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Archive for the ‘Third party payer’ Category

I’ve often explained that “third-party payer” is a major problem in our healthcare sector.

This occurs when consumers can buy healthcare with other people’s money. For instance, nearly half of all healthcare spending in America is directly financed by government. And a big chunk of supposedly private healthcare spending is actually the result of government policies that encourage and subsidize over-insurance (in which case, people may be buying healthcare with their own money, at least indirectly, but in a system akin to a pre-paid all-you-can-eat buffet).

Anyhow, one of the big downsides of this system is that third-party payer undermines market discipline and leads to higher prices and massive inefficiency in the health sector.

This then leads to a perverse outcome as politicians point to the higher prices and inefficiency and say this is evidence of market failure!! In a stereotypical example of “Mitchell’s Law,” they then propose more government to ostensibly deal with problems created by government (and people wonder why I have lots of gray hair).

We have the same problem in higher education, except it may be even worse if you look at these charts. Simply stated, government loans and grants have enabled colleges, schools, and universities to dramatically boost tuition and engage in massive bureaucratic featherbedding.

Interestingly, the Obama Administration has a proposal that sort of addresses this issue. The Department of Education is proposing “gainful employment” regulations that would, among other provisions, limit loans and financial aid on the basis of whether a school produces students with high student-loan debt relative to post-graduate earnings.

This sounds like it might be a good idea. After all, it would presumably lead to less government spending.

But there’s a catch. A giant catch, as explained by Brian Garst of the Center for Freedom and Prosperity.

…if it is truly needed to protect students, why are public and private non-profit universities excluded? For-profit schools only serve about 20% of all higher education students, and yet are the exclusive target of the regulation.

Yes, you read correctly. The Obama Administration is not trying to save money or impose accountability. Instead, it is seeking to undermine competition.

You may think I’m making this up, but a former senior bureaucrat at the Department of Education bragged, in a speech to a left-wing group, that the goal is to stamp out for-profit schools.

Here’s another excerpt from the folks at the Center for Freedom and Prosperity.

Former deputy undersecretary of education Robert Shireman, who initiated the Gainful Employment regulations, is currently under investigation for ethics violations and conflicts of interest relating to these effort. He has made clear through public comments that he sees eradicating private-sector colleges as his ultimate goal. In a recent speech delivered at the Center for American Progress, he said he does not believe that a business should own a college.

This fight illustrates why government intervention is so corrupting.

I don’t like any federal subsidies to education, whether for K-12 or for higher education. I don’t care whether the subsidies are for government schools, non-profit private schools, or for-profit private schools.

So I would like to cut off loans, grants, and other funds to for-profit schools, but that should happen at the same time that handouts also are being eliminated for other types of schools (Tim Carney has a very good explanation of why there are no good guys in this fight).

Let me close with an analogy.

I don’t want federal money in the healthcare system. So that means I don’t want payments of taxpayer money to private hospitals and private physicians.

But I would be even more agitated if the Obama White House said that it would “save money” by cutting off health funds, but only monies going to the private providers. The net result is that we all would be forced into VA-type treatment from government.

The moral of the story is to shrink government across the board.

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The new leftist website, Vox, has an article by Sarah Kliff on Vermont’s experiment with a single-payer healthcare system.

But I don’t really have much to say about what’s happening in the Green Mountain State, other than to declare that I much prefer healthcare experiments to occur at the state level. Indeed, we should reform Medicaid and Medicare and also fix the tax code so that Washington has no role in healthcare. Then the states can experiment and compete to see what works best.

But that’s a topic for another day. The real reason I cite Kliff’s article is that Ezra Klein tweeted this image from the article and stated that is was “The case for single payer, in one graphic.”

Vox Third-Party Payer

I don’t know if the numbers in the graphic are correct, but I have no reason to think they’re wrong.

Regardless, I certainly don’t disagree with the notion that our healthcare system is absurdly expensive and ridiculously inefficient.

In other words, the folks at Vox have accurately diagnosed a problem.

However, do these flaws prove “the case for single payer”?

It’s probably true that “single payer” has a lower monetary cost than the system we have today (assuming you don’t include the cost of substandard care and denied treatment), but that doesn’t mean it’s the ideal system.

Indeed, there is a better way to deal with the waste, inefficiency, and bureaucracy of the current system. third-party-2The answer is free markets and genuine insurance, both of which would help address the real problem of third-party payer.

Third-party payer, for those who are new to the healthcare field, is what you get when somebody other than the consumer picks up the tab. And because of government intervention, that’s what happens with about 90 percent of healthcare spending in the United States. Here’s what John Goodman had to say about this problem.

Almost everyone believes there is an enormous amount of waste and inefficiency in health care. But why is that? In a normal market, wherever there is waste, entrepreneurs are likely to be in hot pursuit — figuring out ways to profit from its elimination by cost-reducing, quality-enhancing innovations. Why isn’t this happening in health care? As it turns out, there is a lot of innovation here. But all too often, it’s the wrong kind. There has been an enormous amount of innovation in the medical marketplace regarding the organization and financing of care. And wherever health insurers are paying the bills (almost 90 percent of the market) it has been of two forms: (1) helping the supply side of the market maximize against third-party reimbursement formulas, or (2) helping the third-party payers minimize what they pay out. Of course, these developments have only a tangential relationship to the quality of care patients receive or its efficient delivery.

And here’s some analysis from a study published by the National Bureau of Economic Research.

In most industries, higher quality is associated with higher prices. That is not true in medical care, however, largely because of the public sector. …Every analysis of medical care that has been done highlights the significant waste of resources in providing care. Consider a few examples: one study found that physicians spent on average of 142 hours annually interacting with health plans, at an estimated cost to practices of $68,274 per physician (Casalino et al., 2009). Another study found that 35 percent of nurses’ time in medical/surgical units of hospitals was spent on documentation (Hendrich et al., 2008); patient care was far smaller. …In retail trade, the customer is the individual shopper. If Wal-Mart finds a way to save money, it can pass that along to consumers directly. In health care, in contrast, the situation is more complex, since patients do not pay much of the bill out-of-pocket. Rather, costs are passed from providers to insurers to employers… About one-third of medical spending is not associated with improved outcomes, significantly cutting the efficiency of the medical system and leading to enormous adverse effects.

Here’s my humble contribution to the discussion, starting with an explanation of how special tax breaks deserves some of the blame.

…how many people realize that this bureaucratic process is the result of government interference? For all intents and purposes, social engineering in the tax code created this mess. Specifically, most of us get some of our compensation in the form of health insurance policies from our employers. And because that type of income is exempt from taxation, this encourages so-called Cadillac health plans. …We have replaced (or at least agumented) insurance with pre-paid health care.

I then explain why this isn’t a good idea.

Insurance is supposed to be for unforseen major expenses, such as a heart attack. But our gold-plated health plans now mean we use insurance for routine medical costs. This means, of course, we have the paperwork issues…, but that’s just a small part of the problem. Even more problematic, our pre-paid health care system is somewhat akin to going to an all-you-can-eat restaurant. We have an incentive to over-consume since we’ve already paid. Except this analogy is insufficient. When we go to all-you-can-eat restaurants, at least we know we’re paying a certain amount of money for an unlimited amount of food. Many Americans, by contrast, have no idea how much of their compensation is being diverted to purchase health plans. Last but not least, we need to consider how this messed-up approach causes inefficiency and higher costs. We consumers don’t feel any need to be careful shoppers since we perceive that our health care is being paid by someone else. Should we be surprised, then, that normal market forces don’t seem to be working?

And I ask readers to think about the damage this approach would cause if applied in other sectors of the economy.

Imagine if auto insurance worked this way? Or homeowner’s insurance? Would it make sense to file insurance forms to get an oil change? Or to buy a new couch? That sounds crazy. The system would be needlessly bureaucratic, and costs would rise because we would act like we were spending other people’s money.  But that’s what would probably happen if government intervened in the same way it does in the health-care sector.

This is probably more than most people care to read, but it underscores the point that we don’t have a free market in health care. Not now, and not before Obamacare.

So the folks at Vox are right about the current system being a mess. But I disagree with the notion that more government is a way to solve problems created by government.

The real answer, as I’ve already noted, is to get Washington out of health care. This means entitlement reform AND tax reform.

And if you want to get a flavor of why this would generate better results, watch this Reason TV video and read these stories from Maine and North Carolina.

So how do we get there? Repealing Obamacare is a necessary but far from sufficient condition. Cato’s Adjunct Scholar, John Cochrane, has a nice roadmap of what’s really needed.

Though Vermont certainly is welcome to travel in the other direction. It’s always good to have bad examples and I wouldn’t be surprised if the “Moocher State” played that role.

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Obamacare may not be good news for taxpayers or consumers, but let’s look at the bright side. At least the law has generated some superb political humor, including funny videos.

*The head of the National Socialist Workers Party finds out he can’t keep his health plan.

*A creepy version of Uncle Sam wants to know about your sex life.

*Young people discover that they’re screwed by Obamacare.

*One of the biggest statists of the 20th century is angry that the Obamacare exchanges don’t work.

We have another addition to this amusing collection. This cartoon video employs lots of snark to expose the illogical underpinnings of Obamacare.

My one complaint with this video, though, is that it merely scratches the surface.

Yes, Obamacare is a cluster-you-know-what, but there are many other government programs and policies that cause inefficiency and high costs

Here’s some of what I wrote on this topic back in 2009, starting with an explanation of how government intervention in the tax code has distorted the insurance market and turned it into an inefficient form of pre-paid healthcare.

Insurance is supposed to be for unforseen major expenses, such as a heart attack. But our gold-plated health plans now mean we use insurance for routine medical costs. This means, of course, we have the paperwork issues discussed above, but that’s just a small part of the problem. Even more problematic, our pre-paid health care system is somewhat akin to going to an all-you-can-eat restaurant. We have an incentive to over-consume since we’ve already paid. Except this analogy is insufficient. When we go to all-you-can-eat restaurants, at least we know we’re paying a certain amount of money for an unlimited amount of food. Many Americans, by contrast, have no idea how much of their compensation is being diverted to purchase health plans.

I then ask readers to contemplate what car insurance would look like if government also intervened in that market. Or to think about the consequences if insurance for houses also was subject to government-caused distortion.

Imagine if auto insurance worked this way? Or homeowner’s insurance? Would it make sense to file insurance forms to get an oil change? Or to buy a new couch? That sounds crazy. The system would be needlessly bureaucratic, and costs would rise because we would act like we were spending other people’s money.  But that’s what would probably happen if government intervened in the same way it does in the health-care sector.

The best way of fixing the mess in health insurance, for what it’s worth, is a flat tax. This is because the “healthcare exclusion” is repealed and compensation in the form of fringe benefits is taxed at the same (low) rate as other forms of income.

This presumably will end the incentive for gold-plated Cadillac health plans since workers – once the playing field is level – will prefer a greater amount cash compensation. So health plans gradually will be scaled back so they offer genuine insurance.

This video from the Center for Freedom and Prosperity offers a good explanation.

You also should watch this Reason TV video that shows a real-world example of how prices fall and the system is more efficient when consumers are in charge of healthcare.

For the same reason, I also recommend this story from North Carolina, as well as this example of capitalism from Maine.

It’s also worth noting that there are a few tiny parts of our healthcare system where markets are allowed to operate and consumers are in charge of spending their own money, and in these areas – such as cosmetic surgery, laser eye surgery, and abortion (regardless of whether you approve or disapprove) – we find stable prices and rising quality.

Free markets work…when they’re allowed to function.

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Not counting humor-oriented pieces such as this and this, it’s been nearly a month since I’ve written about Obamacare.

To make up for this oversight, today we’re going to look at a way out of the Obamacare mess.

But the goal isn’t simply to repeal the President’s bad policy. That merely gets us back to where we were in 2009. We need to figure out how to restore market forces to healthcare, and that means undoing decades of misguided government intervention.

Fortunately, we have a roadmap thanks to John Cochrane, a Cato adjunct scholar and Professor at the University of Chicago. Writing in the Wall Street Journal, he explains how radical deregulation is the right approach.

He starts with an essential point that “settled law” doesn’t mean unchangeable law.

…proponents call it “settled law,” but as Prohibition taught us, not even a constitutional amendment is settled law—if it is dysfunctional enough, and if Americans can see a clear alternative.

And he points out that Obamacare will get worse over time.

This fall’s website fiasco and policy cancellations are only the beginning. Next spring the individual mandate is likely to unravel when we see how sick the people are who signed up on exchanges, and if our government really is going to penalize voters for not buying health insurance. The employer mandate and “accountable care organizations” will take their turns in the news. There will be scandals. There will be fraud. This will go on for years.

But the law won’t collapse on its own. Indeed, its failures will be used as excuses for even more government.

Yet opponents should not sit back and revel in dysfunction. …Without a clear alternative, we will simply patch more, subsidize more, and ignore frauds and scandals, as we do in Medicare and other programs.

So what should be done?

Professor Cochrane points out that the healthcare system isn’t a free market now and it wasn’t a free market when Obamacare was imposed.

Instead, it’s one of the most heavily government-controlled sectors of our economy.

The U.S. health-care market is dysfunctional. Obscure prices and $500 Band-Aids are legendary. The reason is simple: Health care and health insurance are strongly protected from competition. There are explicit barriers to entry, for example the laws in many states that require a “certificate of need” before one can build a new hospital. Regulatory compliance costs, approvals, nonprofit status, restrictions on foreign doctors and nurses, limits on medical residencies, and many more barriers keep prices up and competitors out. Hospitals whose main clients are uncompetitive insurers and the government cannot innovate and provide efficient cash service.

He then explains how a market could operate – if it was allowed.

A much freer market in health care and health insurance can work, can deliver high quality, technically innovative care at much lower cost, and solve the pathologies of the pre-existing system. …We’ll know we are there when prices are on hospital websites, cash customers get discounts, and new hospitals and insurers swamp your inbox with attractive offers and great service. …Only deregulation can unleash competition. And only disruptive competition, where new businesses drive out old ones, will bring efficiency, lower costs and innovation.

If this sounds familiar, it may be that you watched this video from Reason TV on market-based hospitalization. And if you haven’t, you should!

Cochrane writes that deregulation will enable the “creative destruction” that brings progress in other parts of the economy.

We need to permit the Southwest Airlines, Wal-Mart, Amazon.com and Apples of the world to bring to health care the same dramatic improvements in price, quality, variety, technology and efficiency that they brought to air travel, retail and electronics. …Health insurance should be individual, portable across jobs, states and providers; lifelong and guaranteed-renewable, meaning you have the right to continue with no unexpected increase in premiums if you get sick. Insurance should protect wealth against large, unforeseen, necessary expenses, rather than be a wildly inefficient payment plan for routine expenses. People want to buy this insurance, and companies want to sell it. It would be far cheaper, and would solve the pre-existing conditions problem. We do not have such health insurance only because it was regulated out of existence.

Needless to say, Obamacare is the opposite of a free market. It assumes that you solve government-created problems by adding additional layers of government.

The Affordable Care Act bets…that more regulation, price controls, effectiveness panels, and “accountable care” organizations will force efficiency, innovation, quality and service from the top down. Has this ever worked?

Cochrane has the right diagnosis and right cure, but that’s the easy part. The real challenge is implementing the policies that would restore a functioning market.

That requires reforms to Medicare and Medicaid, not only to save money for taxpayers, but also because those are some of the steps that are needed if we want market forces to bring down the cost of healthcare.

Health care liberalization also means a flat tax, not only for the pro-growth impact of lower tax rates, but also because it gets rid of the internal revenue code’s healthcare exclusion, thus ending the distortion that encourages over-insurance.

It means state-by-state battles to get rid of regulations, mandates, and other forms of intervention that hinder competition and markets.

They say that even long journeys begin with a single step. That’s true, but it’s also important to walk in the right direction.

That hasn’t happened in recent decades, so it’s time to scrub the slate clean. We need free markets, not more government. We need more consumer sovereignty, not more third-party payer.

Since I’m a sucker for good political humor, we’re going to close with a great Michael Ramirez cartoon. As you can see, there’s a reason why he won my political cartoonist contest. Indeed, if I ever do another contest, this could replace his award-winning “Julia” cartoon.

Pajama Boy Move Out

It’s almost enough to make you feel sorry for Pajama Boy.

Maybe somebody should fix him up with Julia. I’m guessing they wouldn’t even know how to reproduce without intervention, handouts, and subsidies, so that would be an additional way of improving the gene pool.

And it would offset the reproductive advantage of the bureaucracy.

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You know things are going poorly for the Obama White House when even the New York Times is writing about the “third world experience” of Obamacare.

Heck, it’s almost gotten to the point where I feel sorry for the President.

But I guess I must be a mean-spirited anti-government ideologue, because I can’t stop myself from mocking the President’s ill-fated healthcare scheme. Whether I’m sharing funny cartoons or sarcastic videos, I can’t resist the temptation to kick Obamacare while it’s down.

In this spirit of love and togetherness, let’s take a look at some recent news about the law.

McClatchy News has a big expose that reveals the magnitude of the President’s if-you-like-your-insurance-you-can-keep-it prevarication. Let’s review a couple of excerpts from the story, beginning with a comparison of the President’s promise and the staggering revelation that as many as 52 million Americans may have the rug pulled out from under them.

Even as President Barack Obama sold a new health care law in part by assuring Americans they would be able to keep their insurance plans, his administration knew that tens of millions of people actually could lose those their policies. …report in 2010 said that as many as 69 percent of certain employer-based insurance plans would lose that protection, meaning as many as 41 million people could lose their plans even if they wanted to keep them and would be forced into other plans. Another 11 million who bought their own insurance also could lose their plans. Combined, as many as 52 million Americans could lose or have lost old insurance plans.

Amazingly, the President continues to be truth-challenged.

Obama insisted anew Thursday that the problem is limited to people who buy their own insurance. “We’re talking about 5 percent of the population who are in what’s called the individual market. They’re out there buying health insurance on their own,” he told NBC. But a closer examination finds that the number of people who have plans changing, or have already changed, could be between 34 million to 52 million. That’s because many employer-provided insurance plans also could change, not just individually purchased insurance plans.

Now let’s examine an example of what this means. The Weekly Standard reports on what has happened to some citizens from flyover country.

McDonald's Obamacare CartoonIn North Dakota, only 30 people have so far signed up for Obamacare. Meanwhile, 35,000 people have already or will be losing their existing health insurance plans in that state alone.

But that’s not the only bad news for the President’s statist healthcare scheme.

It seems that Obamacare is a gold mine for crooks and con artists. Let’s look at parts of a New York Times story.

To the list of problems plaguing President Obama’s health care law, add one more — fraud. …State and federal authorities report a rising number of consumer complaints, ranging from deceptive sales practices to identity theft, linked to the Affordable Care Act. Obamacare Identity Theft Cartoon…Some level of fraud or abuse is predictable with any big government program… But now, the technical failures troubling the HealthCare.gov website, as well as the law’s complexity, threaten to make matters worse. …Authorities warn that in some cases the come-ons are merely a ruse to get people to divulge sensitive Medicare and banking information. …Medicare has also long been a magnet for swindlers, thanks to its sheer scale and complexity. The troubled rollout of the new health care law has amplified the problem.

By the way, this story doesn’t even mention the possibility and risk of hackers and identity thieves breaking into the massive government databases that will be created as a result of Obamacare.

And if you’ll allow me to briefly digress, the same danger exists if politicians create the huge tracking-and-monitoring database that would be necessary if state politicians get the authority to tax out-of-state Internet sales.

Returning to the topic of Obamacare, it’s also worth noting that the growing burden of taxes and spending isn’t part of the aforementioned stories. Yet can there be any doubt that the program’s failures will lead to even more spending?

Not that any of us should be surprised. That’s almost always been the case when politicians create new entitlement programs. Indeed, I would pat myself on the back for making exactly this predication about Obamacare, but anybody with a room-temperature IQ knew this would happen, so I can’t claim any special insight.

But this does give me a reason to share this new Lisa Benson cartoon.

Obamacare Cost Cartoon

Needless to say, I’m enjoying the ongoing Obamacare disaster. But not just for reasons of Schadenfreude. The cluster-you-know-what of Obamacare is good news because it increases our chances of repealing the law in a few years (just as I predicted back in April).

But not just our chance to repeal Obamacare. We may actually have a chance to deal with the larger government-caused problems in our healthcare system, all of which lead to third-party payer and undermine the efficiency and low costs that exist when there is a genuine free market.

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We have a very interesting question from a reader in Nebraska. Is Obamacare such a cluster-you-know-what that the law will self-destruct?

Well, I’ve already explained why I’m optimistic about the possibility of turning Obamacare lemons into free-market lemonade.

Simply stated, the law took a healthcare system that already was a mess because of government intervention and subsidies and it doubled down on that misguided approach!

And since it’s highly unlikely that more government is the solution to problems created by government in the first place, I think we’ll have great fun being able to highlight all the bad consequences of Obamacare and make a principled case for pro-market reform (meaning not only Medicaid reform and Medicare reform, but also tax reform to help deal with the third-party payer crisis).

That being said, I don’t think Obamacare will collapse on its own. We’re going to have to give it a push. A big push.

This is because legislation will be required to undo all the taxes and subsidies in the law. And even though we have the bizarre situation of the Obama Administration deciding to deliberately ignore a legal requirement to impose an employer mandate beginning in 2014, we’ll also need legislation to undo both the individual and the employer mandate.

In other words, the fact that the law won’t achieve any of its goals (such as lower costs and universal insurance coverage) won’t cause the bad policy to disappear.

But it will make the law even more unpopular – particularly if we do our job.

That’s why we should relentlessly highlight examples of wasteful Obamacare spending. The Washington Post, for instance, is reporting on “the extreme measures states are taking to get young people signed up for Obamacare programs.”

And when even the Washington Post thinks politicians and bureaucrats are going above and beyond in their efforts to waste money, you know it’s something especially foolish. But when you’re trying to trick young people into signing up for insurance policies designed to subsidize richer seniors, you don’t really have much choice.

Oregon might do branded coffee cups, for example, whereas Seattle is looking at doing outreach at music festivals. It only makes sense, then, that Kentucky would be doing outreach at multiple bourbon festivals across the state.

From a big picture perspective, this type of waste in just a penny or two on the dollar, but it’s very symbolic of a law that is poorly designed and unworkable.

I also think political cartoonists are very helpful allies since they’re so effective at illustrating some of the worst parts of Obamacare. So let’s wrap up this post with a new batch of cartoons.

We’ll start with a couple that skirt the edge of appropriateness by playing off the recent airline crash in San Francisco. The first one is by Steve Breen.

Obamacare Cartoon July 15 1

And the second one is by Eric Allie.

Obamacare Cartoon July 15 2

The donkey pilot blaming the elephant passenger is a good touch, and you find that theme in this Gary Varvel gem.

Obamacare Cartoon July 15 3

Let’s close with a great Rick McKee cartoon that focuses on exploding costs, a message near and dear to my heart.

Obamacare Cartoon July 15 4

One final warning. We’re not guaranteed of victory simply because Obamacare is leading to bad results. The statists are going to try and seize control of the narrative by asserting that the higher costs and greater inefficiencies could be fixed by squandering more money in the short run and imposing a single-payer system in the long run.

That’s a very perverse example of Mitchell’s Law and it surely doesn’t make sense to normal people. But it’s an approach that plays to the worst instincts of politicians, many of who will grab any excuse to increase the size and scope of Washington.

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Last year, I showed an image of evolutionary stages that was so accurate that it would earn approval even from many strict creationists.

Here’s a new image of evolutionary stages that sets the stage for today’s discussion. Simply stated, Americans are becoming bigger. In some cases, a lot bigger.

Is this trend toward greater obesity a bad thing? As a reader asks, is it something that requires a government response?

The answer is yes…and no.

Libertarians believe people should be free to make their own decisions so long as they’re not infringing on the rights of others. And that includes the right to eat too much and exercise too little.

But the “yes” part of the answer is that we can think obesity is unfortunate and we can encourage our friends and family members to live healthier lifestyles. And if we’re willing to be pests and to run the risk of being told to mind our own business, we can even encourage strangers to shape up.

The “no” part of the answer refers to whether the government somehow should get involved. I shared a great video from Reason TV several years ago that explained why paternalistic anti-obesity programs don’t work. And just this week, one of my colleagues at the Cato Institute, Michael Tanner, addressed this issue. Here’s some of what he wrote for National Review.

Recently the American Medical Association declared that it will consider obesity a disease. …the AMA’s move is a symptom of a disease that is seriously troubling our society: the abdication of personal responsibility and an invitation to government meddling. …the AMA’s move is actually a way for its members to receive more federal dollars, by getting obesity treatments covered under government health plans. A bipartisan group of congressmen has already seized on the AMA declaration as they push for Medicare coverage of diet drugs. Observers also expect an effort to expand Medicare reimbursement for bariatric surgery, a.k.a. stomach stapling. And there will almost certainly be pressure to mandate coverage for these things by private insurance carriers, under both state laws and the Affordable Care Act. …After the AMA decision, John Morton, treasurer of the American Society for Metabolic and Bariatric Surgery, was almost giddy, calling the AMA decision a “tipping point” and adding that “now coverage policy must catch up to that consensus.” Since a typical bariatric surgery costs as much as $40,000, that could be interpreted as a warning for all of us to get out our wallets. In the end, we will be paying more, through either taxes or higher premiums.

And don’t forget that the price of treatments such as surgery almost surely will climb as there’s more “third-party payer,” so our taxes and premiums will climb by a lot more than what it cost to provide these services today.

But that’s only part of the story. Since government is picking up the tab, that gives politicians a green light (at least in their minds) to pass laws and rules designed to control and influence our behavior.

…expanded Medicare and insurance coverage socialize the cost of treating obesity, thereby inviting all manner of government mischief. After all, if being fat is not our fault, the blame must lie with food companies, advertising, or other things that need to be regulated. And if you and I have to pay for the food and exercise choices of others, we should have a say in those choices. Already, Harold Goldstein, executive director of the California Center for Public Health Advocacy, has cited the AMA declaration to boost his group’s efforts to ban junk food and tax soft drinks. …The nanny state can now claim medical backing.

Mayor Bloomberg doubtlessly thinks this is a wonderful idea. Maybe he can ban snack food as well as 17 oz. sodas.

Heck, why not have a cop in every house to make sure we consume 5 servings of fruits and vegetables every day? Actually, I shouldn’t say that too loud. Given the Supreme Court’s Obamacare decision, there’s apparently no limit to the federal government’s power to control our behavior through the tax code, so I’d hate to give politicians any more crazy ideas.

If you think I’m engaging in a bit of hyperbole, just remember that New York City already has gone after bake sales for peddling sweets.

So what’s the big picture? Mike nails it, explaining that the medicalization of obesity is symptomatic of the effort to undermine individual responsibility.

Much of public policy these days seems designed to eliminate personal responsibility. Take efforts to reduce poverty, for example. How much of poverty is due to poor lifestyle choices? We don’t want to blame the poor, nor should we forget that there are those, especially children, trapped in poverty by circumstances beyond their control. But we also know the keys to getting out of or staying out of poverty: (1) finish school; (2) do not get pregnant outside marriage; and (3) get a job, any job, and stick with it. Unfortunately, much of the welfare state we have constructed is perversely designed in ways that end up encouraging destructive behaviors.

In other words, the welfare state hurts the poor, as Thomas Sowell explained the other day. Though I suppose fairness requires me to admit that there are those who benefit from all the various income-redistribution programs. A vast army of bureaucrats get very comfortable salaries to administer these program, and these poverty pimps, as Walter Williams describes them, enjoy much higher levels of compensation than they could earn in the economy’s productive sector.

But I’m guilty, once again, of digressing. Let’s get to the rest of Mike’s final point.

Big government reduces all of us to the status of children. We have no responsibility for anything in our lives; therefore, government must take care of us. All we have to do, like children, is give up the freedom to make our own choices — good or bad.

Amen. A “good choice” isn’t good if it’s the result of coercion. Paternalists sometime have admirable goals, but they err when they want to turn big government into big daddy and big mommy.

P.S. Several readers have noticed that I’m now writing one post a day instead of two and have asked whether this is a permanent change. The answer is yes. With all the other things I’m trying to juggle – researching and writing, dealing with Capitol Hill, talking to the press, giving speeches, etc – this seems like the best way to allocate my time. Particularly now that my posts tend to be a lot longer and more substantive than when I began blogging.

P.P.S. Since we’re on the topic of obesity, it goes without saying that our real problem is bloated government, not bloated people. Which is why I always enjoy cartoons that portray DC as the true home of gluttony. For good examples, see here, here, hereherehere, here, here, here and here.

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I’ve complained ad nauseam about how government has screwed up the health sector, both because of spending programs such as Medicare and Medicaid and because of tax and regulatory distortions that have mutated the supposedly private insurance market into some bizarre form of pre-paid, all-you-can-eat healthcare.

These policies have created a third-party payer crisis.

http://danieljmitchell.wordpress.com/2010/12/08/everything-you-need-to-know-about-healthcare-economics-in-one-chart/There are a few tiny parts of our healthcare system where markets are allowed to operate and consumers are in charge of spending their own money, and in these areas – such as cosmetic surgery, laser eye surgery, and abortion – we find stable prices and rising quality.

But how do we move free market from isolated niches into the mainstream of the healthcare sector?

Well, it’s happening in small ways organically, largely because the current system has become an even bigger mess under Obamacare.

I’ve already cited the case of a North Carolina doctor who decided to use market-based pricing, and I’ve shared a very powerful video from Reason TV about  a hospital in Oklahoma that’s doing the same thing.

Now we have a free market revolution by a doctor in Maine.

Dr. Michael Ciampi took a step this spring that many of his fellow physicians would describe as radical. The family physician stopped accepting all forms of health insurance. In early 2013, Ciampi sent a letter to his patients informing them that he would no longer accept any kind of health coverage, both private and government-sponsored. Given that he was now asking patients to pay for his services out of pocket, he posted his prices on the practice’s website. …“It’s been almost unanimous that patients have expressed understanding at why I’m doing what I’m doing… the decision to do away with insurance allows Ciampi to practice medicine the way he sees fit, he said. Insurance companies no longer dictate how much he charges. He can offer discounts to patients struggling with their medical bills. He can make house calls. “I’m freed up to do what I think is right for the patients,” Ciampi said. “If I’m providing them a service that they value, they can pay me, and we cut the insurance out as the middleman and cut out a lot of the expense.”

His expenses have come down, and consumers benefit from much lower prices.

Ciampi expects his practice to perform just as well financially, if not better, than before he ditched insurance. The new approach will likely attract new patients…because Ciampi has slashed his prices. “I’ve been able to cut my prices in half because my overhead will be so much less,” he said. Before, Ciampi charged $160 for an office visit with an existing patient facing one or more complicated health problems. Now, he charges $75. Patients with an earache or strep throat can spend $300 at their local hospital emergency room, or promptly get an appointment at his office and pay $50, he said. Ciampi collects payment at the end of the visit, freeing him of the time and costs associated with sending bills, he said. …“If more doctors were able to do this, that would be real health care reform,” he said. “That’s when we’d see the cost of medicine truly go down.”

I have no idea if all medical costs would fall by 50 percent in a market-based system, but even if the system-wide savings were only half that much, that would be an enormous benefit to the economy.

In other words, it would be great to repeal Obamacare, but fixing the healthcare system requires far more sweeping reform.

We’ve tried everything else, and all these other options have failed. Maybe it’s time to give the free market a chance.

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I’ve frequently argued that “third-party payer” is the main problem with the healthcare system. In simpler terms, this is the notion that a market won’t function very well if consumers think they’re spending someone else’s money.

Why be a careful consumer, after all, if someone else is picking up the tab?

This is a pervasive problem in the United States, thanks to government programs such as Medicaid and Medicare that account for nearly 50 percent of total healthcare spending.

But our supposedly private insurance system also contributes to the problem. Under our convoluted internal revenue code, there’s no tax on worker compensation in the form of employer-provided fringe benefits such as health insurance. This allows workers to avoid a significant amount of both income tax and payroll tax by getting more and more of their compensation in the form of fringe benefits.

And since the average employer-provided family policy now costs about $15,000, the tax savings are significant. I like it when the government is deprived of revenue, of course, but this policy also contributes to the third-party payer problem by encouraging over-insurance.

Indeed, we’ve reached the point where only 12 percent of healthcare costs are paid for directly by the consumer. No wonder the healthcare market doesn’t function very well!

With this bit of background, let me explain why I’m about to say something quasi-nice about Obamacare.

Since I’ve already said the law is a fiscal nightmare and explained how it further cripples market forces in healthcare, this may be a bit of a surprise.

But even ogres and trolls occasionally have good points, and the same is true of Obamacare.

There’s a provision in the law that will cap the tax break for employer-provided health insurance. Here are parts of a New York Times report.

Say goodbye to that $500 deductible insurance plan and the $20 co-payment for a doctor’s office visit. They are likely to become luxuries of the past. …Expect to have your blood pressure checked or a prescription filled at a clinic at your office, rather than by your private doctor. Then blame — or credit — the so-called Cadillac tax, which penalizes companies that offer high-end health care plans to their employees. …Companies hoping to avoid the tax are beginning to scale back the more generous health benefits they have traditionally offered and to look harder for ways to bring down the overall cost of care. In a way, the changes are right in line with the administration’s plan: To encourage employers to move away from plans that insulate workers from the cost of care and often lead to excessive procedures and tests, and galvanize employers to try to control ever-increasing medical costs. …as many as 75 percent of plans could be affected by the tax over the next decade — unless employers manage to significantly rein in their costs.

The key passage in the above excerpt is that this change will “encourage employers to move away from plans that insulate workers from the cost of care.”

That’s just another way of describing how to deal with the third-party payer problem.

But I’m not an unqualified fan of this provision of Obamacare. I like getting rid of tax breaks, but not if it means more money for government. I want to use the money to lower tax rates, not to fatten government coffers. Needless to say, that’s not what happened with Obamacare.

Moreover, I don’t want employers figuring out how to reduce costs. Consumers need to be in charge, But if you read more of the story, it’s clear that many supporters of Obamacare don’t understand this critical distinction.

Proponents of the law say the Cadillac tax is helping bring down costs by making employers pay attention to what their health care costs are likely to be in the long run. “It’s really one of the most significant provisions” in the Affordable Care Act, said Jonathan Gruber, the M.I.T. economist who played an influential role in shaping the law.

Since Prof. Gruber played an “influential role” in the law, I guess we shouldn’t be surprised that he’s misguided even on this provision. But let’s set that aside.

I just wanted to point out that the “Cadillac Tax” would be my choice if I was forced to identify a silver lining to the dark cloud of Obamacare.

P.S. I’m not trying to rationalize a bad law. I want Obamacare repealed and I actually am reasonably optimistic that this can happen.

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What government spends the most on health care?

  • Is it Canada or the United Kingdom, which are famous (or, if these stories are any indication, infamous would be a better description) for single-payer healthcare systems?
  • Is it Sweden, the home of the cradle-to-grave welfare state?
  • Or France, the land of the world’s most statist people?
  • How about Italy or Greece, nations that have spent themselves into fiscal crisis?

Nope, nope, nope, and nope.

The United States spends more money, on a per-capita basis, than any of those countries. Here’s a chart from a Forbes analysis prepared by Doug Holtz-Eakin and Avik Roy.

Per Capita Government Healthcare Spending

There are three big reasons why there’s more government-financed healthcare spending in the United States.

1. Richer nations tend to spend more, regardless of how they structure their healthcare systems.

2. As you can see at the 1:18 mark of this video, the United States is halfway down the road to a single-payer system thanks to programs such as Medicare and Medicaid.

3. America’s pervasive government-created third-party payer system leads to high prices and costly inefficiency.

So what’s the moral of the story? Simple, notwithstanding the shallow rhetoric that dominates much of the debate, the United States does not have anything close to a free-market healthcare system.

That was true before Obamacare and it’s even more true now that Obamacare has been enacted.

Indeed, it’s quite likely that many nations with “guaranteed” health care actually have more market-oriented systems than the United States.

Avik Roy argues, for instance, that Switzerland’s system is the best in the world. And the chart above certainly shows less direct government spending.

And there’s also the example of Singapore, which also is a very rich nation that has far less government spending on healthcare than the United States.

If you read the Avik Roy articles linked above, and also this study by my Cato colleague Mike Tanner, you’ll see that there’s no perfect system.

Our challenge is that it’s very difficult to put toothpaste back in a tube. Thanks to government programs and backdoor intervention through the tax code, the United States healthcare system is nowhere close to a free market (with a few minor exceptions such as cosmetic surgery and – regardless of what you think of the procedure – abortion).

Yes, I think entitlement reform can make things better, though fixing Medicare and Medicaid should be seen as a necessary but not sufficient condition. As I show in this post, we would simply move a little bit in the right direction on the spectrum between markets and statism.

Tax reform could solve another part of the problem by removing the bias for over-insurance, which presumably would lead people to pay out of pocket and use insurance for large, unexpected costs.

Fundamental tax reform is also the best way to improve the healthcare system. Under current law, compensation in the form of fringe benefits such as health insurance is tax free. Not only is it deductible to employers and non-taxable to employees, it also isn’t hit by the payroll tax. This creates a huge incentive for gold-plated health insurance policies that cover routine costs and have very low deductibles. …Shifting to a flat tax means that all forms of employee compensation are taxed at the same low rate, a reform that presumably over time will encourage both employers and employees to migrate away from the inefficient over-use of insurance that characterizes the current system. For all intents and purposes, the health insurance market presumably would begin to resemble the vastly more efficient and consumer-friendly auto insurance and homeowner’s insurance markets.

In other words, as this poster suggests, government is the problem and less government is the solution.

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Notwithstanding the title of this post, perhaps nobody deserves blame.

Sometimes, a good or service rises in price solely as a result of changes in supply and demand. And if the price of something climbs because of market forces, then it’s merely a reflection of unfettered exchanges between buyers and sellers.

But politicians and bureaucrats often distort market forces with subsidies. And even though consumers ostensibly benefit when government helps to pay for something, intervention can have very costly consequences.

I’ve already shared an amazing chart and a very powerful video to help explain how government subsidies in health care have created a third-party payer problem that has resulted in rapidly rising prices and considerable inefficiency in that sector.

Well, the good intentions of government also are causing problems for higher education.

Here’s a superb video from Learn Liberty, explaining why college expenses are skyrocketing.

The first part of the video shows that a college degree has become more valuable, so it’s understandable that the relative price of higher education has risen.

But then, beginning at about 1:55, the video discusses the role of subsidies. Echoing points I’ve made in the past, the professor explains how subsidies have simply generated higher prices. In other words, colleges have captured all the benefits, not students.

Business Week recently published a story that provides some glaring example of how universities have wasted all the additional money. Here are some remarkable excerpts.

“I have no idea what these people do,” says the biomedical engineering professor. Purdue has a $313,000-a-year acting provost and six vice and associate vice provosts, including a $198,000-a-year chief diversity officer. Among its 16 deans and 11 vice presidents are a $253,000 marketing officer and a $433,000 business school chief. The average full professor at the public university in West Lafayette, Ind., makes $125,000. The number of Purdue administrators has jumped 54 percent in the past decade—almost eight times the growth rate of tenured and tenure-track faculty. “We’re here to deliver a high-quality education at as low a price as possible,” says Robinson. “Why is it that we can’t find any money for more faculty, but there seems to be an almost unlimited budget for administrators?” …Purdue is typical: At universities nationwide, employment of administrators jumped 60 percent from 1993 to 2009, 10 times the growth rate for tenured faculty. “Administrative bloat is clearly contributing to the overall cost of higher education,” says Jay Greene, an education professor at the University of Arkansas. In a 2010 study, Greene found that from 1993 to 2007, spending on administration rose almost twice as fast as funding for research and teaching at 198 leading U.S. universities. …Trustees at the University of Connecticut are reviewing administrative salaries at the school’s main campus in Storrs, following a controversy over the compensation of the school’s former police chief, who received $256,000 annually—more than New York City’s police commissioner. …Mitch Daniels, a fiscal hawk who will become [Purdue's] president when his term expires in January…says he wants to take a look at administrative costs that he suspects are “marbled” throughout the university—beginning with his office. In anticipation of his arrival in January, and without his knowledge, the school renovated the president’s 4,000-square-foot suite. The cost was $355,000, enough to send 15 Indiana residents to Purdue for a year.

Wow. Reminds me of this post about politically correct featherbedding at the University of California at San Diego. I can see why college administrators like this system. But it’s definitely bad news for students who get stuck on a treadmill of higher tuition and more debt.

P.S. At 2:18, the video has a discussion of how subsidies lead to higher costs, which then leads to more demands for additional subsidies. Hmmm…bad government policy leads to more bad government policy. Seems like there’s a term for that phenomenon.

P.P.S. I highly recommend the Learn Liberty videos. Here’s one on protectionism, one on the legality of Obamacare, and here’s another about how excessive federal spending is America’s real fiscal problem.

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When I travel, particularly overseas, I run into a lot of people who are totally confused about the American healthcare system.

For all intents and purposes, they think the United States relies on the free market and that government (at least in the pre-Obamacare era) was largely absent.

So they are baffled when I tell them that nearly one-half of all health expenditures in America are directly financed by taxpayers  and that the supposedly private part of our healthcare system is massively distorted by government interference and intervention.

When explaining how government has screwed up private health insurance, I talk about third-party payer and  how genuinely private insurance works for home ownership and automobiles. And I cite examples of genuine free markets for cosmetic surgery and even (regardless of your views) abortion.

But from now on, I think I will simply tell people to watch this superb video from Reason TV.

This shows how a true free market operates. Efficiency and low prices are the norm, and consumers get a good deal.

My only quibble is that the video doesn’t explain how government policies – such as the healthcare exclusion in the tax code – should be blamed for the grotesque waste, inefficiency, and featherbedding in most parts of the medical industry.

But that’s a minor gripe. You should share this post with any and all fuzzy-headed friends and colleagues and tell them this is how smoothly the market would work if the government simply would get out of the way.

And if they want another example, here’s a report from North Carolina on free-market healthcare in action.

If we want this kind of system to be the rule rather than the exception, we need to scrap the healthcare exclusion in the tax code as part of a switch to a simple and fair flat tax. That will help bring some rationality to the health insurance market and address the part of the third-party payer crisis caused by indirect government intervention.

Then we also should reform Medicaid and Medicare to help address the part of the third-party payer crisis caused by the direct government intervention.

P.S. As this poster cleverly illustrates (and as Ronald Reagan correctly warned in the second video of this post), government is the problem, not the solution.

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When I give speeches about entitlement reform, I often make the point that there’s nothing radical about Paul Ryan’s plan to reform Medicare.

Spending will go up, for instance, not down. And the reforms only affect people under age 55. This is evolutionary change, not revolutionary change.

But my main example is that future seniors, for all intents and purposes, will have a health plan similar to what’s now available for Members of Congress. Not only the politicians, but also their staff and the entire federal bureaucracy.

I’m not the only one to think this is a powerful point. Here are a couple of passages from Deroy Murdock’s National Review column on the topic.

The Medicare-reform proposal of presumptive GOP running-mate Paul Ryan is precisely as extreme as the health plan available today to every member of Congress. Ryan envisions average seniors’ being able to enjoy Capitol Hill–style medical options. This itself, however, would be a choice. Seniors who oppose choice in health coverage will be 100 percent welcome to remain within traditional Medicare. …Wyden-Ryan mirrors the way federal legislators buy health insurance. As FactCheck.org’s Brooks Jackson notes, “House and Senate members are allowed to purchase private health insurance offered through the Federal Employees Health Benefits Program, which covers more than 8 million other federal employees, retirees and their families.” …As FactCheck.org, elaborates, “All plans cover hospital, surgical and physician services, and mental health services, prescription drugs and ‘catastrophic’ coverage against very large medical expenses . . . There are no exclusions for preexisting conditions.” Participants may change plans during annual “open season” periods. Also, the government pays 72 percent of the average worker’s premium, with a maximum of 75 percent. Democrats cannot explain why Medicare recipients need to become congressmen to enjoy such choices in health coverage. If Ryancare, in essence, is good enough for senior citizens like Nancy Pelosi and Harry Reid, it’s good enough for any senior who wants it after 2022.

Deroy’s column shows how supporters of entitlement reform can counter some of the left’s demagoguery.

He’s making a point about political salesmanship, but it’s also important to understand why Medicare modernization is good healthcare policy.

Simply stated, the main healthcare problem in America is the third-party payer crisis. As explained in this video, markets are dysfunctional when government programs and other forms of intervention create a system where 89 cents out of every healthcare dollar is paid for by somebody other than the consumer.

Ryan’s Medicare reform doesn’t directly address this problem, just as block-granting Medicaid and reforming the tax system don’t automatically restore a market-based approach.

But if a sufficient share of future seniors use their premium support vouchers to buy high-deductible catastrophic insurance policies (which presumably will be the smart approach), then a growing share of routine medical expenses will be purchased directly by consumers – thus slowly but surely returning market forces to healthcare.

So I fully agree with Deroy that there are smart ways to promote the Ryan Medicare reforms. But I also want people to understand what it is that we want to accomplish.

I elaborate in my video on Congressman Ryan’s proposed Medicare reform.

Last but not least, check out this chart and you’ll begin to understand the potential benefits of fixing the third-party payer problem.

P.S. The current version of the Ryan plan, now known as Ryan-Wyden, is not as good as the original version because it keeps the current Medicare system as an option.

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I’ve often complained that government-created third-party payer is the main problem with America’s healthcare system, and I was making that point well before Obamacare was imposed upon the country.

Simply stated, people won’t be smart consumers and providers won’t compete to keep costs low when the vast majority of expenses are paid for either by government programs or by insurance companies.

That’s why I want to see reforms to Medicare and Medicaid, not only to save money for taxpayers, but also because that’s one of the steps that is needed if we want market forces to bring down the cost of healthcare.

And I want to see a flat tax, not only for the pro-growth impact of lower tax rates, but also because it gets rid of the internal revenue code’s healthcare exclusion, thus ending the distortion that encourages over-insurance.

With all that in mind, I’m obviously a big fan of this new video from the Center for Freedom and Prosperity.

Narrated by Julie Borowski from FreedomWorks, the video explains that third-party payer has been a growing problem for decades and that it would have required fixing even if the Supreme Court hadn’t botched the Obamacare decision.

And now that we’re stuck with Obamacare, at least temporarily, it’s more important than ever to deal with this underlying problem.

P.S. This new video expands upon the analysis provided in a previous CF&P video.

P.P.S. Setting aside the debate about whether it’s right or wrong, the abortion market also is an interesting case study of how prices don’t rise when consumers pay out of pocket.

P.P.P.S. Government-created third-party payer also is screwing up the market for higher education.

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I was born 54 years ago in the People’s Republic of New York.

Back then, all I wanted was a new baseball glove

But I don’t mention that because I want you to send me a present or to say Happy Birthday.

Instead, I’m hoping at least five of the Justices on the Supreme Court will make this day special by rejecting Obamacare.

And I mean the entire legislation, not just the mandate. I want them to throw out all the new taxes, all the new spending, all the new subsidies, and all the new market distortions.

My video on Obamacare, for instance, completely focused on how the legislation would expand the burden of government. The mandate is a bad idea, without question, but it’s also a big mistake to impose more spending and taxes when government already is far too big.

I’m worried, though, that the Court will reject the mandate and decide the rest of the law is okay. Not only does this mean we’ll be stuck with bigger government, but it also creates a scenario where politicians – including squeamish Republicans – may decide to enact other bad laws.

John Stossel shares my concerns about what may happen after a Supreme Court decision.

I’m scared. I fear that even if the Supreme Court overrules most of Obamacare (or did already, by the time you read this), Republicans will join Democrats in restoring “good” parts of the law…parts of Obamacare are popular. People like getting what they think is free stuff.

John elaborates, noting that politicians may enact laws that destroy the insurance market.

…discrimination is what makes insurance work. An insurance regime where everyone pays the same amount is called “community rating.” That sounds fair. No more cruel discrimination against the obese or people with cancer. But community rating is as destructive as ordering flood insurance companies to charge me nothing extra to insure my very vulnerable beach house, or ordering car insurance companies to charge Lindsay Lohan no more than they charge you. Such one-size-fits-all rules take away insurance companies’ best tool: risk-based pricing. Risk-based pricing encourages us to take better care of ourselves. Car insurance works because companies reward good drivers and charge the Lindsay Lohans more. If the state forces insurance companies to stop discriminating, that kills the business model. No-discrimination insurance isn’t insurance. It’s welfare. If the politicians’ plan was to create another government welfare program, they ought to own up to that instead of hiding the cost.

And since big business has a dismaying habit of getting into bed with big government, John isn’t expecting the insurance industry to defend markets.

Women go to the doctor more often than men and spend more on medicines. Their lifetime medical costs are much higher, and so it makes all the sense in the world to charge women higher premiums. But Sen. John Kerry pandered, saying, “The disparity between women and men in the individual insurance market is just plain wrong, and it has to change!” The industry caved. The president of its trade group, Karen M. Ignagni, said that disparities “should be eliminated.” Caving was safer than fighting the president and Congress, and caving seemed to provide the industry with benefits. Insurance companies wouldn’t have to work as hard. They wouldn’t have to carefully analyze risk. They’d be partners with government — fat and lazy, another sleepy bureaucracy feeding off the welfare state. Alcoholics, drug addicts and the obese won’t have to pay any more than the rest of us. But this just kills off a useful part of insurance: encouraging healthy behavior. Charging heavy drinkers more for insurance gives them one more incentive to quit. “No-discrimination” pricing makes health care costs rise even faster.

I’ve repeatedly written that the only way to fix healthcare is to get rid of the government-created third-party payer problem.

Unfortunately, that will be very difficult precisely because people like the illusion that they don’t pay (even though they do bear the costs in the form of lower take-home wages and higher taxes).

So while I want a full-repeal birthday present from the Supreme Court, that will only provide fleeting happiness unless we solve the third-party payer problem caused by Medicare, Medicaid, tax distortions, and other forms of government intervention.

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Writing for the Washington Post, Robert Samuelson has a column on “The Folly of Obamacare.” This piece criticizes the President’s signature achievement for many good reasons, including increased uncertainty, the negative impact on job creation, rising levels of red ink, and generational unfairness.

I agree with all those complaints, but then Samuelson makes another point that rubbed me the wrong way because he’s complaining about a symptom and overlooking the underlying problem. Here’s what he wrote.

Uncontrolled health spending is the U.S. system’s main problem — and the ACA makes it worse. Spiraling health costs crowd out other government programs and squeeze wage increases by diverting compensation dollars into employer-paid insurance. Because insured people use more health services than the uninsured, the ACA (covering an estimated 30 million more) raises spending. As for the ACA’s cost-control provisions, even the government’s own actuaries don’t believe they will do much. By their latest projection, total health spending — government and private — rises from 17.9 percent of the economy (gross domestic product) in 2010 to 19.6 percent in 2021. In 1980, health care was 9 percent of GDP.

I assume all his facts are correct, but Samuelson is missing the point. The reason we have “spiraling health costs” is because of something called third-party payer. As the chart shows, nearly 90 percent of health care costs in America are financed by someone other than the consumer. And when folks get to consume with other people’s money, they have very little reason to care about costs.

In my speeches, I frequently cite myself as an example. When my kids were small and it seemed like there was an earache or sore throat every other week, I was always at the pediatrician. But I never cared about the bill because I knew my employer-provided coverage limited the out-of-pocket amount I would pay.

The same is true for the tens of millions of other Americans with health plans provided by their employers, and it’s also true for the tens of millions of Americans who use Medicare, Medicaid, or some other government program.

By the way, this is why undoing Obamacare – either legislatively or through a Supreme Court decision – doesn’t solve the problem. Third-party payer was a huge problem even before the President made the problem a bit worse with his misguided scheme.

This video explains why free-market reform is necessary to solve the problem of third-party payer.

One final point is that there are parts of our health care system where consumers still pay out-of-pocket, and you shouldn’t be surprised to learn that those are areas – such as cosmetic surgery (or even abortion) – where costs are restrained and quality keeps rising.

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Taxes and spending are two of the most obvious burdens imposed by government, and I’m glad that many people are fighting against a political class that seems to have a limitless appetite for a bigger public sector.

But politicians also can do great damage to an economy with mandates, regulations, and other forms of intervention. And because they are indirect and somewhat hidden, these costs are poorly understood by most voters even though the burdens can be enormous.

Interfering with the price system is an especially pernicious form of intervention.

When functioning properly, prices enable the wants and needs of consumers to be properly channeled to producers and suppliers in a way that promotes prosperity and efficiency.

Unfortunately, governments hinder this system with all sorts of misguided policies such as subsidies and price controls.

One of the worst manifestations of this type of intervention is the system of third-party payer, which occurs when government policies artificially reduce the perceived prices of goods and services.

In this post, let’s look at markets for higher education, housing, and health care to get a better understand of how third-party payer leads to rising prices and damaging bubbles.

Let’s start with the market for college education. Glenn Reynolds of Instapundit has been promoting the idea of a higher-education bubble for years. His theory, as he explained in the Washington Examiner, makes a lot of sense.

A couple of years back, I suggested in these pages that higher education was facing a bubble much like the housing bubble: An overpriced good, propped up by cheap government-subsidized credit, luring borrowers and lenders alike into a potentially disastrous mess. …This is a simple case of inflation: When you artificially pump up the supply of something (whether it’s currency or diplomas), the value drops. The reason why a bachelor’s degree on its own no longer conveys intelligence and capability is that the government decided that as many people as possible should have bachelor’s degrees. There’s something of a pattern here. The government decides to try to increase the middle class by subsidizing things that middle class people have: If middle class people go to college and own homes, then surely if more people go to college and own homes, we’ll have more middle class people. But homeownership and college aren’t causes of middle-class status, they’re markers for possessing the kinds of traits — self-discipline, the ability to defer gratification, etc. — that let you enter, and stay in, the middle class. Subsidizing the markers doesn’t produce the traits; if anything, it undermines them. One might as well try to promote basketball skills by distributing expensive sneakers.

I hope he’s right, and I also hope the bubble bursts quickly. The last of my three kids is a senior in high school, so anything that lowers tuition and fees would be most welcome.

But let’s look at some data and think about whether this will happen.

This first chart, using data from the Bureau of Labor Statistics on college tuition and fees, certainly shows a big jump in the cost of higher education. Indeed, tuition and fees have climbed more than twice as fast as the overall consumer price index.

Now let’s look at the Case-Schiller data on housing prices in the second chart. While the lines aren’t identical, it certainly seems like Instapundit is on to something. When the government intervenes in a sector of the economy with lots of subsidies, prices climb rapidly.

The key question, of course, is whether the market for higher education will behave the same way as the market for housing. In other words, has the government created a house of cards that inevitably will collapse?

As noted above, I hope there’s a bubble that’s on the verge of bursting. But since I tend to be a pessimist, I’m worried that the education market may be more similar to the healthcare market rather than the housing market. Take a look at this final chart, showing what seems to be endlessly rising prices for medical care.

So why do I worry that higher education may be more like healthcare? Because both benefit from third-party payer, which happens when someone other than the consumer pays a significant share of the cost of a product. For instance, consumers directly pay for only 12 cents of every dollar of healthcare they consume. So why care about rising prices when somebody else is picking up the tab?

Indeed, in the few areas where out-of-pocket expenditures dominate, such as cosmetic surgery and abortion, we find that prices are stable or even falling.

In the case of higher education, there is substantial third-party payer because of money funneled to students in the form of grants and loans, as well as funds channeled directly to colleges and universities.

There is some third-party payer in the housing market, but the bubble that recently popped was more the result of (hopefully) one-time factors such as the Fed’s easy-money policy and Fannie Mae and Freddie Mac subsidies that caused reckless lending and foolish speculation.

So what does all this mean? The honest answer is that I don’t know, but I fear that there is no looming collapse in the price of higher education. At best, we have probably reached a point where prices have leveled off, but that’s more a function of a glut in certain fields such as law.

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The Obama Administration is in a bit of hot water because it wants to coerce just about everyone – including a lot of religious institutions –  to provide health insurance policies that cover the cost of birth control and certain abortion-inducing drugs.

The White House already has tried to defuse the controversy by shifting the coverage mandate from insurance buyers to the insurance companies, but everyone with an IQ above room temperature realizes that is a meaningless cosmetic change.

Regardless of how one feels about abortion or birth control (or even how one feels about religion), this is a bad policy. Decisions about what  sort of insurance to provide shouldn’t be the result of a one-size-fits-all government mandate.

Yes, the Administration’s religious intolerance is unseemly, but it is also symptomatic of why government intervention in the health sector is the underlying problem.

John Cochrane, an economist at the University of Chicago (and an Adjunct Scholar at Cato!) addresses the economic issues in a Wall Street Journal column. Here are some key passages.

Insurance is supposed to mean a contract, by which a company pays for large, unanticipated expenses in return for a premium: expenses like your house burning down, your car getting stolen or a big medical bill. Insurance is a bad idea for small, regular and predictable expenses. There are good reasons that your car insurance company doesn’t add $100 per year to your premium and then cover oil changes, and that your health insurance doesn’t charge $50 more per year and cover toothpaste. You’d have to fill out mountains of paperwork, the oil-change and toothpaste markets would become much less competitive, and you’d end up spending more. …Doubling the number of wellness visits and free pills sounds great, but who’s going to pay for it? There is a liberal dream that by mandating coverage the government can make something free. Sorry. Every increase in coverage means an increase in premiums. If your employer is paying for your health insurance, he could be paying you more in salary instead.

For all intents and purposes, Professor Cochrane is explaining the economics of third-party payer, which occurs when government intervention undermines the ability of markets to promote efficiency and low prices.

He also delves into the moral issues and explains that the only solution is to get the government out of health care.

Our nation is divided on social issues. The natural compromise is simple: Birth control, abortion and other contentious practices are permitted. But those who object don’t have to pay for them. The federal takeover of medicine prevents us from reaching these natural compromises and needlessly divides our society. The critics fell for a trap. By focusing on an exemption for church-related institutions, critics effectively admit that it is right for the rest of us to be subjected to this sort of mandate. They accept the horribly misnamed Patient Protection and Affordable Care Act, and they resign themselves to chipping away at its edges. No, we should throw it out, and fix the terrible distortions in the health-insurance and health-care markets. Sure, churches should be exempt. We should all be exempt.

I’ve explained four principles that should guide policy makers as they try to put the toothpaste back in the tube and restore free markets to healthcare.

And I’ve cited a real-world example of how the system would work if the third-party payer crisis was fixed.

We can implement free-market reforms, though they won’t be easy. Or we can keep on the current path, lose more of our freedom, and eventually have life-and-death decisions controlled by bureaucrats.

Should be an easy choice.

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Other than my affection for the Georgia Bulldogs, I’m not a big fan of higher education.

Colleges and universities are hotbeds of political correctness, but that’s actually a minor issue.

The big problem is that higher education consumes a huge amount of resources and provides inadequate value.

In these two videos, Richard Vedder documents staggering levels of inefficiency.

And here’s another portion of Rich’s remarks, given at the Pope Center in North Carolina.

A big problem in higher education is the existence of third-party payer, which is also what’s screwing up the healthcare system. More on that issue – as it relates to higher education – later this week.

P.S. Rich also is a co-author of an article for the Cato Policy Report documenting how spending cuts helped restore growth after World War II.

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I did a debate on income inequality for PBS, but haven’t written much about the issue because I think it is a misguided diversion.

One frustrating aspect of this debate is that folks on the left genuinely seem to think the economy is a fixed pie and that rich people get money by impoverishing others.

This is utter nonsense. Just look at this chart comparing North Korea and South Korea, or this chart comparing Chile, Argentina, and Venezuela. With the right policies, countries can get much richer over time, yielding enormous benefits for the average household.

More rational leftists understand this data, so they change the argument by asserting that the rich are getting richer faster than the poor are getting richer and that politicians should “solve” this alleged problem with class-warfare tax policy and more redistribution.

They even cite numbers from the biased bureaucrats at the Congressional Budget Office to supposedly prove their point.

There are all sorts of methodological problems with this kind of research, including the fact that people move up and down the income ladder over time, so it is very sketchy to compare, say, the top 20 percent in 1990 with the top 20 percent in 2010.

But even if you incorrectly assume that all households are locked into their current income levels, the data used by the left is deeply flawed.

My colleague, Peter van Doren, reviewed two studies for one of Cato’s in-house journals. Here some of what he culled from the scholarly publications.*

Increasing inequality in the distribution of earnings has become one of those stylized facts that everyone “knows.” The nightly news reminds viewers that ordinary workers have not fared well in the labor market over the last 25 years, while corporate executives have. Many professional economists and a recent CBO report have supported this view as well. While it is true that the cash explicitly paid to employees has become more unequal over the last generation, the…more benign explanation for the change in cash compensation over a generation is the dramatic increase in health insurance costs. …inequality in total compensation has not increased because the fixed costs of health insurance are a much larger percentage of the total compensation of lower-earnings workers. Burkhauser and Simon explore this explanation. They add the value of employer-provided health insurance as well as Medicaid and Medicare to the pre-tax, post-cash-transfer household income data and find that the bottom three income deciles actually exhibit higher growth than the top seven deciles from 1995 to 2008. …Warshawsky makes a similar discovery. Using unpublished BLS total compensation data, including employer health insurance expenditures, from 1999 to 2006, he finds that the growth in compensation by earnings decile (from the 30th to the 99th) averages 35 percent, with 41 percent growth at the 30th percentile (workers earning $10–$14 an hour) and only 35.8 percent growth at the 99th percentile (workers earning $59–$80 an hour).

Translating all this into simple English, it turns out that the rich are getting richer slower than the rest of us are getting richer.

By the way, even though I’m glad total compensation is growing more rapidly for the non-rich, these studies should not be interpreted as good news. As noted in the excerpt above, much of the additional money is diverted into a rather inefficient healthcare system.

This is the problem, not inequality. As I’ve explained before, American healthcare suffers from a third-party payer crisis caused by too much government intervention.

And because this distorted system leads to ever-higher costs, the increase in total compensation for lower-income and middle-income people does not translate into an increase in their living standards. Ordinary people feel like they’re on a treadmill.

In other words, while assertions of rising income inequality are dubious, there is a real issue of stagnation.

But as is often the case, the left’s answer is completely wrong. Class warfare and redistributionism are terribly misguided, as illustrated by this Walter Williams column and this Margaret Thatcher video.

If we want to help people live better lives, restoring a free market to health care would be a good first step, as explained in this video.

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*“Can the Rapid growth in the Cost of employer‑Provided Health Benefits explain the Observed increase in earnings inequality?” by Mark J. Warshawsky. september 2011. ssRn #1932381. And “Measuring the impact of Health insurance on Levels and Trends in inequality,” by Richard V. Burkhauser and Kosali i. simon. March 2010. nBeR #15811.

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I’ve written several times about the sometimes-deadly shortcomings of government-run healthcare in the United Kingdom (see here, here, here, here, here, here, here, and here), so I like to think I’m relatively immune to being surprised.

But this story from the Telegraph is a shocking combination of tragedy and farce. Some regional healthcare bureaucracies are deliberately delaying treatment to avoid raising “expectations” on the part of patients (that’s the farce part), a policy that helps them meet budgets because some patients may “remove themselves” from waiting lists by dying (that’s the tragedy part).

At least 10 primary care trusts (PCTs) have told hospitals to increase the length of time before they see patients in order to save money, an investigation by The Daily Telegraph has found. In some areas, patients endured delays of 12 or 15 weeks after GPs decided they needed surgery, even though hospitals could have seen them sooner. The maximum permitted time between referral and treatment is 18 weeks. In one case a manager said the policy keeps patients in line as “short waiting times also create more demand for treatment due to the expectations this raises”. It comes after an NHS watchdog suggested that if patients are forced to wait a long time, they will remove themselves from lists “either by dying or by paying for their own treatment”. …Too many PCTs have been operating in a cynical environment where they can game the system — and in which political targets, particularly the maximum 18-week waiting time target, are used to actually delay treatment.”

Amazing.

By the way, criticism of the UK’s government-run healthcare system is not an endorsement in any way of the US’s government-dominated healthcare system. America’s system is almost as screwed up, largely because government intervention has created a massive third-party-payer problem.

But a single-payer scheme is not the answer. At some point, when all the various government policies fail, we should give free markets a try.

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A couple of years ago, Paul Krugman assured us that government-run healthcare was a good idea, writing that “In Britain, the government itself runs the hospitals and employs the doctors. We’ve all heard scare stories about how that works in practice; these stories are false.”

Well, if the stories are false, the British press must love to tell negative lies about their own nation, as I’ve pointed out in a series of often-horrifying blog posts here, here, here, here, here, here, and here.

And now there’s a new revelation that further demolishes Krugman’s assertion. But more troubling, it also provides a glimpse at America’s future with Obamacare. Here are some cheerful excerpts from a story in the UK-based Independent.

Hip replacements, cataract surgery and tonsil removal are among operations now being rationed in a bid to save the NHS money. Two-thirds of health trusts in England are rationing treatments for “non-urgent” conditions as part of the drive to reduce costs in the NHS by £20bn over the next four years. One in three primary-care trusts (PCTs) has expanded the list of procedures it will restrict funding to in the past 12 months. …According to responses from the 111 trusts to freedom-of-information requests, 64 per cent of them have now introduced rationing policies for non-urgent treatments and those of limited clinical value. Of those PCTs that have not introduced restrictions, a third are working with GPs to reduce referrals or have put in place peer-review systems to assess referrals. In the last year, 35 per cent of PCTs have added procedures to lists of treatments they no longer fund because they deem them to be non-urgent or of limited clinical value. ..Bill Walters, 75, from Berkshire, recently had to wait 30 weeks for a hip operation instead of the standard 18.

I’ve never pretended the American healthcare system is perfect, largely because of massive government intervention and control. And even a laissez-faire system doubtlessly would generate some horror stories.

But I feel very comfortable in stating that the United Kingdom is a good example of why more government is never the answer for problems created by government involvement in the first place.

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This new video from the Center for Freedom and Prosperity explains why Medicaid should be shifted to the states. As I note in the title of this post, it’s good federalism policy and good fiscal policy. But the video also explains that Medicaid reform is good health policy since it creates an opportunity to deal with the third-party payer problem.

One of the key observations of the video is that Medicaid block grants would replicate the success of welfare reform. Getting rid of the federal welfare entitlement in the 1990s and shifting the program to the states was a very successful policy, saving billions of dollars for taxpayers and significantly reducing poverty. There is every reason to think ending the Medicaid entitlement will have similar positive results.

Medicaid block grants were included in Congressman Ryan’s budget, so this reform is definitely part of the current fiscal debate. Unfortunately, the Senate apparently is not going to produce any budget, and the White House also has expressed opposition. On the left, reducing dependency is sometimes seen as a bad thing, even though poor people are the biggest victims of big government.

It’s wroth noting that Medicaid reform and Medicare reform often are lumped together, but they are separate policies. Instead of block grants, Medicare reform is based on something akin to vouchers, sort of like the health system available for Members of Congress. This video from last month explains the details.

In closing, I suppose it would be worth mentioning that there are two alternatives to Medicaid and Medicare reform. The first alternative is to do nothing and allow America to become another Greece. The second alternative is to impose bureaucratic restrictions on access to health care – what is colloquially known as the death panel approach. Neither option seems terribly attractive compared to the pro-market reforms discussed above.

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This is the most depressing – but revealing – thing I have read in a long time: “the health-care sector has twice as many clerical workers as nurses and nine times as many as doctors.”

That passage is from a very good column by Robert Samuelson, in which he covers a lot of ground. He starts by expressing contempt for the demagogues attacking Congressman Ryan’s budget plan.

This predictably partisan reaction — preying upon the anxieties of retirees — must depress anyone who cares about the country’s future. It is only a slight exaggeration to say that unless we end Medicare “as we know it,” America “as we know it” will end. Spiraling health spending is the crux of our federal budget problem. In 1965 — the year Congress created Medicare and Medicaid — health spending was 2.6 percent of the budget. In 2010, it was 26.5 percent.

Demagoguery is part of politics, however, which is why I think proponents of reform are making a mistake by allowing the left to characterize this issue as a fight between the status quo and the Ryan plan. As Samuelson notes, there is no alternative to change. The only question is whether we will get consumer-oriented reform as proposed by Ryan or top-down rationing, as would be the case with Obama’s “death panel” approach.

Samuelson’s column also noted that the Congressional Budget Office is hardly a reliable source for cost estimates. I had a post yesterday discussing how the bureaucrats dramatically underestimate costs for new entitlement programs. Well, Samuelson points out that they also have a history of overestimating costs when looking at the impact of reforms that involve giving consumers some control over their health care spending.

CBO may be wrong. When a voucher system was adopted for Medicare’s new drug benefit, the CBO overestimated its costs by a third; the Centers for Medicare and Medicaid Services’ overestimate was 42 percent. When fundamental changes are made to a program, the green-eyeshade types can’t easily predict the results. Moreover, as health expert James Capretta notes, “managed care” plans in the Medicare Advantage program in 2010 did not have higher costs than Medicare’s fee-for-service for similar coverage. Under Ryan’s plan, incentives would shift. Medicare would no longer be an open ATM; the vouchers would limit total spending. Providers would face pressures to do more with less.

I don’t pretend to be an expert on healthcare, but I am firmly convinced that third-party payer is one of the big reasons for rising costs and pervasive inefficiency in the healthcare sector. When we buy goods and services with our own money, we try to get maximum value, and producers respond by trying to be efficient as possible.

In the healthcare sector, by contrast, we shop with other people’s money. Or, to be more technical, we shop in an environment where government policies result in us bearing very little out-of-pocket cost for each additional increment of health care.

As a result, we tend to be unconcerned with price. And producers respond accordingly. Here’s a rather long excerpt from a study mentioned in Samuelson’s column. Published by the National Bureau of Economic Research, it offers a neutral and dispassionate analysis of the healthcare market, but I think the information presented helps make the case that government intervention is a major problem.

In most industries, higher quality is associated with higher prices. That is not true in medical care, however, largely because of the public sector. Medicare accounts for 25 percent of physician and hospital services, and Medicaid accounts for another 13 percent. Since the 1960s, Medicare has paid providers on a fee-for-service basis, without reference to the quality of care delivered. Medicaid reimbursements are more flexible, but they are so low that many providers view Medicaid patients as effectively uninsured. As a result, about 40 percent of the market transmits incentives to provide more care but not more efficient care (Medicare) or to avoid patients who are sick (Medicaid). With so much of compensation pegged to volume, not value, inefficient care is the natural outcome. …The low level of service quality in health care is ironic given the enormous investment in non-clinical personnel. There are 9 times more clerical workers in health care than there are physicians, and twice as many clerical workers as registered nurses. This investment has not paid off in superior outcomes or better customer service, however. …Every analysis of medical care that has been done highlights the significant waste of resources in providing care. Consider a few examples: one study found that physicians spent on average of 142 hours annually interacting with health plans, at an estimated cost to practices of $68,274 per physician (Casalino et al., 2009). Another study found that 35 percent of nurses’ time in medical/surgical units of hospitals was spent on documentation (Hendrich et al., 2008); patient care was far smaller. …The obvious question about health care is why the market has not evolved to become more efficient. …who is the appropriate customer when payers consider care management. In retail trade, the customer is the individual shopper. If Wal-Mart finds a way to save money, it can pass that along to consumers directly. In health care, in contrast, the situation is more complex, since patients do not pay much of the bill out-of-pocket. Rather, costs are passed from providers to insurers to employers (generally) and on to workers as a whole. If this process is efficient, the system will act as if the individual is the real customer, since they are ultimately paying the bill. It may be, however, that the incentives get lost in the process, and efforts to innovate are not sufficiently rewarded. …About one-third of medical spending is not associated with improved outcomes, significantly cutting the efficiency of the medical system and leading to enormous adverse effects.

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This new video from the Center for Freedom and Prosperity discusses a proposal to solve Medicare’s bankrupt finances by replacing an unsustainable entitlement with a “premium-support” system for private insurance, also known as vouchers.

This topic is very hot right now, in part because Medicare reform is included in the bold budget approved by House Republicans, but also because Newt Gingrich inexplicably has decided to echo White House talking points by attacking Congressman Ryan’s voucher plan.

Narrated by yours truly, the video has two sections. The first part reviews Congressman Ryan’s proposal and notes that it is based on a plan put together with Alice Rivlin, who served as Director of the Office of Management and Budget under Bill Clinton. Among serious budget people (as opposed to the hacks on Capitol Hill), this is an important sign of bipartisan support.

The video also notes that the “voucher” proposal is actually very similar to the plan that is used by Members of Congress and their staff. This is a selling point that proponents should emphasize since most Americans realize that lawmakers would never subject themselves to something that didn’t work.

The second part discusses the economics of the health care sector, and explains the critical need to address the third-party payer crisis. More specifically, 88 percent of every health care dollar in America is paid for by someone other than the consumer. People do pay huge amounts for health care, to be sure, but not at the point of delivery. Instead, they pay high tax burdens and have huge shares of their compensation diverted to pay for insurance policies.

I’ve explained before that this inefficient system causes spiraling costs and bureaucratic inefficiency because it erodes any incentive to be a smart shopper when buying health care services (much as it’s difficult to maintain a good diet by pre-paying for a year of dining at all-you-can-eat restaurants).  In other words, government intervention has largely eroded market forces in health care. And this was true even before Obamacare was enacted.

Medicare reform, by itself, won’t solve the third-party payer problem, but it could be part of the solution – especially if seniors used their vouchers to purchase real insurance (i.e., for large, unexpected expenses) rather than the inefficient pre-paid health plans that are so prevalent today.

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I just read something that unleashed my inner teenager, because I want to respond with a combination of OMG, LMAO, and WTF.

Donald Berwick, the person appointed by Obama to be in charge of Medicare, has a column in the Wall Street Journal that makes a very good observation about how relative prices are falling for products bought and sold in the free market. But he then draws exactly the wrong conclusion by asserting that further crippling market forces for healthcare will yield similar cost savings for programs such as Medicare.

Here’s the relevant passage from his Wall Street Journal column.

The right way is to help bring costs down by making care better and improving our health-care system. Improving quality while reducing costs is a strategy that’s had major success in other fields. Computers, cars, TVs and telephones today do more than they ever have, and the cost of these products has consistently dropped. The companies that make computers and microwaves didn’t get there by cutting what they offer: They achieved success by making their products better and more efficient. …Under President Obama’s framework, we will hold down Medicare cost growth, improve the quality of care for seniors, and save an additional $340 billion for taxpayers in the next decade.

I have no idea whether Berwick realizes that he has inverted reality, so I can’t decide whether he is cynically dishonest or hopelessly clueless. All I can say with certainty is that what he wrote is sort of like asserting “gravity causes things to fall, so therefore this rock will rise when I let go of it.”

To explain, let’s start by looking at why relative prices are falling for computers, cars, TVs and telephones. This isn’t because the companies that make these products are motivated by selflessness. Like all producers, they would love to charge high prices and get enormous profits. But because they must compete for consumers who are very careful about getting the most value for their money, the only way companies can earn profits is to be more and more efficient so they can charge low prices.

So why isn’t this happening in health care? The answer, at least in part, is that consumers aren’t spending their own money so they don’t really care how much things cost. As this chart illustrates (click to enlarge), only 12 percent of every healthcare dollar is paid directly by consumers. The rest comes from third-party payers, mostly government but also insurance companies.

In other words, Berwick’s column accidentally teaches us an important lesson. When consumers are in charge and responsible for paying their own bills, markets are very efficient and costs come down. But when government policies cause third-party payer, consumers have little if any incentive to spend money wisely – leading to high costs and inefficiency.

Defenders of the status quo argue that the market for healthcare somehow is different than the market for things such as computers. But here’s a chart (click to enlarge) showing that relative prices are falling in one of the few areas of the healthcare system where consumers spend their own money. And I’ve previously noted that the same thing applies with abortion, where prices have been remarkably stable for decades. Regardless of one’s views on the procedure, it does show that costs don’t rise when people spend their own money.

That’s common sense and basic economics. But it’s not a good description of Obama’s healthcare plan, which is explicitly designed to increase the share of medical care financed by third-party payer.

The White House presumably would argue that price controls will help control costs. And the President’s Independent Payment Advisory Board (a.k.a., the death panel) will have enormous power to directly or indirectly restrict care, but that’s probably not too comforting for the elderly and others with high healthcare expenses.

The right approach, needless to say, would be to restore market forces to healthcare, which is the core message of this video narrated by Eline van den Broek of the Netherlands.

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The invaluable Tim Carney of the Washington Examiner is an expert at exposing the corruption of big government, and his article about for-profit colleges and government-subsidized tuition shows that everybody involved in this fight is sleazy. Unfortunately, no matter who wins, the taxpayers lose. It’s also worth pointing out that the main effect of government-financed tuition payments and loans is to drive up the cost of college – another example of the third-party payer phenomenon.

Here are key passages from Tim’s column.

For a case study in the tawdry and twisted world of Washington policymaking and lobbying, you can’t do much better than the current fight over the subsidies and regulations for for-profit colleges. Behind every argument is an ulterior motive, around every corner is a conflict of interest, and in every pocket there is cash procured through government policy supposed to serve the public good. …don’t confuse “for-profit” with “capitalist.” Without federal subsidies in the form of Pell grants and federal loan guarantees, the for-profits might not exist. At the very least, they would be much smaller. About 87 percent of the revenue at the biggest for-profits comes from federal taxpayers, according to the Chronicle of Higher Education. They belong to a class of company that I call Subsidy Sucklers. Sen. Tom Harkin, D-Iowa, earlier this year declared war on the for-profits, ordering the Government Accountability Office to investigate these schools’ marketing techniques. The GAO produced a scathing condemnation. …But a closer look revealed a murkier picture. The GAO last month corrected the paper, modifying 16 of the report’s 28 findings. At Education Week, Rick Hess wrote, “all 16 of the errors run in the same direction — casting for-profits in the worst possible light.” The credibility of Harkin’s star witness in his August hearing, Steven Eisman, was also called into question. Eisman is a short-seller who reportedly stands to make big money if the stocks of for-profit colleges collapse. He also is a vocal lobbyist for new regulations that would cripple these colleges. The term for Eisman is Regulatory Robber Baron. … Bill Clinton’s former special counsel Lanny Davis first flagged Eisman’s role in a Politico op-ed, and liberal ethics “watchdog” Melanie Sloan followed up, criticizing Harkin for allowing Eisman to testify, sparking the liberal American Prospect to ask in a headline, “Why Are Progressives Fighting Student Loan Reform?” The answer: money. On September 17 — about three months after Davis’s op-ed — Davis registered as a lobbyist for the Coalition for Educational Success, a trade group of for-profit colleges. Then in November, Sloan announced she was joining Davis’s lobbying firm. Also lobbying for the for-profit colleges are six former Democratic congressmen and three former Republican lawmakers. This tale has no good guys, but it does have a moral: When you inject government into an industry, you get some pretty unsavory results.

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The title of this post may be a slight exaggeration. I actually recommend you read the entire two-page paper by Devon Herrick of the National Center for Policy Analysis. But this chart from that study is an excellent visual display of what’s wrong with the health care system.

You can see that the price of medical care is rising twice as fast as inflation, but you can also see that prices for cosmetic services are rising only half as fast as the general price level. Why are general health care prices soaring, yet prices in one segment of the health care world are very stable (and actually falling relative to all other prices)? The answer is simple. As Devon writes:

A primary reason why health care costs are soaring is that most of the time when people enter the medical marketplace, they are spending someone else’s money. When patients pay their own medical bills, they are conservative consumers. Economic studies and common sense confirm that people are less likely to be prudent, careful shoppers if someone else is picking up the tab. Thus, the increase in spending has occurred because third parties – employers, insurance companies or government – pay almost all the bills.

Study this image for two minutes and contemplate the implications. After that, you’ll know more about healthcare economics than 98 percent of all politicians (though that’s not exactly a huge accomplishment).

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Here’s some horrifying news from the United Kingdom, where the government-run healthcare system allowed 239 patients to die of malnutrition in 2007. Another 8,000-plus entered the system for malnutrition and actually deteriorated.
In 2007, 239 patients died of malnutrition in British hospitals, the latest year for which figures are available. A wag might say it must be the English cuisine. But the real roots of this tragedy lie in Britain’s government-run medical system, which tells us something about what we might expect from ObamaCare in the years ahead. A British charity, Age U.K., has been seeking for years to raise awareness of the issue. Yet despite increases in screening, training and inspection programs, the problem has only gotten worse. The charity reports that in 2007-2008 148,946 Britons entered hospitals suffering from malnutrition and 157,175 left in that state, meaning that hospitals released 8,229 people worse-off nutritionally than when they entered. In 2008-2009, that figure was up to 10,443. The problem is not a lack of food. Hospital malnutrition mostly affects the elderly or otherwise frail, who often need individualized mealtime assistance. Spoon-feeding the elderly may not seem like the best use of a nurse’s time, but for some it may literally be a matter of life and death. Yet the constant scarcities created by government medicine, along with the never-ending drive to trim costs, has led the National Health Service to give nurses additional responsibilities and powers in recent years. Inevitably, this leaves them with less time to make sure patients are getting fed.
No system is perfect, so the point of this post is not to assert that there is something especially inhumane and/or incompetent about the British system. Instead, the real lesson is that doctors and hospitals generally try to please the people paying the bills. In government-run systems, that means appeasing politicians. This doesn’t preclude good patient care, but it does mean that other factors may have too much of an impact on decisions. In a market-based system, though, medical professionals have a greater incentive to focus on patients.
I should also say that this is not an endorsement of the American system, which also suffers from the third-party payer problem. In part, this is because of direct government financing, but also because of excessive use of insurance caused by government-created distortions.

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John Goodman of the NCPA has a great article about how the current healthcare system is heavily distorted by government policies that result in people making decision with other people’s money (or at least what they perceive as other people’s money). The excerpt below is a good summary of John’s key points, but I’ll add a couple of rhetorical questions. What do you think would happen if government created a tax break that made it attractive to expand auto insurance to cover the cost of oil changes and trips to the gas station? Would that make that market more efficient or less efficient? Would Jiffy Lube and Sunoco charge higher prices or lower prices? What would happen to administrative costs?

Almost everyone believes there is an enormous amount of waste and inefficiency in health care. But why is that? In a normal market, wherever there is waste, entrepreneurs are likely to be in hot pursuit — figuring out ways to profit from its elimination by cost-reducing, quality-enhancing innovations. Why isn’t this happening in health care? As it turns out, there is a lot of innovation here. But all too often, it’s the wrong kind. There has been an enormous amount of innovation in the medical marketplace regarding the organization and financing of care. And wherever health insurers are paying the bills (almost 90 percent of the market) it has been of two forms: (1) helping the supply side of the market maximize against third-party reimbursement formulas, or (2) helping the third-party payers minimize what they pay out. Of course, these developments have only a tangential relationship to the quality of care patients receive or its efficient delivery. The tiny sliver of the market (less than 10 percent) where patients pay out of pocket has also been teeming with entrepreneurial activity.  In this area, however, the entrepreneurs have been lowering cost and raising quality — what most of us wish would happen everywhere else. …Wherever there is third-party payment, the goal of innovation is to produce more products that qualify for reimbursement, even if the effects on patient outcomes are only marginal. Wherever there is no third-party reimbursement, innovators are focused on ways to lower cost and raise quality. Take cosmetic surgery. Over the past two decades there has been an enormous amount of innovation in the field — all of the cost-lowering, quality-raising variety. That explains why the volume of cosmetic surgeries grew six-fold over the past 20 years, while the real price declined by more than one-third. Similarly, there has been remarkable innovation in LASIK surgery — another area where third-party payers are not. Yet the real price of LASIK surgery has declined by 25 percent over the past decade. The same principle can be seen at work in the international marketplace. For example, India has a potentially huge market for medical care. But 80 percent of health care spending in that country is private and there is very little health insurance. So some of the companies that make expensive technology for the developed world are now finding ways to produce the same services for a fraction of the price. GE Healthcare, for example, has introduced a portable electrocardiogram machine into the Indian market that will perform the heart exam for 20 cents (compared to a normal price of $50). Siemens (another maker of high-end, expensive equipment) has built mobile diagnostics units for the Indian market with X-ray, ultrasound and pathology systems.

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