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The Dangers of Fannie Mae Health Care
A public plan would have certain advantages. That's precisely the problem.
JOHN E. CALFEE
President Obama and most congressional Democrats say they want to preserve private health insurance. They also want to add a "public plan" to compete with private insurance plans. Their basic argument is that a public plan would offer needed competition, save money through low administrative costs and zero profits, realize greater economies of scale, and be a superior negotiator of the prices of medical services and technology.
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David Klein The first three arguments are bogus. The fourth argument is only half-bogus -- but the half that isn't reveals a great danger: If a public plan is inserted into private insurance markets, the American health-care system could rapidly evolve into a single-payer system, which would have devastating effects on R&D for new medical technology.
The first argument, that we need a public plan to spur competition, just isn't plausible. Hundreds of health insurance plans already exist, and employer benefit managers can choose among numerous alternatives. There is no lack of firms willing to compete to provide health insurance.
As to the second argument, what is to be saved by avoiding profits? Nonprofit health insurance firms are common, including many of the Blue Cross-Blue Shield plans. Nonprofit status has not proved to be a reliable source of efficiency and cost-saving. The addition of new nonprofit cooperatives and the like -- as a bipartisan group of senators has proposed -- would make little difference, unless the new plans are given the power to set prices and take on extra risk supported by government subsidies.
Would a public plan have lower administrative costs? Well, how often are public enterprises run more efficiently than private ones? Why did practically all economically advanced nations dismantle their public airlines, phone companies, and so on, invariably obtaining lower administrative costs and consumer prices?
As Stanford University health economist Victor Fuchs has pointed out, what "insurance" firms actually sell to large employers -- which account for the single largest segment of the entire health-care market -- is usually administrative services, not actual insurance. (Large companies are not insured; they pay benefits directly.) There is no reason to expect a Medicare-like public plan to match the administrative efficiency of Aetna, Blue Cross-Blue Shield, Cigna, UnitedHealth Group, and WellPoint. Medicare doesn't even try. It outsources most administrative services to the private sector.
Turning to public plans like Medicare and Medicaid for more efficient administration is a fool's errand.
What about economies of scale? Aetna currently serves about 18 million subscribers, UnitedHealth Care serves between 25 million and 30 million, and WellPoint more than 35 million. That is more than is served by the health-care monopoly of Canada (population 33.6 million), and more than the entire health-care systems of most European nations. Once a plan reaches a few million subscribers, there may not be a lot of economies of scale left that can enable public plans to provide lower prices.
Finally, there is the crucial task of negotiating prices for doctors, hospitals, clinics, drugs, devices and thousands of other items essential to modern health care. Here, there are really two arguments for a public plan. The first is about bargaining skill and the firm size, basic ingredients in any negotiating environment.
There is no reason to think the administrators of a public plan will possess skills superior to those honed by private plan personnel during years of negotiations under the pressure of competition. Nor is there any reason to think that mere size would help.
True enough, relatively small European nations routinely obtain better drug prices than are achieved by mammoth American pharmacy benefit managers such as Express Scripts (50 million patients) and Medco (60 million patients), each of whose numbers exceed the entire citizenry of all but the largest European nations. Even sparsely populated New Zealand (population four million) gets better prices than the giant drug-price negotiators in the American private market.
Their success is due to what economists call "monopsony power." Monopsony occurs when a single buyer negotiates prices with several competing sellers (as opposed to monopoly, where there are many buyers but one seller).
Thus, if you want to sell your branded drug in New Zealand, your prices are negotiated with PharMac, a branch of the government. Much the same is true when selling to Canada, Germany, the Netherlands, and essentially the entire developed world save the United States. The negotiating power of these government entities results from monopsony, not superior skill.
For example, the various sellers of cholesterol drugs (Lipitor, Crestor, and so on) have to compete with one another while they all face a single government negotiator. If one seller balks at government prices, it leaves competitors to pick up more sales. The same is true for most other drug classes and most medical devices. This uneven battle ensures that negotiated prices will be well below those in a competitive market.
But here is where the huge risks of creating a "public plan" to compete with private insurance firms come into focus. Foremost among these risks are the effects of monopsony power in the purchase of medical technology.
The U.S. is unique because it alone is the source of half of world-wide profits that provide the payoff for the complex, lengthy, and expensive process of developing new treatments. When other nations construct their health-care systems, they ignore the impact of their pricing policies on R&D incentives. As the dominant R&D funding wellhead, we do not have that option.
Competitive markets have generated the prices and the profits necessary to induce a steady flow of medical innovation in this country. A public plan option would tend to dismantle that system. The people in charge will not know how to set reimbursement levels to motivate reasonable R&D efforts, and there is no reason to expect them to try. In public plans, the tried-and-true method is to push the prices of suppliers down until something gives -- too few doctors willing to take on Medicare patients, for example -- and then to ease up. That is a destructive approach to medical technology R&D.
Who knows what drugs will not be developed if reimbursement levels for a new multiple-sclerosis treatment are too measly? In virtually every advanced economy but our own, pricing authorities simply make sure prices are high enough so that existing drugs continue to be made available. We can expect a public plan here to do the same. The inevitable result is to drastically under-incentivize R&D.
This problem would not matter if a public plan remained small -- but it would likely grow into a monster. Monopsony negotiating power will generate lower prices, so many consumers will switch to a public plan. Employers eager to offload health-care costs will also dump unwilling employees into the public plan. That is the basis for the Lewin Group's much-cited prediction that a public plan would come to dominate any market in which it is allowed to compete.
Bargaining power, however, is far from the only potential source of below-market prices for public plans. In the home mortgage market, the public plans -- known as Fannie Mae and Freddie Mac -- were for years viewed by investors as less risky because they would be bailed out by the federal government if they took on too much risk. That translated into lower prices (the interest rates paid by borrowers), which eventually translated into extraordinary and unseemly growth, culminating in bankruptcy and a federal bailout.
The lesson for health insurance is clear. All insurance plans -- especially in health-care markets -- have to take on risk. Prudent planning, including the maintenance of reasonable financial reserves, is necessary. That increases costs. It would be all too easy for a public plan to gain a competitive advantage by taking on extra risk while keeping prices low because everyone would expect the federal government to take care of financial surprises down the road.
In sum, a public plan would possess formidable and perhaps overwhelming competitive advantages -- generated not by efficiency but by the artificial advantages of "public" status. This would have two disastrous consequences. The first will be to cause most Americans now covered by private insurance to move to public insurance -- one step away from single-payer health care. The second will be to undermine incentives to develop more of the immensely valuable medical technology that is central to all of health care.
Mr. Calfee is a resident scholar at the American Enterprise Institute.
Health-care reform in America
This is going to hurt
Barack Obama was elected in part to fix America’s health-care system. Now is the time for him to keep his word
DIAGNOSING what is wrong with America’s health-care system is the easy part. Even though one dollar in every six generated by the world’s richest economy is spent on health—almost twice the average for rich countries—infant mortality, life expectancy and survival-rates for heart attacks are all worse than the OECD average. Meanwhile, because health insurance is so expensive, nearly 50m Americans, an obscene number in such a rich place, have none; those that are insured pay through the nose for their cover, and often find it bankruptingly inadequate if they get seriously ill or injured.
The costs of health care hurt America in three other ways. First, since half the population (most children, the very poor, the old, public-sector workers) get their health care via the government, the burden on the taxpayer is heavier than it needs to be, and is slowly but surely eating up federal and state budgets. Second, private insurance schemes are a huge problem for employers: the cost of health insurance helped bring down GM, and many smaller firms are giving up covering employees. Third, expensive premiums depress workers’ wages.
Every rich country faces some of these problems (see article), but nobody suffers worse from them than America. This summer’s debate about health care may determine the success of Barack Obama’s presidency. What should he do?
Uncomfortably numb
If he were starting from scratch, there would be a strong case (even to a newspaper as economically liberal as this one) for a system based mostly around publicly funded health care. But America is not starting from scratch, and none of the plans in Congress shows an appetite for such a European solution. America wants to keep a mostly private system—but one that brings in the uninsured and cuts costs. That will be painful, and require more audacity than Mr Obama has shown so far.
The uninsured are the relatively straightforward bit. All you need do is “mandate” everyone to take out health insurance, much as drivers are legally required to have car insurance. Poorer Americans would get subsidies, and (as with car insurance) insurance-providers would be forced to offer affordable plans and not exclude the sick or the old. This has already happened in Massachusetts as well as in a raft of countries, including the Netherlands, Israel and Singapore. All the main proposals now working their way through Congress include some version of a mandate. Mr Obama opposed a mandate on the campaign trail, but since he has not come up with any plausible alternative, he should quietly swallow one.
The snag is that all these subsidies are expensive. Those congressional plans might cost $1.2 trillion to $1.6 trillion over ten years: the White House is feverishly trying to massage the estimates downward, as well as working out how to plug the hole through various savings and tax increases. But the sticker-shock for the mandate is really just a reflection of the second big problem: the overall cost structure of American health care. Indeed, one of the worst things about Mr Obama’s oddly hands-off approach to health reform (see article) is that he is concentrating on a symptom, not the underlying disease.
A bolder president would start by attacking two huge distortions that make American health care more expensive than it needs to be. The first is that employer-provided health-care packages are tax-deductible. This is unfair to those without such insurance, who still have to subsidise it via their taxes. It also encourages gold-plated insurance schemes, since their full cost is not transparent. This tax break costs the government at least $250 billion a year. Mr Obama still shies away from axing it, as do the main congressional plans on offer; but it ought to go (albeit perhaps in stages).
Perversity on stilts, or crutches
The second big distortion is that most doctors in America work on a fee-for-service basis; the more pills they prescribe, or tests they order, or procedures they perform, the more money they get—even though there is abundant clinical evidence that more spending does not reliably lead to better outcomes. Private providers everywhere are vulnerable to this perverse incentive, but in America, where most health care is delivered by the private sector rather than by salaried public-sector staff, the problem is worse than anywhere else.
The trouble is that many Americans are understandably happy with all-you-can-eat health care, which allows them to see any doctor they like and get any test that they are talked into thinking they need. Forcing people into “managed” health schemes, where some species of bureaucrat decides which treatments are cost-effective, is politically toxic; it was the central tenet of Hillary Clinton’s disastrous failed reform in 1994.
But to some extent it will have to be done. There is solid evidence to suggest that by cutting back on unnecessarily expensive procedures and prescriptions, anything from 10% to 30% of health costs could be saved: a gigantic sum. The Mayo Clinic in Minnesota and the California-based Kaiser Permanente system have shown that it is possible to save money and produce better outcomes at the same time. So reform must aim to encourage more use of managed health care, provided by doctors who are salaried, or paid by results rather than for every catheter they insert. Medicare, the government-run insurance scheme for those over 65, could show the way, by making much more use of results-based schemes and encouraging more competition among its various providers and insurers.
But in the end it will be up to the private health-care system. One thing that should be unleashed immediately is antitrust: on a local level many hospitals and doctors work as price-fixing cabals. Another option, favoured by many Democrats and the president, is for the government to step in with a results-based plan of its own, to compete against the private industry. That could harm innovation and distort the market further. Mr Obama should use it as a threat, rather than implement it now. If the private sector does not meet certain cost-cutting targets in, say, five years, a public-sector plan should automatically kick in. Such a prospect would encourage hospitals and doctors to accept a painful but necessary reform now.
by James Bovard
James Bovard is the author of Attention Deficit Democracy [2006] as well as The Bush Betrayal [2004], Lost Rights [1994] and Terrorism and Tyranny: Trampling Freedom, Justice and Peace to Rid the World of Evil (Palgrave-Macmillan, September 2003) and serves as a policy advisor for The Future of Freedom Foundation. Send him email.
by Sheldon Richman
Contrary to the U.S. government’s position, acts of terrorism are crimes that have little in common with acts of war. The terrorists whom Americans worry about are not trying to overthrow the U.S. government or conquer and occupy the United States. Instead, they are trying to obtain vengeance for U.S. government intervention in the Middle East. Historically, terrorism has been the tactic of the weak against the strong.
A military response is both disproportionate and unnecessary — and it inflicts suffering on innocents. Occupying and bombing a country because a group of terrorists might have plotted there is itself terrorism. Moreover, when the government assumes a war footing, it flings the doors open to violations of domestic liberty. “No nation can preserve its freedom in the midst of continual warfare,” James Madison said.
The Obama administration’s early signals on these matters have not been encouraging. The president is escalating in Afghanistan and Pakistan, and his intention to close Guantanamo is undercut by his plans to continue military commissions for terrorist suspects in lieu of real criminal trials and to seek authority for indefinite preventive detention of suspects whom the government fears could not be convicted.
However, the administration has now indicated that the normal criminal justice system may play more of a role in investigations of terrorism. A report in the Los Angeles Times states, “The FBI and Justice Department plan to significantly expand their role in global counter-terrorism operations, part of a U.S. policy shift that will replace a CIA-dominated system of clandestine detentions and interrogations with one built around transparent investigations and prosecutions.
“Under the ‘global justice’ initiative, ... FBI agents will ... expand their questioning of suspects and evidence-gathering to try to ensure that criminal prosecutions are an option, officials familiar with the effort said.”
It’s too soon to know how much of an improvement this policy will be over the Bush administration’s war policy, but if the government is thinking more in terms of traditional criminal trials, with the presumption of innocence and the burden of proving guilt beyond a reasonable doubt, that is indeed an improvement.
Of course former Vice President Dick Cheney wouldn’t approve. He recently said the Clinton administration wrongly treated the 1993 World Trade Center bombing as a crime. The government tried some of the suspected bombers, won convictions, and imprisoned the offenders for life. Cheney pointed out, however, that since the Twin Towers were brought down some eight years later, the criminal-justice approach to terrorism was an obvious failure. As he put it in a recent speech,
“The first attack on the World Trade Center was treated as a law enforcement problem, with everything handled after the fact — crime scene, arrests, indictments, convictions, prison sentences, case closed.
“That’s how it seemed from a law enforcement perspective, at least — but for the terrorists the case was not closed. For them, it was another offensive strike in their ongoing war against the United States.”
But Cheney left out an important part of the story. One of the planners of the 1993 bombing, Ramzi Yousef, explained that the 1993 bombing was a response to the decades-long U.S. interventionist foreign policy in the Middle East. While that policy cannot justify attacks on innocents, Yousef was right to object to the intervention. For decades the U.S. government has supported Middle East despotisms (sometimes instigating coups) and unconditionally supported Israel against legitimate Palestinian grievances. In the 1990s the U.S. embargo on Iraq took the lives of hundreds of thousands of children, while American bombings terrorized the Iraqis. And the U.S. military kept troops near holy Islamic sites in Saudi Arabia.
The U.S. government acknowledges that such conduct created Muslim resentment. Yet that aggressive policy did not change after the 1993 bombing — quite the contrary. So Cheney cannot reasonably conclude that it was the criminal-justice approach to terrorism that failed. Rather, continued intervention produced “blowback” on 9/11.
Sooner or later, all empires are targets of terrorism. If Americans are really serious about keeping safe, the first step must be to renounce interventionism and adopt a foreign policy of peace and free trade. Treating terrorism as a crime is consistent with that policy.
Sheldon Richman is senior fellow at The Future of Freedom Foundation, author of Tethered Citizens: Time to Repeal the Welfare State, and editor of The Freeman magazine. Visit his blog “Free Association” at www.sheldonrichman.com. Send him email.
Thursday, June 25, 2009
Suppressing Free Speech Here at Home
by Jacob G. Hornberger
While the Ayattolahs in Iran are intimidating people into ceasing their criticism of the government, U.S. Justice Department prosecutors are doing the same here in the United States, specifically in the trial of U.S. vs. Robert Kahre, which is currently taking place in Las Vegas. Upset with critical comments posted by American citizens regarding the prosecution of a man who used gold and silver coins issued by the U.S. mint as legal tender, the prosecutors have been abusing their power to issue grand-jury subpoenas.
This prosecutorial-abuse saga, which I blogged about here, began with an ordinary news article in which the Las Vegas Review Journal explained what the Kahre prosecution was all about. Dozens of people posted comments under the article, most of which were critical of the government and the prosecution.
Obviously stung by the criticisms, the prosecutors responded by serving a grand-jury subpoena on the paper demanding that it produce all identifying information on all of the people who had posted the comments.
After the paper resisted the subpoena, the prosecutors issued a new subpoena that limited their request for identifying information to only two commentators. One commentator wrote: “The sad thing is there are 12 dummies on the jury who will convict him. They should be hung along with the feds.” Apparently the other commentator bid 12 Quatloos (Star Trek money) that one of the prosecutors would not celebrate his next birthday.
It would seem rather obvious that the issuance of the narrower subpoena is prima facie proof that the primary aim of the prosecutors was intimidation when they issued their original subpoena. After all, if they really were concerned about only two comments, why subpoena identifying information about all the other commentators?
Moreover, in my opinion the aim of the narrower subpoena is about intimidation as well. Here’s why:
The central issue is: Is there any reasonable possibility that the Justice Department is going to prosecute the commentators for the precise words they used in their comments?
The answer to that question has to be “No.” After all, this is not Iran but rather the United States, a country in which people are still free to express critical opinions about what their government is doing, no matter how repugnant.
Consider the first comment — that the jury “should be hung along with the feds.” The word “should” is a subjunctive and, as such, does not connote anything but an opinion. It is, in fact, a common figure of speech that has long been used in this country. If it were a criminal offense to use it, the penitentiaries would be even more filled than they already are.
Consider the second comment, where the commentator bids Quatloos that the prosecutor does not celebrate his next birthday. Is there any reasonable possibility that a jury would convict a person of a crime or that a federal court would uphold a criminal conviction based solely on the utterance of that precise phraseology?
Again, the answer is “No.” After all, it is impossible to determine any objective meaning to the phrase. Is the commentator suggesting that the prosecutor might not reach his next birthday because of a heart attack brought on by the stress of the Kahre trial? Or is he implying that someone might do harm to the prosecutor? We don’t know. Far more information would be needed to sustain a criminal conviction on the mere utterance of those precise words.
So, what’s the point of subpoenaing the newspapers records in an attempt to secure the identity of the commentators, if it’s not to intimidate and scare the commentators and everyone else? After all, everyone knows that the commentators can refuse to answer any questions before the grand jury based on the Fifth Amendment, something they would almost certainly do. In that case, the prosecutors would be left with nothing more than the phrases posted on the newspaper’s website.
But in the process, the prosecutors will have forced the newspaper to identify commentators on its website and forced the commentators to appear before a federal grand jury. They will also have threatened the commentators with the prospect of a federal criminal prosecution for what they wrote.
In other words, the prosecutors will have sent a powerful message to the American people, the same message those Ayatollahs are sending to the Iranian people: “If you know what’s good for you, shut up and stop criticizing what we’re doing.”
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