Health Care Reform: What, Me Worry?

Megan McArdle opposes health care reform, with many concerns that I share:

[I]n the absence of a robust private US market, my assumption is that the government will focus on the apparent at the expense of the hard-to-measure. Innovation benefits future constituents who aren't voting now. Producing it is very expensive. On the other hand, cutting costs pleases voters this instant. This is, fundamentally, what cries to "use the government's negotiating power" with drug companies is about. Advocates of such a policy spend a lot of time arguing about whether pharmaceutical companies do, or do not, spend too much on marketing. This is besides the point. The government is not going to price to some unknowable socially optimal amount of pharma market power. It is going to price to what the voters want, which is to spend as little as possible right now.

I won't summarize it. It's a long post and it speaks for itself. I'm not as sanguine about reform, generally. I think that the 1/6 of Americans that are uninsured are a really big deal (and I'm sure Megan thinks so to). But I happen to think that the right answer is the one that insures that 1/6 as directly and inexpensively as possible, avoids moral hazard as much as possible, and doesn't create massive market distortions for the percentage of Americans that can actuall afford their own coverage. But that's probably not what we're going to get.

Why Can't the Market Control Health Care Costs?

The terrifying answer to this question is "maybe it does!"

Proponents of a public option for health care argue that the private sector has proven itself unable to control the rising costs of health care, and that government is uniquely able to strong-arm better prices. There's something to be said here (that I'm not exactly qualified to comment on) about private, employer-provided and tax-free health insurance creating distortions in how much people have to pay for what they get, and this generally driving up the cost of care. But this doesn't explain why private health insurers (and they are enormous, with enormous amounts of baraining power) wouldn't have incentives to keep costs down, even if YOU don't.

This morning on Morning Joe, Howard Dean tried to explain it:

His answer: CEO salaries!

Does this make any sense? Why should CEO salaries have any relation to health insurance companies' incentives to keep costs down? Your typical greedy corporation should want to do both, after all. Keeping down costs has the effect of drawing more business, increasing equity and leaving more cash on the table for big, fat CEO salaries.

Proponents also argue that creating a public option is the way to deal with this problem. But Medicare is already an enormous program with huge amounts of bargaining clout. What cost-control power will a new public option have that Medicare (or for that matter, equally enormous private insurers) doesn't?

The most dramatic change would likely come from changing medical malpractice liability so that doctors will have less incentive to throw every expensive test at a problem. Right now the cost of avoiding malpractice suits is being passed along to insurance companies which are, in turn, passing it along to the employers which are providing insurance to their employees. A public option only stands a chance of lowering costs if those doctors are less vulnerable to medical malpractice claims. But then ask yourself "Do I want to see a doctor that is really difficult to sue?"

Can Congress Price Risk Effectively?

There's an interesting parallel between the recent debate about the F-22 and the current debate over health care. Health insurance (all insurance) is a hedge against risk. An individual looks at the potential that they may become sick in the next ten years. Say the risk of catastrophic injury is 10% over 10 years, with a cost in the event of injury of $100,000, so total "cost of injury" once the risk is factored in is $10,000. In hedge against this risk, the individual should be willing to pay $1,000 a year for 10 years. In order for the insurer to make any money (or pay overhead, processing, etc.) and individuals are willing to pay this because the marginal utility of safety against catastrophic illness is slightly higher then $1,000. Say, $1,010 a year and everyone is happy.

What does any of this have to do with the F-22? The F-22 is a dogfighter. It's probably the best dogfighter every built. But there is currently no other airforce in the world that can effectively contest our current dogfighters, let alone a super-advanced, super-expensive next-gen dogfighter. The F-22 is essentially a hedge against a peer-competitor that might arise in the future, likely China. The problem is that, unlike catastrophic illness with a risk of 10%, we can see China coming. The price of fighting a war with China and losing is, lets say, 10 trillion dollars in today's money. Enormously catastrophic. But if China wants to build a dogfighter that can challenge the F-22, there are enormous hurdles it has to jump over first, with clear markers that make such a development easy to observe from the outside. So lets say the risk of China developing a sufficiently sophisticated dogfighter without YEARS of advance warning is 1%, and a hedge of $100 billion would be appropriate.

But that's not the end. Let's set the likelihood of war with China fairly high at about 10% (no two nuclear powers have ever been to war.). Now, combined with the 1% likelihood of China developing an F-22 rival without us noticing, despite years of leadtime, the total likelihood of "being caught with our pants down" in a war with a China armed with a dogfighter capable of challenging the F-22 is now 0.1%. With the total cost of the war at $10 trillion, the appropriate hedge would be $10 billion. The total cost of the F-22, prior to current cuts, was $62 billion. And even that assumes that the F-22 is the effective hedge, and without it we would be facing certain Chinese victory (even generously setting the odds of that at 50%, we're down to a $5 billion hedge).

The problem is that Congress is insensitive to price. If "the USA" was a single, rational actor consuming insurance (and that's all a fighter program really is) it would have cancelled the F-22 in 1991 when the USSR collapsed. But Congress isn't a cost-sensitve actor. Rather than hedge effectively against national risk, Congress hedges against "risk of failure in re-election campaign" where showering F-22 related jobs on their districts is more important than safeguarding the nation's coffers.

None of this is to say that Congress can't effectively create a national program for health insurance. But when "keeping costs down" is asserted as a rationale for national health insurance, we should be more than a little skeptical.

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XBLA Is Not Getting More Expensive

There's a bit of a dustup online over the price of XBLA games. Kotaku, among others, is claiming that XBLA is becoming more expensive. The Consumerist chalks this up to increased damand for games, even while admitting that digital distribution elimits the supply side of supply/demand.

Needless to say, it's more likely that neither are true. While "games" as finished units have increased in price over the last year, it's unlikely that the increase is due to an increase in "demand" as such, but rather that XBLA has proven itself able to effectively sell more expensive games, and so developers are less hesitant to investing more resources to create a stand-out product. Of course, maybe developers are more experienced, and it takes the same amount of "time and effort" to create a $15 game that it used to take to create a $10 game. Why should that matter? After all, experience and efficiency is a resource in and of itself, and has its own associated expenses. An hour by an experienced developer could easily be worth 1.5x the time of a novice.

You can imagine a model where prices are invariate to the expense of the project, like movie tickets, where you'd pay $10 for every game, no matter how expensive to produce, and games targeting different units would simply make widely different profits. Like a movie ticket, in a sense you're getting a "deal" on a blockbuster which cost some 200 million to produce, while an arthouse flick is a premium good. But I can't think of very many pricing schemes that work this way. Usually, the more work that goes into something, the more it costs.

In fact, if anything, it's likely that these games are getting cheaper. Developers are getting more experienced, there's more competition, more risk-taking. And if it costs me $15 instead of $10? I won't care, so long as the game appears to have an increase in quality of about 1.5x.

Testing

I'm using the Zoundry Raven blogging software. Does it work?

Here's an update. Does that work?

Very cool. Raise your glass to free software.