Friday, July 17, 2009

Straight talk on the issue of healthcare

Clifford Asness is a very smart money manager, and he has written a gem of a piece that explodes the many myths surrounding the supposedly urgent need to remake our entire healthcare industry. It is brilliant and it is hilarious at the same time, and it doesn't hesitate to pull any punches. I highly recommend you read the entire piece, but at 7,000 words you might not have the time to finish it. If you're short on time, I've produced an unauthorized abridged edition of only 2,000 words:

What We Know That Ain't So

Will Rogers famously said, "It isn't what we don't know that gives us trouble, it's what we know that ain't so." So it is with the health care debate in this country. Quite a few "facts" offered to the public as truth are simply wrong and often intentionally misleading.

There are large groups of people in this country who want socialized medicine and they sense that the stars are aligning, and now is their time to succeed. They rarely call it socialized medicine, but instead "single payer health care" or "universal coverage" or something that their public relations people have told them sounds better. Whatever they call it, they believe (or pretend to believe) a lot of wrong-headed things, and they must be stopped. Step one is understanding how and why they are wrong. Step two is kicking their asses back to Cuba where they can get in line with Michael Moore and Al Gore for their free gastric bypasses.

Myth #1 Health Care Costs are Soaring

No, they are not. The amount we spend on health care has indeed risen, in absolute terms, after inflation, and as a percentage of our incomes and GDP. That does not mean costs are soaring.

You cannot judge the "cost" of something by simply what you spend. You must also judge what you get. I'm reasonably certain the cost of 1950's level health care has dropped in real terms over the last 60 years (and you can probably have a barber from the year 1500 bleed you for almost nothing nowadays). Of course, with 1950's health care, lots of things will kill you that 2009 health care could prevent.

In the case of health care, the fact that we spend so much more on it now is largely a positive. We spend so much more on health care, even relative to other advances, mostly because it is worth so much more to us.

In summary, if one more person cites soaring health care costs as an indictment of the free market, when it is in fact a staggering achievement of the free market, I'm going to rupture their appendix and send them to a queue in the UK to get it fixed.

Myth #2 The Canadian Drug Story

The general story is how you can buy many drugs in Canada cheaper than you can buy them in the US. This story is often, without specifically tying the logic together, taken as an obvious indictment of the US's (relatively) free market system. This is grossly misguided.

Here's what happens. We have a (relatively) free market in the US where drug companies spend a ton to develop new wonder drugs, a non-trivial amount of which is spent to satisfy regulatory requirements. The cost of this development is called a "fixed cost." Once it's developed it does not cost that much to make each pill. That's called a "variable cost." If people only paid the variable cost (or a bit more) for each pill the whole thing would not work. You see, the company would never get back the massive fixed cost of creating the drug in the first place, and so no company would try to develop one.

Drug companies that spent the enormous fixed costs to create new miracles are charging a relatively high cost in the free and still largely competitive world (the US) to recoup their fixed cost and to make a profit. But socialist societies like Canada limit the price they are allowed to charge. The US-based company is then faced with a dilemma. What Canada will pay is not enough to ever have justified creating the miracle pill. But, once created, perhaps Canada is paying more than the variable cost of each pill. Thus, the company can make some money by also selling to Canada at a lower price as it's still more than it costs them to make that last pill.

If we all tried to be Canada it's a non-working perpetual motion machine and no miracle pills ever get made because there will be nobody to pay the fixed costs.

Myth #3 Socialized Medicine Works In Some Places

This is a corollary to the "Canada as parasite" parable above. The funny part is socialized medicine has never been truly tested. Those touting socialism's success have never seen a world without a relatively (for now) free US to make their new drugs, surgical techniques, and other medical advancements for them.

To put it simply, right now the US's free system massively intellectually subsidizes the world's unfree (socialized) ones. That sucks. The only thing that would suck worse is joining them without anyone to subsidize us all.

Myth #4 A Public Option Can Co-Exist with a Private Option

Part of the current junta's plan is to add a "public option" for health insurance. That is health insurance provided by the government (actually provided by you and your neighbors). They claim this "public option" can co-exist fairly alongside private health insurance, increasing competition and keeping the private system "honest," and not deteriorate to a single payer (socialized medicine) system. They are wrong, or very dishonest, as in unguarded moments they admit that the single payer socialized system is what they really want.

By their logic the government must be a major player in every industry. Ah, just when you think you have them, you remember, they are socialists … dismantling liberty piece by piece.

The government does not co-exist or compete fairly with private enterprise. It does not play well with others. The regulator cannot be a competitor at the same time. Finally, it cannot be a fair competitor if when the "public option" screws up (can't pay its bills), the government implicitly or explicitly guarantees its debts.

Perhaps the best example of the destructive "public option" is our nation's schools. Here we clearly have a government provided "public option" competing with (and in fact dominating in size) private schooling. But, is it fair? Does it work well? Not by a long-shot.

With a "public option" things inevitably would go the horrific way of our public schools. It will be like looking in a funhouse mirror and seeing a doctor where you used to see a teacher.

Finally, let's worry a bit about the end game. We are not here yet, but in a world where the "public option" replaced all private options, would we still be allowed, if we had the resources, to pursue private medical alternatives? Some socialized countries say yes, some say no. Imagine the answer is no in this country, where freedom is valued more than anywhere else in the world. Imagine a person is to be prevented from spending their hard earned money on their or their children's health care, or a doctor was prevented from earning what he could in a parallel free system after all his training and work.

It takes literally seconds to realize that this "public option" cannot co-exist with liberty and thus will indeed lead to full-on socialization. Since the simplest answer is usually best, and the President has already declared his preference for a "single-payer" system, and since this "public option" leads there with near certainty, might I be forgiven for assuming he knows this and is lying, and has a socialized medicine end-game in mind?

Myth #5 We Can Have Health Care Without Rationing

Rationing has to occur. This sounds cold and cruel, but it is reality. If you have a material good or service, like health care, that is ever increasing in quality, and therefore cost, there is no way everyone on Earth can have the best at all times (actually the quality increases are not necessary for rationing to be needed, it just makes the example clearer). It's going to be rationed by some means. The alternatives come down to the marketplace or the government. To choose between those alternatives you judge on morality and efficacy.

It is an uncomfortable truth that tough choices will have to be made. There is no system that provides for unlimited wants with limited resources. Our choice is whether it should be rationed by free people making their own economic calculations or by a bureaucracy run by Congressional committee (whose members, like the Russian commissars, will, I guarantee you, still get the best health care the gulag hospitaligo can provide). Free people making their own choices only consume what they value above price, using funds they have earned or been given voluntarily. With socialized medicine health care is rationed by committees of politicians trying to get re-elected and increase their own power, and people consume as much of it as the commissars deem permissible. I do not find these tough alternatives to choose between.

Myth #6 Health Care is A Right

Nope, it's not.

This is more philosophy than economics, and I'm not a philosopher. But, luckily it doesn't take a superb philosopher to understand that health care simply is not a "right" in the sense we normally use that word. Listing rights generally involves enumerating things you may do without interference (the right to free speech) or may not be done to you without your permission (illegal search and seizure, loud boy-band music in public spaces). They are protections, not gifts of material goods. Material goods and services must be taken from others, or provided by their labor, so if you believe you have an absolute right to them, and others don't choose to provide it to you, you then have a "right" to steal from them. But what about their far more fundamental right not to be robbed?
So why do people scream health care is a "right" if it so obviously is not? If not a right it can still be willingly provided as charity by society.

So, Why Are These Crazy Things Believed (Or, Pretended to Be Believed)?

Lots of politicians understand that the simple free system leaves them out in the cold. No power for them. No committees to sit on to decide people's lives. No lies to tell their constituents how they (the government) brought them the health care they so desperately need. No fat checks from lobbyists as the crony capitalists pay dearly to make the only profits possible under this system, those bestowed by the government.

Finally, if the above is not enough, the rush to pass a huge expansion of government now, and limit debate and discussion, is indicative of a group that knows it is wrong, and if people have time to think they will refuse to go along, but is attempting an exercise of naked power, to impose dictatorship before the people wake up. Paraphrasing Mark Twain, a lie can travel halfway around the world while the truth puts on its shoes. They are counting on this, and they don't want to give the truth time to be shod.

And In Conclusion

We do not need a single payer (socialized medicine) system to cut confusion and inefficiency. On the contrary we need unfettered competition and clear legal standards. Another major concern is provision of basic healthcare to the needy. This is an important issue, but not an expensive one in the scheme of things, and not one that should drive the trillion-dollar healthcare debate. You do not reorganize the entire housing industry and tax policy around the need for homeless shelters, you just build enough shelters and let the market take care of, and discipline, the people who can pay for their own housing.
Finally there is the concern that healthcare costs make US workers too expensive to compete in global markets. As long as workers get full value for their healthcare dollars, it shouldn't matter whether companies pay in cash or in health benefits.
HT: Andrew Coors

4 comments:

Brian said...

"Lots of politicians understand that the simple free system leaves them out in the cold. No power for them. No committees to sit on to decide people's lives."

That says it all.

Thanks for the post Scott.

Chad said...

Hi Scott,

In your opinion, what are the chances that a health care bill that includes a government option reaches Obama's desk?

Scott Grannis said...

I'm not an expert handicapper, but it looks to me like the odds are less than 50/50 right now, and declining with every day that goes by. I see rapidly rising concern over the consequences of the healthcare bill.

The Intrade prediction market says the chances are a bit less than 50%, by the way.

http://www.intrade.com/jsp/intrade/trading/t_index.jsp?

Louis Cyphre said...

Enough said:

“There is no system that provides for unlimited wants with limited resources. Our choice is whether it should be rationed by free people making their own economic calculations or by a bureaucracy run by Congressional committee (whose members, like the Russian commissars, will, I guarantee you, still get the best health care the gulag hospitaligo can provide).”