Economism and Health Care

By James Kwak

A core feature of competitive markets, according to the basic model, is that they allocate goods to the people or companies that are willing to pay the most for them. In theory, and in many situations, this is a good thing: If I am willing to pay $1,000 for a custom portrait of my (daughter’s) dog, and you are only willing to pay $1 for it, then aggregate satisfaction is likely to be higher if I get the portrait. But not always: If I am willing to pay $10 for a turkey sandwich, but you are only willing to pay $1 because you only have $1, and have no borrowing capacity, then society may very well be better off if you get the sandwich. Yet in an ordinary, healthy market, I get the sandwich.

This problem is acutely apparent when it comes to health care. People place a high value on not dying, but when it comes to the allocation of medical treatment, they can’t bid more than their income allows. The obvious result is that markets deliver unnecessary procedures to rich people while denying essential care to poor people—because that’s what markets do. Obamacare attempted (with mixed success) to mitigate this problem. The Trump administration is rhetorically committed to deregulating health insurance; the question is whether they are willing to accept the political consequences of pricing millions of people out of not dying.

This is the topic of my new guest post, “Health Care and John D. Rockefeller’s Dog,” on Econbrowser (a fabulous economics blog, by the way, written by Menzie Chinn and James Hamilton). For more, head on over there.

21 thoughts on “Economism and Health Care

  1. This may have haopened to me. I needed gall bladder surgery last week, Just saw the bill sent to insurance: $98k. I’ll pay $2k (max out of pocket.) But the number of different tests performed were legion.

  2. Even by the principles of economism, insurance is not the right tool to pay for healthcare, so why is the US using it for that and expecting good results?

    Insurance is a service for amortising the risk of random events. The job of an insurer is to take in all information and calculate the risk premium accurately and precisely. The value for the customer is they pay (a little over) the average risk, not a random loss that may be too high for them to afford. Insurance is a valuable financial service if you have a ship or a satellite to cover, but it has nothing to do with healthcare. Healthcare is not random.

    Healthcare is only random if everyone buys lifelong coverage anonymously at birth. In that case there’s no risk assessment and the insurer is adding no value, at least not as an insurer. They’re a pension fund that collects contributions early in life and pays out benefits later in life, and they’re a lottery where everyone buys the same ticket but gets randomly different payoffs depending on whether they get ill. A useful redistribution service, but not insurance.

    If you wanted to apply insurance to healthcare it would look like this: You would feed all available clinical information about a specific person – age, genetic factors, current diagnosis, previous conditions, etc. into a risk model to predict the cost of care over a short period. For example two years, or an upcoming hospital admission. Of course the premium would be high for people who have serious conditions, but the job of insurance is to calculate the specific risk accurately.

    This may already be happening because it’s what a hospital would do to insure themselves of the variable (to them) cost of admitting a patient under the bundled payments system. The hospital may charge the same “bundled payment” of say $5,000 to every patient for a kind of procedure, but it helps the hospital to know if John Doe is likely to cost them $4,000 or $200,000 due to complications. Then the hospital can take insurance, or set money aside if it’s large enough.

    That’s what insurance is for. Assessing and amortising specific risk. What the public call health insurance is not insurance, unless they only want cover for accidents.

    Disclaimer: I work for a large healthcare technology company, but the views expressed here are my own.

  3. @Pavlos Papageorgiou. I find your post very intelligent and informative. I do not mean this following post to be a critique, but rather a consideration at a different magnitude and a distinctive dimension in what is at risk (defined in social terms and not from a finance textbook). As such, your entry inspired an elaboration that I hope is in addition to your post, not in place of it. Regards to you, Bruce
    Amortization (or amortisation; see spelling differences) is the process of reducing, or accounting for, an amount (usually a financial debt) over a period according to a plan.
    The word comes from Middle English amortisen to kill, alienate in mortmain, from Anglo-French amorteser, alteration of amortir, from Vulgar Latin admortire “to kill”, from Latin ad- and mort-, “death”.
    80% of the population is generally healthy at any given time, and the 80/20 pyramid of the Pareto principle (also known as the 80/20 rule) is a consideration in assessing health risks as opposed to relative market cost risk amortization to a for profit industry. Out of the 20% it is estimated that 10% are chronic and raise the most per capita cost to manage their health status. In terms of profits, amortization prioritizes insurance industry survival over the bulk patient interest (self-rationalizing; typical rational choice blind model) and this is categorically a cost/medical ratio (or rationing: as profit to expense permits). Patient categories are depreciated in the system according to high risk against capital expenditures, while the “cost” of actual assets…the revenue streaming infrastructure of medical care technology…is amortising the risk of investment capital that are presently commanding great magnitudes of return. (It is these 10% that most need the help from the rest of the population, yet these have also been the target population for insurance companies to evade and avoid.) Actual HEALTH RISK as environmental, nutritional, educational and economic factors are not the risk measured, either before or after the fact. If we had a system of risk measurement a good deal of corporate america would need reform to correct the cancer causing, anxiety producing, toxic exposures that market profits ignore; and in that way kick the can down the road;…push it into the future…and generally consider externalizations that are not their direct responsibility or concern.
    My understanding of insurance is not a business proposition as its first order of concern. It is a distribution of risk cost to the population as a service industry that can then determine a collective financial pool to distribute the cost across the economy where people are considered the real assets. In Michael Moore’s “SICKO” we hear under testimony in Congress, the CEO of United Health denying service to cancer patients because their interest and service obligations (they say self-servingly) is to their stock share holders; and the bottom line. So there is a distinction to be made in defining risk in the health care delivery to the public being served, or to the health care markets that mediate (manage) the primary finances that support the current medical economic systemic with all it’s perverted incentives and morally hazardous (political) market terrain.
    Current immediate concern:
    “A partial repeal of the ACA, striking the law’s premium subsidies, mandate, and Medicaid expansion, would raise the number of uninsured by about 22 million. We know from experience that the regulatory structure that would remain would cause the nongroup markets in most states to collapse, depriving perhaps an additional 6 to 7 million Americans of coverage…”… Friday, January 20, 2017 State Experiences Show Why Repealing the ACA’s Premium Subsidies and Individual Mandate Would Cripple Individual Health Insurance Markets
    By Justin Giovannelli and Kevin Lucia.
    WHAT RISK IS BEING MEASURED? We are operating in another cosmology where too big to fail not only alters incentives, but perverts the actual perception of the reality we seek to assure…and insure.

    “The average American family of four incurs an annual healthcare insurance tab of $23,000. In many cases, this astronomical sum doesn’t afford them nearly enough coverage for emergency medical care. That’s just one of the startling realities presented in Fix It: Healthcare at the Tipping Point, a distressing examination of the country’s badly broken healthcare system.”
    “From grain to poultry to vegetables, less than a handful of companies control the production of the foods we eat. Their too-big-to-fail monopoly comes at a disastrous price. The film delves into big agriculture’s operational practices, reliance on dangerous pesticides and other chemicals, cost-cutting measures, unprecedented legal and political lobbying power, and insidious marketing tactics.”
    Always noteworthy: SICKO by Michael Moore
    Sicko | Watch Documentary Online for Free

  5. Man all I see is a nation that is rapidly becoming to sick to tend (or logically insure itself). As the resources, time, and energy required to maintain a country’s health go above a certain percentage, like 2% of gdp, you become a backwardian society. (well understood by the few, not all by the masses).

    The living longer vs cost, argument of success, is the great illusion. Because its been proved older people have no sense, (money yes, sense, no) once the war on human pain is lost, the nature of the human being no longer cares about anything except reducing the discomfort at any cost. Now this loss can occur as early as 40, but the majority magic number once again is 71, by then there is no longer any doubt, or any question about winning this war, its now a question of the addictions of a daily survival of least misery.

    Enter satan and his ends to his means.

    Which is why we need to retire judges, lawmakers, and a few others at this critical age, because once not prosecutable, you no longer have the best interests of a nation within you, you have the best interests of your own like minded thinkers in mind over all else. And they, on average and in majority, have lost their moral sense.
    A nation without a moral compass, controled financially by the few, at the expense of the many, is the recipe for human disaster, we are well past this point of no return. A better educated, younger judiciary was the only answer.
    A race, cemented in failure, of the human kind, is what has been achieved, I would feel sorry for it, if I wasn’t so disturbed about its ubiquitousness.

  6. “Though some forms of group “managed care” did exist prior to the 1970s, they came about chiefly through the influence of U.S. President Richard Nixon and his friend Edgar Kaiser. In discussion in the White House on February 17, 1971, Nixon expressed his support for the essential philosophy of the HMO, which John Ehrlichman explained thus: “All the incentives are toward less medical care, because the less care they give them, the more money they make.”

  7. Oddly enough Bruce, the Germans were well aware of dental issues in the 30’s where as the U.S. was and still is numbed into a deep denial of these same issues,( hence the reasons why people go to war) all so they can make more money?
    Humm, make more money at the expense of your fellow citizens health and well being?
    Why am I not understanding this logic, and why am I understanding the rest of the world needing to start world wars in order to get through to the minds of people of such complete and utter denial.
    Once a people will no longer discuss an issue,(the private side of the Fed as the best example) what does that define those people as? Besides morally insignificant. We need more words for Webster.

  8. In addition to James Kwak’s reference to Jacob Hacker’s The Great Risk Shift, another work by the same author is also a valuable resource.
    The Divided Welfare State: The Battle over Public and Private Social Benefits in the United States
    (also by Jacob S. Hacker)
    “American social spending is actually as high as spending is in many European nations. What is truly distinctive is that so many social welfare duties are handled not by the state, but by the private sector with government support.” From the Editorial Review
    This goes directly in hand with James’ statement on public trust and the essential ingredients for corruption deriving from conflicts of interest:
    “The problem is corruption: the potential for elected officials to take actions that benefit themselves, their family, their friends, or their business associates rather than the country as a whole.”
    which he paraphrased in emphasis:
    “The point I wanted to make in my Atlantic column today, however, is that this is just the most obvious and egregious example of the larger problem of corruption: government officials acting in the interests of themselves, their family and friends, or their business associates.”
    All of which seems a bit of “politicism” in the economics of political crony capitalism.

  9. Off Center: The Republican Revolution and the Erosion of American Democracy ,
    by Professor Jacob S. Hacker

  10. Just stopping the health sector from abusing those uninsured that do not have powerful insurance companies negotiating the costs of medicines and medical services on their behalf, could go a long way to solve health care problems.

    For instance, no hospital should be able to charge more than 20% higher for any of its services than what it charges the lowest paying insurance company.

  11. Per, adopting trench warfare to fight abuse of powerful health insurance companies, is like drying out a hyde after it becomes jerky.

    “Employment of healthcare occupations is projected to
    grow 19 percent from 2014 to 2024, much faster than the average for all occupations, adding about 2.3
    million new jobs. Healthcare occupations will add more jobs than any other group of occupations.
    This growth is expected due to an aging population and because federal health insurance reform should increase the number of individuals who have access to health insurance.”

  13. The growth in health care occupations does not mean that the goal of having universal education – everyone in USA having the equivalent of a 2 year nursing degree (if their IQ allows) – is being reached. And without universal education, there is no possibility for this elusive “ideal” in USA – universal “health care”.

    Thank you, Pavlos, for the “insurance” discussion of “facts”. How much “profit” and who gets it….? Sorry if I missed that part of it.

    Seems to me that this statistic should be of great concern in “for profit” car repair shops for skin suits :-)

    Yup, “IT” is a problem, especially because the internet does not provide the most recent information – temporal timeline of reality – as the first article when you google “Death from Medical Mistakes”. This meta-data information collection problem is deliberate because it helps hide the problems with the prevailing “theory” of the day not matching the reality of human existence – like how industrial pollution (throw GMO stuff like high fructose corn syrup in the category of pollution people have no protection against the “government’s” protection granted to corps and their poison), and like how labor conditions affect “health” (work them to death).

    Obamacare is rob Peter to pay Paul and newly minted “pain” management for uninsured became a heroin epidemic after the payments from “peter” run out for “paul”.

    Hey, but “Mission Accomplished” for filling up CIA poppy coffers?

    Gonna take some time, but getting “government” out of my face which is only there to HURT me when it comes to health care, OBVIOUSLY, is still the mission. But my gene pool is being called “racist” because we cleaned it up, willingly among the people, btw, over a 1000 years ago.

    How about some creative deals? How about letting the 71+ year olds have the legal right to bequeath their Social Security/Health Care benefits ……

    paid into (stolen from honest labor paychecks, it seems, was the truth of that!)

    since they were 15 years old and the “economy” in USA grew into the TRILLIONS,

    so there has to be some profit from “investments” made by “government” with our “taxes” – right?

    …… to whom they choose in exchange for committing suicide?

    The way it works now is someone in Homeland Security picks you out and picks you off and what you were gonna cost “they system” is given to – well in my Mom’s case – probably Cheney’s mechanical heart…and my Nephew’s death…? Still trying to find who is getting that….? Any ideas, SKUNK?

    That’s fair, right? Suicide in exchange for securing who gets what you were supposed to get…?

  14. Well I guess when as a kid you are required to carry the baggage___, the scars, the trauma and the drama, then as an adult forced to go out beyond Hercules 13 laborious chores, battle satan, track down securities, fight the gvt war on women, gvt tyranny, gvt denial, and overwhelm jeckle and hyde,….. to the victor go the spoils I always say.

    Was your nephew capable of accomplishing such things or was the suicide card the easy way out? We need all the help we can get around here running as late and on empty as we are.

  15. Health care (or insurance) is not automatically a
    commodity, despite right-wing insistence to the
    contrary. In a democratic economy, we get to decide
    what is a commodity, and what is not. Virtually
    every other first-world country has decided that
    it is not, and they are all doing better than
    we are. The economic experiments are over, the
    results are in.

    Because some people don’t get this, imagine that
    a TV were purchased they way we sell health
    insurance. You couldn’t buy it, you’d only
    get to make periodic payments. Those payments
    would vary, in ways you couldn’t predict. Under
    certain ambiguous circumstances your TV would
    stop working. Even when it worked, it would
    only get certain channels, and you might have
    to pay extra for some of them. The rules for payment
    and performance would change each year, at the
    whim of the seller. No sensible person would
    buy a TV under these circumstances, and this
    does not even get into the issue that being
    without a TV is not like having an untreated
    massive disability, or dying of a treatable

    I think this is the basic question in
    economic behavioralism. Why are so many people
    willing to complain endlessly about government
    abusing them, but they have no problem with
    being abused by large insurance companies
    engaged in an anti-consumer conspiracy?

  16. Hey Mikel, I think you hit on a vein, of insanity. Thanks for the info. No sarc either, its straight up no end crazy TV.

  17. No Mikel, not at the “whim of the seller”, the ACA has Minimum Loss Ratio provisions which allow state regulators to regulate the whims.

  18. Health care complication arise when completely corrupted institutions like Aetna get involved with……wait for it… care.

    Excuse my French here, but F*ck Aetna.

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