Healthcare and monopoly

Russell Arben Fox asks:

How should a distributist or localist or communitarian in America feel about proposals which would attempt to provide the same sort of equalization which Democratic party reformers are squawking about, but do so solely on a state-by-state (or perhaps region-by-region) basis?

Just more of the same? No different from any other kind of centralization? Or different in degree, but not in kind?

First, you have to remember that successfully reorienting our healthcare system requires two things: cost-sharing pools and competition. We need to do two things to achieve this:

  1. National sale of insurance so that insurers can scrap together larger cost-sharing pools (which lead to lower premiums) and drive harder bargains with healthcare providers and suppliers.
  2. An end to anti-trust exemptions so that health insurance consumers have choices and the industry can’t fix prices. Consumers of healthcare especially need the freedom to exit if they are unhappy with their insurer.

I think many localists and states’ rights advocates miss the larger picture when they advocate for more state control of health insurance. For one thing, many of the problems we currently face are rooted in state-based monopolies in the insurance industry, largely due to the restriction on interstate sale of health insurance and the anti-trust exemption these companies receive. This also leads to overcharging from the supply side and consequently unaffordable healthcare for many Americans.

This is a confusion of scope and scale. Simply because something is able to be sold on a national level does not mean it is in any way more or less “centralized” than if something is sold locally. The problem arises when monopoly or tyranny exist, not simply when something is very large. For instance, a local grocer could very well constitute a monopoly if it were the only grocer in town. It could then wield monopolistic power over the local community, driving up prices and driving down quality of goods and services. The same is true of healthcare.

The same is true of government, actually. A local government can be every bit as tyrannical as the federal government. (Think of the Sheriff in the excellent Clint Eastwood film Unforgiven, for instance.) It isn’t enough to say that something is simply small or local. The existence of some sort of competition or choice must also exist. The scope of the local grocer or local sheriff’s power may be very great within its limited region, and regardless of that limited scale. Conversely, a nationally competitive insurer may be large in terms of scale, but have a much more precarious position of power due to its competitors in the market.

There are many things that should be decentralized in both scope and scale. The provision of healthcare itself, for instance, is best handled at a local level. Doctors and community health clinics and the entire healthcare community can function at that local level quite well. Often there are enough providers in a community for some competition to naturally exist. This discussion is and always has been more about the insurance side of things. And yes, of course, the insurance side and the supply side are intertwined, but they are nevertheless very different pieces to this puzzle.

In sum, it doesn’t really matter where the centralization occurs or on what scale. Centralization can lead to monopoly and monopoly is bad for everybody. Whether we are limited to one national insurer or one local insurer makes little difference. Therefore we need to exploit the strengths of the insurance model by creating a national marketplace that is at once able to sustain large cost-sharing pools and also be highly competitive. This doesn’t go against the grain of localism. This creates a more affordable healthcare landscape for consumers, and creates a less byzantine medical system that should be good for providers of healthcare services as well.

In the end it should lead to stronger communities less burdened by healthcare costs and better able to focus on other pressing local issues.

~cross-posted @ True/Slant

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31 thoughts on “Healthcare and monopoly

  1. Kain, I like your two points, but I’d like to do it one better –

    Instead of trying to lower costs by making the insurance companies more competitive and thus making slightly better deals with the providers, wouldn’t it be best if we could do away with the middle man entirely?

    I contend they are the entire problem. Not just because of the money wasted on overhead and claims management, but because insurance has become the basis of the entire health care system.

    In the past, before the HMO act and similar legislation, it was not unheard of for people to self-pay, because prices were still reasonable the insane arms race between hospital prices and insurance company payments had not yet begun.

    There are still vestiges of this – procedures such as Lasik eye surgery, cosmetic surgery, and a few other things that are still not covered by insurance have all bucked the trend and gone down drastically price over time.

    In other words, there must be a market for procedures to drove costs down and improve quality, just like markets for goods do. This would also make be only choose procedures and tests that make sense, as opposed to doing everything, simply because it’s covered.

    There are a few ways of doing this – Flexible Spending Accounts (FSA) and Health Savings Accounts (HSA) are the ones that I can think of right now.

    Now understand – not everyone has to enroll in or do self-pay for a market to begin to created and costs to fall… but there is a certain critical mass somewhere. I imagine it would be best to experiment with these on a local level somewhere, in order to make it easier.

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    • Absolutely. But it’s not at all likely to ever happen. But yes, if I could, I’d tear down the entire system, put everyone directly in control of their own healthcare decisions via health savings accounts, and top it off with universal catastrophic coverage. That is the ideal system.

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    • I agree that in health care (and higher education, for that matter) there happens a great deal of price inflation because the consumer is not immediately responsible for paying for the service. But it is mind-boggling to suggest that “self-pay” take over as the predominant system of paying for health care. The costliest health care services are also the least predictable. Sure, I can rationally shop around for a dental hygienist if I want to get my teeth cleaned, but if I’m having a heart attack, I’ll be dialing 911 – not phoning around to find the cheapest ER. The essential function of insurance is to spread out the cost of such services across people and across time. That’s something no HSA can do.

      Now, Kain writes that “successfully reorienting our healthcare system requires two things: cost-sharing pools and competition.” The irony of it is that the greatest possible cost-sharing pool can only be achieved by eliminating competition. The dilemma of health reform is how to balance these two elements. One possibility is that we would want to share the cost of some services, but not others, across the entire population. The implication would be a tiered system – completely centralized and monopolistic government insurance (a sort of expanded Medicare, if you will) for one set of health care services, and a private market for supplementary insurance to cover other services.

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      • grandmute – that’s a common misconception. There is no reason to think that somehow a single monopolistic system would be a better cost-sharing pool than several big pools competing with one another. Monopolies are notoriously bad at containing costs. A government monopoly would be subject to far too much special interest meddling. Better to have a handful of very big pools competing. (Right now, of course, we have a myriad small pools not competing so it’s the worst of all worlds).

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        • Cost-sharing and cost-containing are different things, though. A mandatory and monopolistic insurance plan would be better at cost-sharing by definition than any other plan because it will enroll everybody, spreading any costs incurred across the largest possible number of consumers. The old argument about whether monopolies are more or less efficient at this or that does need to be rolled out for the healthcare debate, but it can’t obscure the simple fact that the best way to share costs (not necessarily the best way to provide healthcare) is to force everyone into a single insurance plan.

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      • As I said, this does not require everyone to abandon insurance. It only requires a certain critical mass of people to do self-pay, HSA, or FSA for a market to exist. Others can still use insurance.

        You say that the costliest health services are the least predictable. I disagree. The fact is, cancer, transplants, surgery, and the like mostly don’t require an ER. They are chronic, not acute.

        As far as I can envision, this is the only way to really to attack costs.

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        • … Cancer or the need for transplants or surgery are predictable? I beg to differ – there is no way for someone to know whether they’ll encounter any of these in their lifetime, much less the likelihood that they will. Even if you lump all costly treatments together as Generic Costly Medical Treatment, there is absolutely no accurate way to self-assess one’s risk. That means that investment in HSAs will be fraught with error, and, given what we know about Americans’ propensity to save, a strong downward bias.

          You’re right that with a chronic rather than an acute condition there should theoretically be a greater time frame to try shopping around for the best value. But that doesn’t make the condition more predictable, and it certainly doesn’t help if you hadn’t salted away enough money to pay for the inevitably high bill yourself.

          The other issue with shunting some people into self-pay is selection. People who would opt for self-pay would likely be those who believe for whatever reason that they can cover their future health costs without relying on insurance. More likely than not, these would be the healthy people who would otherwise be subsidizing the sickly by way of insurance premiums. So the exit of healthy individuals from the market for insurance devalues to some extent the policies of those still insured. It’s a bit like the offensive linemen walking off the field mid-game and telling the quarterback, “Don’t worry, you can still play.”

          If we construct self-pay as a viable alternative to insurance, these are the groups I see emerging:
          1.) The uninsured and indigent. They’re largely unaffected by the change, but are still pretty much screwed.
          2.) The insured. Because they are now on the whole a more sickly bunch, either their premiums go up or their coverage declines. Or both.
          3.) The self-payers who succeed in covering their own costs. These are the winners. They didn’t get very sick, or they managed to put away a lot of their own money. They get a cookie for their foresight and independence.
          4.) The self-payers who do not manage to cover their own costs. I expect this group to be smaller than (3), but large enough to matter. These people are really screwed. They thought they’d put one over those suckers who pay for insurance, but then a huge medical bill (or ten) hit them, and they’ve seen their HSAs go up in smoke. These people are essentially in no better a place than (1), except they will have probably already spent a big chunk of their own savings.

          So the shift to a parallel HSA/private insurance system (more so than the current system, in which no one forbids consumers to try to pay their way for medical care without an insurance policy) will only benefit those lucky enough (by health or wealth) to exit the insurance market and save a couple bucks doing so. That’s not much of an improvement in my eyes.

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  2. I get what you’re saying about the need for competition and the ability of consumers to switch plans. By “national marketplace” I assume you mean enabling insurance companies to sell across state lines, but without a benefit mandate consumers ultimately lose in the end. Without a national benefit baseline, insurance companies will choose to operate in states where the benefit mandates are lowest because that will mean the most opportunity for profit. These will then be the source for the cheapest plans and we’re back to consumers only being able to get the insurance they can afford, which might be terrible.

    For instance, a number of years ago Maryland mandated that insurance had to cover a 5-day hospital stay for C-sections. Previous to that, some insurance companies would only cover a 3-day stay no matter what the doctor recommended. Other states have different benefit mandates for that surgery. If insurance companies can sell across state lines, they’ll operate in a state that only requires a 3-day stay or has no benefit mandate. This means that the plan covering a longer stay, let’s say Maryland’s mandate, will be charged a steeper premium and only higher income consumers will be able to afford it.

    I think the national marketplace is a great idea, but not without some controls so consumers aren’t stuck paying for subpar insurance because it’s all they can afford.

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  3. E.D.:

    Sigh.

    For the most part, medical goods and services are not ordinary commodities. Buying and selling health care goods and services is NOT THE SAME as buying and selling, for example, cellphone goods and services.

    This is because the demand for health care goods and services is both relatively inelastic–approaching 0–and in many cases, PERFECTLY inelastic. That is, with a 0 slope. That means that ultimately so-called “free” so-called “markets” are not capable of equitably and efficiently distributing health care goods and services.

    NOTHING fundamentally predicated on a market mechanism will EVER work in the health care industry. We can and probably should include a few quasi-market mechanisms at a layer or two above whatever social mechanism constitutes the fundamental structure of the system. As far as I can tell, many European countries do just that, as something of a check on the reciprocal inefficiencies that are certain to arise in a social-insurance model. But the foundation has to be social, not market, based

    As long as we approach the problem with buzzwords like “competition” and “consumer choice” and “national marketplace” and all that other market-oriented horse manure, we are never going to reach a feasible solution.

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    • Nonsense, Jack. Look at Singapore. Look at the Netherlands. They have used these very same ideas – market ideas – and combined them with government in the form of reinsurance or even catastrophic coverage, and they have done a remarkable job at creating affordable healthcare. Using – yes – competition and yes the state in tandem to create very good systems.

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      • E.D.:

        Oh please. Both of those countries, if you can call Singapore a country, do/did exactly what I said. They applied a few quasi-market mechanisms to what is fundamentally and foundationally a social-insurance model.

        I do understand that America being America we have to fake all this discourse with phony litanies at the altar of the Market, Blessed be Dollar, and if that’s what you’re doing above I apologize. I’m just afraid you actually believe this “market” hogwash.

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        • I fail to see how the avoidance of monopoly and the creation of competitive insurers (Dutch system) is a bad thing – or faux-market-speak. I also think government has a place in all this, so caricuraturizing this as a litany to the altar of the market is pretty odd to say the least.

          The concept of markets is not about the “blessed dollar.” It’s about choice. It’s about not handing over everything to one monopolistic entity – whether that is the state or a corporation or whatever. Didn’t you write a piece here a while back about the problem with 50 states regulating insurance and how little sense that made? Don’t you see how that ties in to all of this?

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          • E.D.:

            Because the level of regulation and state intervention in the Dutch system is so heavy that it’s downright silly to call it a “market.” The Dutch system actually reduces to something more like a public utility rather than market competition.

            The Dutch system works in great part because they came at the problem from a foundationally social-insurance perspective, which is something you might expect from a European country where Social Democracy and socialism aren’t rejected out of hand by dumbshit Republican Senators from Texas.

            All I’m saying is that the cornerstone has to be social. Build whatever edifice you want on top, but if the cornerstone is market forces, the system will fail.

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            • I fail to see how the avoidance of monopoly and the creation of competitive insurers (Dutch system) is a bad thing – or faux-market-speak. I also think government has a place in all this, so caricuraturizing this as a litany to the altar of the market is pretty odd to say the least.

              I guess conservatives don’t have that monopoly on butchering basic economic concepts and going straw man on those they disagree with.

              Jfxgillis,

              Markets for goods can function with inelastic demand curves. Your problem, I suspect, is that change in price are more profound with inelastic demand curves than if the demand curve was more elastic meaning that more people can be priced out of obtaining a given good or service. That has nothing to do with markets inefficiently allocating resources (since we have a functioning price system and that price system is determining the allocation based on the supply and demand).

              However, you don’t like markets when they produce results you don’t like. Leave it at that. Don’t mix “unfair” and “inefficient”. You’re incorporating your subjective views of fairness into cut and dry economic theory in a way that makes no sense whatsoever.

              If you think that’s “worshipping at the altar of the market”, then let’s just agree to disagree…

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              • Dave:

                Markets for goods can function with inelastic demand curves.

                No they can’t. There’s no equilibrium in a market on goods with a perfectly inelastic slope. Thus, prices are arbitrary. If you want to call a mechanism that produces arbitrary prices a “functioning” market, I suppose I can’t stop you any more than I could dispute it if you claimed that a deep fryer that blew up was “functioning” because it was capable of cooking french fries when it blew up. But it seems rather a silly argument.

                Even that assumes that a given equilibrium in a very but not perfectly inelastic commodity is socially acceptable. Which it isn’t but that’s another story.

                Don’t mix “unfair” and “inefficient”.

                I didn’t. I mixed “unfair” and “efficient.” An efficient market in health care goods and services is intrinsically unjust. I wonder if you can figure out why.

                It is not true that I don’t like markets. I like markets fine when the commodity is something like cellphone goods and services. Or fully-cooked prepared bacon. Yummy. I don’t like markets in health care because the commodity for sale is too inelastic to allow for a functioning market.

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                • Jfxgillis,

                  No they can’t. There’s no equilibrium in a market on goods with a perfectly inelastic slope.

                  Basic math disproves this notion. The textbook definition of equilibrium is solving for a price where quantity supplied = quantity demanded. A perfectly inelastic demand curve, mathematically speaking, is a constant. In our example, let’s assume quantity demanded (Qd) = 10. Quantity demanded at a price of $0 is 10 and at $2,000,000, it’s 10. Let’s assume a basic linear supply function Qs = 2P. Are you going to tell me with this basic information that I can’t solve for an equilibrium price where Qs=Qd? Why is this not an equilibrium condition?

                  Even that assumes that a given equilibrium in a very but not perfectly inelastic commodity is socially acceptable. Which it isn’t but that’s another story.

                  So an equilibrium condition can exist in a very inelastic but not perfectly inelastic situation? How do you differentiate the two? A “very” inelastic demand can be as close to downward sloping as possible with changes in Qd based on a change in P that are infintessimal (a 1% change in P that causes a .000000000000001% change in Qd).

                  It is not true that I don’t like markets.

                  I never said you didn’t like markets. I only said that you don’t like markets when those markets produce what you perceive to be socially unjust results.

                  Personally, I don’t think it’s inelasticity you have a problem with but rather scarcity. Just saying.

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                  • Dave:

                    Let’s assume a basic linear supply function Qs = 2P.

                    Sure! Why not? It’s just as arbitrary as any other arbitrary supply curve you could plug in. Which is my point.

                    The reason why it’s not an equilibrium position is because it doesn’t even come close to operating under empirical conditions. So yeah, you can draw a chart on page 18 of whatever book you freshman-econ types want to read, but it doesn’t matter in the real world of life, sickness and death.

                    We can’t even half-assed-approximate equilibrium conditions using market mechanisms, which is why the USA pays twice as much for its market-oriented health care as the other developed countries pay for their social-insurance-oriented health care.

                    I only said that you don’t like markets when those markets produce what you perceive to be socially unjust results.

                    Okay. That is my position, so I can’t complain.

                    I don’t think inelasticity and scarcity are unrelated concepts; in fact, they amplify each other in this particular case.

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                    • Scarcity of *WHAT*?

                      Health Care? What does that mean? Scarcity of medicine (effectively a widget)? Well, we can always create more widgets. Start up another factory. Undercut the competition by 10% (use the moyel rule!) and make millions!

                      If it’s a problem of not enough manhours (nurses, doctors, surgeons, therapists, etc) then it’s worth exploring whether this bill will make providers’ lives easier or more difficult.

                      If it’s the latter, you’re making the problem worse.

                      Then we get to explore the concept of a government-protected right to a service that fewer and fewer are willing to put up with the associated bullshit to provide.

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                    • Additionally, how would “scarcity” be measured?

                      We do not yet have medication that can treat problem X.

                      Is this a scarcity problem? In 30 years, we will. Will it then become a scarcity problem if not everyone with problem X gets subsidized medication to treat their problem?

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                    • So yeah, you can draw a chart on page 18 of whatever book you freshman-econ types want to read, but it doesn’t matter in the real world of life, sickness and death.

                      So you use economic concepts when it’s convenient, and mock them when it isn’t. Allow me to challenge your use of “inelastic demand” above. Jaybird already has hinted at this: what does it mean to say that demand for health care is inelastic? How are you quantifying health care – by person-hours, by quality, by outcome? Maybe what you’re trying to say is that people are going to get sick whether or not they want to purchase health care. That’s fine. But that doesn’t immediately translate to “PERFECTLY INELASTIC DEMAND !!!” In fact, from a public health standpoint, we often have the problem of demand for health care being too elastic, whereby people won’t get treatment or medication if they can’t afford it or would rather not pay for it.

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                    • greg:

                      So you use economic concepts when it’s convenient, and mock them when it isn’t.

                      No. I use them when they help us better understand the world and help us make the world a better place.

                      I mock them when freshman-econ types privilege the economic concept over the lives the humans affected.

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                    • Health care is a positive good.

                      So long as there is a treatment out there that (rich guy) has available that (poor person) cannot afford, there will be accusations that people opposed to eliminating the treatments that the rich guy has available “privilege the economic concept over the lives the humans affected.”

                      There will always be one more treatment, one more specialist, one more prescription, one more therapy, one more last-ditch effort to make.

                      And if it works for rich guy and poor guy doesn’t get it, we will live in a rich society that ought to be able to provide health care to people but we’re not, for some reason.

                      And the people who oppose spending more than a trillion dollars of other people’s money will be painted, once again, as “selfish”.

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                    • Jay:

                      Hey, I pretty much agree with all that!

                      But. If rich can get treatment that poor guy can’t, then rich guy starts bitching and moaning about paying taxes so poor guy can get it, is there some reason why we shouldn’t call rich guy selfish?

                      Jus’ wonderin’.

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                    • The reason why it’s not an equilibrium position is because it doesn’t even come close to operating under empirical conditions.

                      No. It is an equilibrium condition, just one you don’t like. Please don’t discuss empirical conditions without providings links or evidence.

                      I was not attempting to determine a supply-demand curve equilibrium in a particular industry. I was attempting to show you how wrong you are when you flat-out suggest that a condition of equilibrium can not exist with a perfectly inelastic demand curve. Given any positively sloped supply curve, the two shall meet. Forget life, death, and all that other fluff. This is basic math and you have not grasped it.

                      So yeah, you can draw a chart on page 18 of whatever book you freshman-econ types want to read, but it doesn’t matter in the real world of life, sickness and death.

                      Maybe a textbook definition of supply and demand equilibrium does not matter in the real world (it doesn’t matter much in mine and I work in finance) but that hardly makes anything you have said on basic economic definitions correct.

                      I don’t think inelasticity and scarcity are unrelated concepts; in fact, they amplify each other in this particular case.

                      I never said they weren’t unrelated concepts. I just said that you were confusing the two, which you are.

                      I mock them when freshman-econ types privilege the economic concept over the lives the humans affected.

                      I explained that you have basic freshman-econ concepts completely wrong and then you go so far as to imply that I am privileging economic concepts over the lives affected?

                      Do you have any idea how ridiculous that sounds? You realize that you have now taken our disagreement on basic economic concepts and employed an ad hominem attack against me for no reason at all, right?

                      Can you please tell me how my view on supply and demand fundamentals have anything to do with my views on the healthcare debate, a topic I have never once touched anywhere in this blog?

                      I’m going to leave it at that. We agree to disagree. Done. Cya.

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  4. I’m not sure I accept this premise.
    “First, you have to remember that successfully reorienting our healthcare system requires two things: cost-sharing pools and competition.”

    I think there is one single thing that will go a long way in achieving success. First, the problem. I believe that a large driver of our cost is the unhealthy lifestyle of many americans, think obesity epidemic. Currently there is no large industry with an incentive to change this, but there are large industries benefiting from the status quo. If we prevent insurers from denying coverage and impose universal coverage then we suddenly have a large industry that cares a great deal about improving the lifestyle of americans. It wont be fast, but I believe this incentive will drastically improve things in the long run.

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  5. Jfxg, I suspect that such an official policy will instead result in a cutting down of the tall poppies mixed in with a healthy amount of corruption where those who are politically connected will receive the best treatment while those without will not benefit particularly… and the heavy lifting of innovation will go somewhere else (if not away entirely).

    Which will not particularly help anybody either.

    But people will feel less bad about not having an option to do X if nobody at all has the option of X.

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      • Well, we’re back to that Solomon story.

        Two chicks go to Solomon and both say that they’re the mother of the live baby.

        At the behest of Solomon, a soldier gets ready to cut the baby in half.

        The mother of the at-this-point-still-alive baby says “no, give the baby to her”. The other mother says “yes, cut that baby in half!”

        It seems to me that asking why the other mother should care about what happens to the baby is a fair question. Coming to the conclusion that, of course, she should not implied a complete and total lack of personal investment related to parenthood which indicated that she was not the real mother.

        I suspect that a similar dynamic goes on here with the question regarding the poor guy. Why should he care?

        Indeed, he should not.

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