16 December 2008


Sorry if I mis-interpreted your positions as Austrian. They seemed to extoll a situation with classic market failures as able to succeed without government intervention. Yeah, if you believe that government intervention is needed for market failures then that would be neo-classicism. But, private info in insurance markets is one of the classic market failures, so a neoclassicist to me, would endorse government intervention here. But, I agree this is not justification of government intervention by any means. It's not the point of the post. The point of the post is, if the government is intervened as it is, how can it reduce costs.

The argument in rational ignorance is the following. You claimed that poor US policies could be understood if economists abandoned a notion that voters are self-interested outside of voting, but altruistic when voting. Yes, this is possible, but I'm not sure if I agree that economists adopt that model. Altogether differently, I prefer to understand poor US policies as the result of rational ignorance, or non-representative political system. Yes, satisfying these two policies are not sufficient conditions for good policies. But, not satisfying them is an intuitive way for me to understand poor policies.

My arguments are not arguments for government intervention. They are arguments for, if the government will intervene to provide government insurance such as Medicaid and Medicare, how can it do so for the lowest cost.

True, there aren't formal models of costs and benefits of specification of use of government transfers. Yes, at first glance it appears that is improving to eliminate constraints, but just because there aren't models of the benefits of these constraints, doesn't mean that in reality there aren't benefits of these constraints. For example, it could be modeled that the search and process costs of converting baby food stamps is a deterrent to converting food to money with which alcohol or drugs might be bought.

Again, these models are not complete by any means. Academic models are a work in progress, and in desperate need of improvement, that 's the point of grad school econ. The point of this blog is not to simply apply leading models to policies, (that is policy analysis), it is also to include pieces of reality that are not modeled. This is true for unconstrained redistributive transfer models, and for public choice models.

15 December 2008

ryan health comments 2

Great comments.

The positions you represent, which you probably know, are what is generally called the Austrian school of economic philosophy; with strong skepticism of any government involvement, highest regard for the individual and their ability to optimize without much market correcting mechanisms. This school of thought is emphasized at Auburn, and follows the writings of Ludwig von Mises and Hayek.

  1. Yeah, I agree with the questioned need for government intervention. It has to do with efficiency of redistribution in general, an open question (see comment 5).

The discussion on moral hazard here is, if the government is already intervened in markets, and wants to minimize its expenditures, it should focus on reducing moral hazard. And, to do so, it should implement Medicaid and Medicare structures with higher co-pays and out-of-pocket payments, like the HMO approach. This is a major hope for any government program that wants to adapt its payee structure to reduce costs.

2. In any academic model I would write, it would be fatal to assume that individuals are not optimizing. That is a slippery slope which could explain anything. Away from academia and more realistically, I do believe the less-financially well-off forego buying adequate health insurance. My personal belief is that they do so because the effects aren't as tangible as physical commodities, but when they develop what appears to be a costly condition, they seek insurance; classic adverse selection. It's important because, doctors and hospitals and service missions help them, and ultimately, we all foot some of that bill, and that's my realistic general concern. My personal assessment of reality might be wrong. This is another good question.

3. Academically however, for empirical analysis of the degree of adverse selection and moral hazard in the US health insurance market, I like the model by Chiappori and Salanie, discussed in my re-production of that paper at http://mastroresearch.googlepages.com/ "Private Info for Health Care". It's a good complement to the Rand health experiment.

4. The big picture, like you mention, and I talked about in the last post, is the need to eliminate the information asymmetry, private information. That would indeed fix all the market problems. Unfortunately, health is more complicated than automobiles. Nonetheless, there are some institutional changes we could adopt to lessen the asymmetry. Having a more tiered approach; where patients first see a General practitioner before being allowed to seek a more expensive specialist, would greatly reduce costs by lessening the information asymmetry without government intervention. If the individual is not granted the General Practitioner's consent, the specialist visit either should not be covered, or less coverage than if they did receive consent. You could allow for payment recoupment if the individual did see the specialist and was vindicated in their complaints. The whole problem here is liability. Given the complexity of the human body, the malpractice coverage for General Practitioners would be expensive, and therefore they would pass those expenses to the patient. But, as time goes on, better records are kept, machines improve, and we learn more, those costs would drop. Plus, the Practitioners would have incentive to improve their service, reduce need for malpractice coverage, and get more patients. Reducing information asymmetry also eliminates adverse selection. These first tier practitioners would be hired by health insurers to provide screenings for pre-existing conditions.

5. Altogether, these are ways that current Govt Health Insurance programs could cut their costs. Private health insurance programs have already begun to adopt these measures. The need for existence of government health insurance programs is a different story, having to do with the general trend in our country to choose redistribution. Some argue that everyone is made better off by not having extremely sick cohabitating with extremely wealthy. Redistribution is costly, and if you think the costs outweigh the benefits, let your representatives know.

6. Your comment 3 is quite true and almost impossible to rebuke with a structural model; but it's not going to happen in the near term, and we are going to have to continue to pay the bills for government health insurance for at least a little while. Being pragmatic, a short term goal of economic policy analysis "how to achieve same coverage for less." The bigger picture is political and has to do with desired redistribution (comment 5).

7. Bad government policies do not necessarily imply that voters are not self-interested. That would assume that our political structure is perfectly representative, which we have reason to believe it is not. Given the improbability of actually being the decisive median voter, it is often justified as rational for a voter to be politically ignorant. When the costs of government ambivalence finally catch up with our country (not too far future in my perspective), we will see greater citizen involvement in political process. Another reason self-interested voter's policies might not get enacted are other imperfections in our political process, such as translucency in the quality of that individuals' representation. What exactly is the context of the legislation and all its amendments? What did the rep vote? What did the rest of your district want? Did the rep make a deal on that legislation that will actually help on more important policy tomorrow? Altogether, these two situations justify economist's position of why bad government policies get enacted while voters may still be self-interested. For a structural model of how special interest money can influence the political process from standard majority preferences, see my first paper FAMVM, again at http://mastroresearch.googlepages.com/

12 December 2008

Health comment

In response to Ryan's comment from "Looming Health Care Crisis"

btw, thanks for the comments

1) right; health care is not a public good.

But, there are other market failures besides the markets for non-rival and non-excludable goods, that warrant government intervention, even by conservative economists' standards.

In particular, private information (hard to verify claims) hamper market transactions; whether a worker's back really hurts and he needs time off, or whether a used car salesman's car has some glitch somewhere.

Consider 10 used car salesmen, one of which is selling a lemon, but consumers are unable to discern which. All salesmen then must lower their price below fair value to deal with the customer's belief that their car might be the lemon. Introducing an independent verification service, as long as it costs less than the price reduction from having the lemon in the market, would make the good salesmen better off.

The problem is, with the health market, health diagnosis are not confident enough to stand by a verification service at this point, so the government is legitimately offering to stand in. Even as a minimal interventionist, this makes sense to me. The human body is still too complex relative to an automobile.

As an after thought, another market failure besides 'public goods' and 'private information' that could warrant government intervention in markets is 'market power', when firms don't act as price-takers. In this situation, the firms profit maximizing behavior can differ from a benevolent social planner's behavior when maximizing consumer surplus (total value added by market transactions).

2. I do think adverse selection is a real problem.

Sure, among financially well off individuals, most are buying health insurance as to insure against unforeseen risk. But, in less well off social circles, where money is tight, many individuals prefer to spend their money on more tangible commodities until they begin to believe that they might be afflicted with a very costly condition.

3. Last, health insurance is comparable to car insurance for just the reason you point out, the potential costs on others. Many people would find it objectionable to someone afflicted with a treatable emergency condition to die on the front steps of a hospital. And, since we wouldn't let that happen to those who don't pay for it, we shouldn't make anyone pay for it. Unforeseen emergency afflictions should be covered by a pool of small contribution from all who want to participate.

Sure, if you don't want to be pooled for this cheap coverage, you can wear a tag that either says "don't help me, I chose not to be pooled" or "help me, I don't have the pooled coverage, but I have been verified to have the financial resources to cover this emergency operation up to the level …"
Honestly, it would probably be just as cheap to include both 'those who want pooled coverage on emergencies' and 'those want to forego the coverage', since then insurance companies would not have to do any screening at all. They wouldn't have to worry about any adverse selection (people more prone to emergency, more likely to buy insurance) because everyone would be getting it. So, basically, we'd cover those who don't want it for free.

In conclusion, this is a great and timely conversation. In the wake of a severe implosion to the Republican Party, it reminds us of how the virtues of fiscally conservative policies should be considered in even the most Democratic agendas such as Health Care in order to get the most cost effective coverage with the least government infringement on our individual freedom of choice.