Doing Right by Veterans

There are approximately 22 million veterans of the United States Armed Forces. They are served — not always well — by the Veterans Administration, with a budget of about $182 billion a year. That’s almost $8300 per veteran per year.

Which raises the question: Why, exactly, do we have a Veterans Administration? My guess (and admittedly it’s only a guess) is that an overwhelming majority of those veterans would much prefer to lose the VA and get a check for $8300 every year instead.

Of course some veterans get end up claiming a lot more than $8300 a year in VA services due, for example, to combat-related trauma that manifests itself only years after leaving the service. But with $8300 a year, you can buy a lot of insurance against such contingencies (and with 22 million veterans each having $8300 a year to spend, there are sure to be a lot of new insurance products available).

How can it possibly be better to offer veterans medical services from just one provider — a provider facing no competitive pressure to excel — than to give them the cash that will allow them to seek out the providers they prefer — and/or to purchase something else entirely?

If you’re worried about the veteran who blows through his $8300 a year for 15 years and then suddenly develops a medical emergency related to his service, and if you’re unwilling to say “No” to that veteran, then you can at least hand out medical-care and medical-insurance vouchers instead of cash. There’s still no need for VA hospitals, or a VA at all for that matter.

I assume that the reason we nevertheless have a VA is that it facilitates corruption — it’s a way for politicians to funnel contracts to supporters and potential supporters. But has anybody even tried to muster an argument that it’s good policy?

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36 Responses to “Doing Right by Veterans”


  1. 1 1 Sub Specie Æternitatis

    I’ve frequently asked myself the same question and do not have any better answer than the corruption-facilitation one.

    My favorite, conceivably politically feasible VA replacement would be just to give all current VA beneficiaries Medicare instead. While Medicare outlays per beneficiary are somewhat higher than VA outlays, that is for a population which by definition is elderly (sixties+) and hence likely much more expensive than the generally healthy and always younger VA beneficiaries. So this would be a net saving to the tax payer.

    Conversely, VA beneficiaries would get access to a rather generous and much less restrictive health payment scheme.

  2. 2 2 Ken B

    I agree, but the argument you will hear is that these resources are *reserved* for veterans, who thus receive a better grade of service. There are big holes in this argument, but they might not be immediately obvious to everyone.

  3. 3 3 Advo

    Military personnel and in particular veterans have way more health issues than the general population.
    Aside from injuries received in training, accidents, wars and such, and aside from the absolutely enormous scale of mental health problems among veterans, military personnel is also exposed to more toxic substances than the average US citizens.
    Jet fuel, agent orange, depleted uranium, explosives, lead etc.
    Vietnam veterans have twice the incidence of type 2 diabetes as the general population, for example.
    And retired soldiers may receive healthcare from the VA or from Medicare, or both, so it’s not true the VA population is generally younger. I don’t know of any statistics, but for all I know, a large part of the VA’s budget could be going towards treating Vietnam veterans.

    It is very doubtful that privatizing veteran treatment is going to lower costs.
    Privatizing medical treatment (under a fee-for-service model) can’t ever really lower costs (while maintaining quality), because the massive information asymmetry between patient/third-party payor on the one side and the treatment provider on the other and the incentives for the treatment provider under a fee-for-service model create enormous inefficiency.
    That’s the reason why you get the best bang-for-the-buck under the Cuban healthcare system and the British NHS.
    You don’t get the best healthcare in absolute terms, but you get the best cost efficiency.

  4. 4 4 Advo

    The average age of VA healthcare enrollees is apparently around 62.
    I would guess there is a certain amount of self-selection, i.e. the sicker a veteran is, the more likely he is to be (also) enrolled in the VA. I think it’s very unlikely that a switch to Medicare or, god forbid, some private scheme would lower costs.

    http://www.va.gov/healthpolicyplanning/soe2011/soe2011_report.pdf

    http://prospect.org/article/why-veterans-health-system-better-you-think

  5. 5 5 Alan Gunn

    It would be interesting to see the per-pupil Federal figures for education. They’re probably enough to send kids to private schools and to pay for a good part of college. If you added state and local spending the per-pupil costs would probably be astronomical.

  6. 6 6 Ken B

    @Advo 4
    Heaven forfend the sick should get service comparable to FedEx or Amazon when they can have service comparable to the Post Office or DMV.

  7. 7 7 Advo

    Heaven forfend the sick should get service comparable to FedEx or Amazon when they

    Funny you chose those two examples – a logistics and a retail company.
    Both industries that work very well (for consumers).
    Total transparency, information symmetry, extreme competition, low profit margins, very high efficiency.
    For the majority of the healthcare industry, the exact opposite on every one of those counts.
    Opacity, extreme information asymmetry, little competitive pressure (in most parts of the industry), very high profit margins, extreme inefficiency.

    That’s why there’s no such thing as “FedEx or Amazon” for healthcare.

  8. 8 8 Pete

    The VA does two other expensive things that I know of, though I’m uncertain that either fall under the budget you’re referring to.

    The Post 9/11 GI Bill pays for tuition and housing for up to 36 months of college. The amount varies by where you live, but her in New York City, it’s about $2,600/month for housing (an allowance that you get regardless of the price of your rent or mortgage) and about $22,000 each year for tuition and fees (this is paid to the school so it won’t be this much if the school is cheaper).

    Three years at Columbia (which I believe has the largest GI Bill footprint of private schools in the country) will cost $160,000; just shy of 20 years of $8,300 payouts.

    The VA also guarantees home loans for service members and veterans. This is supposed to make it practical to buy rather than rent a home every time you have to change duty stations, since buying and selling homes every few years is normally very expensive. Why the government sees a need to buy versus rent is beyond me. I also can’t figure out why this benefit applies to veterans and not just active duty, since the whole reason for it was because the military was making you move often.

    Most important for this discussion, I have no idea what this costs the VA. It seems as though they’re guaranteeing part of the mortgage so that the lender will charge a lower rate and so that the downpayment can be very small yet no PMI is required. Aside from administrative costs, I doubt this costs much, if anything, so long as the homeowner doesn’t default. I don’t know what this meant for the VA in the years following the housing crash.

  9. 9 9 Advo

    The problem of high price inflation (= decreasing efficiency) in the medical sector is in my view not caused by input costs, but by pricing power of health care providers.

    Let me provide a concrete example for the problems in the healthcare sector.
    A close friend of mine is a controller working for a big pharmaceutical company. He told me that if a controller working in the retail, logistics or semiconductor sectors (characterized by low margins and intense competitive pressure) would change industries and join a pharmaceutical company, he would think he’d migrated to a different planet. Or perhaps a madhouse.
    “If we need more money, we just raise prices on the Americans”. That’s a direct quote.

    That’s not to say that there aren’t all kinds of programs and strategies developed and implemented within pharmaceutical companies which aim to keep costs down and increase efficiency.
    It’s just that they aren’t very good at actually keeping costs down. Those programs are just what the controllers and the managers do to justify their salaries. The actual results of these measures are of secondary importance (and often cause more harm then good).
    A logistics or a semiconductor company cannot afford to engage in placebo exercises and self-deception. It has to make the hard decisions, fight against internal bureaucratic resistance and inertia, fiefdoms and egos or it will just go bankrupt in short order.

    In the medical sector, this is MUCH less the case. There is far less Darwinistic pressure to weed out incompetence and inefficiency both on the level of companies as well as at the level of individual personnel.
    Some way has to be found to exert pressure on the medical industry – and that includes hospitals – to keep costs down. Perhaps it’s price control.
    Perhaps mandatory, standardized price disclosure would help.
    But you can’t just stand by and let the trend of decreasing cost-efficiency continue or the healthcare problem will progress from dire to disastrous.

  10. 10 10 Biopolitical

    Veterans are only indirect consumers of VA services. The key consumers are voters. There is substantial demand for VA among voters. Politicians diligently supply it. Why do voters prefer VA to vouchers or cash payments? It is a matter of consumer taste. Why do voters have such taste? I would like to know. Why do voters care so little about the welfare of veterans that they do not make the effort to learn that cash would be better than vouchers, and vouchers better than VA? That is human selfishness. It doesn’t need special explanation.

    The corruption explanation is no better that the explanation based on voter taste. Why do voters put up with a system of corruption based on VA and not with other potential systems of corruption? It looks like a question of taste.

    For some voters “policy arguments,” and especially “good policy arguments,” are complementary goods of favored policies, just as sugar is a complement of yogurt and gift wrapping is a complement of gifts. There is an example above of someone going at lengths to wrap a preferred policy with arguments.

  11. 11 11 Advo

    There is an example above of someone going at lengths to wrap a preferred policy with arguments.

    My preferred policy is always that which yields the best result.
    I agree with Deng Xiaoping’s statement:

    “It doesn’t matter whether a cat is white or black, as long as it catches mice.”

    In general, my approach to economic policy is to promote and optimize competition. This is the central idea behind a school of economic thought called “ordoliberalism”, which appears to be relatively unknown in the US.

    The German economic system after WWII was structured along the lines of ordoliberalism.
    It’s an approach which understands that the driver of capitalism’s success is competition, and that maintaining and promoting competition takes a lot of government intervention.

    Hayek, when he wrote The Road to Serfdom, belonged to that school of thought (Later on in his life he unfortunately drifted more into libertarianism). He understood very well just how much the government was needed to build and maintain competitive markets, which is something libertarians either don’t understand at all or severely estimate.

    So that’s my approach. I like the competitive markets. I want to get rid of agricultural subsidies. I want to break up the French labor market regulations. I don’t like government-owned utilities or telecommunications companies (for the most part).

    HOWEVER, healthcare is a different issue.
    I have spent many years looking into the issue of healthcare and health insurance, and I’ve simply come to the conclusion that the most cost-efficient way to provide healthcare is a system that mostly works in command-economy style like in the UK and Cuba.
    As soon as you get into a privatized fee-for-service model, service providers start exploiting the enormous information problems and the huge pricing power these provide.
    A system with flat case-fees and cost budgets for treatment options is a less costly alternative to fee-for-service but of course has its own problems.

    In terms of overall outcome and cost-efficiency, the French with their partly privatized model have perhaps the best system. Results are better than in Britain and it’s not THAT much more expensive.

  12. 12 12 OH Anarcho-Capitalist

    The issue would seem to be how to pay for treatment for those with chronic/traumatic combat injuries.

    Seems there would need to be some form of special combat-insurance offered by the private sector, perhaps paid by the government for active duty servicemen. But then, in case of a declared war, those insured losses could be catastrophic and destroy those private insurers.

    No easy answers when it comes to the costs of state military adventurism…

  13. 13 13 Manfred

    In principle I have no quarrel with Steve’s proposal.
    Couldn’t you say the same about Medicaid?
    And what about Medicare?

  14. 14 14 Dave

    Although medical insurance is the largest single item in the VA budget, only about $65 billion is directed specifically toward the VA medical care system. The rest of the money pays for non-VA provided medical care, as well as (for example) job training, disability assistance, and the largest cemetery system in the United States.

    Although the government could simply hire private contractors to provide these services, history has shown us that private contractors can be every bit as inefficient, corrupt, and disrespectful as even the worst government program.

    Although $8300 is a pretty high price for “bad” insurance, it is a relative bargain for “good” insurance. For full-coverage insurance, it is a bargain’s bargain. My employer pays $9700 per employee for high-deductible insurance, and that is over-and-above the $5200 that is charged to the employees.

    People will argue that my employer’s costs are so high because the average includes family coverage. If you look closely at programs such as CHAMPVA, you will see that the VA provides similar coverage.

  15. 15 15 Khodge

    Krugman says that the VA works which proves that the US government can successfully run socialized medicine.

    As hinted at in Advo @3, above: Theoretically, the government has a comparative advantage by virtue of the fact that certain medical problems are common, if not unique, to veterans. Allowing the VA to develop and exercise this specialty would be both cost effective and highly successful.

    Note that this expertise does not include building hospitals.

  16. 16 16 Floccina

    @Advo,
    I am not sure that I agree with you, but assuming that you are correct about the market for healthcare the question is why is the market for healthcare so strange.

    Robin Hanson makes an attempt to answer that here:http://www.econtalk.org/archives/2007/05/hanson_on_healt.html

  17. 17 17 Ken B

    Khodge
    Why couldn’t the market cater to those same needs? As Bernie complained, it caters well to different needs in deodorant pretty well. I think you need to make a case based on a particularity, say some power the government has the rest of us lack. Otherwise there is no reason to suspect the government has an edge. But there is always a reason to worry about graft, when there is no market.

  18. 18 18 Ken B

    I think I like biopolitical’s answer. A lot. It’s not independent though, as any program creates its own audience. The voter demand for VA will be lumpy, not uniform, and higher in places where VA spending is higher. So then we have the concentrated benefits, distributed costs — and circle back to graft.

  19. 19 19 Khodge

    Ken B
    The market absolutely can do a better job. The VA, like the CDC, NASA, and virtually every other entity that is suckling at the government’s teat would like us to believe they are unique in their ability to save the world (or whatever their mission might be). It keeps them employed and they think they are the good guys because they are non-profit.

    (Note the adverb used in my comment.)

  20. 20 20 Advo

    @Floccina

    I will listen to the podcast, but I don’t think that the problem with healthcare is that people are irrational about it.
    The problem can illustrated in the following example:

    Take an every-day medical issue. You have been having abdominal pain for a few days in a row.
    You go to the doctor. Now what are the incentives of this doctor? The doctor is incentivized to run every conceivable test on you regardless of whether or not that is cost-efficient for you.
    So now the doctor says: “Ok we have to do blood work with 30 parameters, do a CT of your abdominal cavity and an ultrasound”.

    And you say – what?
    “I don’t think these 10 blood parameters are necessary”? Or do you say “Let me see if I can’t get the ultrasound or the blood work cheaper at the next hospital”?
    Or perhaps: “Can you explain to me why you think each of those measures are cost-efficient?”

    The cost-efficient course of action might have been to carry out a cursory exam and then do NOTHING and see if the problem goes away on its own. But in any fee-for-service system you’re on average not going to get the cost-efficient approach because the patient is at such a huge information disadvantage.
    The idea that costs in the healthcare system can be efficiently controlled by putting the onus on the patient through copays or deductibles (or through medical savings accounts, as Friedman proposed) is completely ludicrous.

  21. 21 21 iceman

    Seems obvious on its face less competition = less efficiency, absent some *very* compelling ‘natural monopoly’ argument in this case as others have said.

    IMHO the asymmetry argument is overblown; we effectively hire insurance companies as our negotiators and they have lots of data. Of course we’re schizophrenic about this because we always want more for less, so we turn around and make them political whipping posts. So in a sense the asymmetry exists to the extent we ‘want’ it to (handcuffing the negotiators). It seems obvious to me that putting people more in charge of their own spending (e.g. MSAs) would reduce spending, probably dramatically. The basic argument for something like single payor is 1) we don’t trust people to spend ‘enough’ on themselves (note preventive care is not necessarily cost-effective) and 2) we don’t trust people to spend ‘enough’ on others if we do it transparently, so we want everyone in the same pool where some have to buy things they actuarially don’t need. We justify this by talking about bogeymen ‘death spirals’. Note 1 and 2 have little to do with cost control; that comes in the form of limiting access to medical advances for everyone (see below). An example of how a myopic focus on cost-efficiency may not be the most important criterion.

    I can easily believe fee-for-service is not the best arrangement. But it also seems clear what we call inflation in health care is not what we typically mean by the term, i.e. prices rising for the *same* product or service (the recent cases of a few ‘orphan’ drugs aside). Instead what we see is the effect of new things entering the basket, innovations that sometimes dramatically improve and extend our lives and which we should celebrate. Instead these represent a political problem because we have to figure out how to make them immediately accessible to everyone, which is of course impossible. It may not be too cynical to say in that case it’s easier to have less innovation so everyone’s getting the same.

  22. 22 22 Advo

    IMHO the asymmetry argument is overblown; we effectively hire insurance companies as our negotiators and they have lots of data.

    They have data but apparently that’s not helping, is it. Look at the example I gave you and tell me how the insurance company (which has to draw up abstract rules) is going to be in a good position to make rules that give the physician the flexibility to provide good care while also ensuring cost efficiency.

    The fact is that private health insurers in the US have not been effective at cost containment.

    It seems obvious to me that putting people more in charge of their own spending (e.g. MSAs) would reduce spending, probably dramatically.

    Of course it would. But that’s not really a useful observation, because which medical services the patient dispenses with is quite random. In very many cases the decision to forego a doctor’s visit or a treatment has seriously detrimental effects and the patient wouldn’t have decided against diagnostic or treatment measures had he understood the consequences. In other cases, the undiagnosed and untreated patient will go around infecting others.

    For the majority of health care costs, the patient is simply not in a position to make an informed judgment what kind of services he requires.
    That’s why he goes to the doctor in the first place.
    Nor is the patient able to shop around for the majority of medical costs.
    Forcing the patient to decide on treatment and diagnostic measures is simply not an efficient way to lower healthcare costs.

    But it also seems clear what we call inflation in health care is not what we typically mean by the term, i.e. prices rising for the *same* product or service (the recent cases of a few ‘orphan’ drugs aside).

    So we’re back to the unsupported idea that the BLS doesn’t know how to calculate inflation. That wasn’t true when we were discussing apartments and it isn’t true for medical inflation.
    If anything, since the Boskin Commission, it’s probably understated.

  23. 23 23 iceman

    Assuming BLS has it totally nailed, I don’t think medical inflation of around 3.5% over the past 20 years is what people are freaking out about, it’s premiums rising along with co-pays etc., because the basket is growing – which is a wonderful thing.

    Saying ‘we don’t pay for 10 blood parameters’ etc. is precisely what insurers do, while they also have an incentive to prevent more costly problems later on, which seems like the type of balance we’re looking for. Any 3rd-party arrangement faces the same structural issues – so pointing those out, or that costs and quality are a trade-off, are not such useful observations either; the question is how does govt as ‘single denier’ get the incentives any better. Its main advantage is opaque redistribution, its major disadvantage is the potential to decrease innovation (because that alleviates a political problem).

  24. 24 24 Bob L.

    If information asymmetry is a problem then I would think there are ways to address it without the government taking over the healthcare system. A good use of government would be to provide this information. Or people could hire consultants to help them with decisions. There could be websites dedicated to providing this information (which to some extent already exist). Then there are HMOs like Kaiser who take care of your medical needs for a fixed cost. These are a few ideas off the top of my head. When the market is more free, particularly in the context of our ever-expanding technology, there will be innovation and solutions that we probably haven’t imagined yet.

  25. 25 25 Advo

    Assuming BLS has it totally nailed, I don’t think medical inflation of around 3.5% over the past 20 years is what people are freaking out about

    If you look at the 20 years pre-ACA (1990-2010), medical care inflated by +4.57% p.a.
    If you subtract the normal CPI inflation from the medical care CPI, you end up with +70% for the time period.
    This is not sustainable.

    because the basket is growing – which is a wonderful thing.

    It’s not a wonderful thing if the result of the growing basket is that you end up with a situation where you can’t afford healthcare anymore because healthcare providers drop the cost-efficient options from the basket in favor of an option that’s 5% better and 200% more expensive.

    its major disadvantage is the potential to decrease innovation

    Once you subtract government R&D spending, the overall amount of medical spending that goes into R&D (not market research) is fairly small. Much less than goes into marketing and legal expenses.

    Any 3rd-party arrangement faces the same structural issues

    Other countries manage to do it. Hell, Medicare has been doing a far better job at cost containment than private insurers.

  26. 26 26 Bob L.

    It’s apples and oranges to compare insurance to Medicare. Our current insurance arrangements do not encourage cost containment. I can reasonably look at my place of employment for evidence of this. Of the insurance options available, the best choice for me financially is the one that costs the company the most and has the lowest deductibles. I pay less than $200 per year out-of-pocket. As it is, I am incentivized to go in (or bring my kid in) for every little thing that might require medical attention. If I had the option, I would choose a high-deductible policy and use way less services. If I chose to not get insurance through my employer, I would get very little in the way of reimbursement for this ($250 cash compared to $1200 in benefits), and would get no subsidies or tax breaks for an Obamacare policy.

  27. 27 27 iceman

    Bob L – yes I’m all for people making informed decisions and govt helping to inform. I too would probably get a high-deductible plan if my employer’s tax advantage didn’t make it make sense to just get the full package. Employer-provided care is the source of portability problems and in turn much of the pre-existing condition issue among other things, and equalizing the taxability versus individual policies should be considered way before one jumps to single-payor.

    Advo – we’re starting to play games with timeframes. For purposes of assessing *sustainability*, It’s not the last few years that drags the trend down, it’s the earlier period that drags your number up (for some reason medical inflation declined dramatically from a spike in 1990, obviously following the general inflation of the 1980s).
    - If there are cases where the #s resemble your example I’d agree we should try to fix that so insurers can say “in this case 95% as good is good enough”.
    - “Lower legal expenses” = “single-denier faces no recourse”. Other countries impose price controls and free ride off US innovation (or innovation driven by the ability to make a profit in the US in the case of foreign-domiciled pharma companies). There’s a pretty clear difference in the incentive to innovate which is always my starting point

  28. 28 28 Advo

    - If there are cases where the #s resemble your example I’d agree we should try to fix that so insurers can say “in this case 95% as good is good enough”.

    This is really difficult to do, apparently. Insurers ARE doing this, or trying to do this, but it appears that they’re still unsuccessful in containing cost growth.

    (for some reason medical inflation declined dramatically from a spike in 1990, obviously following the general inflation of the 1980s).

    If you take the time period from when the Boskin commissions’s report was implemented (1997) and 2008 (prior to the Great Recession) the results aren’t very different (just over 4%).
    Any way you look at it, pre-ACA, medical inflation was simply unsustanaible. It may still be. Innovation does not appear to be used to improve cost-efficiency but to a large degree goes into improving pricing power of healthcare providers.

    https://fred.stlouisfed.org/series/CPIMEDSL

    Other countries impose price controls and free ride off US innovation (or innovation driven by the ability to make a profit in the US in the case of foreign-domiciled pharma companies).

    That is true, but in terms of overall cost that hardly moves the needle for the simple reason that of the overall healthcare spending in the US, only a very small fraction actually goes towards producing innovation, and it’s not like the EU countries don’t fund medical research.

    Here’s a research paper about the impact of price controls on pharmaceutical revenues:

    The study estimates that, after extrapolating to a broader set of OECD countries, the diminished returns are in the range of $18 billion to $27 billion annually. This represents a 25 to 38 percent increase in revenues over actual 2003 revenues from sales of patented drugs in the OECD countries considered.

    http://webcache.googleusercontent.com/search?q=cache:qV-NUVZl61gJ:www.trade.gov/td/health/drugpricingstudy.pdf+&cd=1&hl=de&ct=clnk&gl=ph

  29. 29 29 Advo

    Here’s another statistic:

    The analysis also found that the United States spends about 6 cents of every health care dollar on medical research.

    http://www.nytimes.com/2005/09/21/us/medical-research-got-more-money-over-last-decade.html

    So the effect of free riding is negligible in dollar terms.

  30. 30 30 iceman

    Thanks. You’ve clearly researched this more than I have and my objections are more theoretical / philosophical. But I remain stuck on 1) why insurers couldn’t naturally address many of your concerns *if we let them* — again we’re schizophrenic on this, i.e. “control costs, but not in any particular case” — and 2) how your preferred alternatives negate the same obstacles other than that govt can simply decree prices and approved services *for everyone*. That’s not avoiding costs just shifting them into other forms. The most dangerous form being why in my view any negative effect on innovation has to dominate just about any other consideration over the long run, as today’s cutting edge is tomorrow’s basic care. Just think of how many things are trivial today but were fatal 30, 50, 100 years ago. This should weigh heavily even on the pure utilitarian.

  31. 31 31 Ken B
  32. 32 32 Advo

    Thanks. You’ve clearly researched this more than I have and my objections are more theoretical / philosophical.

    I first became interested in the topic of US healthcare approximately 15 years ago. At the time, I expected the US healthcare system to be cruel but efficient. I was quite surprised when it turned out to be not only cruel but also highly inefficient. In terms of cost-efficiency, US healthcare is the worst in the Western World by a very large margin. It also ranks low in terms of overall medical outcomes, mostly because large population groups lack sufficient access to care. Satisfaction scores are also low compared to the other OSCE countries.

    why insurers couldn’t naturally address many of your concerns *if we let them*

    How are we not letting them?

    how your preferred alternatives negate the same obstacles other than that govt can simply decree prices and approved services *for everyone*. That’s not avoiding costs just shifting them into other forms.

    Healthcare costs aren’t a fixed amount. Putting cost pressures on healthcare providers forces them to increase their efficiency.

    Here is an overview with some data on the various countries:

    http://www.commonwealthfund.org/publications/issue-briefs/2015/oct/us-health-care-from-a-global-perspective

  33. 33 33 Advo

    I would like to add that the healthcare market is really fascinating from an economic science perspective because it fails so bad.
    Studying it is very instructive because you learn a lot about market failure in general.

    Here’s something I wrote a while ago about why there really can’t be such a thing as “private individual health insurance”.

    http://boards.fool.com/how-choice-destroys-the-health-insurance-market-29144599.aspx

  34. 34 34 iceman

    Sorry I was on vaca…in case you’re still around:

    “How are we not letting them?”
    The essence of the ACA is to require insurers to offer certain packages of services (and require people to purchase them). Taking insurance mandates to a new level. Legal reform would be helpful too.

    On your linked post, I find the “death spiral” argument to be a red herring. As you note, annual re-underwriting is not “insurance”. The essence of insurance is aggregating *unpredictable* events. From there a spiral requires that despite all the confounding uncertainty and complexity that Arrow first described, insurers can underwrite so precisely that the risk groupings are too narrow to underwrite. Of course there will be people who can’t afford basic coverage (e.g. didn’t obtain it before incurring an ex post un-insurable condition), which is the proper role for a basic public pool, provided we’re willing to fund it transparently.

    Which is why IMO when people say the health care market “fails badly” what they really mean is it’s too *politically* sensitive to ration in this area. E.g. Henry Aaron (Krugman’s favorite health care economist) focuses a lot on “can we say no?”, cultural factors, conditioning expectations etc.

    I think OECD comparisons etc. are fraught with difficulties — satisfaction surveys are kinda worthless (conditioned expectations); on quality, what might be enlightening in an “apples to apples” spirit is to compare, say, northern states with northern countries, but for some reason I haven’t seen this done; on cost, perhaps it shouldn’t be too surprising that health care is the ultimate luxury good?

  35. 35 35 Advo

    Legal reform would be helpful too.

    Tort reform is a STATE issue. Texas did medical tort reform (very restrictive) in 2003. To my considerable surprise, it had absolutely no impact on healthcare cost growth. NONE.

    From there a spiral requires that despite all the confounding uncertainty and complexity that Arrow first described, insurers can underwrite so precisely that the risk groupings are too narrow to underwrite.

    I don’t see how you address my death spiral argument.
    Medical insurance requires annual (or other periodic) underwriting because the insurer cannot estimate the development of medical inflation for more than a short time period (I read somewhere that the bands of uncertainty became intolerably large after 18 months).
    The consequence is that “development of a chronic condition” is not an insurable event, because the insurer cannot know how much it’s going to cost over the next 30 years if you get diabetes or pulmonary edema.

    It’s just not possible for a health insurer to provide health insurance to individuals without periodically adjusting for that specific individual’s newly arising risk factors.
    And that means that sooner or later, many/most people will sooner or later become uninsurable.

  36. 36 36 iceman

    Thanks. I agree the way most people get their coverage through employer- / group-based plans means they are subject to periodic changes (as a trade-off for guaranteed issue) – however my understanding is typically only across the board not individual “re-underwrites”. (Interestingly, while I’ve long believed employer-based coverage is problematic (and a relic of wartime wage and price controls), I learned one advantage it has is actually reducing the adverse selection that’s inherent in all insurance and, taken to an ‘illogical extreme’, is the basis for fears of death spirals.)
    Where we disagree is that this is the only way it could be / have developed because it’s not possible to have individual policies that function effectively like other types of insurance. For better or worse I’ve never had to shop the individual market, but I would point to the existence of noncancellable / guaranteed renew policies and developed markets for “specified disease” policies for things like cancer and diabetes, and LTD and LTC.

    On legal reform, I would note that I worked for an insurer (not in an insurance function) that had been a leading writer of medical malpractice for a long time and exited the business some years ago because of exploding jury awards. Other companies had similar experiences. The significant loss of competition in many markets made this coverage much more difficult and expensive to get, which surely has ripple effects.

    On medical CPI, I poked around a little and found one example that doesn’t necessarily inspire confidence in our ability to perfectly adjust for a constantly shifting and innovating basket: pharma prices aggregate heavily in the index, and “the more frequently a certain drug shows up in the “last 20 list” and the more expensive it is, the more likely it is to be selected for the index” (BLS)

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