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On Obamacare and the Real U.S. Healthcare Crisis, Part I: A Look In The Rearview Mirror

[Note: If you have a layperson’s or a colloquial understanding of insurance industry jargon, you might want to read this prior to reading the post below.]

 

The government shutdown has once again brought the PPACA  – commonly known as Obamacare – into the glaring national spotlight.  As I noted earlier this week, this seems as good a time as any to take a look at our healthcare system and how it may or may not be transformed by the President’s signature achievement.  As I said on Monday, I plan on making the following arguments:

1Despite what you may have heard from the left, the health-insurance crisis that led to the passage of Obamacare was not the nation’s poor being uninsured.  Despite what you may have heard from the right, the nation’s healthcare system was not sustainable, because the way that system is primarily funded had been in the process of radically changing to something different than what it had been for decades.

2Despite its good intentions, Obamacare will not solve the actual crisis it was originally meant to solve.  This is because it was largely diverted to tackle the problems that were easy to sell politically, rather than the larger problems that were more difficult to discuss.

3Our healthcare system is going to change radically over the next 10-20 years — and it will change regardless of whether Obamacare stands or is overturned.  Despite what politicians of all stripes may say, there are only a limited number of directions we can go — and though each direction has benefits, each will also require sacrifices of some sort that we, collectively, would prefer not to make.

4We would be better off acknowledging the change that’s coming now, and begin to have a discussion about which sacrifices we as a nation wish to make.  Otherwise, those changes will happen without our having input, and we may very much dislike what we end up with.

I’ll be discussing those various choices in my next post, as well as the pros and cons each carries.  Before we make guesses at the future, however, it is necessary to examine the past.  It’s important to be aware of how our current healthcare system evolved into what it is today, and how that evolution is inexorably tied to our predominant health-insurance scheme.  It’s also necessary to take a look at other health insurance schemes that were attempted in this country and note why they failed.  We should acknowledge the tremendous successes our current system had borne, some of which will suffer as that same system changes.  Lastly, we need to recognize that our health insurance and healthcare system has been not only been in crisis for quite some time, it’s actually been changing into something both wholly new and unsustainable.

The seeds of our system’s breakdown are sewn into the very fabric of what has made it so very successful for so very long.  Because of this, we need to look fully into our rear view mirror before we hit the accelerator.

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Health insurance’s roots in the United States actually go back to the mid-1800s.  The two earliest types of policies, accident insurance and sickness insurance, were actually closer to what we now think of as workers compensation. Each primarily existed to partially reimburse wages lost due to injuries and illness.  There were many entrepreneurial attempts to form a stable insurer around both of these policies; however, each of them eventually crumbled under the weight of the Law of Adverse Selection. Most men who were healthy and worked in relatively safe occupations chose not to spend their wages on what they saw as an unnecessary and frivolous expense.  Those few who would initially purchase annual policies usually let them slip into cancelation at renewal.  The eventual pool of risk, therefore, largely consisted of working-class, high-risk, and unhealthy men.  Eventually, losses drove up premiums to the point that they were unaffordable to the insurers’ target demographic and the pools collapsed.  Much of the demand for these products disappeared after 1917, when the Supreme Court’s ruling on New York City Railway v. White cleared the way for forced participation in government workers compensation schemes.  It would be more than a decade after the New York City Railway v. White ruling before what we might call modern health insurance (i.e.: insurance designed primarily to pay hospital bills) was first successfully attempted by Baylor University’s Vice President of Medical School, Justin Ford Kimball.

Kimball was a career school administrator, and had no special training in actuarial mathematics.  Because of this it is likely that he “accidently discovered” his Law of Adverse Selection workaround without being aware that the law even existed.  Kimball created his insurance plan as a way to reduce the medical school’s bad debt racked up by Baylor teachers who often partook of the adjacent medical school’s facilities without being able to pay subsequent bills.  At first blush, Kimball’s scheme was similar to all of those that came before him: Kimball figured that if he could get healthy teachers to pay a small amount each month (50¢, in fact) they could collectively fund up to 21 days of hospital care per teacher over time.  Kimball, however, had one advantage his entrepreneurial predecessors did not: He was his potential clients’ employer and could therefore mandate their participation.  Kimball’s plan was so successful that within a few years other schools in the Dallas area were joining his fund, which became known as the Blue Cross fund.  In 1939, lumber and mining employers in the Pacific Northwest copied Kimball’s model when they formed the Blue Shield fund.  Soon, existing life insurers were creating similar schemes, marketed to employers.

Unlike every private health insurance scheme that had come before, these plans thrived over time. And they thrived for the same reason the government-mandated workers compensation schemes did: forced participation of healthy insureds kept the Law of Adverse Selection at bay.  Interestingly, doctors and small-government advocates at the time were largely opposed to employer-based schemes for reasons that seem positively oracular in retrospect: They feared that private compulsory health insurance would eventually lead to public compulsory schemes, and that eventually penitents’ choices themselves might be regulated by the government.

Employer-based health insurance schemes grew in popularity throughout the 1940s and early 1950s, but they truly exploded after 1954.  That was the year the IRS tax code first made employee and employer contributions to health insurance tax exempt.  Employers throughout the United States began using health insurance schemes as a low cost way to compensate employees tax-free.  Within two years of the tax code change, almost half of all Americans were covered by private health insurance schemes; by the early 1960s, over three quarters were covered.  As America’s middle class burgeoned, it did so fully insured.

And as we reach this moment of bourgeois triumph in our history review, we need to take a moment to stop and survey the early employer-based health insurance landscape back in the day.  If you are relatively young, you would be excused for reading the paragraph above and asking, “Wait – health insurance was an inexpensive way to compensate employees?”  It was.  Premiums back then were around 12% of what they are today, and that’s after taking both inflation and average cost of living indexes into account.  There are a number of reasons for this cost discrepancy, but by far the largest is this:  The definition of “healthcare” is substantially different today then it was back then.

If you were to go back in time sixty or seventy years to discuss healthcare, you’d find that people would most likely look at you funny.  (And not just because your jeans look like they’re about to fall off and you’re wearing your baseball cap all wrong.  Also: Get off my lawn!)  A huge number of things that you include in your definition of “healthcare” were not included in theirs, such as pre-natal care, treatment to extend the life of the terminally ill for short periods, preventative care, physical therapy, or anything at all having to do with mental health.

More than that, however, the expectations of what healthcare could address were significantly lower.  Hospitals today are a place where sick people go to receive medical treatment with the expectation of being made healthy again, but this is a very recent development.  Throughout most of US history, hospitals were more akin to today’s hospice centers. They existed largely as places where families with enough funds could put sick and dying members of the household — temporarily or permanently — out of the way, for the comfort of the sick as well as the family.  Simply put, at the outset of the health insurance industry premiums were incredibly cheap because medical intervention was rare – even for the sick.  This is a larger point than it first appears, because the advent of compulsory healthcare coverage and the American medical treatment and technology boom that began in the mid-20th century are inescapably bound.

As it turned out, insuring the vast majority of Americans provided an astounding benefit to the healthcare industry: an enormous, well-funded customer base that cared more about treatment than cost.  Towns that previously could support only a handful doctors could suddenly support numerous clinics, scores of private practices, and perhaps even a hospital to boot.  Health insurance is also responsible for the proliferation of specialized medicine, because it created a large market of patients with both the means and willingness to fund it.

At the same time, the vast number of insureds created the ability of private companies to engage in profitable and robust medical research.

Over $100 billion is spent in the United States each year on medical research.  The vast preponderance of this research will hit dead ends, and primarily provide data for other researches on what doesn’t work and why.  Despite this, research continues (and continues quite profitably, thank you very much) because when that rare breakthrough occurs, it’s a virtual goldmine.  But here’s the thing: it’s only a virtual goldmine because it’s assumed that the vast majority of people who could use whatever drug, treatment or device will be able to purchase it.  And the overwhelming majority of them can only afford that treatment because of health insurance.

Take any ailment being researched today: cancers, AIDS, heart disease, you name it. Let’s say that creating a breakthrough, working treatment for any of these treatments costs the research industry an average of  $75 billion over time to perfect.  If 75% of the country is able to pay for these treatments as they are introduced into the market, you can see the appeal to venture capitalists to roll those investment dice. (Especially since it’s hard to imagine a more motivated customer base than someone that needs your product to live.) But what if you knew that less than 1% of the population would ever be able to afford your new cancer/AIDS/artificial-heart treatment were you able to make it work?  You’d never come close to getting your $75 billion investment back, let alone make a profit.  Why would you invest that kind of money?

Its predominant insurance scheme also gave the US a decided market advantage with medical research over other industrialized countries.  While the US was going with employer-based compulsory schemes, the populations of the United Kingdom, Japan, the Scandinavian countries, and others were moving to government-based compulsory schemes.  One of the way those country’s were able to make their schemes work without bankrupting their respective governments was by defining certain expenses as not being part of the healthcare system.  The US had no such centralized restrictions, and because of this the amount of research here dwarfed research everywhere else.  And this isn’t just to the US’s benefit; all countries have benefitted from that research.

I cannot stress this point enough, because it will be very important when we get to our next discussion about what the future holds for the US healthcare system.  It is a common argument among some these days that covering those too poor to afford the escalating costs of healthcare insurance can bring upward premium pressure for the rest of the country.  And this is true enough, at least to a point.  But if this is the argument on which you’re banking your future healthcare system, you need to also be aware of what you’re giving up: a robust research incentive that has driven the most significant medical advances in the past half-century.  The smaller you make that pool of potential patients, the less likely people are to invest those billions into the system.  And make no mistake; that pool is already shrinking at an exponential rate.

Which brings us back to our history lesson.

As the ability for people to get care grew, so did the demand for that care.  In fact, it grew too quickly.  The Nixon administration was actually the first to note out loud publically what actuaries had begun to observe a decade earlier.  Fueled by the access provided by employer-based insurance, the cost of healthcare wasn’t simply growing faster than inflation rates, it was growing exponentially.  The system, declared the administration, was not sustainable and something needed to be done.  (Each subsequent presidential administration as well as every major-party presidential candidate over the past 30 years, it should be noted, has repeated this declaration.)  Nixon and insurance actuaries knew the lines on graph had to cross; the only question was when they would.  As it turns out, the lines began to cross thirty years later, in the 1990s.

If you’re of a certain age, you will immediately recognize the pattern.  For years, your employer paid all of your health insurance premiums. And then one year, they couldn’t afford the price increase and took monies out of your paycheck to cover 10% of the latest bump.  Before too long, they were splitting each premium increase; then they were forwarding each increase in its entirety on your shoulders.  Eventually, health insurance was something that you could either pay for mostly or entirely by yourself through the company health plan, or you could just choose not to be insured.

And just like that, the Law of Adverse Selection caught up with the American healthcare system.

As participation became voluntary and the cost of premiums was pushed on to employees, the predictable happened.  Those that were young, healthy, and least likely to need medical intervention chose to pocket the premium.  Employees who were older, less healthy, and highly likely to need medical intervention chose to remain, regardless of expense.  Of course, the effects began to slowly snowball.  Reduced participation and adverse selection would negatively affect renewal rates.  (In the last part of the 2000s it was not unusual to deliver the bad news of 40% rate increases to my clients.)  As those increases hit, more and more employees made the financial decision to save their money and roll the dice.  Sometimes, of course, they would opt back in later.  Perhaps they were about to go through a pregnancy, or perhaps they began to have chronic back pains, or perhaps they became freaked out because they began to notice blood in their urine.  More and more, employer-based health insurance schemes are becoming a place where only the upper-middle class and those likely to need expensive care choose to participate.  When President Obama took his oath of office in 2008, participation in private health insurance schemes had already fallen to levels this country hadn’t seen since the mid-1950s when the IRS tax exemption was initially introduced.  Predictably, medical research dollars in the United States are now also in decline.

And herein lies the truth of the healthcare crisis you heard so much about four years ago.  The crisis was never that the nation’s most impoverished were uninsured and couldn’t get access to quality healthcare; the nation’s most impoverished have always been uninsured and unable to access quality healthcare.  This is not to say that the poor being uninsured and lacking access to quality healthcare isn’t an important issue, or that this state of affairs isn’t morally questionable – it absolutely is.  It’s just that it’s absurd to call the conditions we have always happily lived under since the country was founded a “crisis.”  The real crisis that had insurers and healthcare policy wonks freaking out was this:

Thanks to the Law of Adverse Selection, we have been rapidly approaching a scenario where the middle class cannot afford health insurance or quality healthcare.  Healthcare reform wasn’t implemented to make sure the guy living under the bridge in a cardboard box could get health insurance ten years from now.  It was needed to make sure that you could.

If that seems heartless, think of the nation’s healthcare system as a luxury cruise ship.  For years we’ve been tanning on the Lido deck, blissfully unaware that there are quite a few fellow passengers who have fallen overboard and are drowning.  Now, however, the engine room has caught fire and the ship is starting to sink, and for the first time we’ve glanced over the railing and said, “Huh.  People are drowning.  That’s not good.”  We can argue about the moral imperative of pulling them out of the sea vs. the cost-savings of letting them drown — (or how they’ll never learn to swim if you throw them a line, or whatever your conservative metaphor is) — but before we can save anyone, we really, really need to make sure the ship doesn’t go the way of the Titanic.

At any rate, that’s where we’ve been, and that’s where we are now.

Next up in our discussion: The various directions we might choose to go now (with or without Obamacare), the advantages and disadvantages of each, and why anyone on the right or left that tells you we can have everything we’ve ever wanted in a healthcare system without making difficult and possibly heartbreaking sacrifices is either yanking your chain or doesn’t know what they’re talking about.

Follow Tod on Twitter, view his archive, or email him. Visit him at TodKelly.com

 

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119 thoughts on “On Obamacare and the Real U.S. Healthcare Crisis, Part I: A Look In The Rearview Mirror

  1. Thanks to the Law of Adverse Selection, we have been rapidly approaching a scenario where the middle class cannot afford health insurance or quality healthcare. Healthcare reform wasn’t implemented to make sure the guy living under the bridge in a cardboard box could get health insurance ten years from now. It was needed to make sure that you could.

    As a self-employed family living in a state that has long said 1) you cannot exclude people for pre-existing conditions and 2) certain things (mental health care, for instance) need to be covered in you plan, I’ve long been experiencing the problem you’re describing.

    A year ago, we were still on our independent policy with a $15,000 deductible, costing upwards of $500/month (in my name, it would have been more in my husbands because he’s over 55). This is where your scenario is headed; and I’m already there. And I should also note that my state actually had a well-integrated health-care system; there’s not much of the two-tier system, the one with fancy doctors that the rich (meaning well-insured) visit and the one the Medicaid patients visit.

    On the research end (the chart): As long as the status quo of pricing lasts, it doesn’t really matter where in the world new discovery is done, if developers can, they will release things in the US first because we pay a premium price for new things; it’s the best way to get your R&D money returned and then turn a profit before patents expire.

    I’m also always stunned at the lack of credit given to NIH for the significant research support — both of research that becomes a private enterprise and research that reveals what doesn’t work and so supports private enterprise. And there is no accident that research had been declining, GWB decreased HIH funding and created a level of fear amongst researchers (this is anecdotal from researchers I know), that they became unwilling to take risk and pursue unusual research for fear of losing grant money. The sequester also has a significant impact on research.

    Nice work, Tod. I look forward to the next installment.

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  2. A really good piece Tod.

    What I’ve often argued is that medical advancements require the existence of insurance. During the early days that you mentioned, medical science and technology was improving but it still wasn’t very good. The treatment for TB was to send you to a sanitorioum and hope for the best. Diabetics were out of luck, same with people with cancer, etc. We used to talk about invalids.

    Medical science improved by light years during the 20th century (and probably from 1800-1899 as well). There are shots and medicines and treatments that would be unthinkable in the earlier eras and when hosptials were like hospice. But these expenses are really expensive and there is no way most people including very wealthy people could afford them without insurance. These are drugs that can cost 10,000 USD a month or more.

    Now this becomes the moral question. We have drugs to cure major diseases and ensure that people with formally terminal diseases like cystic fibrosis and HIV remain alive and have good lives. But no one except the very, very rich could afford these treatments without insurance and the premiums end up eating at budgets and income anyway.

    You are probably right in your assessment that the health care crisis is about giving middle-class people affordable health insurance. You are probably right that Obamacare is an imperfect medium for that problem.

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    • As I read Tod’s piece, I was thinking of making a comment similar to yours. It wasn’t merely the advent of society-wide employer-provided access to care that drove demand, it’s that the care itself got so much better. If hospitals used to be where you went to maybe get better but likely die, at some point they became the place where you went with every expectation of getting better.

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      • And, see, this is why I don’t like going to the doctor. The BEST news the doctor can give me is that everything is fine, which I tend to assume anyway. Far more likely than that, he is going to tell me something is wrong. Perhaps drastically wrong. Maybe even fatally wrong! Egads! Why would I want to subject myself to that?!?!

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      • I was being at least partially tongue-in-cheek. A younger me more genuinely believed that, but after some recent doctor visits for known ailments led to great recoveries, I am more inclined to look favorably upon folks like our dear Dr. Saunders.

        However, there is some subset of people that genuinely believe doctors have nothing to deliver but bad news. I wonder if some of this is a hold over from when that was more often the case.

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    • After thinking a bit, it is wrong to say employer provided insurance drove demand. Demand for medical care has risen in all the rich western countries with the entire gamut of HC provision methods. In fact demand for more health care has risen in all sorts of less rich countries. It isn’t the payment method that has driven demand for HC it is improved health care. Which is Russell’s point but it wasn’t quite clear to me until his post. Improved health care rests mostly in the massive advances in science and technology which suggests to me we are profoundly screwing over the future by not spending far more on research.

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  3. When President Obama took his oath of office in 2008, participation in private health insurance schemes had already fallen to levels this country hadn’t seen since the mid-1950s when the IRS tax exemption was initially introduced.

    I don’t doubt that this could be true, but I’m curious as to how that data looks. Who is opting out, where they’re opting out. What industries are most highly reflected in this change. What the ten-year trendline looks like.

    Because I have some ideas about what might be affecting this, and I’m curious how wrong I am.

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    • I’d like to see those numbers, too, .

      Also, some measure of change over the time period from, say 1980 on; change in premiums (both to employer and passed on to employee), changes in coverage options, and changes in exclusions for pre-existing conditions.

      I’ll search later, but I’d guess some of that information would be available the ‘Death by Spreadsheet’ research that was done pre-ACA.

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      • I’d start with small business, of any sort; a trend I spotted in about 2002/03; and not so much companies outsourcing as small companies facing global competition; health insurance for employees did not allow them to be competitive any longer.

        I watched places go through some what seemed, at the time, crazy stuff. Now, it seems sort of normal: start wellness programs, contract with medical professionals to find ways to eliminate work-related illness, offer financial incentives to employees who worked out or lost weight or quit smoking. I always wondered if, when the layoffs finally began, the first employees out the door where the ones with really sick family members.

        I know when that was my beat, I covered it over and over. Company trying to survive, dropping health insurance in the march to oblivion. (And yes, a lot of those companies were in manufacturing; but retail and service sectors, too.)

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      • Speaking of outsourcing, the USA has outsourced much of its biomedical research to other nations, notably India, where it’s easier and cheaper to get through the final stages of drug research. Much of this work is done on a highly unethical basis.

        And here’s another thing for the record: I designed much of the data integration merging two major pharmaceutical firms. In the course of this work, I came to understand two things. One, these firms spend far more on advertising and what can only be described as corrupt practices, unduly influencing physicians to prescribe their drugs. Two: most medical “research” is an attempt to find patentable isomers of existing products under patent. Most of these drugs are not of the life-saving sort. They are mostly drugs to combat indigestion and the like. That’s where the money is, folks, “cures” for entirely preventable conditions. The life-saving drugs are given very short shrift, often abandoned because no market exists for them. They are called Orphan Drugs.

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  4. It’ll all work out as long as we get the government out of the way. If to accomplish that, we have to destroy the government’s ability to service the debt, it’s a small price to pay.

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  5. Towns that previously could support only a handful doctors could suddenly support numerous clinics, scores of private practices, and perhaps even a hospital to boot.

    Perhaps worth noting that across much of rural America, this trend has reversed. Declining populations are making hospitals, clinics, and individual practices unprofitable. Even stable populations are problematic as fiscally-stressed states reduce Medicaid reimbursement rates and expenses like education loans that must be amortized across the fixed patient population increase rapidly. There have been a number of news stories recently here in Colorado about rural jurisdictions that are faced with the real possibility that they will no longer be able to provide emergency ambulance service. At least one of the rural members of the General Assembly understands the irony of the situation; he was quoted saying something close to, “I’m going to have to do lots of apologizing next year for the bad things I’ve been saying about the Front Range counties, since it looks like we need to ask them to subsidize our ambulance service.”

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    • That’s a really interesting point, MC.

      I know little about this part of the equation, and if we have this issue in Oregon I’m unaware of it. I would love to learn more about it. Which you would be correct were you seeing that as a request for a guest post on the subject

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      • I’m sure that Oregon has the same problems as most states with a pronounced urban/rural divide. This seems especially true given that the Oregon Health & Science University has a separate Office of Rural Health, and will be hosting the 30th Annual Oregon Rural Health Conference later this month. The state has also instituted at least some of the common policies like loan forgiveness in exchange for some period of rural practice after graduation.

        This isn’t a new problem. People were writing books about the trends at least as far back as 25 years ago. I claim that rural America today is facing its greatest existential threat since the Depression. What I really don’t understand is why the people there (and I’ve got relatives among them) seem determined to piss off the political party that pulled their chestnuts out of the fire then (Democrats) by creating many of the government programs intended to keep rural areas from falling into a permanent second-class status.

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      • One simple way to check look at the yellow pages for say Burns/Hines, or John Day in particular for OB/GYn. I live in Tx and if you check the online yellow pages for places like Junction (Kimble county which has 4000 people) you find no OB/GYNs in the Yellow Pages. Now this means for that service you go to San Antonio, (100 miles), San Angelo (97 miles) or Kerrville which having 40k folks in its county which is 50 miles. I suspect you find folks in Easter Orgegon going to Bend or Ontario.
        Its sort of a simplistic test but sort of gives an idea Looking for Burns gives 13 physicians as does John Day. Let alone talking about Jordan Valley in the Owhyee Country. Its 85 miles to Ontario, and since the population is only 180, and no local physicans show up in the online yellow Pages.

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    • I wrote about it here, though from more of a personal standpoint.

      An update to that post: Clancy left earlier this year, obviously. she gave them over a year and a half to find a replacement, which they didn’t or couldn’t. There are supposed to be three full time FP-OB’s, though they never actually seemed to get up to that number. About a month after she left, a new doc came in. But the other doc reached a breaking point and has announced that he is going on extended leave. So there will be one doctor holding down the FP-OB fort.

      This is in, I should add, a relatively affluent county as far as rural counties go. I can chalk some of this up to poor management, but it’s been an ongoing struggle for years. If they’re still offering obstetrical services in ten years, it will be a pleasant surprise.

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    • I’d also add that for rural docs, Colorado pays terribly. My wife has always had an affection for that state and so we kept an eye out. It just couldn’t be justified financially, though. The pay was better than the IHS, but only barely, and with much worse of a schedule.

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      • When you say “Colorado”, do you mean the state government, local government, private rural practices/clinics, what? Rural can also mean different things in Colorado. On the one hand there’s rural but resort-heavy Pitkin County up in the mountains, and on the other hand there’s the several counties in the far SE corner of the state that are — literally, these days — drying up and dying.

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      • The three I remember off the top of my head were Craig, Vail, and an undisclosed location near Lake Powell. But we never saw any there worth checking out. Pay was generally sub-par for rural jobs in states with urban populations (Washington excepted, for whatever reason), but Colorado was the furthest on the scale.

        I refer to private practice and/or hospital positions. Not state jobs. The Lake Powell one may have involved some work for the federal government, though.

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      • Yep. Anything “near” Lake Powell is well over into Utah, but the nearest part of Colorado is the extreme SW corner, which is dirt poor on average. Craig is in the extreme NW corner of the state, boom-and-bust country for mineral resources, currently busting as the state is discouraging coal for electricity and the companies with research oil shale leases are abandoning them. The folks up there simply can’t afford to pay reasonable salaries. Grand Junction is supposed to be better, but is decidedly less rural.

        Vail is similar to the “Colorado Paradox” in education. Colorado overall does a very so-so job of graduating its kids from high school and moving them into and through college. But Colorado has one of the most-educated work forces in the country. Because if you and a buddy have a choice of starting your little software business in Cleveland or Boulder, well… Boulder. Doctors who take jobs in Vail, other than perhaps specialists in certain kinds of broken bones, do so because they want to ski 100 days each season, and will take crappy pay/benefits in order to do so.

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  6. Thanks for addressing the research aspect of this all, it’s something that gets brushed aside rather often, but which is very important to the big picture.

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    • Generally speaking, “why is this so crazy now?” is usually answerable by figuring out how we got here.

      One of the problems with policy analysis (once it hits the road of political inclinations anyway) is that the “how we got here” is not typically referenced when people starting talking about “what should we do now”.

      Which often leads to, “I know, let’s try this thing that hasn’t worked before for reasons that I find difficult to accept because of my political inclination!”

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      • I think that it indeed a good part of the cost. The Boomer demographic bulge is at the age where they’re at the peak of their private insurance medical costs, and there are fewer Gen Xer’s and too many underemployed Millenials to properly backstop them. The good news for private insurers is that this demographic hog will be sliding the rest of the way through the anaconda in about a decade – the bad news for everyone is this shifts the strain to Medicare.

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      • Aging boomers is one stress, but underemployed and underserved Millenials is a bigger problem.

        Because it’s a hard sell to say, “Hey, outsourcing to countries has destroyed the ability of countries to compete while paying for your medical care, but you need to pony up the dinero for Medicare, which you can’t use.”

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  7. Awesome, simply awesome. Well done, Tod.

    A question and a pushback, though….

    First the Q. Your data shows participation in private insurance. Where is the data for public insurance such as Medicaid and Medicare? Or is it included in this definition?

    Now for the push. You seem to be asking adverse selection to carry a lot of weight. Another dimension to the issue is that the insurance mechanisms which fed the innovation machine had the negative side effect of undermining control over costs. We treated a system of scarcity and tradeoffs (“sacrifices”) as if there were none. We all benefited every year from insurance while kicking the affordability issue to tomorrow. Welcome to tomorrow.

    I would suggest that these two factors feed upon and self amplify each other. Pardon me if I am getting ahead on the conversation though.

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    • I think that’s probably right — but the issue of hidden costs and the criminally random system by which health care providers arrive at bottom-line charges, seems to me to be an accelerant but not the engine of what our Tod is revealing to us. The basic issue is comparing who uses health care at all against who pays into the health insurance system — and having passed the point where there are more users than payers, even if costs were affordable that would only have delayed the day of reckoning.

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      • Perhaps I was not clear in my point, Burt

        A huge underlying problem is that we have set up a system where we pay for care with other people’s money.

        Everyone throws money in the pool and then they get whatever care at whatever quality they want. This leads to an arms race within the health care industry to capture every cent in the pool. This depletes the pool and leads to the request the next year for a larger contribution per person into the pool. Repeat this process for forty years and you will not just get medical discovery. You will also get systemic inefficiency, rent seeking and an industry which captures a significant share of our wealth.

        Prices in health care are a fiction. It is not a functioning market, not even a functioning insurance market.

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      • Roger, systemically I don’t think the Medicare system is that bad.

        There are some boondoggles in there, but my wife worked in the medical device field for a while and Medicare has some pretty big cost control loopholes to jump through. Sure, the occasional giveaway gets into the system, but the typical response is to only give approval to treatments that are cheaper or significantly better than existing ones. They also negotiation tough deals with providers; there’s a reason not every doctor accepts Medicare patients.

        This is an impression, but this is one of those cases where the price distortions inherent by pooling money have compensatory factors. It may be more efficient than a strict market, but it also provides a lot better coverage, which is the point of the exercise.

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      • Hi Patrick,

        I was not suggesting Medicare is bad. I was suggesting that the underlying health care system is becoming bloated because we are all paying with other people’s money. This is working in tandem with the adverse selection problem. Medicare is probably does best at controlling costs, but again it just pushes the Pillsbury doughboy in one place and he pops out somewhere else.

        I basically agree with Burt below that we have the worst of both markets and socialized medicine. The trouble of course is that when we kill off the last remnants of the dysfunctional market that we will shift completely to a centralized model. This kills of the last remnants of a discovery mechanism of the market, and leads to the well documented impossibility of directing the efficient use of resources from the top down. Socialized anything depends upon markets somewhere to determine how resources should be allocated. As conditions change, absent markets the system cannot “learn” nor will it be effective at innovation, other than that supplied by science and technology (but again this assumes a central bureaucracy would have any clue what technology the future needs — it won’t).

        1. If markets are a discovery/learning system (and they are!),
        2. Then as we socialize medicine in the last remaining semi market,
        3. The future progress (efficiency and innovation) of health care is screwed.
        4. Hence we need to find ways to provide universal catastrophe care while keeping the underlying market alive. Or future generations will be screwed by our shortsightedness.

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  8. As an employer who has been purchasing insurance for myself and employees for 20 years, I can vouch for the veracity of this statement re: the Law of Adverse Selection making the cost of health insurance increasingly unattainable for the American middle class. As the article points out, we have been predicting this crisis for decades, as the aging of the Boomer population intersects with the escalating cost of health care in this country. Now factor in the number of Americans who are falling out of middle class, including the working poor employed in low-wage services jobs and the increasing number of self-employed who don’t qualify for an employer-provided health plan. We can either start dealing with the problem now while we still have some ability to spread smaller concessions over a wider population, or we can wait for the employer-based system we currently have to collapse under its own wait and deal with fallout at an epic scale with even fewer tenable options available. The piper has to be paid.

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  9. Why would expenditures on health care in a particular country have anything to do with expenditures on research in that country? The market is global; it’s not as though you’re only allowed to sell drugs in the country in which you develop them.

    Also, you seem to be attributing an awful lot of heavy lifting to what is, studying to that table, a ten-percent drop in private insurance coverage (how much of that is just an increase in the population eligible for Medicare?). Aren’t actual expenditures, which are more relevant than insurance coverage rates, increasing anyway?

    It seems to me that if we want to increase the incentives for innovation (and we should), the most important thing to do is to lean—hard—on other countries to stop screwing over innovators with price controls. People talk about the low drug prices in other countries as if they were evidence of enlightened policymakers rather than as evidence of being free-riding assholes.

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      • So do Pfizer and AstraZeneca. Brandon asks what expenditures on health care in a given nation have to do with expenditures on research in that country. The market is indeed global.

        Walmart, by comparison to these drugs firms, is a fine, upstanding citizen of the global community. All they want is low-cost labour. They aren’t using their workers as unwitting guinea pigs in often-lethal drugs trials. The Great Moustache says the world is Hot and Flat and Crowded. He might add Statistically Lethal in the case of Stage III drugs trials. Saving American lives by using Chinese and Indian guinea pigs. If that isn’t Innovation, I don’t know what is.

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      • Sigh.

        Walmart doesn’t have monopsony power, and even if it did, that’s not the issue. It’s precisely because, say, France is such a small portion of the global market for pharmaceuticals that it’s able to engage in free-riding. If the French government were a true monopsony—the only entity in the world purchasing pharmaceuticals, then it would just be shooting itself in the foot by screwing over the drug companies. No profits, no innovation. France gets good prices on existing drugs, and then few if any new drugs, ever.

        The issue is that France is able to exploit the fact that drugs have a high fixed cost of development and a low marginal cost. As long as US consumers pay enough for them to recover the fixed costs, drug companies will begrudgingly sell to France for a price that covers marginal production costs but not fixed development costs. France gets new drugs but doesn’t have to pay for them.

        If you find yourself making one of these “Oh, you must be taking about X!” comments, just stop, and feel ashamed for even having considered it. They’re not clever, and I’ve yet to see one that even makes an intelligent point.

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      • It’s precisely because, say, France is such a small portion of the global market for pharmaceuticals that it’s able to engage in free-riding.

        Remarkable how much economic incoherence you’ve managed to cram into one short sentence. I suppose the implication is that if French consumers negotiated individually with the drug companies, they’d get their drugs even cheaper. Because, after all, they’d each constitute an even smaller portion of the global market, so they’d be able to engage in even more free-riding, right?

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      • I didn’t say France gets low prices because it’s a small share of the market. I said it’s able to free ride because it’s a small share of the market. If it were truly a monopsonist, it could still negotiate low prices, but there would be nobody to free ride on.

        And getting low prices on drugs requires that you credibly demonstrate Terri facts about yourself: That you absolutely cannot or will not pay a higher price, and that you will not resell to customers willing to pay a higher price.

        A country’s government is in a good position to make these claims credibly. But so is, say, a low-income senior who really needs the medicine. Which is why pharmaceutical companies have programs to sell discounted medicine to low-income seniors.

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      • Dan Miller,

        Barry C. Lynn may direct the Markets, Enterprise, and Resiliency Initiative at New America Foundation, but he seems to have little understanding of markets, enterprise, or economic history. In the article you link he says Wal Mart’s approach is “a radical departure from traditional market structures and market-based competition,” which is really quite silly.

        He complains about Wal Mart driving down wages (but ignores that they also have a significant downward pressure on inflation) and that they pressure suppliers for lower prices. Whether we like these behaviors or not, they are the actions of a market-based firm that is being extremely competitive.

        I mean, what’s the alternative model, a firm that pays higher wages and doesn’t pressure suppliers because of a combination of unions and protectionism, like the U.S. auto industry in the ’70s? That’s far less of a market model.

        There are other problems with the article. Lynn claims that when Wal Mart pressures suppliers to lower prices it’s taking money from their employees–he doesn’t point out how much of that savings is actually passed onto consumers. It’s almost as if this guy who feels qualified to write about economics was unfamiliar with such basic concepts as consumer surplus. He also claims Wal Mart has ” power to compel even companies as big as Philips to reduce the quality of their manufactures.” But they have mo power to compel–only the power to offer a deal better than not dealing with them. Think hard and you’ll realize there are brands that don’t sell at Wal Mart. It doesn’t matter whether they turned down the opportunitu or were never approached–what matters is that they’re profitable despite not being available at WallyWorld.

        I’m not arguing that anyone should like Wal Mart. I’m just pointing out that Lynn doesn’t seem to know his business and should be taken as a credible source.

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  10. How do countries with more government involvement in providing healthcare deal with these problems? From what I can tell, it has a lot to do with some very serious price control on various costs of treatment. It also seems to get done by making treatment facilities less fancy. A couple of months ago, the NYT had a very long and detailed article on why hip replacement surgery is more expensive in the United States than it is elsewhere. Belgium served as the comparison country. Now Belgium is a pretty wealthy place but the hospitals there seemed to be more downmarket than many in the United States.

    We a similar thing happening with college and university education. The price of education at state and private institutions of learning has gone up exponentially since my parents where in college or even since I was in college, and this was from 1998 to 2001 so its not that long ago. The amenities offered by more than a few universities and colleges now seem positively palatial compared to what they were like when I went to college. There is literally no comparison. I don’t think this is a good thing. Treating education too much like a consumer good raises costs and things like luxurious dorms and gyms only raise the costs. Likewise, our hospitals are much less spartan than those in other very wealthy countries. We tend to use expensive treatment of dubious results more than other countries. These raise prices.

    The only way to really make sure that healthcare remains affordable is through a combination of universal enrollment and involvement, that is pay it from taxes, and serious price controls from the government. Treating healthcare, and higher education, as a consumer good makes everything more expensive than it has to be.

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    • “Treating education too much like a consumer good”

      it is a consumer good. it became that as soon as it stopped being an exclusive club. how can it not be one? i’m even tempted to say it always was, though most of the consumers were people with hella dosh, as the kids say, and hella cultural currency, as virtually no one says (though they should).

      anyway, this was very a good post.

      i’ve never bought the whole obamacare is 11th dimensional stalking horse chess for single payer insane gibberish; it’s more like doing something/”something” because it would ultimately please (and energize) dems once they got over it not being “we get all our healthcare for free!” and being something the bushhitler mchaliburtons were against.

      plus as it fails to deliver the dreamed of results (because it wasn’t going to do that stuff in the first place, but no one pays attention) it can always be blamed on Those Who Would Stand In The Way of The True Path of Righteousness.

      win – win.

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      • dhex, education is only a consumer good in that many times people have to pay for it. Its also a necessity because without education, you really aren’t going to get far in life unless you are really lucky. Things that make education unnecessarily expensive like hotel-style dorm rooms and fancy gyms price out a lot of people, unless they go into debt, and return education to being an exclusive club.

        I’m also not sure that these things are that conductive to learning anything from a practical major to an impractical one.

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      • You mean lucky as in work hard, live within your means, and take chances? I always laugh when I see that education is the only way to get ahead. It is a means towards achieving goals. When I was first deciding to go back to school I was working 12 hours night shifts. I went around and asked every person working with me whether they had degrees and if so in what fields. I found that over 50% of the people working the same job I did had degrees. Most in health care, some teachers and accountants. Out of the 53 people I worked with there were 4 who had masters. One was a psychologist who decided after her first post masters job that it just wasn’t for her.

        I may be totally wrong, but from my experience it isn’t the education that enables one to succeed, it is the willingness to stick with something, find something you love and pursue it, and a mindset that life isn’t easy but it can be rewarding even when it is hard.

        I have family members who never finished high school, worked hard after leaving the farm, that now own their own businesses. Why? Not because they were lucky but because they worked their butts off and made sacrifices to get where they are now. They had drive, knew who they were and where they wanted to be and had the gumption to make it happen.

        I totally agree with the pricing people out of education with the fancy dorms and rec areas. Sadly even the community colleges are going that route. I guess it is more sad that as a society we place more value on fun and nice things then real substance. If the consumers, those going to school or the parents of those going to school, didn’t place such a high value on the amenities we wouldn’t see these trends. As long as we are willing to pay extra to have the latest and greatest can we fault those that make it available, those who meet those expectations?

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      • Just Me, its certainly possible to achieve a lot in life, in material and non-material terms, without much formal education. Higher education increases the chances of this sort of success. A lot of employers have a credentialist fetish and getting a job with a degree is usually easier than without one. Education, espeically at the right institutions, gives people a necessary jump start in the early part of their career through connections.

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      • : The payoff for an education used to be reasonably predictable. In my day, a college education pretty much guaranteed you’d earn at least twice as much as my uneducated peers at any given point along the line — and as much as ten times, if I was promoted into an executive role.

        That’s no longer true, for two reasons. One, the cost of education has risen far out of proportion to its actual value. Two: student loans cripple a person at the most crucial time of his or her career. And don’t miss a payment, your already-fragile credit rating will get dinged — not that you’re going to get financing for a home or a car, what with all that student debt on the Debt / Equity / Earnings formulas governing such loans.

        No, these days, the smart move is to get some community or technical two year college, get a few certifications, get to work — forget Shakespeare or anything of cultural or historical value. Those sophos-moros with their four year degrees? Already behind the financial eight ball. Who’s so stupid as to rack up that much debt for so little payoff? Wasting two years where you might have been getting that first real line on your resume, getting some experience.

        Doesn’t pay, anymore. Maybe if you have some financial backers or something, it might be worth it. Hard to aim through the smoke of this fire: student loan debt now exceeds credit card debt — and for good reason. Can’t get a credit card if you don’t have any credit history.

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      • “I’m going to start using “hella cultural currency”.”

        then my work here is done.

        my position is that you can need something like food or shelter and still have it be a consumer good.

        i am sympathetic to the dorms and admins blowing up costs argument. it’s a big factor. but so was the pipeline of available students expanding so rapidly and the resulting levels of competition. if you’re an institution you gotta stand out somehow, and part of that standing out is amenities. us news rankings don’t help too much, especially as they focus a lot on facilities and donor giving levels, which kinda spins the perverse wheel. a lot of those efforts do strain endowment to debt ratios, but also help schools stand out from all of their competitors.

        but education will never go back to being the exclusive club it was. volume makes that simply impossible.

        i’ve heard from oh so many a professor that no college needs to market because – and they all use this phrase – “our work stands for itself”. i usually counter with “there are eighteen hundred private four year schools whose work also stands for itself”, which is a bit less than half of all the institutions of higher education in the united states, if i remember correctly. very few people remember that nyu was considered a shoddy commuter school until the 80s, and fewer still remember how it bought its way to its current situation – facilities investment (via selling off a gifted company, iirc) and poaching high profile profs with big money and tiny courseloads. perhaps silly, and definitely expensive, but one would have to be insane to look at nyu and say “well, that didn’t work”. if anything, it worked far, far too well. the location helped tremendously, of course.

        and in reality there really are other ways to do life, and though my wife is a professor, i’m far more amenable to my son being into something physical, or crafted, or otherwise not a four year degree path kind of life. and i will encourage him to not only think about money and the future and roi on those sorts of things, but to also consider the balance between “what makes me fulfilled” and “what i need to do to survive now and in the future” as clearly and early as possible. i was a first generation college kid, and while i didn’t get any of the information i needed about what college life would be like because my parents couldn’t offer any, i did get a lot of emphasis on the latter bit, and that shaped all of my decisions regarding what school i chose and why i graduated with no student debt. #humblebrag

        how much or little they impact learning is so heavily weighted on individual student involvement that i think it’s very hard to measure, though i would tend to lean far closer to little than a lot. however, there’s also the issue that at a lot of schools you have to live there, and there’s no big city to run to on the weekend and not a lot of other entertainment options. even at a nerd school people want to lift weights and drink beer and get laid and go to parties, etc.

        since i’ve been reading a lot of research on the topic, one thing that stuck out to me is that student retention as a freshman to a sophomore seems to weigh incredibly heavily on how many good friends a student feels they’ve made. three or more seems to be the threshold to continuing on as a sophomore, so if you want to retain students, you gotta have a busy, fun campus as well.

        there are also ways to carry some student debt at a sensible level and have a future payoff. the times loves running those “my kid went to school for feminist basketweaving at vanderbilt and now lives at home in our upper east side townhouse” pieces, but the actual reality is generally more dismal than the upper middle and upper class families they tend to focus on, but also less dismal than the dave ramseyian “all debt is bad debt” view as well.

        full disclosure – next week i start a job within college marketing, so take the above with a self-serving grain of salt if you like.

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      • My view on college educated as the road to the middle class or above is that you are probably damned if you don’t but getting a college education is not as sure a thing as it used to be. Sadly this is one area where anecdote seems to trump data. All the evidence I’ve seen shows that college grads and people with grad school educations suffer much less unemployment than people with a high school diploma or less. Yet everyone loves to trumpet the stories about the exceptions that prove the rule. This is our nature as people and makes us feel better. Now I am not saying that all college educated people will have great incomes or careers but Lee is right about credentialism and even if a job does not require a college diploma in terms of what is done, many employers still want one.

        I also went to undergrad between 1998-2002. My college had one main dining hall. A secondary establishment that only accepted the meal plan at certain times, and our dorms were spartan with no TV in the rooms. Our one benefit was that almost everyone got a single from sophomore year onwards.

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      • The truth is that you can probably major in almost anything at Vanderbilt and come out okay eventually (by eventually I mean the long haul). You might have a few years that are not so great but eventually someone is going to see “Hey! Vanderbilt” and let you in on that credential alone. We focus too much on what happens in the first few years after college as being indicative of the rest of your life.

        That being said I think this is going on. There are a good chunk of colleges and universities that have enough brand recognition that they can have relatively spartan quarters. The schools that seem to be in the luxury dorm race are second-tierish private universities and second-tierish state universities. Schools like Wash U in St. Louis, NYU, George Washington. These schools are fighting hard for upper-middle class students and international students.

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      • : In the immortal words of Jimmy McMillan: “the rent is too damned high”. Colleges and universities are increasingly divorced from the real world.

        When a given commodity’s price rises for no apparent reason, it’s become disconnected from its fundamentals. It’s become an emotional buy. Everyone sorta understands the Panic Sell. They don’t apply the same logic to the Greed Buy. Happens a lot. I used to know a guy who looked for disconnected markets to trade. Stupid people, he said, were always getting into things they didn’t understand. They’re suckers for Big Gainers.

        Look at the AAPL stock. While everyone was agog over Steve Jobs the Miracle Worker, the stock was hugely overpriced. Reality set in with his replacement Tim Cook, who really is a pretty good executive. But he doesn’t have that Reality Distortion Field around him because he’s not a complete dick like Steve Jobs. AAPL is still making plenty of money but the stock deflated. The Thrill is Gone.

        The cachet of an Ivy League school is no different than wearing a Hermès watch. Higher education has gone from complete necessity to an enormous scam. Witness the rise of all these for-profit universities, most of which are simple money-grabs, charging far too much per credit hour, getting these kids into stupid loans, leaving them on the hook. The same goddamn thing is happening in every other college and university. It’s all become an overpriced scam.

        The interesting thing about scams — or anything you’ll ever charge for in life — is this: you have to charge people top dollar for crap. Stupid people think a high price must translate to high value. It seldom does. Some things do cost more — and they’re worth it. But you can’t measure an education before you take it.

        This goes far beyond anecdata. Education has demonstrably become a disconnected market.

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      • I don’t disagree about the student debt crisis or that universities are taking their status for granted.

        However, Steve Jobs is a horrible example and people who receive Thiel fellowships are horrible examples. Those were extraordinary people who also had the sheer luck of being at the right place and the right time.

        The data for unemployment in people with college and advanced degrees vs people without college degrees still holds firm.

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    • The price of education at state and private institutions of learning has gone up exponentially since my parents where in college or even since I was in college, and this was from 1998 to 2001 so its not that long ago.

      Roughly speaking, this puts you in my kids’ age group and me in your parents. With respect to state schools, I like to look at the make-up of state budgets then versus now. Several things stick out when you look at the two eras.

      In both times, the political limit on combined state and local tax revenues was about 10% of gross state product. Somewhat more in rich states, somewhat less in poor ones. There has been one major change on the revenue side — a substantially larger share of that 10% is collected by the state these days, and less by the locals.

      In a typical state (there are a few exceptions), there are two major new spending categories now compared to then. The first is K-12 education. What usually started as an “equalization” fund to help poor school districts has become a major source of funding for all districts. In my current state, K-12 education is about 40% of all state General Fund spending.

      The second program is Medicaid. In my current state, it’s now about 25% of all state General Fund spending, up from zero in 1965. Speaking pre-expansion, it’s an all-or-nothing program; you either meet the minimum federal standards or you lose all the federal dollars. Dropping Medicaid is becoming increasingly difficult because so much of the money is going to long-term care for the elderly. With tongue only slightly in cheek, it’s not because the elderly vote, it’s because the alternative is Grandma comes to live with you and you get to change her diaper.

      The other major spending programs for a typical state are police/courts/prisons; transportation (mainly roads); other human services and income support; and higher ed. Police/courts/prisons are largely untouchable other than some tweaking around the edges. Human services and income support have become entangled with federal programs to the extent that cuts have to be approached very carefully. Eg, if a state drops its unemployment insurance program, the immediate consequence is a substantial tax hike for employers there.

      It is completely unsurprising, then, that roads are falling apart and state support for higher ed is shrinking rapidly. And it’s only going to get worse.

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  11. What a clear and informative post!

    One thing that I’m missing is why the market hasn’t countered Adverse Selection with insurance plans that target the people opting out? You note that young, healthy employees would choose to pocket the premium, but wouldn’t it make more sense for them to just buy into a lower-premium insurance program specifically for young, healthy employees. Why was the result complete opt-out (leading to un-affordable health-care for the middle-class) rather than fragmentation of the plans (leading to un-affordable health-care for the very sick).

    At it’s simplest, I see insurance as just a way to lower the variance on the cost of catastrophe. Say you’ve got a 100 people and one of them gets cancer, without insurance he pays out $100,000 and 99 people pay $0; with insurance, they all pay a $1,000 premium. The total spending is the same, but now the 1 guy doesn’t go broke (which is good for society) and the 99 guys didn’t have to worry about getting cancer and going broke (which is good for them). Add to that all of the nice things that come with economies of scale and the law of large numbers and preventative care and insurance seems like a no-brainer. So why hasn’t Adverse Selection lead to many smaller, homogeneous pools for varying levels of health and with corresponding premiums?

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      • My insurer basically offers two types of plans, and they mostly differ in the diversity of doctors you can see. I don’t know how representative this is of other employers. Do most offer many different risk pools? And if so, then why are people still opting out?

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      • Trizzlor, I think you’re talking about the HMO/PPO distinction. We just had to make that choice ourselves.

        On top of that, though, many employers have different plans with different deductibles. Ours offered five plans. Two with very high deductibles, and three more conventional plans. So if we were healthier, we could have gone with the high deductible plan. Since we have health issues, we didn’t.

        It’s not exactly splitting people up into risk pools, but it can have that effect.

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      • Yes, we have an HMO or Point of Service distinction, but no choice of deductible beyond that (perhaps this was a response to adverse selection). But if the typical case is multiple homogeneous plans, why are people still priced out? Is there just a very substantial number of people who are so at risk that they cost more to insure than they can individually afford? Shouldn’t that have no effect on the mean premium level, so why are all premiums going up?

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    • This relates to my comment to Tod on his initial set up post. The predominant mechanisms of dealing with adverse selection are underwriting and rating. If the actuaries are free to set rates they will eliminate subsidies between disparate risks. Adverse selection shows up big time in a market with pricing and underwriting restrictions.

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  12. My experiences at work mirror this almost exactly. When I started I accepted a lower salary because they covered 100% of medical and dental. That slowly changed to the current split and for a time any potential raises for anyone at the company were absorbed by health care so that they could keep the employees share at a reasonable level.

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    • This phenomenon is a con job. Your firm has worked out a deal with your insurer which benefits them and not you. If your firm says otherwise, you may bet your life they won’t show you the terms of their current contract with your insurer.

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      • I need to look at the literature again, but I think this is actually also part of what’s behind a non-trivial part of the wage stagnation in certain segments of the income table.

        The fact too that premiums/health insurance are tax exempt for employers is also a big bonus to them, as they can claim they’re helping you while lowering their overall tax obligations.

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  13. A fisk-let:

    I’m annoyed to see your otherwise fact-filled post begin by putting words in Lefties’ mouths. Let’s set the record straight.

    The Left, at least this lefty, is not particularly concerned about the poor. They have insurance, certainly for their children they do. Why should one of the much-vaunted Welfare Queens take some McJob which won’t offer insurance when SCHIP does cover her kids?

    The Left says everyone must be covered to push back the Law of Adverse Selection to its practical limit by covering everyone. The argument is simple: everyone wants health insurance, nobody wants to pay for it.

    Even a blind pig will find acorns. The Right is correct to say the current paradigm is unsustainable. Where some are insured, their insurance pays. Often, those very insured will stiff the hospital for what insurance won’t pay. The hospitals, naturally, cope by warping their billing structures to cover their costs. There is no real market in health care because there is no real market in health insurance. I’ve made this point around here at least two dozen times, with startlingly little reaction to this most obvious point, one you do not address in this post, either. It lies at the core of the entire debate: without an actual market, all this society — or any other — can do is entirely prescriptive. Command economy in health care. The absence of a market entirely explains why the cost of health care has risen exponentially.

    Despite all the naysayers, Obamacare really does address the issue it was meant to solve. It covers more people than before. It breaks the ever-tighter spiral of adverse selection. It is revenue neutral. Notice I said it only addressed the issue: there is no “solution” any more than there are Cures in Medicine. This particular condition is chronic by nature and will require ongoing maintenance visits.

    Is paying for something useful a Sacrifice? Or is it common sense accounting?

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    • I believe the logic here was that the mandate would create so much new demand for healthy people to insure that it would spur the competitive health-insurance model; encouraging new insurers to enter the market. But that’s just my recollection of the discussions.

      I have not seen any evidence that this is actually happening. I haven’t been able to log on to the federally-run exchange for my state yet, but from what I hear, our choices are the same insurers as before — two of them. (The value in ACA here is the limits on price for high-deductible insurance and increase in benefits those plans have to offer.) I believe the state run pool set up by our previous governor to attract expensive patients (with a hope toward lowering premiums for healthier patients) is still running, but not included in the exchange, but I’m not certain. But I also live in what is an odd state; a population that’s both too old and too sparse to be an attractive place for insurance companies to do business.

      And that, in itself, is an important reminder: there are still 50 systems, not one system. Your experiences with insurance in that system will still vary based on where you live, and the discussions will still be fraught with apples and oranges comparisons.

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      • That’s right. The aim is to increase the pool of lives and break the vicious cycle of Adverse Selection. And you’re also right, there’s no evidence it’s happening: we’re just now beginning to collect the data. We won’t know for at least a year how these reforms are working — if they’re working at all — and there’s no guarantee of that. Every reform has unintended consequences: the entire system is so boogered up and warped, it’s like an old garden hose: unkink it here, it’ll kink somewhere else.

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      • And you’re also right, there’s no evidence it’s happening: we’re just now beginning to collect the data.

        There’s at least a little evidence the ACA will do that: Insurance companies seem to think the ACA will do that, hence their oddly competitive and low rates on the exchanges.

        That doesn’t mean they can’t be wrong, of course. But insurance companies, at least ones still in business, are rarely wrong with their predictions.

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      • I used to write these trading algorithms for trading physical commodities futures contracts. A given contract trades for roughly 300 days. It opens sparsely. I never used the early price data, it didn’t provide anything useful. I’d also throw out the last few days of trading before expiration, or do a pseudo-rollover into the nearest forward contract.

        The ACA marketplace(s) are just now beginning to expose price information. Not enough to work with just now. Give it a year, I say. We don’t know how people will use this marketplace. Will they stick with existing policies? How will the insurance firms behave? They could collude — or they could enter into ruinous price wars, as we see in the airline industry, another imperfectly-deregulated industry.

        Nobody knows. Not yet.

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      • The passage of ACA certainly hasn’t put a dent in insurer’s profits.

        Insurers led by WellPoint Inc. (WLP), the biggest by membership, recorded their highest combined quarterly net income of the past decade after the law was signed in 2010, said Peter Gosselin, the study author and senior health-care analyst for Bloomberg Government. The Standard & Poor’s 500 Managed Health-Care Index rose 36 percent in the period, four times more than the S&P 500.

        All while the overall economy has been in suffering stagnant growth.

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      • PPACA has certainly been a godsend to the health insurance industry. Really, these insurers aren’t Bad Guys. They’re locked into problems they didn’t create. We’ve backed into health insurance, never looking forward, fixing little things around the edges, never asking ourselves as a nation — how should we regulate this beast?

        Over-regulation is as bad as no-regulation. It’s a strange market space, governed by counter-intuitive principles. We need everyone to participate to keep rates low — no other market obeys such a law. Only insurance does. It’s mathematically provable. Markets need information to work. The insurers are motivated by profit — that’s no evil thing. PPACA is a first draft at getting these markets to obey market principles. The market really can solve these problems. But first, we must create that market space, a proper trading floor where profit varies with risk.

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  14. Very, very informative piece, Tod. Thank you. As you might note from earlier threads, I was very resistant to the mandate. Something seemed off about the government requiring purchasing a product/service. However, seeing that there is a history for this and the importance of universal or near-universal participation, my resistance softens. I’d still rather see it happen via other mechanisms, but I get that the PPACA was a reform effort rather than a tear-down-and-rebuild effort.

    Great piece.

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    • PPACA was a reform effort rather than a tear-down-and-rebuild effort.

      Yeah, that’s the main design consideration that led to a bunch of practical consequences that I don’t like, myself. It’s also the thing that made it politically possible.

      But you can only get so far with reforms. Some times you gotta take off and nuke the entire site from orbit.

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      • I do sometimes wonder if the PPACA was deliberately built to fail, and fail spectacularly, so the next iteration can be more of a rebuild than a reform. That would indeed be some 11th-dimensional parcheesi and a big gamble to take.

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      • There was a plan on the table, derisively known as the “Rahm Special” that might have done that. It was a substantially pared down version of ACA that was basically a cynical political alternative if the Dems couldn’t control their caucus sufficiently to pass the full bill. The combination of factors in it would have made it necessary to revisit reform within a few years of implementation.

        The full version of PPACA isn’t a trojan horse, no matter what people like to claim. It’s built on pretty sensible (if limited) reforms to the existing system. There is an element of trying to transition far far away from employer provided insurance on a 10-15 year time horizon as an expected part of the bill’s structure through follow up legislation, but it’s not intended to fail.

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      • I do sometimes wonder if the PPACA was deliberately built to fail

        I just can’t see this. Any politician has to know their name will be mud, if it’s the primary name associated with some debacle. Presidents (and especially the first black President) have to be extremely conscious of their legacy.

        I just can’t believe any politician, anywhere, would be so heroic as to fall on the sword of making their legacy be a huge debacle, KNOWING that it was going to be a debacle, and intending for that debacle to lead to something better down the road.

        That’s not 11-D Parcheesi, that would be some Batman-at-the-end-of-TDK-level altruism.

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  15. I’ve said before that from an economic and managerial perspective,a nearly completely privatized system works well, and a nearly socialized system works, but the in-between is not something that works well because it seems sort of a Gresham’s law applies — the inefficient aspects of each tend to accumulate while the advantages of each get driven out.

    Tod’s post confirms my thought, at least to my way of thinking. Now that health care is expensive rather than affordable, health insurance is even more expensive (insurance magnifies the costs of its benefits) and becoming moreso on the positive feedback loop [more coverage – more research – more expensive care – more demand for care – more coverage] that Tod illustrates. So to get to a place where the adverse selection problem can be kept at bay, coverage has to be universalized, and at that point we’re approaching if not effectively at single payer.

    What’s surprising to me is how historically recent our existing paradigm of private-through-employer health insurance is. Various kinds of commercial casualty insurance has been around Western economies since at least the fifteenth century, and I’m sure classical historians could point to antecedents of insurance from Greek and Roman times.

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    • Burt. I agree largely with what you say, but–with regards to what working “well” might mean–I think that a completely privatized medical system might work “well” in the sense of working efficiently, but would be less useful in broadly delivering quality health care to the vast bulk of the American populace.

      There are a bunch of reasons I can think of that medical care is not an great fit for a pure (or near-pure) marketplace:

      People (in general) are horrible estimators of statistical risk.
      When it comes to the expensive stuff, when medical decisions have to be made, non-professionals cannot “comparison-shop” effectively between different treatments, medicines, facilities and providers.
      In societies with any kind of empathy (which, thankfully, includes ours), the acute emergencies of the uninsured will be provided for (through emergency rooms, clinics, or insurance fraud), thus undermining the “efficiency” advantages of pure markets
      Efficient markets require transparency and competition. Our medical system has all kind of mechanisms designed to undermine both, in the form of cartels (e.g. the AMA), monopoly price protection (via pharma and medical device patents), market-undermining rules (e.g. the current predominance of arbitration agreements insulating practitioners and facilities from the full “costs” of medical errors
      Non-distinction between medically “necessary” and “desired” services. An non-intermediated marketplace (i.e. one without insurance companies, in which people paid in full for their own medical services) might mitigate this, but at the cost of millions being called upon to make medical judgments for which they are ill-equipt).

      I certainly don’t have the answer. But when I look at the attractiveness of medical pseudo-science in the consumer marketplace–the thousands of diet books, the energy drinks, and supplements, and zillion sundry claims of cancer cures–it suggests to me that a pure market would not contribute to the general welfare.

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      • Good to hear from you, Snarky!

        I’m experiencing the results of the inefficiencies in the medical services market in my real life right now. When you get sick in the middle of the night in a semi-rural area, it’s difficult to comparison shop. You go to the nearest emergency room and you comply with the instructions of the doctor attending to you.

        After the fact, the insurance company does some adjustment and sends the patient an EOB concurrent with its payment of what it thinks its portion of the bill is. And then and only then can the patient comparison shop, to see what the market and, if you can get that information, the Medicare rate for the services is. You need the billing codes to do this research — and the same procedure, and sometimes even the same drug, can have multiple codes.

        In my case, it’s quite amazing how close the apparent fair market rate for the services I received were to the amount left over after my insurance did its adjustment and contribution. Which makes me think that if this were a really free market, I’d be paying the same amount as I actually am paying now, or if this were a single-payer market, I wouldn’t be bothering thinking about this stuff at all because a professional from the single payer (the government) and the hospital would be hashing it all out on their own. Given the near-identity of the post-insurance costs and the apparent market rate, I wonder what my insurance was there for in the first place — except as a cushion against the over-bargaining the hospital did in the first place, which it did because some patients don’t pay at all and it’s not clear, maybe not even to the hospital, whether the money the government pays to cover such patients is enough.

        But as it is, an insurance adjuster, regulator, a hospital billing administrator, and I all have to concern ourselves with apportioning the costs of an insured claim. Oy, the transaction costs alone! And one way or another, I’m going to have to take the hit of an unanticipated and unbudgeted-for expense.

        The part of it that really sucks is that I know full well that there’s an amount that I’m quite sure that I’m willing to pay and that they’d be willing to take, but it’s going to take some negotiation and bargaining, with each side questioning the good faith of the other, before we get there. I even have a pretty good idea of what that number is, and that this number would provide ample profit for the hospital.

        I would seriously rather pay higher taxes to fund a single-payer system than have to deal with all of this.

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  16. “The US had no such centralized restrictions, and because of this the amount of research here dwarfed research everywhere else.”

    Well, this might not have much to do with socialized or privatized healthcare at all. Not sure the “because of this” is so accurate. Needs investigation, anyway.

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    • My guess is the massive amount of research done in the US is likely due to that “entire western world being rubble” thing after ww2. We had almost all of the standing universities and most of the surviving scientists wanted to come here to study. We also had a nifty system of public universities along with rich old private ones so there were plenty of places to research and study. Then we poured money into the research system often for defense and defense related purposes. I’d also guess that having so many kids able to go to school led to the creation of more advanced programs that were able to open up. If thousands of kids can get cheap loans that it not only makes sense to have a snazzy dorm but to also have grad and doctorate programs for them to work at. Cheap college tuition has had benefits.

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  17. “the health-insurance crisis that led to the passage of Obamacare was not the nation’s poor being uninsured.”

    Well there were multiple crises that necessitated the PPACA. One of them was lack of coverage for the poor. There was also cost, waste, adverse selection, etc.

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  18. In the simplest terms, since political reality bars going to single payer or something extreme, the PPACA was a necessary but not sufficient fix to our healthcare funding/cost/coverage problems. (Which is how it was advertised politically, IIRC.)

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  19. or anyone else who can answer:

    http://www.dissentmagazine.org/online_articles/people-are-tired-of-the-hypocrisy-an-interview-with-dan-kovalik?utm_source=rss&utm_medium=rss&utm_campaign=people-are-tired-of-the-hypocrisy-an-interview-with-dan-kovalik

    This is a story about an 83-year old woman who worked as an adjunct for 25 years at a Catholic University in Pittsburgh. She came down with Cancer and was drowned in medical expenses. Eventually her house was rendered unlivable and she needed to take a fast-food night job and sleep in her office. The university dismissed her without recourse and someone eventually called Adult Protective Services. This seems to be the first time she reached out for help (and only to get adult services to go away). Then she suffered a massive heart attack, slipped into a coma, and died two weeks later. She was given a pauper’s funeral.

    The article does not mention whether the adjunct was on medicare and/or medicaid. Can someone tell me if she would be ineligible for any particular reason for one or both of the services?

    The whole story makes me mad. Not only what the university did but where was fer family? The article mentions a nephew? Why didn’t her family help her? Was she on social security is another question I have.

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