Health Care Costs - Additional Info.

As a quick follow up to my earlier post on health care costs, here are some links to additional information.

Here is a Reuter's article from August of 2008 notes the following:

Americans who go without health insurance for any part of 2008 will spend $30 billion out of pocket for health care and they will get $56 billion worth of free care, according to a report released on Monday. Government programs pay for about three-quarters, or roughly $43 billion, of the bills for these uninsured people

And:

"The uninsured receive a lot less care than the insured, and they pay a greater percentage of it out of pocket. Contrary to popular myth, they are not all free riders," Hadley [of George Mason University] said.

The idea of the uninsured subsidizing the insured is one that is also discussed in the book Sick: The Untold Story of America's Health Care Crisis---and the People Who Pay the Price by Jonathan Cohn. This book contains a brief but informative discussion of the current state of health care in the United States as well as some background information about how we got here (such as the beginning of group medical and the system of employer provided health insurance that still exists today).

Finally, I will admit it is difficult to exactly pinpoint what is driving cost increases in health care, though I do not believe that unpaid expenses from the uninsured represent a major factor in cost increases. Here is a link to a National Coalition on Health Care factsheet which includes this:

Experts agree that our health care system is riddled with inefficiencies, excessive administrative expenses, inflated prices, poor management, and inappropriate care, waste and fraud. These problems significantly increase the cost of medical care and health insurance for employers and workers and affect the security of families.

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Doyle through the looking glass on health care cost

Governor Doyle occupied one of the featured blog post spots over at huffingtonpost yesterday in which he extolled the virtues of BadgerCare Plus and FamilyCare. I leave it to others to judge whether or not these programs are successful enough to serve as national role models, but this line was a real eye-catcher (emphasis mine):

More than 46 million Americans lack access to basic medical insurance, clogging our emergency rooms and driving up costs for those lucky enough to have coverage.

Doyle has this exactly backwards. Our system is one in which the uninsured subsidize the insured.

Insurance companies negotiate discount prices with health care providers (including prices for emergency room visits) which is a perfectly rational strategy for maintaining a profitable business.

Providers, knowing that they will have to negotiate their prices with insurance companies, have an incentive to set their initial prices high so that they have room to maneuver and still cover their costs (and make a profit if they are a for-profit entity).

This drives up the initial price for all health care that is ever paid for by insurance, but insured patients do not pay the initial price. If, however, you happen to be one of the unlucky 46 million without insurance, guess which price you pay. That's right, the higher initial price-without a discount. That is not to say one couldn't try to negotiate their own discount, but this is a hit and miss prospect at best.

Through this system of distorted prices then, it is those without insurance that pay the highest prices, subsidizing those that have insurance coverage.

Regardless of where you fall on the spectrum of ideas about what our health care system ought to look like. Whether you are an advocate of single-payer universal coverage or you think that we should just give everybody a leech, a band-aid, and wish them luck, confronting the distorted prices that are a major characteristic of the way we pay for healthcare will be absolutely necessary if we ever hope improve the system.
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There is also a price distortion which results from Medicare and Medicaid reimbursement rates being less than provider costs. Providers then work to shift these costs on to those with private insurance and those that pay for medical care themselves (that is, the uninsured). This represents a hidden additional cost of Medicare and Medicaid. A cost that is above and beyond the payroll taxes which are collected to pay for these programs. See health care economist Uwe Reinhardt's comments on this episode of NPR's Fresh Air.

On Second Thought

Now that the House has reversed course and the bailout legislation has become law, we will get to see just how much the federal government is able to impact the economy. There seems to be a broad consensus that things are going to get worse before they get better, but how bad and for how long no one knows. No doubt the next months and years will bring forth many accounts of how we got here from there, similar to what happened in the wake of Enron, only a much larger scale.

Why Did We Need To Do Anything?

Much of the coverage of the economic news over the last few weeks has focused on individual firms (Lehman, AIG) or on a stock index like the Dow. While these make for better narrative in news coverage, they are not the reason federal action was necessary. Largely buried in the news were references to the status of credit markets. These references usually included words like crunch, squeeze, tightening, or freeze. These descriptions are in contrast to the normal state of affairs in which credit markets are generally very liquid.

It it easy to think that what happens in the credit markets doesn't impact the average person unless they are in the market for a house or a car right now. But these markets, where money moves from where it isn't needed to where it is needed, is central to the functioning of the economy as a whole. When these markets are discussed, they are often compared to blood or grease - something that keeps systems moving. The latest turmoil has inspired many comparisons to the Great Depression, so it is useful to look at that period in history to see just how important credit is to the economy. Historian Niall Ferguson, writing on Time.com, invokes Milton Friedman on this point:

Yet the underlying cause of the Great Depression — as Milton Friedman and Anna Jacobson Schwartz argued in their seminal book A Monetary History of the United States: 1867-1960, published in 1963 — was not the stock-market crash but a "great contraction" of credit due to an epidemic of bank failures.

Given this, it's hard to see how the federal government could not act.

Shelly says my extreme ideology should only be taken in small doses, so I will stop there.

Up next: Why can't we just stop borrowing and live within our means?

The Bailout

It so happens that I am reading Russell Kirk's The Conservative Mind and I cannot get through more than a page or two without my mind being drawn back to the current financial crisis. In the book, Kirk details the history of conservative thought as it arose in reaction to the French Revolution. The reason that current events keep invading my reading is that the men and ideas described in the book have more to say on today's issues than all the chattering heads on cable and talk radio. This is primarily a consequence of the fact that they deal in ideas and rhetoric -not personality(though many of them had that as well). Last night I came across this by John Randolph of Roanoke:

I have said...that the people of this country, if ever they lose their liberties, will do it by sacrificing some great principle of government to temporary passion. There are certain great principles, which if they be not held inviolate, at all seasons, our liberty is gone. If we give them up, it is perfectly immaterial what is the character of our sovereign; whether he be King or President, elective or hereditary-it is perfectly immaterial what is his character-we shall be slaves-it is not an elective government which will preserve us.

Reading this stopped me in my tracks and left me to wonder, is that we are up against. Are we sacrificing some great principle to temporary passion and if so, will that leave us enslaved? Certainly the debate has been framed this way by some, mostly conservative republican, members of congress. But they are joined in their opposition by others, mostly liberal democrat. The democrat argument relies on the premise that Main St should not bail out Wall St. In this construction, the former represents the average American worker who does his job, pays his bills, etc.. While the latter represents everything that is wrong with capitalism, mainly a class of folks who only draw from the collective wealth without adding to it. This class is attacked as if they were the money-changers in the temple of America. This is an attack that works. See as evidence the massive outpouring of letters and calls to members of congress, letters to the editor, and doubtless thousands of blogposts decrying the whole bailout as welfare for the rich.

So in opposing the bailout, we would seem to be correct regardless of which approach we find more appealing. I have a fundamental mistrust of any arguments that invoke fairness (they are usually followed by a request to take something away from you and give it to someone else); but I would be comfortable casting my lot with Randolph and imagining my opposition demonstrates a deep commitment to principle.

So why am I so uneasy about denouncing the bailout?

In his column on realclearmarkets.com, economics writer Robert Samuelson sums it up nicely:

To Treasury Secretary Hank Paulson and Federal Reserve Chairman Ben Bernanke, this financial breakdown now threatens the real economy. Companies depend on bank borrowings and sales of commercial paper (in effect, short-term bonds) to conduct everyday business -- to buy inventories, to pay suppliers and workers before cash arrives from sales. Credit markets were freezing, Paulson and Bernanke decided. Panicky investors were shifting from commercial paper to Treasury bills; banks weren't lending to each other. If it continued, consumers and firms wouldn't get essential credit.


If you reject that conclusion, then the whole crisis has been a contrived farce. Some economists do; they note that downturns always involve losses and disruptions. This one isn't so different. But many economists agree with Paulson and Bernanke. "If we can't calm down short-term credit markets, we're looking at a pretty severe recession," says Michael Mussa of the Peterson Institute for International Economics. "If businesses can't roll over their short-term debt, [they] ask where can we cut back" -- firing workers, reducing spending -- "to avoid bankruptcy."

So there you have it, do we do nothing and risk harm to the real economy (this is the place most of us live)?

To those that oppose the bailout on principle, one can only answer that if Paulson and others are right, will principle heat our homes, feed our children? I know, I know, to paraphrase Benjamin Franklin you can't sacrifice liberty for security, or you don't deserve either. But as a purely practical matter what are we to do if the economy grinds to a halt and massive unemployment is the result?

To those that oppose the bailout in order to punish Wall St. , I would say that you shouldn't swallow poison and expect your enemy to die. It just may be the case that by not bailing out Wall St. we ultimately harm Main St. Perhaps an undesirable, but unavoidable, consequence of providing an environment in which the average American is free to secure his own material well being, is that we have to provide help to those that clearly don't deserve it.

Going forward there are a few things to keep in mind:

1. The stock market is not the economy. Never has been, never should be. There are still people and businesses out here adding real value to the national income, not just creating paper profits for short term personal gain.
2. Nobody knows what will happen -either things will get worse, or they won't. If they get worse, they will either be bad for a long time, or they won't. Be suspicious of anyone that has ready predictions about the future.
3. Everyone should continue to monitor what is going on, read as much as you can (note that I said read, not watch cable). Think about your views and try to make the case for them and against them. Doing this should make thinking about the current circumstance much clearer, which should lead to a better outcome.
4. Always reserve the right to change your mind as circumstances change. Not doing so is extremely dangerous.

Anyway, that is where I am at on the whole thing. Of course, I could be totally wrong, but I doubt it.