Wednesday, December 15, 2010

Kinky Health Care

How should health care be reformed? Well, the Kinky Economist has a plan that provides for both universal health care and the best damn health care that money can buy. The first major component is government provided health care available to anyone. This public plan would be modeled on the VA system where the government owns the hospitals and the doctors and nurses are employees of the government, so members would not be able to choose their own doctor. If you want to choose your own doctor, pay for it yourself (or buy your own insurance). There is no right to choose your own doctor.

The plan would focus on preventative care where annual check-ups are not only free, but you could get paid for a healthy lifestyle. So much of our health care costs, especially diabetes, heart disease, and respiratory problems, are driven by behaviors such as obesity, inactivity, and smoking. By focusing on wellness, these costs can be avoided (although healthier lifestyles do result in higher costs due to increased life expectancy and chronic diseases in old age).

Chronic and catastrophic health care would be rationed by Quality Adjusted Life Years (QALYs). For instance, the government may pay up to $40,000 for treatment that extends a patients life by one year, so the cost per QALY would be $40,000. Yes, health care will be rationed -- it is already rationed. Every scarce resource is rationed. If you don't want the plug pulled on Grandma. then pay for her health care. You shouldn't demand that other people to pick up the tab if you're not willing to pay the costs. If QALYs are used to ration health care, then how much are we willing to pay to save a life? More accurately, how much are we willing to make someone else pay to save a stranger's life? The budget for health care must be limited to a percentage of the total government budget. Once a fixed dollar value has been created, the cost per QALY will depend on how many people are in the government plan and how much health care they need. The government plan is meant for the poor and the sick, not the healthy and the wealthy. If more people get their own insurance, then the available funds can be spread among fewer participants resulting in higher costs per QALY. The plan can also accept contributions from donors that would increase the cost per QALY.Another focus of the plan is positive externalities of health care. The plan could require patients to be immunized resulting in a reduced likelihood that other people will get sick. The plan could strongly encourage organ donation to help save other lives. The plan could be used for research on new medical techniques and drugs. All of these characteristics result in social benefits.

Another focus of the plan is cost containment. Treatments would be based on comparative effectiveness so that costly, ineffective treatments are avoided. Medical malpractice costs would be eliminated or at least drastically reduced by not allowing patients to sue or instituting a program to resolve these disputes. Generic drugs would be prescribed instead of brand names in order to lower pharmaceutical costs. The plan would also use it's size to negotiate better terms for prescription drugs, medical equipment, and other purchases.

There would also be a greater reliance on medical personnel other than doctors such as Physician Assistants and Nurse Practitioners. Additionally, employment in the system could be worked into programs for medical and nursing schools. For example, tuition is free at military academies such as West Point, but students are required to give four years of duty after graduation. The GI Bill will pay for college for soldiers after they leave the service. The federal government could pay for medical school with a requirement that the doctors work in the system after graduation.

The public plan is not for everyone and most Americans can and should get their own insurance, just as they do today. However, the health care system does have flaws and room for improvements. The primary downfall of the plans that seem to be bandied about is the insistance on a single level of health care resulting in either reduced levels of care and/or higher costs. By recognizing that everyone deserves basic health care but not necessarily Cadillac care, I believe that the KinkyCare framework has the best potential to improve health care coverage and results.

Friday, March 19, 2010

The Four Hurdles of Global Warming

After health care, debate over global warming and the environment has been the most raucous over the past years. Before I go into a full discussion of my views, I do want to mention two points worthy of special mention. The first is whether or not global warming is caused by man. Who cares? Suppose we knew that it global warming was real, but not caused by man. Would that make it any less dangerous? The second point is that even if you don’t believe in global warming, fossil fuels are still pollutants that results in negative externalities. As we all know by now, even the most strident anti-government economists recognize that there is a role for government in the regulation and taxing of negative externalities. (Full disclosure: I consider myself a strident, anti-government economist). With that out of the way, I’ll move on by discussing the four questions that should really guide the debate.

Is global warming really happening? This is the question that has the least to do with economics and the most to do with climate scientists. I’m going to have to say yes on this question based on the climate reports. Admittedly, it is fairly easy to massage data to fit your hypothesis and the models have done a very poor job of forecasting the future. What I mean by this is that it is easy to create a model that explains what happened in the past, but if the model can’t predict the future, it isn’t of much use. So even if the Earth has gotten warmer over the past 100 years, I am not confident that it will continue to get hotter even if there are no actions taken to reduce global warming.
What are the positive and negative effects of global warming? It is possible that global warming may cause the ice sheets to melt and sea levels to rise, but it may also lead to longer growing seasons and more temperate conditions elsewhere. There is no reason to believe that the current climate is the optimal climate. It is entirely possible that a warmer Earth is actually better. Realistically, some people will gain and some will lose. It may suck to be a Polar Bear, but there are areas that will benefit from global warming. I have seen reports that the US would be better off with global warming, and not just because California will be under water.
Can human actions affect it? While I don’t think it matters whether or not humans cause global warming, I do think it is important to know whether or not humans can control it. It doesn’t really matter whether or not man caused global warming, what matters is whether or not we can do something about it. What effect will a reduction in carbon dioxide emissions have? Are there other actions that may affect global warming. The book SuperFreakonomics has a chapter devoted to alternative methods of fighting global warming that includes things like huge ocean mirrors and simulated volcanoes. These might be as effective and cheaper than reducing the use of fossil fuels.
Are the benefits of taking action worth the costs? In economics we talk about tradeoffs, and when I say costs I am not just talking about money, I’m talking about lives. Economics is sometimes known as the Dismal Science because it is concerned with Scarcity. It originally got this name due to the work of Thomas Malthus who basically predicted that population growth would outstrip food supply leading to constant famine. The question became one of forced population control (like China’s one-child policy) or natural population control through starvation. The Earth currently has almost 7 billion people. Many people believe that the Earth is overpopulated and a population of 5 billion may be more manageable. Is this a good thing? I’m not even sure if we can define what is good or bad, and if we can’t define an objective, how can we decide what to do? (Side note: Both Global warming and efforts to fight global warming may cause death). Beyond life and death, there is quality of life. If you could go back 100 years and prevent the development of the car or the discovery of oil, would you? By doing so, you may prevent global warming, but you’d also be eliminating the huge strides in our quality of life.

Frankly, I don’t know what to think. I basically support some taxes on fossil fuels due to the negative externality that results combined with some subsidies for greener forms of energy, but there becomes some point where the taxes and subsidies go too far. Just like the discussion of externalities, the tax should be equal to the marginal social cost – no more and no less. The goal is not to have no pollution (or no global warming) the goal is to have the optimal amount, and your definition of the optimal amount may be different from mine.

Wednesday, February 24, 2010

Coase Elections

I have become frustrated by government and believe it is badly in need of fixing. This puts me in agreement with about 300 million other Americans. A common complaint is that special interests and lobbyists have too much influence over policy. This complaint only grew in intensity after the Supreme Court ruled in Citizens United vs. FEC that corporations and other entities have the right to fund political activities as free speech. The decision has been openly criticized by the President in the State of the Union address and has been mocked in Congress as leading to the Senator from Exxon. I disagree with the argument that this ruling means that corporations will be able to do whatever they want. Lobbyists tend to fund candidates on both sides of the aisle and there are lobbyists on both sides of any issue. I don’t think that the new ruling will change the type of legislation that government passes (or doesn’t pass), I just think that more money will be wasted by both sides in “rent seeking” activities, and any time money goes to unproductive resources, society is left worse off.
A better solution, I believe, is to redirect the resources used for rent seeking. Under the current system, lobbyists on both sides of an issue spend millions to get legislation passed (or to stop legislation from being passed) or to get a candidate elected. Any money spent on Lobbying is wasted if you don’t get the outcome you wanted (for example, if the other side spends more and gets the outcome that they wanted). The way to reduce the amount of money wasted is for the two sides to decide among themselves which side is willing to pay more for a particular outcome and then for them to pay off the other side. This is the idea behind the Coase Theorem that basically states that under certain conditions, the outcome will go to the party that places the greatest value on the outcome. Suppose two neighbors are arguing about a tree on their property line. One neighbor want to chop it down and the other guy wants to keep it. They decide to go to court to decide who has the rights over the tree. Coase argues that there is no need to go to the courts; the easier method would be to determine which neighbor places a greater value on the outcome. If one neighbor is willing to pay $20 to chop it down, but the other person is willing to pay $25 to keep it, then the second person should pay the first person at least $20, but no more than $25, in order to keep the tree. Both sides are now better off.
What if we used the Coase theory to decide political outcomes? Participants on both sides of an issue raise money and whichever side raises the most money wins, but has to turn at least some of the money over to the losing side. The easiest way to see this is an election. Candidate A is a favorite of business and raises $1,000,000 while Candidate B is a favorite of unions and raises $900,000. Candidate A would win the election, but the people who contributed would have to pay $1,000,000. The people who donated to candidate B get to keep their pledge plus they double their money because they get paid out of the money that Candidate A raised. The extra $100,000 goes to the government.
Just to be clear, not only does the losing side get their own money back, they double their money. Instead of being a system where the “rich” are allowed to buy an election,the Coase election is really a huge means of wealth redistribution from the rich and powerful to the poor and powerless. Instead of keeping power by "buying" politicians, they have to give the money to the people. Also, each candidate would really have two accounts. One account would be used for campaign activities such as commercials, signs, and fund raising. As a donor/lobbyist, you can contribute to this fund, but you won’t get that money back - any money spent on that is lost. This fund is the same campaign fund that candidates currently have. The other fund is a new fund that determines who wins or loses the election. Whichever candidate raises the most money for this new fund wins. There is no actual election where people go vote. The way you vote is by contributing to the fund. Not only must you decide who you want to win, you must decide how much you are willing to pay to get him elected. Any entity could participate in this, including corporations and speculators would also participate. I may not care who wins, but I may contribute $50 to the candidate that I expect to lose. If I’m right and that candidate loses, then I double my money. If my candidate wins, then I lose my $50.
Is this a great idea? Yes. Will it happen? No. Why? Congress. Let’s look at the current system for deciding these matters. People vote to elect Congress, lobbyists from both sides shower congress with favors. Congress does nothing. Repeat. With 90%+ of congress reelected each time, why would they support a system that takes away their influence and the barrage of favors that comes with it? There are also some practical limitations to the Coase theorem. This type of election requires a fairly clear dispute between two sides. As you add more and more possible outcomes, it becomes impossible for both sides to win. However, you could have a series of votes between outcomes until you have a final winner – sort of like November Madness.

Saturday, January 30, 2010

Ten things I'd like to see in Health Care Reform

While I am not a fan of the reform plans being discussed, I do agree that health care reform is needed. Many of these reforms would only be applicable to government provided or subsidized insurance, I fervently believe that individuals and insurance companies or health care providers should be allowed to make whatever kinds of agreements they wish in the private market. That being said, here are ten things I would like to see.

1. Cost effectiveness measures. These limit the treatments you can receive, the medicines you can take, and the doctors you can see. A lot of health care that is currently provided has very little benefit. That's fine if you are using your own money, but not if you are using taxpayer money.

2. Substitutes for doctors. If your goal is to cut costs and increase coverage, then this involves increasing the supply of health care. One way to do this is to expand the use of substitutesw such as nurses, practitioners, and physician assistants. Most of my visits can be handled by these people without ever having to see the doctor.

3. Subsidizing medical education. If you can reduce the cost of becoming a doctor, then you can increase the supply of doctors available. My personal preference involves providing payment for med school in exchange for several years of service, just as a West Point education is free with the requirement that the cadet serves in the military after graduation.

4. Focus on preventative care. If someone has government provided health care, then you can require that they come in for an annual check up and actively monitor their situation. This is especially important if we are talking about prenatal care.

5. Health care with externalities. Similar to preventative care, behavior with negative externalities need to be discouraged and positive externalities need to be promoted. This could include things like promoting vaccinations and providing antismoking or diet services.

6. Tort reform. This could cut costs for all customers, not just those with government provided insurance. There could be an explicit ban on suing or a higher cost for policies that include the right to sue.

7. National markets. The market for individual health insurance is really 50 different markets on a state-by-state basis and each state is pretty much dominated by a single provider. Allowing insurers to compete across state lines could cut costs. This would also eliminate the 50 different sets of rules and mandates that currently exist.

8. Doughnuts. It sounds stupid at first, but it actually makes a lot of economic sense. Most people really just need catastrophic insurance that covers major emergencies. These plans may have deductibles of $10,000 for example. This means that people would have to pay for preventative care themselves, and alot of people would go without annual checkups and other preventative measures. Doughnuts provide coverage for preventative care by paying for the first $500 of expenses and they pay for catastrophic care by paying for anything over $10,000, but they don't pay anything in between (the hole in the doughnut). These are really the judgement calls where it is up to you to decide whether or not it is worth spending your own money for the treatment.

9. Innovative insurance offerings. People should be able to buy Health insurance in the same ways that they can buy Life Insurance. You might buy a term plan that holds premiums steady for the next ten or twenty years. You might also buy a whole plan that covers you until you cancel or die and holds premiums constant or at least limits the rate of premium increases.

10. Portability. I don't mind the fact that most people get insurance through their employer, but insurance should not be job-based. However, an expansion of COBRA that allows people to continue their coverage even after employment is terminated doesn't consider the fact that there is a differential tax treatment and that employer-based coverage tends to be way costlier than necessary, at least for healthy employees.

Jurassic Health Care

As is true with any plan where nothing can go wrong, something will go wrong. I don't know what, if anything, will be passed in Congress, but I see several potential problems regardless of the final outcome. Here now is my top ten list of future problems.

1. If the reform involves expanding coverage either with private or public insurance, then the reimburesment rates paid to doctors under the new plans need to be set. If rates are so low that the newly insured still don't have access to health care because no doctors are willing to accept them as new patients, then what is the point.

2. If reimbursement rates under the new plans are sufficient to entice doctors to accept them, then Medicare members, which have lower reimbursement rates, or people that already have insurance start getting left out.

3. If Medicare increases their reimbursement rates to ensure that members maintain their access to doctors, then this will cause the cost of health care reform to go way beyond the original estimates. I believe that this is a major concern. If health care reform is passed, it will be based on cost estimates that are way below what they will end up being.

4. Private insurers may also increase their reimbursement rates so that their customers can maintain access. Any hope of "bending the curve" is lost.

5. The government steps in to ensure that all patients have equal access to doctors regardless of the reimbursement rates offered. Private insurers will lower their rates since their is now no advantage to offering to pay more. At this point doctors basically become government employees and their offices are jampacked with patients making it harder for everyone to get an appointment and see the doctor.

6. Doctors revolt by no longer accepting insurance and moving to a cash only basis. This may not be a bad thing in terms of reducing the costs of health care as much of the cost goes to unnecessary procedures that people wouldn't pay for if they were paying their own bills.

7. The number of students training to become doctors starts falling as a future of dealing with government red tape doesn't seem so enticing.

8. Another part of cutting the costs of health care is implementing cost effectiveness measures in order to cut the extent of unnecessary procedures. These measures may include things such as less frequent mammograms, new guidelines on transplants, and reduced end-of-life care. The determination of cost effectiveness would be made by experts, also known as death panels.

9. I'm acually a big fan of cost effectiveness and support death panels, but affected parties will cry foul on these measures and demand that they be alowed to receive any care approved by their doctor. Government will no doubt relent and pay for less efficient treatments causing costs to go way beyond original estimates.

10. If insurance reform involving guaranteed issue, community ratings, and individual mandates passes, then premiums for healthy people would rise dramatically. Granted, premiums on sicker people would fall, but you are robbing Peter to pay Paul. I don't think anyone disagrees that this would happen. Some people believe that that is a fair tradeoff and some people don't.