Thursday, December 03, 2009

On the ebb and flow of public policy

Part of the legacy of the Bush administration, with its mistaken tendency to rely on unfettered capitalism as the engine of economic growth and capital formation, is the Obama administration, with a mistaken tendency to believe that legitimate functions of the private sector should instead be directed and controlled by, or subsumed into, the government. (Each administration has been supported in its views by a majority in the Congress.) The old administration could not understand why there was a call for government intervention in failed markets. The new administration does not understand why there is a call for less government intervention before markets fail in a different way.

Examples about the Bush administration are rampant, and I need not repeat them here. Those folks are gone, anyway.

But the new administration is here, and some commentary is called for. With a 9-10% official unemployment rate and another 7-8% of the population no longer looking for work or underemployed, the top priority should be to adopt policies that will stimulate job creation. Economic recovery of the sort that creates jobs will depend on private sector innovation and risk-taking. Signals from the administration suggest that this will be discouraged.

Let me give two examples from the health care field. These will be controversial, because the sectors I discuss have serious detractors and have not always provided the best examples of citizenship; but they are important as major employers in the country.

I'll start with insurance companies. Commentors on this blog and elsewhere wonder why there should be private insurance companies in the business of providing health care coverage. The answer is that there are actuarial risks associated with the payment of health care costs. Private insurance companies make or lose money depending on their ability to manage that risk and to be innovative in design of new insurance products. (Yes, I know they sometimes do other things that are nasty -- like pre-existing condition exclusions -- but those practices can be statutorily eliminated or regulated.)

When the government provides health insurance, the actuarial risk does not disappear. Instead, it is built into the cost of government. The proposed Obama public insurance organization is one that will attract customers who are actuarially higher risks. Because there will be an expectation of "affordable" premiums for this group of people, the organization will be given authority to use public funds or the public balance sheet to cover those actuarial risks. To the extent such subsidies are implicit in the premiums of the public insurance organization, it will have a competitive advantage vis-a-vis the private insurers. It will grow, and they will shrink. So, of course the private companies lobby against the public option.

Let's now turn to the pharmaceutical companies, who had promised the administration several billions in savings over the coming decade. There was shock recently when those companies raised their prices for drugs. What did they have in mind? Well, they were already looking at flat profit margins because of patent terminations and long cycles in drug development. They are concerned that growth in the industry will move from the US to countries like India and China, which are encouraging its development. Then, they watched how the health care legislation was evolving and saw nothing that would help them in the American market, and feared things that might harm them, and so they took a pre-emptive step.

Here is the ironic political dynamic: Every time an industry responds to a potential government intervention with an unpopular move, it provides fodder to the Obama folks that more such intervention is necessary. "See how selfish they are," is the refrain.

To which I say, yes, they are selfish because that is the nature of capitalism. People will not risk their money to invest in enterprises unless there is a reasonable possibility for return consistent with the underlying risk of the business. I have talked to many people in the venture capital world and the private equity world who have decided to hold back on new investments in the health care field because they do not see a dynamic that will reward risk-taking. They look at the treatment of the insurance and pharmaceutical sectors and assume that a similar scenario will come to play in other segments of the industry. Their anxiety is compounded by their belief that the cost of the health care legislation will be much greater than estimated. Therefore, they believe that more and more of the industry will find itself subject to governmental constraints over time.

As we saw all too clearly during the Bush years, a lack of government regulation can be exceptionally dangerous for the economy. I worry that the swing of the pendulum has now gone too far and that there is too great a reliance on government intervention that will be dangerous in its own way.

Please recall, as I say this, that I am strong supporter of expanding access to health insurance and other necessary reforms. I believe some expanded government role is needed to achieve those goals. This is a question of degree.

7 comments:

Anonymous said...

I believe The Innovator's Prescription, which I know you have read, addresses some of the issues you describe. It also addresses the issue of the existing industry trying to maintain the status quo for as long as possible.
I submit that the entire model for health care delivery is wrong. If insurance companies have to be regulated to forbid them from doing what insurance companies do as a natural part of their business (like exclude pre existing conditions), then, as bfielder pointed out in a previous post, we are not allowing them to be insurance companies. This is not a sustainable business model.
Similarly, when pharm companies use massive R and D costs as an excuse to charge usurious rates for the length of the patent and then pay generic companies not to make their drugs generically, then the business model is wrong, and maybe it needs to move to a country which can do it cheaper.
When hospital executives argue that the industry is one of the country's largest employers (due to its own inefficiency) and therefore cutting it will cost jobs, then the business model is wrong. All of these arguments are particularly unpalatable when people see them putting their own health and lives as risk - a situation peculiar to this industry.
Don't get me wrong - I am not for a government takeover of health care. But business is all about adapt or die. Find a way to provide the product efficiently, cost effectively, and with value, and you have a viable business model. Currently that is not the case. Someone must find that way. Christensen, Porter and others, although I do not agree with all their solutions, are trying to point out this critically important point.

nonlocal MD

Anonymous said...

Paul,
Perhaps we need to rephrase the issue. If employers and employees did not have to worry about obtaining and retaining their health insurance "benefits" (i.e. their health insurance) would that have a beneficial effect on the outcomes of capitalism that are deemed worthwhile - entrepreneurship, willingness to take risk, investment in new employees, etc.? In other words, if all age cohorts were on Medicare, would we see more fluidity (and growth) in the economic system as a whole? I don't know the answer to this obviously broad question, but it appears that given the projected growth of total health care spending, we at least need to ask whether the administration of the system of payment for health care curtails basic economic growth in other areas.

Thanks for a great blog.
Andrew

Engineer on Medicare said...

The model being proposed for the private/government insurance industry with all of the constraints on the insurance industry and the government as the insurer-of-last-resort is doomed to fail for the reasons you have stated. If public policy is going to be that everyone must have access to a certain level of health care, then it appears that the only economical, fair, workable solution is a single-payer system. It is too bad that the health insurers as we now know them would disappear, but there are few producers of buggy whips and cathode ray tubes. Maybe they have a place in management of the single-payer system.

Then, let the providers provide health care in some kind of competitive market that will include some degree of consumer choice. There will continue to be some kind of health care rationing but it will be transparent. There should be some kind of strong incentive for users to control costs, such as significant copays that may or may not be insurable. For example, Medicare D has larger copays for certain branded drugs and the user and physician can decide if the added value is worth the cost.

The payer would be authorized to negotiate payment sechedules with providers, and if they couldn't come to agreement with some providers, then those providers could accept the rates negotiated with others or decide to do business completely outside the system.

They should negotiate with the pharma companies so we aren't charged more than other developed countries. We shouldn't be paying 100% of the development costs.

The providers should be providing some input on how they would operate in a single-payer system. I'm sure the business model would change. The rules should be structured so that when the providers are acting in their own interests, the result will also be in the interests of the public.

jessica lipnack said...

How does Medicare manage risk?

Paul Levy said...

For the most part, it doesn't. You, as a taxpayer, cover the bill.

Anonymous said...

Well, Medicare manages risk in a fashion by deciding upon and limiting what it will pay for. Rather than eliminating patients, it eliminates treatments - or the $$ for them. ( Google MEDPAC panel for more info). These decicisions, however, are mandated to be made WITHOUT consideration of cost - just effectiveness.
However, everyone agrees that Medicare's setting a price which it will pay, which all the private companies also use as a setpoint (most pay more than that price) has the unintended effect of eliminating competition by providers based on price. This is why prices for such things as defibrillators never go down, as they normally would with consumer electronics, for instance.
This is part of my contention that the entire system is set up wrong (see above).

nonlocal

Anonymous said...

My comment and point earlier this month has been much better articulated in David Leonhardt's column in today's NYT, which addresses the macro economic issues as a result of the current health insurance system. I can't paste it into this blog but I highly recommend it.

Andrew