Economic Policy Institute's Health Plan

Sometime during the Democratic Primary's Health Care Mandate food fight the Economic Policy Institute (EPI) released a health care plan authored by Jacob Hacker. So, as the Democratic primary winds to an end, let's spend a minute reviewing a little of the substantive policy we missed during the madness and compare it to the Wyden-Bennett/Committee for Economic Development plan that I have already written about fairly extensively.

The Health Care for America Plan is made up of three central elements:

1. An extension of Medicare to every legal U.S. resident who is not covered by their workplace.

2. All employers will be required to provide their workers with coverage equivalent or better than the Health Care for America plan or pay 6% of payroll to fund coverage for their employees.

3. A requirement (the good old mandate) that all Americans buy into Health Care for America Plan or purchase private coverage.

Of course, there is a lot more to it than that. But those are the basics and who has time for nuance anymore? So let's get into some analysis.

To begin, both plans have mandates. So, not much to compare here. If you still aren't sure what these are about and why there was such a food fight about them, feel free to leave a comment asking for a briefing and I will oblige. So both come down on the side of universality and guarantee (and require) that every American have a health plan.

The more interesting differences come in how each tries to cut costs. Both believe that there is substantial waste in the current system and tries to create incentives to reduce it. Wyden-Bennett does this through competition, requiring that insurance companies compete to offer a basic plan that is risk adjusted for the type of people who enter their plan. (I.e they get paid extra to cover people at higher risk of getting sick.) This will presumably reduce administrative costs of insurers as they compete to be leaner and hopefully make consumers price conscious as they will be able to select a plan to cover their specific medical needs. The hope will also be that insurers will form long term relationships with customers and so will be incentivized to provide preventative care.

EPI's plan uses the bargaining power of the government to negotiate for lower prices with drug companies and providers and the administrative efficiencies of having a single large insurer to further reduce costs. Furthermore, as the government will necessarily have a long term relationship with many of its customers, it will encourage preventative care to reduce its costs.

How will these different approaches to cost cutting succeed? It is impossible to say with an certainty, but I will point to the difficulties that each will face which hopefully will give the reader some guidance on which one he or she sees as more plausible.

Wyden-Bennett plan counts on the government being able to properly price the cost of various health risks in populations across the U.S. Given how many types of health conditions there are, and how much regional variation there is when it comes to intervention this is a very difficult problem. If you don't get it right, you will have insurers either making over-sized profits or going out of business at an alarming rate leading to substandard care. Either scenario could be very expensive. Yes the "Dutch" model that Wyden-Bennett has seen some success in the Netherlands, but we are dealing with a far more heterogeneous population here. I think the argument that would be advanced by the EPI folks would be that many of the insurers under this system would be too small to negotiated significant price concessions from drug companies and providers.

The big problem EPI's plan will face will be the rationing of health care through mechanisms other than prices. As has happened in single payer countries, consumers will not be price conscious and so will demand more of certain types of coverage than the government's reimbursement schedule will supply. So it is likely that health care will be rationed by systems such as wait lists, mechanisms that will increase the cost of overall care.

Which of these problems one finds the most intractable, will go a long way to deciding which health care plan one prefers.

Universal Health Care for Free!

The Congressional Budget Office has scored the Healthy Americans Act as budget neutral. Politically speaking, this is a very exciting development and bound to get a lot of attention if publicized properly. No matter how much money we throw down the drain in the current system, it's very difficult to get Congress to invest in a policy with a large up front price tag no matter how much it saves in the long term. But who can turn down free universal coverage?

Unfortunately, this positive calculation comes partly because of a cap on government spending. After a certain year (2014 I believe) Federal spending will be capped at GDP growth. This cap may very well scare a number of groups that are concerned that a cap will lead to a decline in overall care or the particular disease or medical technique they advocate for. As I covered in a previous post that focuses mostly on a similar policy from the Committee for Economic Development, cost cutting should come from increased competition between insurance companies and preventative care. The Healthy Americans Act is similar enough to the Committee for Economic Development plan that the cap is probably unnecessary.

Still, I think this is an overall win for the Healthy Americans Act. From what I've seen Sen. Wyden is a savvy political player and probably knew what he was doing when he put in the cap on Federal expenditures. Without the cap, the CBO would not be able to issue an estimate so soon because of the complexities involved in seeing whether the incentives generated by the bill will create true cost cutting. This estimate generate a lot of publicity, and even if it gets people quibbling over details, at the very least they'll be talking about it as a new president enters the White House.

Prof. Larry Bartels on Unequal Democracy

Larry Bartels of Princeton delivered a talk on his new book Unequal Democracy: The Political Economy of the New Gilded Age on Monday. The talk was interesting in that a respected academic came to a data driven but very partisan conclusion: if you're concerned about income inequality, elect Democrats.

You can see his most startling graph on the right. It clearly states that income growth is higher for all groups under Democratic presidencies than under Republican presidencies and that this growth is much more equal. A number of objections immediately jump to mind but from what I've seen so far this conclusion is robust, Prof. Bartels provides a response to some of the criticisms at Dani Rodrik's blog.

Why would voter's continue to vote for Republican presidents against their own economic interests? Prof. Bartels believes that they do vote with their economic interests, but only for the last year. The structure of Republican policies Bartels finds is that they lead to lower growth in earlier years of the presidency as spending and programs are cut. But this leads to higher growth towards the end of the term (and the upcoming election) as the economy rebounds from its bitter medicine. Democrats, however, unleash spending and new programs at the beginning of their term. By the time the end of their term has rolled around, the economy has begun to slow as the effects of the stimulus wear out and inflation kicks in.

Unfortunately for Democrats, according to Bartels (with support from Brookings' William Galston and Thomas Mann and over the objections of someone from Pew) voters only really remember the last year when assessing their economic fortunes. Thus, Democrats lose and Republicans win.

A couple of other interesting facts and figures:

1. Low income voters are more likely to support Democrats. It's high income voters in "red" states that swing them to Republicans.

2. Information matters: the more information self-identified liberal voters consume the more likely they are to correctly identify that it has increased in the United States.

3. Information distorts: the more information self-identified conservative voters consume the more likely they are to incorrectly deny that income inequality has increase in the United States.

4. Information doesn't matter: No matter ideological preference and amount of information consumed and preferences regarding income inequality, about 2/3rds of Americans oppose the inheritance tax.

Yet More Health Care Humor...

An entertaining clip in support of the Health Americans Act:

"Predictably Irrational"

I've been meaning to link to this review
of a couple of books on behavioral economics. "Predictably Irrational," a new book by Dan Ariely at MIT sounds like it has some particularly interesting experiments.

In one study, he asked students to look at the last two digits of their social security numbers and then bid on various items. Their social security numbers had marked effects on their bids.

The students whose Social Security number ended with the lowest figures—00 to 19—were the lowest bidders. For all the items combined, they were willing to offer, on average, sixty-seven dollars. The students in the second-lowest group—20 to 39—were somewhat more free-spending, offering, on average, a hundred and two dollars. The pattern continued up to the highest group—80 to 99—whose members were willing to spend an average of a hundred and ninety-eight dollars, or three times as much as those in the lowest group, for the same items.

This effect, which Ariely calls "anchoring," and which retailers such as Tiffany's have been acquainted with for decades (and probably longer) blows conventional economics out of the water. Clean downward sloping demand curves a la Econ. 101 assume rationality on the part of consumers, that they trade off the benefit of consuming the good against the benefit of the other goods they could consume for the same price. If they aren't cold calculators all the time, companies can rely on tricks such as putting other high numbers in the store to set the customer's "anchor" and engine of the free market economy is reduced to a sputter.

This is, however, more of a problem for a lot of academic economists than anyone else. The big money today isn't made on trying to produce commodities that consumers examine with steely eyes and then make a decision based on price. The game is to find a niche demographic and tailor your product to fit their needs. I didn't buy my Mac based on processing power, I bought it because my wife has one, sleek marketing, and because it doesn't feel (and perform) like a hunk of junk.

The key is differentiation, a good businessman doesn't just compete on price. That means that all those pretty supply and demand curves that we were all taught in Econ. 101 are virtually non-existent (they're also pretty damn hard to examine empirically too.) Perhaps this is why economists don't run the world but rather tell others how to?

Faith Based Economics

From Dani Rodrik:

Kevin Hassett, economics advisor to John McCain, is quoted today as saying:

What really happens is that the economy grows more vigorously when you lower tax rates... It is beyond the reach of economic science to explain precisely why that happens, but it does.

Now you can be excused for thinking that the first of these statements is true, if you have an economically sound reason for it. But if you don't, you shouldn't.

Let's call it no longer supply-side economics. It is faith-based economics.

Health Care Humor

The Committee for Economic Development (CED) held a briefing on the Hill yesterday to promote its healthcare plan. As I have written on the plan previously I will not rehash the details but rather share with you the comic stylings of Dr. Alain Enthoven.

For those of you unfamiliar with Dr. Enthoven, (I certainly was before I started tracking healthcare issues) he is a professor emeritus at Stanford and a very respected figure in health policy. He was integral in formulating CED's health plan and his support is equally integral to promoting it to a wide audience.

Dr. Enthoven got his start in public policy as the leader of Robert McNamara's "Whiz Kids," doing quantitative heavy lifting on nuclear proliferation and the war in
Vietnam. He spent a year pushing his conclusion, based on body counts, that the U.S.
could not win the war through attrition.

Despite his incredible stature (but reputation and physically too, he must be 6'3") he is incredible down to earth. Following the talk yesterday, he stuck around for a serious and engaged conversation with the youthful members of the CED, this blogger and the 23 year old American Prospect superstar Ezra Klein. Given this context, I would like to share a couple of his jokes dryly inserted into a very serious policy discussion. The humor of course, is bitter-sweet, given these problems have some very tragic consequences for the people dealing with them.

A Bad Pun:

Because people switch doctors so frequently because switching jobs means switching health plans and because medical information technology is nowhere where it should be, doctors often aren't aware of their patients' full medical history. This, Dr. Enthoven says with a straight face as his colleagues cringe, is "connectile disfunction." He uses this joke at every presentation and from what I hear, even in meetings with U.S. Senators.

Another Bad Pun:

Economists have a term "job lock" that refers to the case where people are prevented from leaving a position because of some sort of market failure. In the case of healthcare, because their plan isn't portable they are unable to be entrepreneurial
or take another job if the new employer doesn't offer the same plan. As many people get their health plan through their spouse's employer, there is another case to be considered. Dr. Enthoven spoke of a woman who was unable to leave her husband because she needed his healthcare insurance. "It brings new meaning to the term wedlock," he deadpanned.