I made a movie. Okay, not really. My superb Mercatus colleagues actually made it. And they were kind enough to let me do the voice over. Here it is. If you like it, please share.
I have a new essay, coauthored with two of my former students, Anna Mills and Dana Williams. We just published a piece in Real Clear Policy summarizing it. Here is a selection of the OpEd:
Liberals, conservative, and libertarians agree on the goals: Patients should have access to innovative, low-cost, and high-quality care. And though another round of federal reform may be years off, a number of state-level changes can move us closer to a competitive and patient-centered health-care market, making it possible to realize these shared aspirations.
In a new paper published by the Mercatus Center at George Mason University, we identify three areas for reform: States can eliminate certificate-of-need laws, liberalize scope-of-practice regulations, and end the regulatory barriers to telemedicine.
Steve Jobs transformed technology, bringing affordable smart phones and personal computers to households across income levels and around the world. In a 15-minute podcast Dr. Robert Graboyes asks why health care hasn’t seen this kind of innovation and explores the potential for health care under free markets. Click here to listen or subscribe.
Most people probably believe that the recent failures of the Affordable Care Act (ACA) are an anomaly, and that most areas the federal government involves itself in, from education to transportation, operate quite smoothly, or at least adequately well. This belief is misguided, however, and the issues we see from the ACA should not be viewed as anomalies. Problems like unintended consequences of policy, privilege granting to special interests, adverse selection in insurance markets, and other issues, are widespread in countless areas of public policy. It just so happens that we usually fail to associate the pernicious effects of laws with their source: public policy.
First, public policies create many unintended consequences. People will change their behavior in response to altered incentives from policies and when these behavior changes are not anticipated by lawmakers, unintended consequences occur. As an example, the ACA has altered incentives for many employers. Business owners are now likely to cut worker hours and keep their staffs under 50 employees in order to avoid paying penalties imposed by the law. The intention was that people will get insurance through their jobs, while a result is that many people will lose their jobs or work fewer hours.
A similar effect occurred after passage of the Americans with Disabilities Act. This well-intentioned Act of Congress was supposed to level the playing field for disabled workers by requiring that businesses with disabled workers provide accommodations, such as wheelchair access. The Act also sought to prevent discrimination of disabled workers, such as firing someone for having a disability. The reality once the law was in place was very different, however. Economists have found that the law was followed by a steep decline in employment among disabled workers, likely because of increased costs associated with hiring them, exactly the opposite result the law intended. Perhaps the most famous unintended consequence of all is the fact that minimum wage laws actually hurt low skilled workers.
A lot of these effects, while unintentional, are actually quite predictable and any good economist should be able to identify potential unintended consequences before a law is even implemented. So why do these policies get adopted? A big reason is because special interests have enormous influence in shaping policy. The Affordable Care Act literally has provisions allowing handouts to insurance companies to make up for losses they face in the new government health insurance exchanges. Unfortunately, cronyism like this shapes policy at all levels. For example, a recent USDA regulation will require additional food safety inspection of imported catfish. This may sound like a sensible idea, until one finds out there is no evidence of a significant problem from tainted catfish. The new program was actually lobbied for by domestic catfish producers who wanted to hurt their foreign competitors by driving up the price of imports, all at the expense of American consumers.
A final problem created by the Affordable Care Act relates to adverse selection in insurance markets. Adverse selection occurs because of information problems between buyers and sellers of insurance. Healthy people may have trouble signaling that they are a low risk to insurers, and so the healthy drop out of insurance markets when insurers don’t offer them a low priced product that serves their needs. This can lead to mostly sick people signing up for insurance coverage, while the healthy decide to go without coverage. Over time this leads to higher prices, causing more healthy people to decline coverage and the pool of insured to become ever sicker.
The ACA creates this problem through community rating requirements and other regulations, like guaranteed issue, that don’t allow insurance companies to price policies based on the riskiness of the applicant. As insurance premiums rise (because of regulations and because insurance companies must cover many new services), more and more healthy people will find these policies unattractive. The insurance pool will become ever sicker over time. To avoid this problem, the ACA includes a mandate that everyone purchase insurance. However, it is far from clear whether the current mandate is strong enough to prevent adverse selection problems from taking place.
This problem is hardly new. New York State passed extremely strict community rating regulations several decades ago. This led to higher premiums and lots of young, healthy people dropping out of the insurance pool. I should know, I lived in New York and went without insurance for most of my 20s. The prices of policies were simply too high for me to justify paying.
The list of government failures likely to result from the Affordable Care Act is too long for one blog post. The ACA also has regressive effects that tend to favor the wealthy at the expensive of the middle class, and the law will add to moral hazard problems in our healthcare system (i.e. people over-utilizing medical services or not taking adequate care of themselves because the costs of their behavior are passed on to others).
The ACA may have serious problems, but it works great as a teaching device. Nearly every day we see another example of government failure in action. Maybe once Americans see the effects of the ACA, they will look more closely at the effects of other policies as well.
Dr. Robert Graboyes, Mercatus scholar and expert on the Affordable Care Act, recently discussed the law’s impacts on Medicaid and challenges facing states considering Medicaid expansion on Mercatus’ Inside State and Local Policy podcast. In 20 minutes, Dr. Graboyes discusses principles legislators may consider while attempting to improve opportunities for health, strengthen the healthcare system, and why the two might not be the same mission.
Lately, a lot of attention has been given to the fact that millions of Americans are seeing their health insurance plans cancelled as a result of the Patient Protection and Affordable Care Act (aka Obamacare). Some pundits have gone so far as to argue this is a good thing. The cancelled plans, the logic goes, were lower in quality than the plans being offered in the new government health insurance exchanges. Many people will end up paying more for the replacement plans, but since the new plans cover a wider variety of health services, they are better off, right?
Actually, no. Imagine if the same logic were applied to automobiles. I drive a 2003 Toyota Matrix. Would I be better off if my current model was banned and I was forced to buy a brand new Ferrari instead? The President made a similar comparison in a recent press conference when he said:
We made a decision as a society that every car has to have a seat belt or air bags. And so you pass a regulation. And there’s some additional cost, particularly at the start, of increasing the safety and protections, but we make a decision as a society that the costs are outweighed by the benefits of all the lives that are saved. So what we’re saying now is if you’re buying a new car, you got to have a seat belt.
If the President’s comparison were appropriate, people would be able to keep their current plans, and might only have to add a new feature or two when they buy a new plan. Instead, people are being dumped from their current coverage and forced into the government run exchanges where they are being forced to buy all kinds of options they don’t want or need. Some might get a subsidy to help with the purchase, but this is still like forcing everyone to buy a Ferrari when all they really want is their trusty old Honda Accord.
Sure, if I had to buy a new Ferrari, it might have all kinds of amazing features that my current car lacks. But I would also have a lot less money to spend on other things that I value a lot more, like my monthly gym membership, or taking my girlfriend out to a nice restaurant on occasion. If banning low quality goods and services is so good for consumers, why not extend this logic even further? Why not ban row boats and force people to buy yachts instead? Imagine how much better dressed Americans would be if we banned all of the clothes sold at Target and Walmart and only allowed people to purchase Christian Dior or Armani!
The problem with this logic is that quality is what economists call a “normal” good. A normal good is something people demand more of when their income rises. By contrast, an “inferior” good is something we demand more of when our income falls. Think macaroni and cheese dinners or sneakers from Payless, for example.
There’s nothing inherently “inferior” about an inferior good. Rather, people with lower incomes often prefer to trade off quality in exchange for a lower price. This is a perfectly rational decision. Since people demand more quality as income rises, banning lower quality products, like catastrophic only health insurance coverage, is actually banning the products that lower income people prefer. And it’s not just the poor who make tradeoffs between price and quality. (For example, I know for a fact that one of my more senior colleagues at the Mercatus Center buys most of his clothes at Walmart!). When prices rise in response to the mandated improvement in quality, the preferences of the poor are ignored and their options limited. As such, each individual must decide for him or herself what the right balance is between quality and price.
Once this becomes clear, one has to wonder who a lot of regulations are really designed to serve. For example, the FDA recently announced it will be setting standards for the production of pet food. Are regulations like this designed to cater to the preferences of the poor, who probably opt for the 79 cent can of cat food? Or are they more in line with the preferences of people who already buy organic food for their cats, people who might not mind paying a little extra to ensure that their pet food has met the new standards set by the FDA?
Mandating rearview cameras in automobiles is regressive for the same reason. This item was originally found mostly in luxury cars, but, thanks to market innovation, these cameras are rapidly becoming commonplace features in cars, all without government regulation.
One of the benefits of the market system is that when a new product is first introduced, the wealthy often pay a lot for it. Over time, the kinks in the product are worked out, and prices fall as the new technology becomes more affordable. Eventually, low income people can afford the product as well, but each consumer must decide for herself when the price has fallen sufficiently to make the purchase worthwhile.
Banning low quality items may seem like a noble way to protect consumers, but not when that removes lower-priced options for those consumers who have the fewest resources to spare. Rather than forcing consumers to buy luxury items, regulatory agencies should respect consumer preferences, especially the preferences of the poor.
A Colorado organization managed to produce ads promoting health insurance under the Affordable Care Act that are so goofy that some supporters thought they were a parody produced by over-caffeinated tea partiers. But the ads are more than just an unwitting parody. Some of them also unwittingly illustrate an economic principle that is crucial for understanding the cost of health insurance: moral hazard.
Two of the best examples are reproduced below.
Contrary to what you might think after reading the ads, “moral hazard” does not mean health insurance is hazardous to your morals. (For some commentary on what these ads say about morality, look here.)
Moral hazard refers to an insured party’s incentive to take greater risk because the insurer will pay the costs if there is a loss. The two ads above pretty clearly say, “Go ahead and engage in risky behavior, because if there’s a cost, your health insurance will take care of it.”
In the health care context, moral hazard can also involve excessive use of health care services because the insurer is paying the bill. “Excessive,” in this context, means that the patient uses a service even though its cost exceeds the value to the patient. For example, my Mercatus colleague Maurice McTigue tells me that before New Zealand reformed its health service, a lot of elderly people used to schedule monthly visits to the doctor’s office because it was free and provided a good opportunity to socialize with friends and neighbors. Visits dropped significantly after New Zealand’s health service instituted a $5 copay for doctor visits — which suggests that some of these visits were pretty unnecessary even from the patient’s perspective!
Moral hazard can have a big influence on the affordability of health insurance. Moral hazard losses in private insurance plans can equal about 10 percent of spending. Moral hazard losses in Medicare and Medicaid are much higher, equal to 28-41 percent of spending. (References for these figures are on page 8 of this paper.)
Duke University health care economist Christopher Conover and I examined the eight major regulations rushed into place in 2010 to implement the first wave of Affordable Care Act mandates. The government’s analysis accompanying these regulations failed to take moral hazard into account. In other words, federal regulators extended insurance coverage to new classes of people (such as “children” aged 21-26) and required insurance plans to offer new benefits (such as a long list of preventive services), without bothering to figure out how much of the resulting new health care expenditures would be wasted due to moral hazard.
Is it any wonder that health insurance under the Affordable Care Act has turned out to be less affordable for many people? Makes me want to do a keg stand to forget about it. After all, if I fall down and get hurt, I’m covered!
A few days ago, I pointed out that many people with employer-provided health insurance plans may not be able to keep the same plan, because even some small changes to employer-sponsored plans could make them forfeit their “grandfathered” status. Duke University health care economist Christopher Conover and I noted in 2012 that the “grandfathering” regulation could have been written much more flexibly to prevent some of this.
On October 30, Chris published an article in Forbes that put some numbers on this abstraction. Based on survey data showing what percentage of plans complied with various provisions of the Affordable Care Act (ACA), he estimated that 129 million (68%) will not be able to keep their old health insurance plans, even if they liked them. That does not mean these people will go uninsured. Rather, they will have to buy more expensive plans that include coverages mandated in the ACA.
This result is consistent with figures the Department of Health and Human Services supplied in its 2010 analysis of the grandfathering regulation that established the very restrictive terms an insurance plan had to meet if employers or policyholders wanted to keep it.
The true promise of the ACA is now clear: “If you like your current health plan, tough luck; you will buy a plan with coverage the federal government has decided you must have.”
The recent discovery that the federal government knew in 2010 that many people would not be able to keep their old health insurance under the Affordable Care Act has made nationwide news. But most of the discussion has focused on the market for individual and small group policies. A much bigger group of people — those of us with employer-provided insurance — are affected by the same “grandfathering” regulation that affects individual policies. And as I pointed out in an op-ed in The Hill yesterday, the Department of Health and Human Services’ 2010 analysis accompanying this regulation predicted that 39-69 percent of employer plans would no longer be grandfathered by 2013. (If you don’t believe me, you can download the grandfathering regulation and read the analysis yourself, on pages 34,550-34,553.)
Why has the effect on employer-provided policies received so little attention, even though it potentially affects a lot more people?
I suspect it’s a transparency issue.
If the employer makes changes to the plan that prevent it from being grandfathered, the new plan must include a number of new, costly coverages, such as childbirth, children’s vision care, psychological services, and substance abuse treatment. But employees do not receive letters in the mail saying that they can no longer continue their prior insurance plan because it does not comply with the ACA. Instead, the employer and the insurance company simply modify the plan, and the premiums change to reflect the cost of the new mandates.
Since employers usually pay most of the premium, employees do not see the full cost increase. Any increase in the employee’s share of the premiums is paid with pre-tax dollars, which further cushions the blow. And since we’re all conditioned to expect the cost of health insurance to go up every year, employees are not likely to ask how much of the premium increase occurred because of the new mandates versus other factors.
As a result, many employees may believe they’ve kept their old health insurance plan even if they haven’t!
The effect of competition on the quality of health care remains a contested issue. Most empirical estimates rely on inference from nonexperimental data. In contrast, this paper exploits a procompetitive policy reform to provide estimates of the impact of competition on hospital outcomes. The English government introduced a policy in 2006 to promote competition between hospitals. Using this policy to implement a difference-in-differences research design, we estimate the impact of the introduction of competition on not only clinical outcomes but also productivity and expenditure. We find that the effect of competition is to save lives without raising costs.
That’s Martin Gaynor, Rodrigo Moreno-Serra, and Carol Propper writing in the latest issue of the American Economic Journal: Economic Policy.