Category Archives: Health policy

Health Care and the Dynamics of Intervention

At the heart of the government’s defense of its health insurance mandate is the premise that, as Wall Street Journal reporter Jess Bravin puts it, “40 million uninsured Americans are distorting the health-care market by shifting costs of free emergency-room care to taxpayers and insurance ratepayers.”

In other words, the government believes that there is an externality problem with health insurance. If healthy people aren’t compelled by law to buy insurance, then they will drop out of the insurance pool. This will mean that the average health level of those who remain in the pool will decline. This, in turn, will raise the cost of insurance for all remaining members of the pool.

Of course, insurance companies have a way of dealing with this by attempting to charge people for the (statistical) cost that they impose on the pool. They can do this by charging higher rates for riskier people such as those who are overweight or those who are smokers (this, by the way, is why kids with bad grades pay higher rates for their auto insurance). But the government doesn’t like this solution because it means that some people who are higher risk through no fault of their own (for example, those with unlucky genetics), may end up paying higher rates. So the Patient Protection and Affordable Care Act made it more difficult for insurance companies to charge higher rates to higher risk customers (this is known as “community rating”). They also made it impossible for these companies to deny care to those with preexisting conditions.

According to the Journal, plaintiff’s attorney Michael Carvin doesn’t buy this reasoning. In yesterday’s oral argument he averred:

The failure to buy health insurance doesn’t affect anyone. Defaulting on your payments to your healthcare provider does. Congress chose for whatever reason not to regulate the harmful activity of defaulting on your health-care provider.

In other words, he agrees that there is an externality problem but it is entirely of the government’s making; it isn’t in any way inherent to the industry. There would be no externality if those who defaulted on their health care providers could be held liable.

Image by Duncan Lock

This is an example of what economists call the “dynamics of intervention.” Sanford Ikeda explores the concept in his 1997 book on the topic and credits Ludwig von Mises for its initial development. The basic idea is that one intervention often begets further interventions. Once government says that doctors can’t sue patients for defaulting on their bills and once government says that insurance companies can’t charge higher prices to riskier clients, then the argument for forcing everyone to buy insurance becomes stronger.

(Economists who aren’t familiar with Mises’s or Ikeda’s arguments will still recognize them as a version of “the theory of the second-best” BTW: read the link; it remains one of my favorite blog posts five years after first reading it).

The dynamics of intervention are strong enough to convince plenty of otherwise free-market advocates to countenance new government intervention in the marketplace. Milton Friedman, for example, famously said that as long as we have a welfare state, it makes sense to regulate the border. And a lot of free market advocates are willing to say that as long as we have Federal Deposit Insurance, the government should be allowed to regulate the risk profile of banks.

When PPACA was passed, self-described libertarian economist Kevin Grier found himself countenancing regulation of fast food, sugar, and even exercise (he also hated himself for thinking that way).

Of course, the other interpretation of the dynamics of intervention is that you shouldn’t start down the path to intervention in the first place because it will inevitably lead to much more intervention than you initially intended. That’s my take on it, at least.

I’ll end this already-long post by noting that Congress might have gone about this a different way and greatly reduced the dynamics of intervention problem. Instead of making it impossible to deny care to those with preexisting conditions, and instead of requiring community rating, and instead of requiring everyone to buy insurance, Congress might have left the insurance market alone and reformed Medicaid. It could have turned Medicaid into a voucher program that would allow qualifying recipients to use their voucher to either purchase insurance, or–in the event that no insurers will pick them up–to purchase health care services on the open market. If they were so inclined, Congress could have made the voucher more generous for those with pre-existing conditions (ideally, people wouldn’t be eligible for more generous benefits if they brought on the pre-existing condition themselves through their own health decisions). These reforms would best be coupled with other market-oriented reforms such as equalizing the tax treatment of employer-provided and individually-purchased insurance, legalizing the cross state purchase of insurance, and reforming medical malpractice laws.

My own view is that the most vulnerable in society would be best served by a robust private and charitable market (consider how well the poor are served by our mostly-private markets for necessities like food and clothing). The next best option would be for the states to develop their own safety nets. But the federal reforms in the preceding paragraph seem to me to be far superior to both the status quo and the mess that is PPACA.

New Medicaid Case Study Highlights the Role of Politics in Policy

Last week, Scott Beaulier and Brandon Pizzola released new research on Medicaid, conducting case studies of five states that have implemented reform measures designed to control program costs. They find that the political climate is essential to the success of reforms.

Medicaid is a cost driver in state budgets for several reasons, but an important factor is that most states have designed the program so that a formula determines the amount of federal money they receive based on state-level Medicaid spending. Reforms which move to essentially a block grant program, as implemented in Rhode Island and Washington, have so far successfully reduced Medicaid spending by eliminating this incentive. These two states have moved to a system where the federal government pledges a fixed yearly amount toward their Medicaid spending. If the full amount is not spent, the remainder can be transferred to the general fund. This reverses the incentive from spending as much as possible to searching for cost savings. Both states have also introduced measures of individual patient responsibility, requiring, for example, that Medicaid recipients do not rely on emergency rooms for routine care. While it is too soon to tell if Rhode Island and Washington will manage to control costs in the long run, both states appear to have achieved improved incentive structures for doing so.

These states passed reform bills not by making a gradual transition to new policies, but by moving decisively. In contrast, Florida lawmakers attempted to test reforms in two counties before expanding them to apply to the rest of the state. This time lag served as an opportunity for interest groups to block further changes. Rhode Island and Washington developed support from these interest groups by framing the issue as the state against the federal government rather than one of winners and losers within the state. In Tennessee reform has not been successful because key interest groups like the Tennessee Medical Association did not get behind proposed reforms, making them unworkable in practice.

Despite the apparent successes in Rhode Island and Washington, the federalism research that Ben and Eileen explored last week reveals that block grants are not a panacea. Block grants, like all intergovernmental spending, carry with them fiscal illusion. This obfuscates program costs to taxpayers by spreading the funding across multiple layers of government. While moving from a matching funds formula to a block grant is an improvement in transparency, total spending is still obscured. Furthermore, while neither state has failed to keep spending within the the budgeted block grant so far, it’s hardly inconceivable that program costs will outpace grants at some point, leading states to seek bailouts after implementing reforms.

The demonstrated reasons to be pessimistic about the viability of programs whose costs are shared across state and federal governments leave reason to question whether or not block grants are successful tools for curbing costs in the long run. However, Rhode Island and Washington have chosen a path that is at least more sustainable than other states, which face incentives to increase Medicaid spending with no limit in sight.

Cocktails, Community Transformation Grants and the City

The Department of Health and Human Services has a new program: The Community Transformation Grant (CTG). To date $103 million in CTG funding has been awarded to 61 cities to, “support community-level efforts to reduce chronic diseases…by promoting healthy lifestyles” thereby reducing spending on health care.

According to The New York Post,“The city Health Department’s far-reaching Partnership for a Healthier New York City initiatives proposes to slash the number of establishments in the city that sell booze.” The proposal includes a few other ideas like limiting liquor advertising on subways, department stores and restaurants.

As a result of the news coverage, the Mayor’s office issued a statement hours later spiking the proposal. But since it was proposed, let’s give it some consideration.

Will limiting the sale of alcohol reduce alcoholism? Prohibition was repealed in 1933. Recent history should be a guide here.

Many pin the birth of the Temperance movement on America’s Puritan roots but history tells a more nuanced story. Alcohol was consumed regularly in Colonial America. Moderate consumption of drink was praised by Increase Mather in his sermon Wo to Drunkards.

Research by David Hanson of SUNY links the rise of the Temperance movement to rapid societal change in the early 19th century that altered American drinking habits from social to solitary. The move from a rural society to an urban and mobile society meant the disappearance of many of social mechanisms that encouraged moderate drinking and maintained,”the expectation that abuse of alcohol was unacceptable.”

Interestingly, Hanson cites the tavern as one such social control:

Central to the drinking culture of colonial life was the tavern … The role of the tavern in colonial America and the attitudes toward it were quite different from what they would become in the nineteenth century. The tavern was considered an integral part of community life, second only in importance to the meetinghouse, which served as the church, town hall, and courtroom. The laws of most colonies required towns to license suitable persons to sell wine and spirits for the convenience of travelers and town dwellers; failure to do so could result in a fine. Contrary to the modem practice of keeping alcohol outlets a certain distance from schools and churches, colonial taverns were often required to be located near the meetinghouse or church. In towns that lacked a meetinghouse or in those where the meetinghouse did not provide sufficient warmth in winter, “religious services and court sessions were held in the great room of the principal tavern; there, ecclesiastical affairs were managed, the town selectmen and county justices met to conduct the business of government, and the voters assembled for town meetings” (Popham, 1978, p. 271). Those who attended these gatherings naturally took advantage of the hospitality of the tavern, the expenses not infrequently being paid out of town funds. People also came to taverns to see plays and concerts, to attend lodge meetings, to participate in lotteries, to read newspapers, and to engage in political debate. Taverns were, in fact, more important as centers of social activity than as places in which to drink. Most drinking took place in the home or at communal gatherings. (Popham, 1978, pp. 267-277; Conroy, 1984) (Prendergast, 1987, p. 27)

Late 19th and early 20th century Temperance advocates believed that limiting access to alcohol would end the social and physical ills produced by alcoholism. But by outlawing the saloon and sale of alcohol with the passage of the 18th Amendment the only thing the movement did was to turn America into “a nation of scofflaws,” as well as amateur still-operators; sometimes with deadly results. As Hanson notes, driving drink underground didn’t decrease drinking, it increased it; it didn’t eliminate crime but created it. The saloon was replaced by the speakeasy.

The CTG program is new and it is part of the larger health care reform of the Obama administration. Other CTG projects critiqued as lacking in evidence: an e-cigarette campaign in Boston and a $15.8 million garden co-op and composting initiative in Pima, Arizona.


Medicare fraud: bogus clinics in barns

Each year the Medicare program loses millions of dollars to fraud. Applicants simply set up fake clinics using stolen medical IDs and real addresses in barns, UPS stores and abandoned apartments. It’s called the drop box scheme and apparently it’s hard to catch every bogus clinic operator given the ease of presenting what looks like a legitimate medical clinic on paper. Reuters tracks down the scheme. But it’s just one of several the program has to contend with. Other kinds of fraud documented by GAO include “rent-a-patient” and “pill mills.”


Medicaid: Are Costs Up or Are We Buying More?

Writing in the New York Times, Peter Orszag notes that a quarter century ago, states spent 50 percent more on higher education than on Medicaid, while today states spend 50 percent more on Medicaid than they do on higher education. The former Office of Management and Budget director is absolutely right that Medicaid costs have grown far faster than every other major category in state spending. He is at least partially wrong, however, on the diagnosis. He writes:

These Medicaid cost increases have closely tracked cost increases in the rest of the health care system over the past three decades. So the problem is not Medicaid per se; the fundamental problem is rising health care costs as a whole.

The graph below, taken from my recent working paper, examines this issue:

The left column shows 2009 Medicaid spending as a percent of 1987 Medicaid spending. Over this period, spending increased 813%. There are three factors that might explain this increase:

  • The general population has increased,
  • The cost of medical care services has increased (which is what Orszag sees as the problem), and/or
  • The Medicaid program is buying more medical services.   

The chart helps disentangle these three factors. The right column is the sum of population growth and medical care inflation. Note that, together, these two factors explain little more than half of the increase in Medicaid spending.

This suggests that much more weight should be placed on the third option. In other words: Yes, medical prices have gone up and yes, the overall population has grown. But more importantly, the program is simply buying more medical services. In what ways? This paper by Holahan and Yemane offers some insight. They find that the real reason we are spending more on Medicaid is that more people are enrolled in the program.

In addition to increased federal support for the program, Orszag believes that the “fundamental response” is to “get a better handle on rising health care costs.”

The data suggest that the more appropriate response is to get a handle on enrollment growth.

My thanks to Tyler Cowen for directing me to Orszag’s piece.

Overhauling Health Insurance from the Bottom Up

Over the weekend, following a town-hall meeting in Grand Junction, Colorado, President Obama broadened his rhetoric on health care reform, saying that a government insurance policy was not the only option available to lawmakers.  However, a New York Times article reports:

Speaker Nancy Pelosi said Monday that House Democrats, rather than backing down, strongly supported giving people the choice of a new government health insurance plan. “A public option is the best option to lower costs, improve the quality of health care, ensure choice and expand coverage,” said Ms. Pelosi, Democrat of California.

Grand Junction was selected as a location for one of the President’s town-hall meetings because it was recently profiled in a New Yorker article as an example of a region that successfully manages health costs. The presidential interest in Grand Junction’s system, however, seems strange, because the area’s cost-saving practices have not come about by the sort of top-down overhaul that his administration is promoting for the country. Rather, area doctors developed a grassroots solution:

Years ago the doctors agreed among themselves to a system that paid them a similar fee whether they saw Medicare, Medicaid, or private-insurance patients, so that there would be little incentive to cherry-pick patients. They also agreed, at the behest of the main health plan in town, an H.M.O., to meet regularly on small peer-review committees to go over their patient charts together. They focussed on rooting out problems like poor prevention practices, unnecessary back operations, and unusual hospital-complication rates. Problems went down. Quality went up. Then, in 2004, the doctors’ group and the local H.M.O. jointly created a regional information network—a community-wide electronic-record system that shared office notes, test results, and hospital data for patients across the area. Again, problems went down. Quality went up. And costs ended up lower than just about anywhere else in the United States.

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Methheads and Feds

The publication of Nick Reding’s book Methland: The Death and Life of an American Small Town has refocused national attention on the abuse of methamphetamine that was widely reported on as an epidemic a few years ago.

Although fears of about the spread of methamphetamine have somewhat subsided, the Wall Street Journal documents that last year more than 7,000 residential meth labs were discovered, so clearly the drug remains prevalent in national culture.

A New York Times blog about the book’s release explains the shift in perception over the past years:

It was going to destroy the heartland, this methamphetamine epidemic, just as crack cocaine had done to the inner city. There was no George Bailey in this version of Bedford Falls. No John Mellencamp melodies on the soundtrack. Just toothless boys on bikes peddling some nasty stuff cooked up from cold medicine and farm products.

And then it all passed, as these things do, the damage done, leaving the impression of rural America as a broken land, scary. In the interim, the more traditional narrative, of country people somehow more authentic than city folk — “the best of America in these small towns” — came roaring back in the form of Sarah Palin.

Both of these stereotypes reflect the human tendency to lump people into broad categories and stereotypes, masking the nuances that make each community, rural or urban, unique.  While the blogger, Timothy Egan, acknowledges that neither view of rural America is correct, he does not acknowledge that these subtle differences in place require different policy approaches to methamphetamine abuse or other social problems. Egan continues with a quote from President Obama’s primary campaign:

“You go into these small towns in Pennsylvania and, like a lot of small towns in the Midwest, the jobs have been gone now for 25 years and nothing’s replaced them. And they fell through the Clinton administration and the Bush administration.”

Every president said he would do something about it, Obama continued, but never did. But he has a chance to make a difference in places that are neither methland nor mythland, just overlooked parts of the same country.

Looking to national leadership for dealing with local problems is doomed to lead to mass inefficiencies because the program that works to curb the meth problem in one town in unlikely to produce the same results in another.  In a public radio interview, Reding described police strategy in Oelwien, Iowa:

“I think it worked incredibly well. Their small-lab meth production plummeted to basically zero by sometime in mid-2006. To go from getting a lab every few days to having zero is a remarkable success.”

This local success may provide a model that could be adapted to use in other areas.  However, suggesting that the federal government could possibly enact such successful policies across small town America is a dangerously naive belief.

State Tax Rates and Health Care Reform

E.J. McMahon of the Manhattan Institute calls it a “sledgehammer” to New York City.

This week, the Tax Foundation released this table. It shows what each state’s top tax rate looks like with the House Bill’s three surtaxes, targeted at high earners, to pay for nationalized health care.

Three states meet the 57 percent tax rate mark: Oregon (57.54%), Hawaii (57.22%), and New York (56.9%). At the very top of the list is New York City with a 58.68% top tax rate.

There is not much improvement for the remaining 47 states; the bottom ten states face a top rate of 47.25 percent.

What is the likely scenario in Manhattan? It’s not just Wall Street’s top earners who will bear the burden (or flee for other professions or places): it is small and/or growing businesses. As the New York Post writes, “The legislation is especially onerous for business owners, in part because it penalizes employers with a payroll bigger than $400,000 some 8 percent of wages if they don’t offer health care.”

Here’s a picture, courtesy of the New York Post: