Nate Silver is Dead Wrong on Health Care

Submitted by Conn Carroll on Wed, 06/24/2009 - 11:18

First let me say I'm a huge Nate Silver fan ... athough more for his baseball writings than for his work at 538.com. He's got a sharp mind that is well applied at picking apart polls, but his partisan blinders fail him when it comes to public policy. His latest on health care is a perfect case in point, including his jumping off point which is a complete misreading of George Will's recent column on the public plan. Silver quotes Will:

Assurances that the government plan would play by the rules that private insurers play by are implausible. Government is incapable of behaving like market-disciplined private insurers. Competition from the public option must be unfair because government does not need to make a profit and has enormous pricing and negotiating powers. Besides, unless the point of a government plan is to be cheaper, it is pointless: If the public option conforms to the imperatives that regulations and competition impose on private insurers, there is no reason for it.

Silver then translates: "Will's argument is apparently this: The government does not need to make a profit and will have greater leverage with providers; therefore it will deliver the same service for less money. That's unfair!"

Um, no. Here is a better translation: Since a public plan will have access to a bottomless pit of government bailouts, the prices the public plan charges consumers and the rates it reimburses health care providers at will be completely unmoored from market realities. It will cost public plan participants less, but taxpayers will end up paying a much higher tab.

Nate goes on: "I'm a big believer in the profit motive in 99 percent of all cases. If the government decided to open a non-profit hamburger stand, I doubt that it would compete successfully against Five Guys." And he later concludes: "If you've been reading me for a while, you'll know that, as compared with most self-described liberals, I'm unusually sympathetic toward the notion of the profit motive and private industry; I've defended Wall Street bankers and the AIG bonuses at various points during the financial crisis, among other things." And he has. Good for him. Like I said, I'm a fan. Nate then continues:

I think the profit motive is generally well worth it in terms of the incentives it creates to cut costs, develop new products, improve customer service, and so forth. But health insurance is not like those things.

OK. Why not? Nate explains:

Now, what's supposed to happen in the free market is that another company will come in and offer Frederick a better deal: they'll offer him the same coverage for $350 a month, accepting a smaller profit, and Frederick will happily take the deal. There are at least a couple of reasons, however, why this may not be happening in the insurance industry. The first is that Frederick might not realize he's paying $400 every month for insurance. That's because if he's like the majority of Americans, he's getting his insurance through his work, and except when the HR lady gave him a shiny brochure on his first day at the office, he's probably never thought very much about what this insurance is costing him in terms of foregone salary. This is particularly so because health insurance benefits, unlike other types of income, aren't taxed, and so Fredrick is less cognizant of them if show up on his paycheck at all. Not only, then, is the free market maxim of perfect information violated, but it's violated in such a way that creates artificial profits for the insurance industry: the government is effectively subsidizing every dollar that Frederick's company is willing to spend on his insurance benefit.

The profits the insurance industry is making, of course -- profits artificially boosted by an enormous backdoor tax subsidy -- don't seem to be buying the customer much of anything in terms of improved service or cost savings. On the contrary, health care costs are rising by as much as 9-10 percent per year, without any concomitant increase in the level of service. If JetBlue were raising the cost of its fares by 10 percent per year, they'd be out of business.

So let me get this straight: the health insurance market is failing because a huge government created back door tax subsidy is distorting the market and raising costs. I agree 100%!!! And so do most conservatives. So does Nate then advocate getting rid of this costly market distorting government subsidy? Not even close. See, Barack Obama campaigned hard against exactly that policy proposal. So Nate doesn't even consider changing it. Instead we get this:

CIGNA and Aetna have a lot of money pooled together and they've been around for awhile -- but they don't have as much money, nor have they been around as long, as the federal government. It's possible, certainly, that the profit motive in the insurance industry has driven more innovation than we're giving it credit for. But that isn't my bet, and it isn't George Will's: There's no obvious reason that the government couldn't provide more for less. And if we are wrong, we would find out soon enough: if the public option can't deliver more bang for the buck than private insurers, it wouldn't gain much market share from them, and Will will have nothing to worry about.

A couple of responses:

First, nowhere in this article does Nate explain why health insurance companies are any more greedy or incompetent than car, home, or life insurance companies. If the government is such a natural player in insurance markets, why isn't Nate advocating public plans for these insurance sectors?

Second, we have a track record for government run health plan. Its called Medicare. Its huge. Way bigger than CIGNA and Aetna combined. If low administrative costs and better leverage with providers were gonna lead to lower health care costs we would have seen them in Medicare. Instead we've seen the exact opposite: Medicare’s costs have risen far more than the costs of privately purchased care.

Finally, if passed a public plan would get tons of market share regardless of whatever "bang for the buck" it delivered. If health care providers were reimbursed at Medicare rates, U.S. employers would dump 119 million Americans off their current private health plan and into the government "option".

One doesn't have to be a crazy ideologue to look at AIG, Citibank, Freddie Mac, Fannie Mae, General Motors, and Chrysler and then question the federal governemnt's ability to administer a public plan without funding it by constantly printing money. One does have to be a blind partisan to look at Barack Obama's long held commitment to single payer health care and not believe that the public plan is just the next step to get there.

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First off

Submitted by cr on Wed, 06/24/2009 - 15:11.

Nate is definitely wrong if he's getting his burgers from Five Guys. Nate, head on over to Ray's Hell Burger.

I don't believe anyone knows where the train is heading on health care. The debate centers around all the current debates in DC. Choice is between

1. Not knowing what's going to happen, but trying something new is better than sticking with what we got.

2. Anything they do is wrong. And hey, since they now have some kind of plan, we'll finally have some kind of plan . . . that's different than their plan . . . which is better because we're not them.

Think again...

Submitted by ThinkTank on Wed, 06/24/2009 - 16:36.

First, nowhere in this article does Nate explain why health insurance companies are any more greedy or incompetent than car, home, or life insurance companies. If the government is such a natural player in insurance markets, why isn't Nate advocating public plans for these insurance sectors?

I don't think health insurance companies are greedy or incompetent. I don't think Nate does either. The problem is that the insuring health care is different in nature from other insurance types. First, there is the question of whether it is a privilege or a right; no so much with the other types of insurance. Second, the economics are different. Car, home & auto are sporadically tapped insurance arrangements--and thus more amenable to an insurance model--akin to a major medical insurance policy. Health care is one with continuous costs, and thus one in which many insurance companies making their own rules with respect to fees, coding, paperwork, etc., works against the long-term fiscal viability of the model. Also, private insurance can set coverage rules and thus alleviate the burdens of costly treatments. In brief, it is relatively more inefficient in terms of gross costs and net effect on the average health of Americans. The profit motive without the burdens of government regulation can really only achieve savings by reducing the amount of health care: e.g., rationing. There are no other "clever" ways or "advanced" technologies to contain costs for an aging population.

Second, we have a track record for government run health plan. Its called Medicare. Its huge. Way bigger than CIGNA and Aetna combined. If low administrative costs and better leverage with providers were gonna lead to lower health care costs we would have seen them in Medicare. Instead we've seen the exact opposite: Medicare’s costs have risen far more than the costs of privately purchased care.

Considering the populations served by Medicare (and Medicaid), this is probably not a surprise. Anderson's article, to which you link, doesn't seem to control for this demographic factor. Perhaps I am missing something, but I don't think so.

Free markets in health insurance can't work

Submitted by jhn on Wed, 06/24/2009 - 17:25.

Your analysis is correct. I doubt that private companies will be able to compete with the public option. But I think that's great. There will always be gold-plated treatment for those who can afford it, but I would love nothing more than the socialization of medicine. I say this as a former libertarian who studied the economics of insurance markets. Health insurance is not a product or a service to be bought and sold like toothpaste. It has features that justify special consideration.

* Adverse selection ensures that health insurance, in a totally free market, will be not be affordable for people at high risk of illness. I.e., if a million dollar boat has an 80% chance of sinking, insurance will cost $800,000. As medicine improves, we are more likely to have accurate pictures of the odds of different people getting sick. Thus, their "insurance" will become less insurancey and more like prepayment.

* The entire basis of health insurance is that healthy people pay for sick people. Healthy people cannot be permitted to opt out of that, purchasing their own insurance from the many competitors that would be happy to take their business. Regulation is needed to avoid this. We have it today in terms of tax breaks for employer plans (which average together many demographics).

* It really bears repeating: health insurance only works when healthy people have no choice but to pay artificially inflated rates, to subsidize older people and the sick. As soon as you give healthy people too much choice, the system collapses. Freedom of choice in health care is antithetical to justice. No one wants to say it, but many health care economists believe it.

* In other forms of insurance, it is just for those at high risk to pay more. Risky drivers should pay more. Etc. But with health insurance, it is not just that different people pay different rates (except for smokers, drinkers, etc). Someone who is genetically at high risk of cancer should not pay more than someone who is not. The costs should be spread around society. This is a fundamental value, you either agree with it or disagree with it. While it is not subject to "debate" it is fairly easy to convince people of the position with a few sob stories.

It is better to just have a government plan than a hyper-regulated "market" subject to endless gamesmanship. I'd rather deal with a lazy and somewhat incompetent bureaucracy than one actively hostile to giving me treatment. Anyway, I was in the military and I know that the government can do some things damn well.

Well put, and can I add

Submitted by NextRightNando on Wed, 06/24/2009 - 17:49.

Well put, and can I add that there are also real problems with the idea of a free market for health care itself. In the free market model the customer shops around, makes an informed decision, and delays gratification if he can't find the product at the price he wants. None of those apply in a case where you've just been told that you've got a rare and agressive cancer.

Car Insurance

Submitted by kerena on Wed, 06/24/2009 - 20:59.

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Not much to add...

Submitted by goodepic on Thu, 06/25/2009 - 18:52.

To the very nicely laid out points from jhn and NextRightNando. Just that the fact that this sort of argument makes it onto a website that can make justified claims to be part of the forward thinking end of the conservative movement is a big clue as to what's wrong with conservatism in America right now. There are lots of places where you can have healthy debate between conservatives and liberals (and libertarians) about economic issues. Health care is not one of them. If you've spent any time studying what real health care economists have to say, and not just ideological hacks writing propoganda, then you know there is no smart way, via economic arguments, to support the current GOP line on health care, or anything resembling what could be inferred as what's being advocated for in this post.

You can make a moral argument that health care is not a right and that your belief that government regulation is always wrong trumps any sort of argument about equity in access of American citizens to health care or any desire to dampen the explosive growth in expenses via a more equitable and science backed version of rationing instead of the current version of rationing (which leads not only to increasing levels of uninsured citizens but also contributes strongly to the explosive growth in costs). But putting the blinders on and pretending that health care is toothpaste or life insurance is the only way to make an argument even slightly resembling what's in this post.

Sad...

In response to jhn, *

Submitted by ncright on Sun, 06/28/2009 - 23:19.

In response to jhn,

***If a boat had an 80% "chance" of sinking, insurable uncertainty exists by definition. You seem to have missed some fundamental points on the economics underlying insurance. Further, if our diagnostic capabilities allowed us to isolate risk factors with that degree of precision, do you trust a system in which decisions are detached from consequences to exploit those informational advantages to the benefit of the patients? (That criticism applies to both a proposed government option as well as the tax favored treatment of employer provided healthcare.) Do you trust that a panel of politically connected bureaucrats would discover said factors more effectively than insurance companies attempting to underwrite risk and patients maintaining their health? You're predicating an argument for universal healthcare on a feature (better information) of a system more market based than any other.

***Not true. The entire basis for insurance (health, life, car, home) is that people can obtain the same expected outcome with lower risk on average. I can't tell if you favor employer based plans because they "average together many demographics" but the fact is that many employers do not provide insurance due to that arrangement. Should a small business owner that is struggling to make payroll feel compelled to provide insurance to a workforce of 10 when 3 or 4 of those employees have 20 to 30 years of history of poor lifestyle choices? (smoking, no exercise, poor diet, etc.)

***Again, not true. Taking away choice removes incentives for information discovery and sound decision making, sewing the seeds of a true systematic collapse.

***To address the problem, someone is going to have to "pay more". The question is what "pay more" means. Someone at genetic risk of cancer may be able to mitigate their otherwise higher premium through proactive measures. If we are going to guarantee "access" as a right, why focus on the healthy? Why wouldn't it be more incumbent on people under 6' tall to pick up the slack? Or people who spend too much time on the internet? Forcing the "low risk" to subsidize the "high risk" becomes a completely arbitrary distinction, once one embraces the "fundamental value" that costs should be spread around society. We should simply stop calling it insurance at that point, no?

***A government controlled entity would be less subject to "endless gamesmanship" than a regulated market?

15% of our GDP goes towards health care.

Submitted by Knackers on Tue, 06/30/2009 - 12:55.

Health care insurance has been listed as a Growth Industry by wall street for years!

Yes, there is a compelling national interest to nationalize (single-payer, in this instance) health care, in a way that the rest do not.

Because health care now costs double what it did in the 70's.

That's 7% of GDP that we can pour into new restaurants, new consumer spending, MORE JOBS.

That's why it is imperative to act on this, and not on home insurance (which would benefit from some sort of regulatory oversight, imnsho).

in response to ncright

Submitted by jhn on Wed, 07/01/2009 - 17:03.

The "insurable uncertainty" is laid out in my original post. A million dollar boat with an 80% chance of sinking will cost 80% of a million dollars to insure (very very roughly, of course)--$800,000. I'm not sure what "fundamental point" you say I missed. It won't cost less than that, at least.

Your response to my point about "the entire basis of insurance" doesn't seem to disagree with mine. Most insurance involves averaging together lots of individuals, so that some get more out of it than they put in, some put more into it than they get out. But if you want an insurance policy for one, in a truly free market with really good prediction abilities, you end up paying a discounted rate for what is likely to happen.

I think that employer-based plans work to skirt around the issue of adverse selection for most of the population. I'm opposed to them, however, as I don't think small business owners and freelancers should be disfavored by economic policy.

You've made a generalized argument in favor of choice that I agree with in most contexts, without addressing my argument about adverse selection. In health care, adverse selection is THE issue. I would love to read a coherent explanation of how a totally free (i.e. not what we have now) market in health care can work without facing the adverse selection issue, AND simultaneously providing health care for every last man jack at affordable rates.

Yes, I would rather it weren't called "insurance," since insurance is a product of the free market and I would prefer health care were completely socialized. Obviously, people at high risk of genetic diseases should be required, at risk of financial penalty, to take preventative measures. But being at a high risk of disease, without fault, in my view should never, under any circumstances, require that person to pay more for health care.

In terms of gamesmanship, yep, I think a government plan will work better than the free market. For one example, you won't be (as) motivated to lie about your family history if you know it won't lead to higher rates.

I could make an economic argument that health care is like a utility, that it provides massive positive externalities and the benefit outweighs the cost, etc. But I think to do so is unnecessary and probably wrong. Health care is not like the military or [pick your favorite positive externality project], since the market, by itself, would provide enough for the country to function just fine economically.

Ultimately, the reason I think truly free market in health care can't provide health coverage for everyone, no matter how sick, is because of the unique economics of health care. I am opposed to this outcome for non-economic, moral reasons. Any system that leaves anyone uninsured because of high rates is unacceptable to me, as a starting point.

New response to jhn . . .

Submitted by ncright on Tue, 07/07/2009 - 11:59.

Portfolio diversification - In an insurance pool, you may have 10 boats with 80% chance of sinking, all for different reasons, and the collective pool have 70% chance of loss. An insurance underwriter would (very roughly) be able to offer rates lower than $800,000, say $750,000. The boat owner is better off by $50,000. The insurance company is better off by $50,000. I also take issue with your notion that a single variable can be forecasted with enough accuracy to yield a single point predictor of loss. If that were the case, I would expect that the information would have most likely been discovered by an insurance company out for a buck rather than a congressional panel. I would further say that in your hypothetical world, that type of information discovery could also be better exploited to improve the medical science.

The underlying problem you bring up of some people not being able to pay for treatment is fair. I think there are more market based reforms to the system that will be much less capricious and much more efficient in taking care of everyone. Rather than force people into the pool, you can: 1. means test insurance vouchers while preserving some sort of mechanism where participants feel they have "skin in the game" 2. equalize tax treatment of employer provided vs individual insurance policies 3. Scrap medicare / medicade and means test potential participants in option #1. Simple measures would do a better job of instilling the notion of cost / benefit in the minds of those that consume health care.

Your arguments also overlook the fact that models to which we are supposed to aspire are subsidized by the U.S.'s more market based system that produces more advances and discoveries in medical science.

The argument that people opposed to a socialized model are willing to let others be "shut out" of the system is a strawman.

Finally, the flip side to your argument of less gamesmanship:

One hand, you may have 20% of an insured pool lying about one or two of 5 or 6 risk factors in their profile. On the other, you may very well have a powerful company headquartered in the district of a ranking congressional leader successfully lobby to have its new ineffective machine / medicine be the allowed treatment under your universal plan. Which does more overall harm to rich, poor, young, old, blonde, etc.? I take the second. The first problem leaves you with diversifiable, idiosyncratic risk. The other leaves you with systematic risk, whereby the incentive to lobby and horse trade increases with magnitude of said disease to overall society.

Yes, I would rather it

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Nate Silver is Dead Wrong on Health Care

Comments

First off

Think again...

Free markets in health insurance can't work

Well put, and can I add

Car Insurance

Not much to add...

In response to jhn, *

15% of our GDP goes towards health care.

in response to ncright

New response to jhn . . .

Yes, I would rather it

do your know this web is

Air Jordan Nike Air Max shox

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