Notes on the Economy – 09/17/09

William Dunkelberg

Professor of Economics at the School of Business and Management, Temple University (Formerly Dean of the Fox School of Business)

Learn more about Prof. Bill Dunkelberg.

1.  Health Care: What Do We Want and Can Congrees Deliver It?
 
The debate over health care “reform” has been confusing indeed and its meaning seems to have eluded even those who are attempting to write the legislation that is supposed to “reform” the system.  For some, this is about efficiency, delivering the same or more health care at a lower cost.  For others, it is about “redistribution”, giving access to the “poor”, funded by taxpayers.  And some are concerned about “fairness”, desiring all people to have access to health care, regardless of their health (and have this access funded regardless of the cost, thus protecting families from dreaded medical bills that result in financial ruin).  Most recently, the debate has focused on “insurance”, guaranteeing insurance to everyone regardless of cost, rather than on “efficiency”, reducing the cost of delivering the current level of care.  Failing to distinguish clearly among these objectives is responsible for much of the turmoil surrounding the issue.
 
The goal of adding “47 million” alleged uninsured to the health care market while lowering costs appears logically impossible to achieve (without reducing the level of medical care received by currently insured individuals).  Resources are limited and it takes a decade to increase the supply of doctors.  On the day of Census measurement, there may have been 47 million who told the Census they were uninsured.  But far fewer are uninsured for long periods of time.  Roughly 10 million of these people are non-citizens, and taxpayers should be able to decide how much if any care they wish to provide to this group.  Another 9 million are covered by Medicaid, but haven’t signed up because they haven’t accessed the medical care system.  When they do, they are covered.  Similarly, about 4 million “uninsured” children are covered under SCHIPS, but have not been enrolled.  About 10 million are from families making enough money to buy health care (income exceeding 300% of poverty line) but choose not to, some paying for care out of pocket, others, many young, preferring to spend the money on a better car and take their chances, knowing that if they have an accident, the hospital will take care of them.  Using “47 million” is misleading and not helpful for identifying the nature of the problems and what might be done.  Indeed, many critics of reform point out that everyone gets health care today since none are turned away.  This is inefficient, but suggests that we aren’t going to add “47 million” people to the system, creating doctor shortages, because they are already in the system and their care is paid for by explicit and implicit subsidies (hospital room charges cover bad debts, for example).
 
Most industrialized countries set a health care budget and manage (ration) delivery to meet the budget.  In the U.S., we don’t know how much we spend until we add it up at the end of the year.  One observer noted that the goal of managed systems is to “save money” while the U.S. goal is to “save lives”.  There is an important kernel of truth in that statement.  All health care is paid for by consumers, directly, or through private insurance, or through taxes (to pay for Medicare, Medicaid and SCHIPS for example).  In that sense, the government’s concern about its budget is misplaced, it is just one conduit we use to pay for the medical care we want.  Characterizing the large share of our GDP paid for health care as a “crisis” is not appropriate if one believes that the task of markets is to deliver what consumers want.  It is appropriate to worry about inefficiencies (including price distortions like a “free” doctor visit or excessive law suits) that cause us to misuse or overuse our valuable medical resources.  But as the baby boomers age, they will spend more on health care and it is inappropriate (if you believe in consumer sovereignty and markets) to attempt to reduce the care retirees take.
 
Routine health care has become cheaper over time (removing an appendix etc.) as technology and scale have reduced costs and hospital stays.  New “stuff” is very expensive and requires wider use (learning curve experience) to reduce costs (an argument against restricting its use artificially).  New “stuff” is always more expensive.  Denying access to it will reduce “spending” (and lower the quality of health care provided), but will stifle innovation and development.  We dance around “end of life” care issues because it has a very dark side and also violates private property rights.  If individuals wish to use private funds (rather than taxpayer money), poorer elderly consumers are denied the same end-of-life care.  Reducing these expenditures is most difficult but would be easier if health care services were priced closer to market cost and not “free” (subsidized), so individuals, and not the government could manage these decisions.  “Nothing but the best for Grandma”, as long as someone else is paying the bill.
 
Many of our health care issues have been created by government meddling with markets, including the vastly different requirements for health care policies across states that result from mandating coverage of unusual items (social workers, hair pieces, marital counseling, reconstructive surgery, acupuncture, eye glasses, hip replacements etc.).  And, the tax deductibility of health insurance for employers has produced a system that provides little or no choice to workers (one must take the plan selected by an employer) and no portability (the executive order establishing tax deductibility was put in place to offset the distortions created by another regulation, wage controls!).  Just the term “insurance” confuses the issue.  President Clinton talked about the fear of financial ruin, something that could be managed with catastrophic health care cost insurance, not very expensive.  But for most, “insurance” means “pre-paid medical care”, “first dollar coverage”.  Visits to the doctor might require only a $10 co-pay for example, far below the cost of the visit (and processing the claim is also expensive) and that encourages misuse.  Car insurance doesn’t pay for maintenance (oil change).  If it did, the cost would be hugely higher and very inefficient and “free oil changes” would clearly result in more of them (but perhaps be “preventive care”?).
 
Some argue that our businesses are at a competitive disadvantage due to rising health care costs.  This argument is somewhat “soft”, and assumes that there is no economic limit on pay, which includes cash wages, employment taxes, 401k contributions, and health care benefits.  No private sector company can survive paying workers more than the value they add to the organization (only state-owned enterprises can do this).  More for benefits means less cash pay. At least to date, firms are not mandated to provide health insurance or any other benefit.  It may be difficult to continue to provide the same policy as health care costs rise, but this is a matter of negotiation between the firm and the employee.  If the tax deductibility of health care benefits were eliminated, many, perhaps most, employers would simply give the money they spent directly to the worker who could then seek the kind of coverage they wanted from tens of thousands of insurance agencies where they get auto, home and life insurance.  Employees today have little or no choice, the employer chooses their insurance program for them and deducts the cost from their total pay.
 
Overall, we can make our health care system more efficient, meaning we can pay less for the care we currently receive and more accurately price the services to let consumers, and not a government panel, manage use.  Forcing people to buy coverage is of somewhat questionable legality and tough when legally they must be cared for when care is needed.  Perhaps the uninsured can be added to Medicaid where most of them probably already are if they just sign up.  Vouchers and subsidies for lower (but not “poor”) income consumers can provide access, without scrapping the whole system.  
 
But there are many conflicting objectives competing in the “reform” debate:  
 
            Health care is a “right”, so everyone must have it, regardless of ability to
           pay for it and this obliges taxpayers to provide the needed care for all.
 
            Consumers must not live in fear of a catastrophic medical event that would
           result in financial ruin, so catastrophic coverage is needed.
 
            No one should be excluded, regardless of medical condition and 
           insurance must be “portable” – in simple terms, owned by the consumer
           and not by a company.  While working, the worker is paying for his/her
           medical care so they should continue to do so after departing an
           employer.  
 
            The system is plagued with inefficiencies and price distortions produced
           by government intervention over the decades and our legal system.
           Eliminating these intrusions will permit consumers to shop for insurance
          coverage and costs would be reduced substantially while maintaining
          incentives to innovate and develop new drugs and technologies.
 
One thing for sure, if health care is “free”, we will never have enough to satisfy demand and the costs will be huge.  If health care services are properly priced, we will buy less and choose the services we want.  The poor will get less than the rich, as is true for everything else in society (democratic or totalitarian).  Most important now is to clearly define what we are trying to accomplish with “reform”: lowering costs for what we do consume by raising efficiency, or giving insurance to everyone (define “everyone”), or reducing the government budgetary costs for what we do consume so deficits aren’t so large.  Of course, consumers will pay for whatever health care we consume, directly out of our pockets, or though the sharing of pre-tax benefits with our employer who buys insurance for us or on April 15 though taxes.  Trying to do all of this in one bill by August (or course we missed this deadline) is likely to lead to many mistakes and since the health care bills don’t take effect until 2013 (conveniently after the next presidential election), what’s the hurry?  Let’s keep learning and debating and perhaps deal with one issue or problem at a time.  Congress is notoriously bad at correcting mistakes, we should try to avoid them.

22 Months of Recession: What Happened and When Will It End?

The U.S. economic officially “peaked” in December of 2007.  18 months later, the economy was still shrinking.  Although it appears that the bottom was reached mid-summer and third quarter growth will be positive, the recession was the worst since the Depression and the road to recovery is strewn with weak banks, crippled government mortgage financial institutions, a boat load of “money” floating around the system, misguided government programs and a consumer trying to regain financial stability.  Profits tanked along with the stock market which has now started to anticipate a recovery, but how strong and how long?  The largest government deficit in history ($1.6 trillion this year alone) will pose a major drag on interest rates and capital availability.  Will the economy muddle through or will the economy spring back?  We’ll try to sort it out.