Health insurance

miller's confusion about health insurance is understandable, because with modern medical technology, health insurance makes absolutely no sense.

The rational purpose of insurance is to allow people to switch a bet from the side they cannot afford to lose (or if society cannot afford them losing) to the side they can afford to lose, even if the expected value of switching sides is technically lower.

Here's a bet: you can take the A or B side of it. A pays B \$1. B flips a fair coin 20 times; if it comes up all heads, B pays A \$1,000,000. If you go by pure expected value, you want to take B's side of the bet, since the probability that B has to pay \$1,000,000 is 1/2²⁰, or 1/1,048,576. In the long run, B wins \$1 1,048,575 times, and loses \$1,000,000 once; thus his expected value for each bet is \$48,575/1,048,576 or about \$0.046.

Here's the rub: if you take B's side and lose, and you don't have \$1,000,000 in your pocket right now, you die.

This is why insurance companies exist: An insurance company does have \$1,000,000 in its pocket, so it can take the B side of the bet. You do not have \$1,000,000 in your pocket, and you (presumably) don't want to take a 1/1,048,576 chance of dying, certainly not for less than a nickel, so you take the A side of the bet and pay \$1 to the insurance company.

Even worse, it may be that if B doesn't have \$1,000,000, someone else will die. The state, then, requires that you take the A side of the bet, or convince the state that you really do have \$1,000,000.

Hence, the state requires, and I happily comply, that I buy auto insurance. I'm a very good driver, but even the best driver makes mistakes, and it's a matter of chance whether those mistakes might lead to a large liability. I also have a high deductible, because I can afford to lose \$1,000; it would hurt, but it wouldn't be a catastrophe, and I'm a good enough driver that the probability that I'll cause an accident, for which I would pay at most \$1,000, is low enough that my expected value of betting that I will not have an accident is higher than betting that I will.

The general rule for buying insurance is: if you can afford to "lose the bet," don't buy insurance. If you cannot afford to lose the bet, buy the insurance.

Thus I never pay for extended warranties, which are just insurance bets. I can replace my phone, my computer, my printer, etc., and the money I save by not buying insurance more than pays for the replacement costs.

On the other hand, I cannot afford the medical bills of someone I might seriously injure in a car accident, so I have auto insurance. When I owned a house, I could not afford for it to burn down and leave me homeless, bankrupt, and destitute, so I paid for fire insurance. I also paid extra for earthquake and flood insurance.

It makes a certain degree of sense, even to this communist*, for insurance to be private. Private, profit-maximizing businesses have an incentive to set prices based on an accurate calculation of risk. If one company sets premiums too high, other insurance companies, who calculate risk more accurately, will take your customers with a lower price. If one company sets premiums too low, it will go bankrupt. There's an element of moral hazard, too; an insurance company has a strong incentive to renege on contracts, and it has an incentive to charge too-low premiums to insure against events that are rare not only for the individual, but in the aggregate (e.g. earthquakes). Hence insurance companies are (usually) heavily regulated by the state.

*I don't believe it's necessary for insurance to be private.

To sum up: Private insurance is the appropriate model when:

• The risk to any individual is low
• The cost of "losing" is too high for a typical individual to pay
• The risk can be accurately calculated
• There is little, if any, ability to differentiate between individuals' risk

It used to be the case that medical care was very much an insurance-like proposition. Most injuries, illness, or disease were either fatal (and hence not worth insuring against), or immediately and expensively treatable. More importantly, it was impossible to predict whether any individual would get injured or sick. Medical insurance really was, like all other forms of insurance, a way of socializing risk.

However, modern medicine transformed many illnesses, especially geriatric illnesses, from fatal to chronically treatable at substantial expense. Furthermore, it made these expenses predictable. Now, almost everyone will eventually have an expensive chronic illness, if for no other reason than old age. Because old age is known to be expensive and virtually certain, we have Medicare, which socializes not risk (since there's no risk in a near-certainty) but cost.

The situation is a little different for younger people.

With modern medicine, everyone, including each individual him- or herself, knows which individuals are at low risk, and which are at high risk, of developing a chronic, expensive illness. Even if there were perfect competition in the insurance industry, there would be price discrimination between low- and high-risk individuals. Low risk individuals do not want to pay more to subsidize high-risk individuals, and high-risk individuals, because everyone knows they're going to lose the expensive bet, have to pay nearly the full (and very expensive) cost of their treatment to "switch sides" of the bet.

Furthermore, the market for medical care developed very weirdly; most routine medical care was fee for service, and rare, expensive medical care was covered by private insurance. There was no such thing as an expensive chronic condition. (Even diabetes was relatively inexpensive to treat chronically, and the complications, when they inevitably arose even with treatment, untreatably fatal.) Today, however, expensive chronic medical conditions, especially cancer (if you have cancer once, you have a much higher risk of developing cancer again) don't fall into either category. Furthermore, because, as a society, we mandate that hospitals have to provide emergency treatment to everyone without regard to ability to pay, and we don't give them enough tax money to cover expenses, they have to charge someone more. The insurance companies have enough power to pay, so they shift the costs to people without insurance who need even routine medical care. Demand for medical care is relatively price inelastic: an increase in the cost of medical care does not cause a proportionate decline in the demand for care. This means that private, competitive producers of medical care have a market incentive to increase costs high enough to price many people out of the market, especially in a society with a lot of wealth and income inequality.

The problem we need to solve in medical care is no longer how to social risk, but whether and how to socialize costs. Like any other attempt to socialize costs, some people will be net payers, and some will be net beneficiaries. This is true even of costs and risks socialized through the private sector: Because I am a good driver, I have paid far more in liability insurance than liabilities I have caused others: in 30 years of driving, for which I've paid conservatively about \$20,000 in liability insurance payments, I've had one accident where I was at fault, with about \$2,000 of liability, and I've received about \$2,100 for the one accident where the other driver was at fault.

There are basically three choices to socializing anything. First, don't socialize costs. If a poor person has an expensive chronic condition, we don't treat it, and that person dies or lives in pain. Second, we socialize costs through taxation, as in Medicare. Third, we socialize costs through the private sector, kind of as we socialize risk with auto insurance.

The PPACA (a.k.a. Obamacare), like its template in Massachusetts (a.k.a. Romneycare), is an attempt to socialize medical care costs through the private sector, by compelling people to buy insurance and compelling insurance companies to insure everyone equally without regard to individual risk.

The alternative is to socialize costs through taxation. Everyone pays some sort of tax, and the government pays for all medical care, either directly by also socializing the production of medical care, or indirectly by paying private producers.

I'll talk about the relative merits of these strategies, and why the PPACA is deeply problematic, in another post.

Decision and choice

It's a bird! It's a plane! Whatever it is, the point whooshes over Tyler Cowen's head.

Let’s say it’s 2027 and I’ve just turned 65. I fill out a Medicare application on-line and opt for a plan with superior heart coverage (my father died of a heart attack), not too much knee coverage and physical therapy (my job doesn’t require heavy lifting), no cancer heroics (my mother turned them down and I wish to follow her example), and lots of long-term disability.

Is that so terrible an approach? Is it obviously worse than having the Medicare Advisory Board make all of those choices for me?

Yes, it's a terrible approach. Cowen conflates decision and choice. It is definitely possible (and probably true) that people can rationally decide between preferred forms of treatment. The problem is that, unlike Cowen, most people are not a tenured university professor with a guaranteed income in retirement. They can't choose anything. In a similar sense, I might be able to rationally decide to colonize Europa rather than Titan, but I cannot choose between the two: I lack the ability to do either. The whole point of Medicare is to provide medical treatment for people without the means to make the choice, whether or not they can rationally make the underlying decision.

If Cowen wants to say that people without the means to make the choice shouldn't get medical care in their old age, let him say so directly, and we can debate the issue on the merits.

Abortion and birth control

The Coming Birth Control Battle

Could prescription birth control—whether the pill, an IUD, or a diaphragm—soon be free of cost for most American women?

Polls suggest the majority of Americans would support such a policy. But the Daily Beast has learned that many conservative activists, who spent most of their energies during the health-care reform fight battling to win abortion restrictions and abstinence-education funding, are just waking up to the possibility that the new health care law could require employers and insurance companies to offer contraceptives, along with other commonly prescribed medications, without charging any co-pay. Now the Heritage Foundation and the National Abstinence Education Association say that, like the U.S. Conference of Catholic Bishops, they oppose implementation of the new provisions.

(via Brad DeLong)

Point/Counterpoint

Point/Counterpoint, a humorous summary of the health-care debate.

(via a reader)

Will the health care bill destroy the conservative movement?

Nathan Newman thinks the health care bill will destroy the conservative movement "[b]ecause trying to repeal it will tear the movement apart and it will be the platform to destroy conservative anti-tax politics."

Nonsense.

The Randian/Soylent Green faction of the capitalist ruling class hated social security too, and that didn't destroy their movement. The Randian faction doesn't need either social security or universal health care to go away, they need it to not expand, and to the extent that it does expand, the expansion needs to be under the direct control of the capitalists, not the government. They're not sadistic, they're just indifferent to the well-being of the people.

Their primary goal is to preserve and enhance their power and privilege as a ruling class. The health care bill as it exists today does little to diminish their power and privilege, and may (as Robert Reich notes) actually enhance it. Their goal, which is largely complete, is to destroy Keynesian economics (and its advocates in the Democratic party), which supports the economic demand of the working and middle classes.

Liberals and progressives — even smart ones — are just as capable of wishful, magical thinking as any Christian.

Krugman and health care

Paul Krugman considers health care reform "a disappointing, flawed bill — and that it’s also a progressive triumph."

Krugman is correct at least that we should pass the bill — it's better than nothing, and a smaller-than-expected gain is acceptable in a sense that a smaller-than-expected loss (e.g. the 2006 Iraq war funding debacle) never is. But other than that, it's hardly a progressive "triumph"; it shows merely that progressives are not losing as quickly as they might. It's the fourth quarter, we're down by 14, and we settled for a field goal. Yeah, I won't give up the 3 points, but this is not how to win the game.

The problem isn't that the Democrats tried and failed to get real health care reform, the problem isn't even that they blinked in a tough situation. The problem is that they did not fight. The Democrats didn't get the health care reform they won, they got the health care "reform" the Republican party let them have, "reform" that consolidates the power of the capitalist class to control health care and use it, like profit, rent and interest, to extract surplus value from the population.

Obama messes up on health care, big time

Obama messes up on health care, big time:

What was the point of signaling, right at this crucial moment, that he’s willing to give away the public plan? Let alone doing it at the very moment that he was making such a good case for it?

Maybe because Obama's corporate masters don't want him to enact a public plan, nor do they even want him to use the idea as leverage. I'm just saying.

The public option

Robert Reich (Bill Clinton's Secretary of Labor) gives us a bunch of good reasons to keep the public option part of health care reform. (You should read his blog to monitor both the sensibility and the ineffectuality of reformist capitalism.)

It's clearly in the interests of the people to have a public option. However it's not in the interests of the American Medical Association (i.e. physicians), Big Pharma, and the biggest insurance companies. Shocking news, I know.

It's in the interests of physicians to have tens of millions of working people locked out of health care. Without a public option health insurance will simply be too expensive for these people; any "mandates" that everyone must buy health insurance (similar to auto insurance mandates) will get watered down or ignored completely. A guy making $7.25/hour is not going to drop two weeks' pay on a monthly health insurance premium, whether he "has to" or not. A subsidized public option will put pressure the health care industry to lower costs and lower profits.

Theoretically, under capitalism, you would expect tens of millions of people who want health care and are willing and able to pay for it to constitute an untapped market: demand creates supply. Imperialist capitalism (the dominance of financial and monopoly capitalists) however, is as much or more against actual free market economics as the most doctrinaire Marxist. Truly free market economics brings the exchange value of every commodity, including health care, into equilibrium with its true cost, either by lowering the exchange value to the cost, or by raising the cost to the exchange value.

A truly free market is not in the interest of any owner of capital, except insofar as he wants his competitors subject to free markets. But when capitalists of some industry do not face competition, they have zero interest in free markets. Interests always trump "principles".

If some commodity is relatively scarce, i.e. demand exceeds supply, then the supplier can demand a price (exchange value) much higher than the cost, generating profits. Under free market economics, this gives other people an incentive to allocate more capital and labor to supplying that commodity, either lowering its price or raising its cost, thus reducing profits.

However, if a capitalist can somehow maintain the relative scarcity, by externally restricting the supply, then higher prices and higher profits can be maintained indefinitely. Relative scarcity, though, never distributes the scarcity evenly; instead, some people get a lot and others get nothing. If health care were distributed to everyone, then the price of health care would fall to what the poorest people were willing to pay (or what the people were willing to pay in taxes to provide the poorest with health care). There would no longer be a scarcity to prop up higher prices and higher profits. The capitalists who own the government will make damn sure this scarcity remains. They are no longer naive, as they were when Lyndon Johnson created Medicare — they know they can just buy more congressmen and senators, and the profits are so huge that money is no object — and they are facing no threat of revolution or severe civil unrest.

One ironic thing about the health care debate is that ordinary physicians themselves are participating in maintaining scarcity to prop up their own individual profits. But what they do not realize is that they work for a living (technically physicians are petty capitalists, since they necessarily own their own training, but petty capitalists face the same pressures as ordinary workers, and end up in the same place), and they require enormous amounts of external capital to work: not just their own training, but the equipment they use directly, drug development and manufacturing, and medical technology in general. As the computer programmers have discovered, the owners of the financial capital underlying all of this investment will eventually appropriate the physicians' surplus labor, either directly by lowering their pay or indirectly by raising the cost of education, insurance premiums, use of medical equipment, etc. They may be the last to go, but they will go: medicine isn't that difficult, and there are enough people desperate for even the lowest rung in the professional middle class to do the work for the lowest prices.

We will not see anything resembling universal health care from the Obama administration. We will see at best only a few token reforms. And when the next Republican administration and congress is elected, the physicians will be the next to get the shaft. Don't say I didn't warn you.