Flashback – Robbing Peter to Pay Paul

[Here, from over seven years ago, are some examples of government actions showing how failures in economic understanding lead to bad outcomes. Politicians will never change their tactics and sales pitch until voters wise up. In many cases we have to lead the people we elected  away from senseless legislation with hidden, but predictable, consequences.]

When I call for economic understanding by saying that there is no magic money tree, here is what I mean. When corporations incur added costs, whether it be shoplifting, a utility rate increase, wage increases or higher taxes, they find a way to pass the cost along to their customers, usually as higher prices. When governments decide to spend more money, they either raise taxes or borrow, leaving the taxpayers to absorb the cost directly or pay the interest now and leave the principle repayment to future generations.  No magic money tree means that the funds must come from somewhere, not out of thin air, and that somewhere is usually from our wallets, directly or indirectly.  The consumer/taxpayer is the bottom of the economic food chain.

As 2013 begins, the Affordable Care Act (ObamaCare) requires manufacturers of medical devices to pay an excise tax, 2.3% of sales. Besides the possibility of reducing costs by outsourcing to other countries and reducing development budgets, the industry also hints that the added costs will result in a price increase. As this article points out:  “Recent surveys show that medical technology executives are examining a host of other options that will have negative consequences, including passing along the added costs through price increases.” (Emphasis added) Those of us who don’t believe in a magic money tree are not at all surprised.

But look at how circular this situation becomes. The government adds a tax to help offset the cost of healthcare. The companies pay the tax by raising prices. Healthcare providers, doctors and hospitals, raise their prices to account for their now higher costs. Insurance companies raise their premiums or co-pays to account for their now higher costs. The government uses the tax money to subsidize health insurance that is now more expensive due to the tax itself! If anything, the cost of the whole system increases due to the added administration associated with paying and collecting a new tax.

In an economy such as ours, this concept of punishing greedy companies with taxes or penalties doesn’t seem to work very well, and why would we even want to punish someone who provides us with a product or service that we want or need? In general, magic-money-tree thinking leads to a host of unintended consequences.  

As citizens and voters we can solve this, but not until we stop thinking this way ourselves. This type of logic drives decisions by both parties at all levels. They tell us that most of a project will be paid for by a federal government grant, as if that's not our money too.  They try to make us believe that corporations pay taxes by just reducing their profits or paying their CEO less. They spend as if the bills will never have to be paid, as if there is some magic money tree or secret treasury to make it all right.  

Your Health and Mine

These thoughts are inspired by a couple of letters to the editor in my local newspaper.  I always try to provide a link to my sources to allow readers to verify the information.  Unfortunately, that newspaper has chosen not to share articles with non-subscribers, so I will summarize the content without a direct link to the original.

The first letter appeared on May 2 and complained about what seemed to the writer to be a proliferation of fat people in the community.  After describing herself and her husband as being “very careful about our diets,” working out regularly and dining out rarely, the writer complained about people she observed during one of their rare dining-out experiences.  She noticed, “with the exception of about six people, everyone who came and went was obese” and “literally waddled when walking.”  The rest of the comments were rather insulting, accusing “many of these waddlers” of being “self-centered gluttons,” raising obese kids and “making the rest of us pay for your medical bills.”

As expected, four days later came the response from a self-proclaimed proud “waddler” lashing out at the first writer’s narrow-minded and judgmental view of the obese.  “We are one of the last groups that you can still deride, criticize and pass judgment on, yet not cross the line of being politically incorrect.” This was followed by the expected angry and sarcastic remarks and concluding, “ thinness be damned.”  I guess he told her!

From a behavioral standpoint both these parties are out of line.  Name-calling does not solve anything.  However, the first person did make one good point at the end of her rant.  Your personal health and mine are no longer private matters.

As the Affordable Care Act was being implemented and the sign-up period was drawing to a close, there was some concern about the number of young people signing up.  No one made a secret of the fact that the young (and presumably healthier) were expected to subsidize the old and the sick.  This was crucial to assure low rates for everyone.  (It’s comparable to safe drivers being charged more so that reckless drivers have lower insurance premiums.)  That’s the way the system is set up.  People who lead healthy lifestyles and remain healthy subsidize those who make other choices or are genetically predisposed to illness.  (People who lead unhealthy lifestyles and luckily remain healthy do the same, but the likelihood of this is far less.)  So it is in the interest of everyone that they themselves and everyone else make good choices and make every effort to remain healthy from a financial point of view as well as a quality of life point of view.  The more who do so, the better off we all are.  This applies not only to obesity, but to smoking, seatbelt use, alcohol and drug abuse, and other risky behaviors.

Despite what “fat pride" or “fat acceptance” groups claim, these choices are not made in isolation and in a sense are not our own business.  The choices of individuals contribute to the overall healthcare bill, and we all share in that cost.

Economic Understanding

Economic Understanding is one of the key dimensions, but what is so important about it?  I have given several examples over the years showing how people make poor decisions when they fail to connect outside spending with their own financial welfare:  insurance claims raising the cost of insurance for everyone, legal settlements driving up the prices we pay, shoplifting affecting honest shoppers, businesses passing along the cost of government regulations, etc.

Another side of economic understanding is being able to predict unintended consequences of artificial interference in the normal course of business.  I have written several times about more insurance not being the answer to high medical costs, whether it be the current plan or some alternative.  (See April 16, 2012, September 10, 2012, February 22, 2013, October 28, 2013)  This prediction continues to come true.

A recent Huffington Post article tells of the impending doctor shortage.  How do you add millions of people to patient roles (by providing them with subsidized insurance) without adding more primary care physicians?  Doctors’ time doesn’t magically expand; new doctors don’t magically appear.  They must be trained and hired.  “According to the Association of American Medical Colleges (AAMC), unless something changes rapidly, there will be a shortage of 45,000 primary care doctors in the United States (as well as a shortfall of 46,000 specialists) by 2020.”

Using our economic understanding we can predict that hospitals will be bidding for those few doctors which will drive their costs up.  Patients will be forced to “pay” through extended waiting times or searching among the dwindling number of doctors who are accepting new patients.  “Many primary care doctors and dentists do not accept Medicaid patients because of low reimbursement rates, and many of the newly insured will be covered through Medicaid. Many psychiatrists refuse to accept insurance at all.”

On the surface the proposals look so enticing:  Insurance for everyone must be a good thing, caring and compassionate.  In the richest country in the world, why doesn’t everyone have access to quality health care?  The argument is compelling, but economic reality provides a brutal wake-up call.  Notice what happened about ten years after the government decided to make home ownership, “the American Dream,” available to more families.  Notice that college prices continued to climb even after the introduction of grants and “subsidized” loans – leaving graduates today with $29,000 debts.  It was not until colleges saw a reduction of state support and viable competition from tech schools and especially on-line courses, in other words real economic pressures, that they felt a need to drive down tuition costs.  The well-meaning proposals and programs often have the opposite effect.

If politicians and the voters they appeal to had a better economic understanding, some of these decisions, innocent and caring as they may appear, might have been questioned based on predictable negative consequences.

Health Insurance vs. Auto Insurance

Experts keep discovering problems I pointed out months ago.  It shows the need for more critical thinking.

In February I wrote about the disparity in procedure costs by location.  In April and October of last year  I cited the need for a menu of sorts to display medical costs to promote competition by not keeping patients in the dark.  On May 8 the federal Centers for Medicare and Medicaid Services released a report highlighting the same issues.  “The report shows a joint replacement in Ada, Okla., could cost $5,300 compared with $223,000 in Monterey Park, Calif., a suburb of Los Angeles.”  Calls are coming for those very menus.  The report also pointed out, that uninsured people are the ones who usually pay the highest prices due to their lack of negotiating power.  The system is flawed.

The major problem, the design of the system, has not yet been addressed.  It arises from patient isolation.  Insurance companies deal with employers and providers.  We are left out of those discussions and become involved only when told how much we owe.  Discrepancies at that point become your headache, not that of your employer, the government or your doctor.  No one can make this ill-designed system fair and affordable, because affordability depends on cost control, and fairness doesn’t ask us to subsidize irresponsible behavior.  The current system misses on both points.  

As it is today, the payer is looking to reduce costs by simply paying less.  One example is the Medicare reductions in payments to providers.  Another is that as states develop their Affordable Care Act plans, some are allowing insurers to charge patients “a hefty share of the cost for expensive medications used to treat cancer, multiple sclerosis, rheumatoid arthritis and other life-altering chronic diseases.”  An example many are familiar with is the transfer of costs from employer to employee.  Cost are shifted rather than controlled and no one is held accountable for abuses within the system due to poor management or poor consumer choices.

One suggestion for an alternative design looks to auto insurance for some answers.  You purchase and hold the insurance.  Although a repair facility might bill the insurance company directly, you deal them on all claims.  Drivers have the opportunity to change insurance companies at any time, which keeps them more competitive, forcing them to work to keep overall costs down.  You can also make better choices because people who work on your car are required by law to give an estimate and get your permission before doing initial work or any extra work that comes up.

Second, auto insurance is behavior-driven.  Although the safest drivers do, to some extent, subsidize the rest; bad drivers generally pay more.  At least one company has a program offering special rates to drivers who are willing to have their driving monitored by a computer plugged into the car.  Another offers rebates for accident-free driving.  Likewise, to make health insurance affordable to all, healthy people must subsidize the seriously ill, but there is little recognition (other than a penalty applied to smokers) of behavioral contributions.  Is it fair to be forced to contribute to the recovery of the guy who got drunk and drove his ATV into a tree, the cost of a high-blood-pressure patient who refused to change his diet or the bills of the elderly widow who sees the doctor weekly primarily as a social outlet?  Many health issues are unavoidable, but some others are long-term consequences of faulty behavior.  What if some portion of health insurance premium reflected diet, lifestyle, bad choices and risky habits or hobbies?

If an outside entity – employer or government – wanted to assist with such insurance, they could provide a set subsidy, same for everyone.  Cost above that would fall on the insured and would be dependent on habits and behavior.  How that is measured and how intrusive it would be are open questions, but I suggest that such a system would be superior to the one we have now.

Fat Tax Warning

Two related articles appeared in the news last week.  One advised that the Affordable Care Act contained high penalties for smokers.  The second told of a proposal to fight obesity by shaming overweight people.  (That outrageous suggestion demonstrates some people's level of frustration and desperation to solve the problem.)  The relationship between smoking and obesity is hard to ignore.  Both behaviors cause personal health problems and lead to increased healthcare costs.  It seems reasonable to use the history of dealing with smoking to predict future possibilities regarding obesity.

Of course smoking was easier to attack because smokers were a minority and smoking can be irritating to others.  The issue of secondhand smoke affecting the health of children also made it an easy target.  The campaign began with increased cigarette taxes, restrictions on advertising and printed warning labels.  It then moved to legislated bans on smoking in most public places and to policies restricting smoking at work.  States won large legal settlements from tobacco companies, intended to be used for education.  Employers began charging smokers a higher health insurance premium.  It is not uncommon for others to look down on smokers, nagging or trying to shame them into quitting (usually unsuccessfully).  Shaming of smokers is not considered outrageous or objectionable, since we're only trying to help.

In light of that, consider the so-called obesity epidemic.  So far the approach has been comparatively mild.  Sports organizations and doctors encourage kids to get outside and play.  There are health warnings and education about the dangers of being overweight.  Food packaging must post nutritional information, but not yet warnings.  Companies provide opportunities, even facilities, for their employees, and sometimes their families, to work out or be more active.  Since these actions have not made a significant impact, governments stepped in with stricter regulations on school lunches and bans on trans fats.  Last fall New York City passed the controversial ban on large soft drinks.  There has been talk of special taxes on fast food to discourage consumption.  Where may this lead?

Following the smoking model and despite a specific prohibition in the current law, could the next step be health insurance premiums based on body mass index (BMI)?  Could life insurance premiums follow?  Could minors be prohibited from buying certain foods?  Will airlines charge based on the total weight of the luggage and passenger?  These changes may not be out of the question.  I recently read in my local newspaper an expert opinion that it's not fair for healthy people to subsidize the healthcare of those with unhealthy lifestyles.  Further, this CBS News report from two days ago on weight-loss myths concludes with the sentence:  "'The big issues in weight loss are how you change the food environment in order for people to make healthy choices,' such as limiting soda sizes or junk food marketing to children."  Changing the "food environment" sounds eerily similar to steps taken to reduce smoking.

This is a responsibility issue.  We expect to be able to live our lives relatively free of interference, free to make our own choices.  But once we expect the government or our employer to pay our doctor bills, our choices become a "public health issue" and they believe they have the right to tell us how to live.  They become judges of our behavior.  As I have often said, failures in the area of responsibility often lead directly to losses of freedom. A right to free or subsidized healthcare cancels some other rights.  We can’t have it both ways.

Added Note (2/13/2013):  A sugary drinks fee is being considered by the Hawaii Senate as "an important way to fight obesity."