Monday, October 22, 2007
Short-term Gain, Long-term Loss
In the most recent issue of City Journal, there is a very interesting article about how health care and health insurance are changing with increasingly advanced technology.
The gist of the article is that now that we’ve pretty much conquered infectious disease, there is not a whole lot of randomness left in health care expenditures. With tuberculosis, polio, etc gone, the risk factors associated with health insurance payouts are completely different from in the past. Sure, you’ve still got car accidents and kids falling out of trees, but much more prevalently you’ve got obesity and high cholesterol caused by lifestyle choices.
Insurance is, at a basic economic level, a way to pool and mitigate risk. Getting patched up after a car accident or getting cancer treatment are expensive things, potentially expensive enough to bankrupt the average family. If these events strike at random, it is economically advantageous for people to pool their money to pass the economic risk of expensive treatments to an insurance company.
However, once randomness is largely removed and health care payouts are mostly driven by choices made by individuals, insurance becomes a whole different ballgame. If companies are allowed to assign risks properly, those risky lifestyle choices can be determined up front, and people with higher expected health care payouts can be charged more in premiums. As the risks become better and better known, the pricing becomes more and more focused, reducing the incentive to buy insurance in the first place. If your insurance premiums are equal or nearly equal to your expected health care expenditures, what’s the point?
This is where the state steps in, with mandatory risk pooling. You may not be aware of it, but in most states there is a fairly rigorous review process in which state departments of insurance review rating plans before they are put into effect. The intent is to make sure that the rates are fair and are not unduly discriminatory. Of course, the definitions of “fair” and “discriminatory” are often politically motivated. States can and have mandated rates below the costs to the company in a state, resulting in companies largely refusing to sell insurance in those states. An example is Florida, where homeowners insurance companies are few and far between, with the state has set up a semi-private company, fueled by tax dollars, to take up the slack.
If at some point mandatory risk pooling enters the health insurance market on a large scale in the form of nationalized health care, the populace will be split into two broad categories all being charged the same premiums - those who live healthy lifestyles and thus have low expected costs, and those who live unhealthy lifestyles and thus have high expected costs. Clearly there are not two discrete categories, but really it is a continuum. In any case, some people are being forced to pay the self-inflicted costs of other people.
The author of this article argues that healthy people will not stand for this, and that such medical advancements, removing random risk components and emphasizing lifestyle choices as risk components, mean the end of socialized medicine. I wish I could agree.
For healthy lifestyle people, the argument against socialized medicine as forced risk pooling appeals to their self-interest. However, I don’t see this argument standing out amongst the other economic mumbo-jumbo and general feel-good garbage that surrounds socialized medicine strongly enough to convince even the people that lose money on the deal. The unhealthy lifestyle contingent largely benefits from the scheme, in that someone else is footing the bill for their health care, so I wouldn’t anticipate any major objection of their part.
Fundamentally, one side stands to gain, and the other side isn’t economically sophisticated enough to understand that they are going to get screwed. Either that, or they’ve bought into the socialist mindset to the point that they don’t care that they are being screwed. In either case, I don’t agree with the author’s conclusion.
This, and other things I’ve read recently have got me thinking about how economic incentives and political incentives are intertwined in our system of government. Individuals have every incentive to use the government to take money from their neighbor, and politicians have every incentive to cater to this trend. Add to that the fact that politicians generally only have only short-term goals in mind, winning the next election, knowing very well that someone else will likely have to deal with any long-term negative effects of legislation passed today. This is why the insolvent social security system is kept limping along, and very likely no serious attempt will be made to fix it until collapse is imminent. It is only under these circumstances that socialized medicine can be seriously proposed as a solution to our health care problems.
Is there any way our political system could be restructured to remove these incentives to short-term gain having precedence over long-term loss? The ideal case is that the populace has sufficient wisdom to elect leadership with sufficient wisdom to make the right choices for the long-term. However, it is pretty clear that this is not the situation in which we find our country. One possibility is that a populace that lacks such wisdom will find a way to screw up any system of government, so the best option is one that delays the damage for the longest amount of time. Is that the state of our political system now, or could something be changed to improve it?
Comments
-
“we’ve pretty much conquered infectious disease”
Not true and getting worse as we sit here.
The lifestyle risk, while overrated, does exist. Anal sex between men, smoking, driving a motorcycle, eating bacon, driving a car are all things that are not real good for you in the long run statistically speaking. The question then come in how and who decides what is “bad” enough to have action taken on it? That is a task that I really have no interest having the government involved in.
Is that the state of our political system now, or could something be changed to improve it?
Yes and no.
Dbltap | 10/22/2007 11:10 AM CDT -
“Politics is, on the whole, an inherently tawdry and degrading process for the pursuit of unsavory ends. So it isn’t the most attractive career choice for many of our best and brightest. Those who have better uses for their time and energies tend to do other things, and we’re left with the candidates and officeholders that are available to us. Of course, there are and always will be the talented and the decent who are involved for the best of reasons, but they’re a minority, and there are two few of them to overcome the inevitable—i.e. that politics is destined to be dominated by those who are sleazy, feeble-minded and/or ridiculous.
It dawned on me that this is another application of Gresham’s Law”
Great on topic quote from Steve Sharkanski.
dbltap | 10/22/2007 11:29 AM CDT -
Dbltap, we’ve conquered the randomness of infectious disease; and more importantly to the topic at hand, we’ve eradicated their economic impact in the risk pool. Nobody buys health insurance to cover the risk of contracting polio. Either way, the statement was made as an axiom and is protected from rebuttal in its current form.
The ultimate goal of the nanny state is to have all good decision makers subsidize the poor decisions of people who choose to behave badly. Is it any wonder, then, that Democrats choose to behave badly? Fundamentally it’s the age-old fight between good and evil, only the good are being undermined because of their inability to pay attention. I wish more of us would do the math and get pissed off about the outcomes.
Individuals have every incentive to use the government to take money from their neighbor, and politicians have every incentive to cater to this trend.
The only have every apparent incentive, if you think in the short term. I understand this to be your point, but wanted to clarify. If taking from my neighbor once creates the precedent for others to take from me indefinitely, then it is a supreme disincentive to do so. Short-term thinking is devastating. It’s more of the same blind buck-passing of spending against the productivity of our children and it pisses me right off. The chickens will come home to roost on our national debt, and it will destroy the country if we don’t take measured steps to fix it immediately. All else descends from this: quit spending money we don’t have. We’ve mortgaged our childrens’ futures, and we’ve simply got to pay it back before they’re left with nothing but to screw their own kids.
Dr. Feelgood | 10/22/2007 02:36 PM CDT -
“we’ve conquered the randomness of infectious disease;”
That comment is silly to anyone who has watched, and seen the money spent on, a person dying of MRSA. It’s not pretty, it’s not cheap and it’s not rare 20K deaths last year and growing fast.
The argument is flawed. Air travel and whiney parents have destroyed the brief period of relative freedom from infectious disease that the US and the West enjoyed. TB while not quite as dramatic (all the stuff that falls off is on the inside) as MRSA is making one heck of a comeback as well.
You have obviously met the average voter. You really think they give a crap if their kids have to pay for their fun now?
Short term thinking is something the human race excels at. Smoking, meth use, drunk driving, getting married at 16 to the town whore, getting only the nutrition that comes through your car window and voting democrat have all been PROVEN to be stupid long term decisions. Buuut…
Dbltap | 10/22/2007 05:40 PM CDT -
In the top ten causes of death in America, there is exactly ONE infectious disease - Influenza, with 60,000 annual deaths. There are ten times that EACH from heart disease and cancer.
From the point of view of insurance companies and drug companies, that’s really small potatoes.
American Farmer | 10/22/2007 07:35 PM CDT -
Don’t intend to be the prophet of doom but just wait just wait… and there are two, septicemia is an infection. The insurance companies can do the math and they see the handwriting on the wall too. Cancer and heart disease deaths are going down, infectious disease rates are going up, fast. The insurance companies really could not care less what is killing people now, it is what is going to be killing people later. From an insurance point of view CVA’s and SCD are great, no lingering, lingering costs. As you can see below about half of the heart disease deaths occur outside a hospital, that means that they pay (or don’t) the ambulance company.
Heart disease: 652,486
Cancer: 553,888
Stroke (cerebrovascular diseases): 150,074
Chronic lower respiratory diseases: 121,987
Accidents (unintentional injuries): 112,012
Diabetes: 73,138
Alzheimer’s disease: 65,965
Influenza/Pneumonia: 59,664
Nephritis, nephrotic syndrome, and nephrosis: 42,480
Septicemia: 33,373325,000 people a year die of coronary attack in an Emergency Department or without being hospitalized. Most of these are sudden deaths caused by cardiac arrest, usually resulting from ventricular fibrillation (ven-TRIK’u-ler fib"rih-LA’shun).
From 1994 to 2004 the death rate from coronary heart disease declined 33 percent.Dbltap | 10/22/2007 08:44 PM CDT -
Yes, septicemia is an infection, but not in the “you’ll catch it if someone sneezes on you” sense of infectious disease. Those sorts of diseases are where the randomness lies.
Let me tell you from first hand experience - insurance companies care very much what is killing people now, and postulate only very vaguely what is going to kill people later. They are largely restricted (by regulators) from incorporating guesses about the future into their rating in any meaningful way anyway.
Suppose a heart attack patient gets taken by ambulance to an ER, where they eventually die. What do you think is the greater cost - the ambulance or the ER?
American Farmer | 10/23/2007 06:16 AM CDT -
The risk is that as we sit here many infections that were previously God awful difficult to catch are turning into “sneeze and ya get it” infections. Healthy people did not used die of infections, they are now.
Cancer and heart disease on the other hand are being brought under control. A 33% drop in deaths from heart disease in 10 years is Nobel worthy. Cancer is the same way. Many “death sentences” 10 years ago are manageable or curable today.
Infections are a different cat. Pre-antibiotic life was not a lot of fun. What happens when the antibiotics don’t work anymore? We are just on the cusp of finding out. Some of the soldiers coming home from Iraq and the ‘Stan are bringing diseases that NO ONE has a clue how to treat, and those are just the exotic ones that get mentioned in the journals.
Death in the ER or in the field, while not inexpensive, is far less than even a day in-patient.
Again not trying to cause a fight, this is just kind of what I spend my days doing and I find it interesting what medical “issues” people tend to get concerned about.
Dbltap | 10/23/2007 11:05 AM CDT -
Quick semantic point: health insurance doesn’t care what kills people; it cares about medical issues for which people seek treatment. Death- and affliction-rates may be related, somewhat, but they’re not the same thing. Life insurance is more interested in what kills people.
That comment is silly to anyone who has watched, and seen the money spent on, a person dying of MRSA. It’s not pretty, it’s not cheap and it’s not rare 20K deaths last year and growing fast.
I thought the rest of my comment made it clear that random infectious diseases have negligible impact on health care costs when it comes to creating a pool of risk. The point of the original article is that we can now ascertain with a high degree of certainty what the average person will be expected to pay in health care costs over their lifetime, based upon their lifestyle choices. Maybe diseases are down, maybe not. My comment (which was poorly phrased, I apologize) was that it’s irrelevant. Since the original post stated that they were down as an axiom, it’s not open to refutation.
If health care costs associated with lifestyle choices outweigh the costs of treating random medical issues by orders of magnitude (and they do) then the random events have a negligible impact on total insurance costs. Those of us with behaviors that keep us out of the risk pool ought to be exempt from contributing to it. It is unethical to charge a non-drug-using heterosexual monogamous person for a share of risk related to treatment of HIV/AIDS when that person is clearly not at risk. What AF laments, and I reluctantly agree, is that those of us who conduct our lives in a healthy manner are complacently allowing everyone else who doesn’t to screw us into providing for their treatment. The moral clashes inherent in some of this should serve to fan the flames. Where’s the outrage? (Does that sort of sum up your position, AF?)
I commented earlier that it is fundamentally the same battle between good and evil. We should not be surprised that good people are willing to compromise and work for the good of their fellow man. The problem, as I see it, is that few good people recognize this as a moral issue worth fighting for. The evils have tricked them into seeing their complicity as philanthropy, or even civic duty. It’s the ultimate con: they take advantage of our good nature to rob us blind.
After discussing the economic future of the country with my wife last night, I glumly agree with her observation that the political machine is corrupted beyond hope of repairing the damage done by short-sightedness. The optimist in me wants to hold out hope that the body of voters will recognize our plight and elect a wise leader to begin to fix our bad policies. I don’t think the nation, as a whole, has the fortitude (or even the proper insight) to bite the bullet and set things right. If voting standards were more stringent (disenfranchesing anyone who has their hand in the public till) I think we could limit the impact of short-sighted citizens who vote to tax and spend for their own benefit. Could this have a trickle-down effect into more substantial portions of the economy?
Dr. Feelgood | 10/23/2007 11:19 AM CDT -
What AF laments, and I reluctantly agree, is that those of us who conduct our lives in a healthy manner are complacently allowing everyone else who doesn’t to screw us into providing for their treatment. The moral clashes inherent in some of this should serve to fan the flames. Where’s the outrage?
That’s exactly right. Due to changes in the nature of health care expenditures, nationalized health care is little more than wealth transfer from those who live healthy lifestyles to those that don’t. The economic perspective is one thing, but as you say, many of the issues have a moral side to them as well. That debate is a little more “squishy”, so I’m trying to avoid it the best I can at the moment.
American Farmer | 10/23/2007 11:37 AM CDT -
The problem comes in a few forms.
We,the US, are the healthcare leader of the world. 90% of technology worth having to prolong life and improve health care was invented or perfected in the US. If we give up on that we are not just destroying our health care system but the rest of the worlds as well. It takes money to do this.
It is also worth noting that “lifestyle” and it’s effect on health is a moving target. Is one drink a day good for you? Well until the paper that came out yesterday all the science said “YES” now it’s open to debate.
Fat good or fat bad? Exercise? Ask Jim Fixx.
Then we get to “accidents” or Darwin at work. What gets regulated and by whom? If the only goal is to drive health care costs down you can ban the following guns, motorcycles, cars, pools, 5 gallon buckets, all manual labor and other things that I think are pretty damn nice to have around.
It is fairly safe to say that if you are a 9-5 Dad, teatoadler that does not smoke you are probably better off than a meth addicted male prostitute in the healthy lifestyle scheme of things. However a lot of “healthy” people die and die long lingering deaths. The meth addict is going to go fairly fast and not get real good treatment when he does. Facts hurt. No one cares about him. The nice productive member of society has his family and friends busting the Drs ass to “do something” to keep him alive. That 4th course of cemo probably won’t bring Dad back but is costing someone a ton of money.
Everyone is going to die. The rich and “healthy” just take longer and spend more money on it when they do.
Mock the spread of infectious disease all you want and write it out of health care plans and see what happens in 5 years or sooner.
dbltap | 10/23/2007 01:33 PM CDT -
Welcome to Hell…
A radical plan to improve the nation’s health - including a workplace “exercise hour” - has been unveiled by a leading Government adviser.
New figures today show England is the fattest country in the EU. Now Professor Julian Le Grand, chairman of Health England, hopes to encourage people to improve their diets, give up smoking and exercise more.
He proposed the introduction of a smoking permit, which smokers would be required to show each time they bought tobacco. It is then their choice to go smoke free and not buy a permit.
Companies with more than 500 staff would have an “ exercise hour”. Employees would have to deliberately choose not to join in. The proposalsare the opposite of the Government’s approach which requires people to opt in to healthy lifestyles. Instead it would be up to them to make the unhealthy choice.
In his speech to the Royal Statistical Society last night the professor, a former aide to Tony
Blair said: “It is not like banning something, it’s a softer form of paternalism.”dbltap | 10/23/2007 07:25 PM CDT -
We already have the perfect system for preventing this problem from taking over the government. The Constitution of the United States does not provide any ready mechanism by which the majority can vote themselves rights to the contents of the minority’s wallets. Article I, Section 8 specifies EVERY SINGLE THING that government is empowered to do, and “pay citizens’ doctor bills” isn’t in there. Neither are most of the other things that the government spends taxpayer money on these days.
So we ignore the rules and just do it anyway.
It may well be (the historical evidence for this view is quite ample) that democratically-organized governments are, in the long run, incapable of resisting the temptation of politicians to buy votes for themselves with their constituents’ money, regardless of what rules and procedures are in place to prevent it.
Matt | 10/27/2007 03:57 AM CDT
