Coyote Blog

I feel like I was way ahead of the pack on May 1 reminding everyone that the Left until recently held up the VA as a model for government health care.  I pointed to articles by Kevin Drum and Phil Longman in 2007, but since then others have highlighted articles by Paul Krugman and Ezra Klein that made the same point.  Klein said:

If you ordered America's different health systems worst-functioning to best, it would look like this: individual insurance market, employer-based insurance market, Medicare, Veterans Health Administration.

Paul Krugman said

Well, I know about a health care system that has been highly successful in containing costs, yet provides excellent care. And the story of this system's success provides a helpful corrective to anti-government ideology. For the government doesn't just pay the bills in this system -- it runs the hospitals and clinics.

No, I'm not talking about some faraway country. The system in question is our very own Veterans Health Administration, whose success story is one of the best-kept secrets in the American policy debate.

Supposedly, the reason for this success according to Drum and Longman was that ever-popular Lefty magic bullets, electronic medical records and preventative care.  On medical records:

"Since its technology-driven transformation in the 1990s...the VA has emerged as the world leader in electronic medical records — and thus in the development of the evidence-based medicine these records make possible." Hospitals that joined Longman's "Vista network" (his name for the VA-like franchise he proposes) would have to install the VA's electronic medical record software and would "also have to shed acute care beds and specialists and invest in more outpatient clinics." By doing this they'd provide better care than any current private network and do it at a lower cost.

On preventative care:

How is a supposedly sclerotic government agency with 198,000 employees from five separate unions outperforming the best the private market has to offer? In a word: incentives. Uniquely among U.S. health care providers, the VA has a near-lifetime relationship with its patients. This, in turn, gives it an institutional interest in preventing its patients from getting sick and in managing their long-term chronic illnesses effectively. If the VA doesn't get its pre-diabetic patients to eat right, exercise, and control their blood sugar, for example, it's on the hook down the road for the cost of their dialysis, amputations, blindness, and even possible long-term nursing home costs....The VA model is that rarest of health care beasts: one with a perfect alignment of interest between patients and providers.

Neither of these have ever proven in real life to actually lower costs in anything but tiny pilot programs, and there is a lot of reason to believe that while preventative care can improve health outcomes, it tends to increase costs.

I have said for years that at the end of the day, the only ideas government planners have for cost control are rationing (which leads to queuing) and cost controls on things it buys from private markets, like doctor time (which leads to shortages and more queuing).  This is why every health care system that offers free care to all comers, whether it be socialist systems in other countries or the VA or even an urban emergency room, has long queues.

In fact, the situation, as I think we will find at the VA, is worse.  Not only is the old pie being allocated differently (shifting from price-sensitivity to queue tolerance) but the pie of available supply is likely getting smaller as resources are consumed by government red tape and price controls drive suppliers out of the market.  The next stories will be about the staggering waste of money on red tape in the VA system, and the stories after that will be about a few VA users jumping the queue because of political connections.

This stuff is so inevitable that it was all addressed years ago in my three part series of Obamacare.  In that series, the issues were not failing exchanges and the mess we have seen so far, but the issues we are more likely to see over the long term.  The VA is merely a preview, but we shouldn't have needed a preview because we could have looked at countries like England.  Of course, if the media had any desire to honestly tell these socialized medical stories we would not get fawning profiles of the horrendous system in Cuba.

My Forbes series:

• part 1:  Information issues when one tries to replace prices with command and control
• part 2: Incentives issues in government management of health care
• part 3: Rent-seeking and special favors for the connected in health care

I have said for quite a while that despite all the hand-waving about  efficiency and electronic records and other BS  (efficiency from owner of the Post Office?) the only two cost reduction tools that state-run health care have are 1) Price Controls and 2) Rationing.  This has become clear yet again in California.  Allocation of scarce resource by bureaucratic fiat has NEVER worked, not only leading to mis-allocations but generally reducing the size of the pie to be allocated in the process.  The only solution is returning health care to a world (that most every other product and service is in) where consumers have the incentive to shop and make price-value tradeoffs for themselves using prices set by the free operations of supply and demand.

The Baucus Health Care bill follows in the tradition of many other pieces of recent legislation in raising taxes in ways such that Congress can claim that it didn't actually raise taxes.  Here are four such taxes in the Baucus Bill  (note that no one that I know of has read any actual legislative language, so this is based on the press releases by the bill's authors.  Actual bill language can only be worse).

Employer Penalty is a Tax: In a step right out of Goldilocks, the Baucus bill will impose "penalties" on employers with no employee health care plan as well as on employers who have plans that are "too rich."  Never mind the insanity of the government micromanaging how an employer chooses to structure his compensation package to employees.  These "penalties" are structured as percentages of wages -- the one for having no health care plan was 8% of wages in the last bill.  This is a direct tax on employment, making hiring people more expensive (effectively the same magnitude as doubling the Social Security tax).  So how does this effect the average person?  Think of it this way, for the same wage, you job will be more expensive to a company that it was before the bill, making it less likely you will get hired at that wage.

Insurance Mandate as a Tax: The mandate that everyone must have insurance is a tax on the young and the healthy, as I explained previously:

People focus too much on the penalty itself being a new tax.  But the new tax is actually the requirement that individuals buy a product (in this case a health insurance policy) that they feel has no value (or else they would purchase it of their own free will today).  The government stopped pretending long ago that these younger middle class families will get much value from such a policy.  In fact, if they did get value commensurate with the premiums they will be paying, the mandate would not be achieving its purpose.  The whole point is that healthy people pay more into the insurnace system than they get back to support sick people.  If that payment is mandatory, then it is a tax, even if it is called an "insurance mandate" instead.

In fact, this is made all the more clear when politicians also suggest that cheaper high deductible health insurance plans be banned, as they were in Massachusetts.  Again, the whole point is to get young healthy people to overpay for insurance, and allowing them to buy sensible, cheaper, high deductible insurance defeats the whole purpose.

In fact, the bill's supporters have explicitly discussed requirements that insurance companies raise the price of insurance to the young and healthy to help reduce premiums for the old and, er, politically more active.  This is a redistributive tax, hidden within an insurance rate structure that will be heavily regulated by Congress.  Though don't expect Congress to admit this when young folks start to complain, they will say "blame the insurance companies."  Which is the whole beauty of such a hidden tax.

Corporate Taxes as Consumer Taxes: The plan would place new excise taxes on insurance companies, drug companies, and medical device providers.  But these taxes, particularly in the low margin insurance businesses (Yeah, I know if you only listened to Obama, you would never realize they were low margin but they are) just get passed onto consumers in the form of higher prices.  Congress knows this, but pretends it doesn't happen, so it can tell the economically ignorant that it hasn't raised taxes on consumers, and that rising prices are all the fault of the evil insurance companies blah blah, you know the drill.

Price Controls as a Tax: A large part of the Baucus Medicare savings is instituting price controls on doctors and other medical suppliers --  basically cutting their reimbursement rates.  This, by the way, just confirms what we all have known, that Obama and the Democrats don't have some mysterious win-win way to cut medical costs.  The only levers they have are 1. Price Controls and 2. Denying care.

There is absolutely no difference to a doctor between price controls and a tax.  A cut in the reimbursement rate from $50 to $40 is the same as having a 20% tax put on his $50 reimbursement.  Again, price controls in this context are just a way of hiding a tax.

And this might be the most dangerous tax of all, as such price controls always, by the immutable laws of economics accepted by monetarists and Keynsians alike, reduce available supply.  Doctors, for example, are going to be less willing to stay in the medical profession.  The result is inevitably shortages and long waits, something that should surprise absolutely no one as shortages and queuing are endemic in every government health care system in the world, starting with liberal darling Canada, whose citizens get medical treatment quickly only by crossing the border into the US.

In many states like California, auto insurance rates have been subject to state price controls for years.  A recent debate over a bill called AB 2840 helps shed some light on the total idiocy of trying to have government set prices.

I have to give you a paragraph of background.  Warning -- the next paragraph is mind-numbingly dull.  Please don't give up.

Apparently, auto insurance rates are higher in California cities in part because claims rates (theft, accidents) are higher in the cities.  The cities, which have a lot of political power, argued that this was unfair that their rates were so much higher than rural folks paid.  State-approved insurance rates were discriminating against cities, they claimed.  I don't know if they made the argument, but they could also have argued that infrastructure costs (sales, claims service) was likely lower in cities per capita because of the concentrated customer base.  So the state insurance board proposed to raise rural rates and cut city rates to make prices to all Californians more even.  Rural folks then freaked, and their legislators have proposed AB 2840 to put things back the way they were before.

So who is right?  How the hell am I supposed to know?  How the hell is anyone supposed to know?  There is absolutely no objective way to settle this argument.  I read the attached article and my eyes just started to blur.  That is why in practice, for all the talk of studies and analysis, issues like this are settled in favor of whoever has more political clout or votes.  Price controls, besides wreaking havoc on supply and demand, always - yes always - result in a transfer of wealth from those without political power to groups that have the power.   That's why politicians love them -- its a great way to raise campaign donations, as groups bid to be on the receiving end of such largess rather than being the sacrificial lamb.  And it's why in a free and just society we use this thing called "markets" to determine prices in most other such complex situations.