money, but if it sets people at ease, maybe it’s worth it.

Most immigration to the US is centered around family reunification, which means that the immigrant populations already here tend to grow in size. We have a diversity visa (DV) program, which aims to bring in underrepresented countries, but the program is tiny in comparison to family reunification immigration. We could expand the size of the DV program considerably as to add more balance to our immigration mix.

And finally, we should consider making English an official language. As it stands, there is no official federal language, though obviously English is the working language. For some reason, proposals to codify English’s status are often viewed as anti-immigrant by the left. To me it just seems obvious that people should have some working knowledge of English; it’s a small price to pay. I’m staunchly pro-immigration, but having worked several years in retail in an urban area, it’s just annoying to have people you are simply unable to communicate with. (If you can’t communicate at a cash register, the most basic of social interactions, what are your chances of integration into society?) For those already disposed to be skeptical of immigration, the sensation that English is threatened is certainly not going to help any. I’m not saying English should be the only language, but we need something more than living in the same territory to bind us together.  

Behavioral Bounds, Society, and the Economy

I’m currently reading The Great Upheaval, a history of the last decade of the 19th century in America, France, and Russia. The author, Jay Winik, has a writing style that does a really good job of conveying the the way events at the time must have felt to the participants. I’m generally skeptical of histories that focus too much on individuals at the expense of the wider social and economic context in explaining historical events, but I think there is real value in getting an emotional understanding of the past as long as it’s tempered with that big picture understanding.

[For example, the history of American conservatism series written by Rick Perlstein does a similarly excellent job of taking us inside the minds of of historical actors like Barry Goldwater and Richard Nixon, making the history more intelligible, but also risks leaving the reader with the impression that history is primarily driven by the psychology of individuals rather than broader forces.]

Now, one thing you notice when you read these personality based histories is that there are a lot of important people that we today would consider mentally ill in some way.

Take Grigory Potemkin, consort of Catherine the Great:

He cared little for social decorum: Famed throughout Europe for his palaces, his jewels, his parties, and his women, he wandered around the empress’s apartments naked under an open bareskin dressing gown, baring his hairy chest and munching on apples and raw vegetables, usually turnips or radishes, or obsessively chewing his nails…More often than not, he might look as though he had just woken up, or had been sleeping off a hangover, only suddenly then to burst into fits of manic activity…

From the moment he awoke, his every day was unpredictable. While still in bed, he received visitors in his dressing gown, then roused himself for a cool bath and a short morning prayer. But after that, his moods swung from unrestrained highs…to crippling lows… When he was depressed, he retreated into a near paralytic silence. He refused to sign papers, machinations of the state would grind to a halt, and a significant part of the Russian government would simply stop. Sometimes he sat along, like a catatonic Gulliver, soothing himself with music and pouring emeralds and rubies from hand to hand.

Such behavior would seem to be today called bipolar, yet Potemkin was one of the most powerful people in Russia at the time. Could we imagine such an individual in the same position today? I think not; if nothing else, the continuous scrutiny public figures face these days means he wouldn’t last long (although Donald Trump may be a strong counter example).

The particular example here isn’t so important though; what I want to explore is the proposition that the increased formalization of the economy leaves behind many people who are wired a little bit differently.

Continue reading “Behavioral Bounds, Society, and the Economy”

Federalism and Redistribution

Somewhat in honor of our national holiday (though perhaps more appropriate for Constitution Day), a recent article about federalism in National Affairs struck my interest.

I’ve been reading about federalism a fair amount lately, mostly from a political theory perspective. In my less thoughtful youth, I tended to disparage federalism as an outdated idea, a mere compromise for the times, and an obstacle to My Preferred Policy Program. But recently, mostly through the writings of political theorist Jacob T. Levy, I’ve come to a new appreciation for federalism as an impediment to centralized state power and a source of cross-cutting ‘tribal’ identity.

On the more grounded side, this article, ‘Federalism in Red and Blue’, also makes some points I hadn’t considered before. One fact often touted by the American left is that Blue states pay more into the federal system than they get back in benefits, and Red states pay less. In essence, Blue states subsidize many functions of Red states. Usually this fact is deployed as an example of the hypocrisy of the right, or in some way to make the reader feel that it’s unfair for Californians to be paying the way of Mississippians. That fact is never deployed to make one consider that there should be *more* transfers of wealth from rich states to poor states; yet, that’s exactly what this article does.

The argument here rests on fixed costs. Basic state services, like education, policing, and welfare, have some fixed costs regardless of the size of the state. Additionally, states all have different ‘fiscal capacities’, i.e. differing abilities to raise revenues. The example in the article is a comparison of Kansas and Massachusetts, both of which recently embarked on sizable shifts of their tax burden from income taxes to sales taxes. Kansas has been in the news for the disastrous impact of said restructuring, whereas Massachusetts has attracted no attention. Why? Well, Massachusetts has per capita income about 30% higher than in Kansas and over twice the population, plus is surrounded by similarly populous states; the state can raise revenue far easier than can Kansas.

So if states’ fiscal capacities have direct effects on their ability to provide basic services, the result is that poor states face the choice of implementing higher relative taxes or reducing services. Given the haphazard boundaries of states, this seems profoundly unfair.

For example, my home state of South Dakota has some of the lowest paid teachers in the entire country. It’s neighbor to the west, Wyoming, has considerably higher paid teachers; it was common for teachers in my corner to the state to decamp to Wyoming after a few years experience. Neither state has an income tax. What accounts for the difference? Wyoming has the good luck of possessing fossil fuel reserves that bring in considerable revenue. In fact, there is a crescent of oil, coal, and natural gas deposits in the American West that passes through North Dakota, Montana, and Wyoming, but almost entirely bypasses the Mount Rushmore state.

Given this fact, the author argues that states with lesser fiscal capacities should receive equalilzation grants from the federal government to even things out. You might think this would be madness, to simply hand states buckets of cash without any strings attached, but other federalist countries, like Canada and Australia, have implemented such programs without any ensuing shenanigans. Furthermore, such grants would actually allow the experimentation that is aspired to in the conception of states as ‘laboratories of democracy’. As it currently is, most federal money to states comes with so many strings attached that the state is basically a delegated administrator for federal spending.

Maybe the big irony here is that when it comes to states, the left and right have reversed views of redistribution. I can see why this is the case, and is related to the tension between the rationalist and pluralist strands of liberalism as proposed by Mr. Levy.

The piece did a good job of making me reconsider my implicit ‘Blue State’ view of federalism. Still, my pie in the sky dream would be a total overhaul of our state structure; I think too many states are too small to have good governance, rural bias in the Congress and Electoral College is becoming a major issue, and we’d all be better off with fewer, larger states that actually corresponded to economic and cultural divisions.