Monthly Archives: August 2009

Healthcare: the Hazards of the Moral Hazard Argument

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In a post on the economic issues around health insurance, Professor Dan Saviro makes the standard “moral hazard” argument:

Consumer demand drives the market, but it is largely the demand of subsidized consumers who are not actually paying at the margin for what they get. Suppose that in the market for groceries or cars we had consumer demand in the driver’s seat (as we do), except that people didn’t actually have to pay for what they purchased (or maybe they just had a small co-pay). Whole Foods and GM might like this, but it wouldn’t be good socially. Yet in healthcare, that’s effectively what we have, much of the time, for people on Medicare, Medicaid, or employer-provided health insurance that overpays at the margin (relative to the optimal insurance level) due to the distorting effect of the tax subsidy.

There are a number of problems with moral hazard arguments in healthcare. For example, the biggest hit in healthcare costs is when choose one sick, and if people were “actually paying at the margin for what they get” such that it would change their behavior when they were really sick, they’d probably go bankrupt.

But there’s a more basic problem with this argument. Saviro assumes consumers have meaningful info about the healthcare “product” they’re considering buying. If you want to buy a car from GM, you can see what Consumer Reports or Road & Track said about it. But what about the pill your doctor just recommended you take?

Let’s assume that unlike many folks, you’ve got the high-level reading skills and the time needed to read up about it. Here’s the catch: you can’t trust what you read. According to the New York Times,

A growing body of evidence suggests that doctors at some of the nation’s top medical schools have been attaching their names and lending their reputations to scientific papers that were drafted by ghostwriters working for drug companies — articles that were carefully calibrated to help the manufacturers sell more products.

Got that? Drug companies aren’t just paying doctors to do research. They’re also helping the lazy bums who can’t even be bothered to write the paper themselves. A case in point from a hormone drug lawsuit:

The [deposed] documents offer a look at the inner workings of DesignWrite, a medical writing company hired by Wyeth to prepare an estimated 60 articles favorable to its hormone drugs. In one publication plan, for example, DesignWrite wrote that the goal of the Wyeth articles was to de-emphasize the risk of breast cancer associated with hormone drugs, promote the drugs as beneficial and blunt competing drugs. The articles were published in medical journals between 1998 and 2005 — continuing even though a big federal study was suspended in 2002 after researchers found that menopausal women who took certain hormones had an increased risk of invasive breast cancer and heart disease.

One lazy physician who was assisted by DesignWrite was Columbia professor Dr. Michelle P. Warren.

Her article was published in The American Journal of Obstetrics and Gynecology in 2004, when women feared that Wyeth’s brand of hormone drugs could be causing particular problems. The thesis of the article was that no one hormone therapy was safer than another.

The published article acknowledged help from four people. But it did not disclose that DesignWrite employed two of those people and the other two worked at Wyeth. Court documents show DesignWrite sent a prepublication copy to Wyeth for vetting and charged Wyeth $25,000 for the article, information not disclosed in the paper.

When the Times contacted Dr. Warren, here’s how she defended herself:

She said she worked on the project in phone conversations and in meetings — contributions not reflected in the court documents, she added. She said that it was a mistake not to have disclosed the writers’ payment and affiliations in the acknowledgment; articles published today involve more detailed disclosures, she said. DesignWrite scoured the scientific literature on hormone therapy for the article, she said. “I would never undertake this without some help,” said Dr. Warren, who is the Wyeth-Ayers Professor of Women’s Health at Columbia. “It’s too much work. I am not getting paid for it.”

Holy crap…

Next week: what this means for building a better economic model.

Selling Green to People Who Think They Aren't

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John Fetterman
In a Grist Magazine interview, Braddock, PA Mayor John Fetterman — the guy you’ve probably seen in the Environmental Defense Fund’s Carbon Caps = Hard Hats ads — explains how to talk about the environment with folks living in small, blue-collar towns like Braddock:

The people that are already in your corner are obviously the ones you don’t have to convince. It’s the working-class folks that might get their news from Fox, or may have grown up in more conservative circumstances. Say, look, you don’t have to consider yourself an environmentalist. You can drive your pickup truck, you can live your life the way you want to. But wouldn’t it make sense to not only care for our environment but also create and replenish the critical mass of blue-collar jobs in this community, this country? We still have to make things in this country. I’m very much a believer in that. You can think that global warming is a myth and the sun revolves around the earth, but here’s how it could benefit your community through this very common-sense approach.

Q. Are folks in Braddock receptive to talk about passing a climate bill?

A. Most people are like, “What the hell is cap-and-trade?” It’s kind of like derivatives, where these economists can’t explain what it is. So there’s a lot of esoteric things involved. But when you explain that this is the kind of thing that helped get lead out of paint and acid rain and these other things, and how it can create the demand for steel, they get that. There are 250 tons of steel in a windmill. If we build a million windmills, that’s 250 million tons of steel. They understand that, that gels for folks.

When you say global warming in 75 years will raise the average temperature by a degree and a half, that doesn’t mean anything to me. I’ve got to eat. My house is falling apart. So not playing to people’s concern for the environment, but [being] pragmatic—you want a job again, let’s pass this bill.

America Lost a Hero Last Night

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Senator Edward Kennedy died last night. Robert Reich on just how deep a loss Kennedy’s passing is for our country:

America has had a few precious individuals who are both passionate about social justice and also understand deep in their bones its practical meaning. And we have had a few who possess great political shrewdness and can make the clunky machinery of democratic governance actually work…

Most Americans will never know how many things Ted Kennedy did to make their lives better, how many things he prevented that would have hurt them, and how tenaciously he fought on their behalf.

Why the Public Option Matters: Checks and Balances

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Matthew Yglesias says the folks pushing the public option need to calm down. Without the public option,

It wouldn’t be an ideal health plan or the best bill you can imagine. But it’s no exaggeration to say that it would be the greatest progressive legislative accomplishment in four decades, and that’s nothing to sneer at.

In the middle of a fight where the other side is screaming that Obama wants to create death panels, it’s a little weird to argue liberals shouldn’t go ballistic over hints Obama is going to drop the public option. As Matt Taibbi said, “time to consider what good stuff might be in a public-option-less bill is after you’ve lost that battle, not before.”

But Yglesias’ argument also highlights a problem with traditional economic models. Yglesias says the current bills have a lot to offer:

most notably a set of consumer protections that would cap out-of-pocket health costs, guarantee access to preventive care, and prevent insurers from treating people well as long as they’re healthy only to start monkeying around when they get sick.. [The bills] force insurers to offer a defined set of benefits to all comers at a fixed price—no discrimination based on gender, health status, whatever. ..those of us who do have insurance would be spared the insurance-related anxiety that’s endemic in contemporary American life.

Let’s assume that such a bill gets passed and that insurance companies don’t manage to bury within the 1000 page bill loopholes that neuter the bill. The day after the bill passes, the insurance companies, will start working nonstop to create as many innovative ways around it as possible. They’d be fools not to — tweak the rules back in their favor and they win serious $$$.

What are the odds that liberals & progressives will be able to mobilize again and again to stop them?

Well, look at what happened with Wall Street. First they gutted the rules restraining their behavior while our side wasn’t really paying attention (some folks on our side saw it was happening but we didn’t do much about it). Eventually the new freedom they gained blew up the system and we had to bail them out, which really pissed off a lot of taxpayers. Despite this public anger, they’ve managed to skate virtually scot free. Why? Because there are no institutions that either act as a political check on them or help to mobilize resistance.

In contrast, look at Medicare. Sure, health care lobbyists have gotten all kinds of goodies for themselves into it (e.g., banning Medicare from negotiating lower drug prices). But when it comes to coverage? It’s so untouchable we’ve got right-wing folks at town hall meetings saying, ” Keep your government hands off my Medicare.”

That’s why the public option matters. It isn’t simply that it’ll create competition. Once created, it’ll act as a foci for organizing. Every time insurance companies try to mess with it – and they will, over and over – they’ll face a much, much tougher battle than they would otherwise have.

Traditional economic theories don’t handle these kind of economy-politics interactions very well. It’s one more reason we need a new way of thinking and talking about the economy.

Investors Business Daily: Now with Extra Crazy Sauce

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Speaking of studying irrational behavior, what’s up with Investor’s Business Daily? First they write an editorial with a flat-out lie:

People such as scientist Stephen Hawking wouldn’t have a chance in the U.K., where the National Health Service would say the life of this brilliant man, because of his physical handicaps, is essentially worthless.

Then, when they get called on the fact that the man lives in the UK, they make this correction:

Editor’s Note: This version corrects the original editorial which implied that physicist Stephen Hawking, a professor at the University of Cambridge, did not live in the UK.

Whaaa? As CJR says, the correction should’ve looked something like:

This version corrects the original editorial which falsely implied that physicist Stephen Hawking would be dead as a doornail if he lived in the UK and had to use the National Health. Hawking has lived in the UK his entire life, and as of press time, is still alive.

Making up Granny-killing death panels I can understand — the bill’s thousands of pages long and almost nobody’s going to read it. But did they really think they could lie about something as basic as where Hawking lives and not get caught? Maybe they didn’t think Hawking could speak up?

Richard Thaler Wimps out (or, the Limits of Behavioral Economists)

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Richard Thaler is a very smart guy. He’s one of the founders of Behavioral Economics — the folks who argue that people aren’t calculators. So when he jumped into the healthcare debate over the public option, I was eager to see his take on the debate.

Unfortunately, he turned off his behavioral economist brain and delivered a boilerplate pro-free-market argument:

Here is a thought experiment: Can you think of a domain where a government-run business competes successfully with private-sector companies? … More generally, it is hard to find examples where government-run businesses compete with private companies and win. One reason is that governments are not very good at innovation….

But what about the often-stated fact that Medicare has much lower operating costs than private insurance companies?… this is not an apt comparison because the new public plan would have marketing and other administrative costs that don’t apply to Medicare with its captive market.

All of this leads me to conclude that if we impose sensible rules on the public option [e.g., that it isn't subsidized], it will neither save nor destroy the health care system because it will simply not get much market share. And if we do not impose those rules, the public option will hurt rather than help.

I’ll let other bloggers bang on his argument against government. There’s a more interesting issue here: why did Thaler ignore the strange role of Medicare in this debate?

As Thaler says,

We hear from the right that an insurance plan run by the government will drive all private-sector insurers out of business and be the first step toward socialism, if not communism.

And yet nobody on the right is saying boo about the biggest, baddest government-run insurance plan — Medicare.

Medicare hasn’t just turned into the third rail. It’s become non-government. At town hall meetings, in between denouncing imaginary government plans to kill off grandma people are yelling, “keep your government hands off my Medicare!”

For a Behavioral Economist, this should be like catnip. It’s about as un-calculator-like behavior is you can get. But Thaler doesn’t touch it. Why?

It may be because he’s conservative. But I think it’s also a sign of a fundamental flaw in most Behavioral Economist work.

Behavioral Economists are fascinated by the impact of our brains on how we think. But they’re mostly silent about the equally critical impact of other people’s brains — the institutions we work in, the political efforts to shape public debate.

If a Behavioral Economist like Thaler took political economy seriously, he’d have to make a very different argument. For example, he’d have to explain why if the public option won’t “get much market share,” are insurance companies pouring millions into strategies that, among other things, tries to convince people that Medicare isn’t really government? Because it isn’t just a lone nutjob at one town hall meeting who’s said it; this strange outburst has happened often enough that it’s probably on somebody’s list of talking points. And can’t be the insurance companies’ strategy to ensure they’ll still be able to compete; there are much less bizarre ways to argue for “sensible rules on the public option.”

You can certainly be a free-market cheerleader and take political economy seriously. But you have to work a hell of a lot harder than Thaler does here. And that’s why I think it’s crucial for liberals and progressives to force Behavioral Economists to take the next step in exploring how people aren’t calculators.

Why Green for All Can Be Hard to Pull Off

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It’s not surprising most cities’ green plans are giving poor communities of color the short end of the stick. Many cities have basically written off these communities. But there are also unique issues that make a truly just green plan hard to pull off.

For starters, it’s hard to help folks in low income communities of color get access to green jobs when there aren’t many green jobs.

While these efforts are promising, by and large, most cities report that “green jobs” remain a concept — a target more than a reality. Some initial programs stalled, after cities discovered they were training workers for jobs that don’t yet exist. In Memphis, Tenn., officials were about to start adding solar installation training to a successful prisoner reentry program, which offers job training to low-level offenders. In the course of researching the program, however, they discovered that almost no one was actually purchasing solar systems in the city, leading them to focus instead on attracting solar companies before they start the job training program.

Ironically, Obama’s stimulus plan gives out a ton of cash for creating green jobs — a lot more than enviros had fought for the past. But, like the stimulus plan more generally, it’s nowhere near the amount of money we need to spend.

Even where green jobs exist, cities will have to change their strategy for economic development to fit these new green opportunities.

To attract jobs, traditionally, cities have focused on traditional business incentive packages, which favor largescale corporations, luring them to come or stay with promises of lower taxes, reduced utilities and developed infrastructure. That model may work for a large wind turbine manufacturer, but the green jobs sector in any given city is much more likely to rely upon dozens of smaller companies, such as contractors who do rehab work in homes or who install solar panels. The challenge for cities will be to adapt their existing strategies to the smallscale, dynamic green jobs sector.

The shift towards green jobs will also demand that cities rework traditional workforce development. This is a system that is typically uncoordinated and disconnected from local employers. Understanding the demand side will entail tremendous effort as these new green skills are just now being deciphered. Green jobs, like many other parts of the economy, demand different types of workers, from skilled carpenters and electricians to landscapers and mechanics, each with their own existing experience, and unique needs for new skills. And the potential employer will not just be a hospital chain or a school system but dozens or even hundreds of small shops and firms.

Another issue that makes Green For All tricky to pull off is that success, particularly smart growth-friendly “transit-oriented development” can ” propel gentrification, leading to skyrocketing rents in newly hip neighborhoods.” Cities are trying several strategies to avoid this problem.

In the Twin Cities, advocates, policymakers and funders are developing plans to ensure that neighborhoods along the corridor stay affordable for current residents. One idea they’re exploring is creating a land trust to preemptively buy up land around the corridor so it is secured for future affordable housing development. Similar efforts are underway in various neighborhoods in the Bay Area…. Advocates and funders elsewhere are exploring less costly strategies, including zoning rules, community benefit agreements, tax increment financing and other means to ensure that transit-oriented development achieves its full potential to boost neighborhoods while not ignoring the fates of its poorer residents.

So yes, it isn’t easy. But that’s no excuse for not trying. It’s not like stopping global warming is easy either.

And if cities — and enviros — don’t work hard to ensure that everybody benefits it’ll make stopping global warming all that much harder. The single biggest argument against seriously stepping it up to stopping global warming is that too many folks will lose their jobs or will be financially crippled by the cost of stopping global warming. If you want to counter this argument, the best way is to show that you’re serious about making life better for everybody.

Green Isn't (Yet) the New Black

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According to Green Cities, a report by Living Cities, a collaborative of large foundations and financial institutions, cities are trying hard to go green.

four out of five cities report that sustainability is among their top five priorities as articulated by the mayor. Over 75 percent of cities have, or will soon have, detailed plans on how they will reduce greenhouse gasses; nearly all are calling for an emissions cut of between 10 and 20 percent in the next five to 10 years

But there’s a big gap in most plans: the needs of low income communities of color.

relatively few cities’ programs are incorporating working families and poor people into their sustainability plans. For example, new transit programs like new rail lines or bike paths tend to move residents of higher-income neighborhoods to the urban core, rather than offering service to neglected neighborhoods. And few city officials we surveyed on green jobs talked about ensuring that links are made between new green-collar job opportunities and the under- and unemployed.

As a result, cities are going to miss a once in a generation opportunity to actually do something about inner-city poverty — and to do it in a way that helps save the planet.

it is precisely in low-income areas that sustainability plans can have the most dramatic impacts: The housing stock is the least energy efficient, and the job seekers have the skills and motivation to plug into the expected growth in construction and retrofit jobs.

What’s particularly galling about the redlining by most city green plans is that, as the report points out, there are lots of ways cities can go green that help everybody. If you build better mass transit, middle-class folk can drive less and inner-city poor folk who don’t have cars now have a shot at jobs that they otherwise couldn’t take.

It would be a particularly awful irony if America threw away its best chance chance to rebuild low-income communities of color right after it elected its first black president.

Why Dropping "Free Market" BS Pays off for Moderates & Conservatives

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If you’re a moderate or conservative, what do you get if you stop pretending that the massive government intervention into healthcare you’re promoting is a “free market” solution? You can build a pro-private sector health insurance system that actually works. Here’s how they do it in the Netherlands:

Health care in the Netherlands is financed by a dual system. Long-term treatments, especially those which involve (semi-)permanent hospitalization, and also disability costs such as wheelchairs, are covered by a a state-run mandatory insurance. This is laid down in the Algemene Wet Bijzondere Ziektekosten (AWBZ, see article in the Dutch Wikipedia), “general law on exceptional healthcare costs” which first came into effect in 1968.

For all regular (short-term) medical treatment, there is a system of obligatory health insurance, with private health insurance companies. These insurance companies are obliged to provide a package with a defined set of insured treatments. For those who would otherwise have insufficient income, an extra government allowance is paid to make sure everyone can pay for their health care insurance….

Funding for all short term health care is 50% from employers, and 45 percent from the insured person and 5% by the government. Children until age 18 are covered for free. Those on low incomes receive compensation to help them pay their insurance. Premiums paid by the insured are about 100 € per month with variation of about 5% between the various competing insurers.

The key to the system is that they take away insurance companies’ incentives to avoid insuring sick people.

Risk variances between funds due to the different risks presented by individual policy holders are compensated through risk equalization and a common risk pool which makes it more attractive for insurers to attract risky clients.

Here’s how risk equalization works:

arranging for a third party to organize a regulatory system of risk-adjusted premium subsidies. The financial transfers are then channeled via a so-called Subsidy Fund. In European countries such as The Netherlands, Belgium, Germany and Switzerland the Subsidy Fund is run by a government agency which assesses risks for individual policy holders.

Personally, I’d still prefer a single-payer system — it seems like a much simpler, straightforward way of providing affordable, high-quality healthcare insurance. But if you want a major role for the private sector, this approach seems like a very smart way to go.

UPDATE: Exhibit A why a private sector-oriented plan’s gotta have risk equalization:

documents obtained by the House Committee on Energy and Commerce… show, for instance, that one Blue Cross employee earned a perfect score of “5″ for “exceptional performance” on an evaluation that noted the employee’s role in dropping thousands of policyholders and avoiding nearly $10 million worth of medical care.

WellPoint’s Blue Cross of California subsidiary and two other insurers saved more than $300 million in medical claims by canceling more than 20,000 sick policyholders over a five-year period, the House committee said.