Economic principles and healthcare reform

On Thursday, May 4, 2017, the US House of Representatives passed a bill repealing major aspects of President Obama’s healthcare law (Obamacare), as reported (here) in the Wall Street Journal and other news outlets. The bill goes to the Senate for a vote. The bill ends mandates for people to carry health insurance and for companies to offer specific types of health coverage, among other things. Another Wall Street Journal article (here) states that backers of the bill “are betting that these changes will engender competition, draw healthier people into the insurance pool and cut premium prices overall.” Interesting, this is the same justification that backers of Obamacare gave when it was passed in 2010.

I know a thing or two about economics. There is nothing in economic theory or experience to suggest that anything in the old or new laws will necessarily increase competition or lower costs. Competition exists when there are many buyers and sellers in the market, where it is relatively easy for buyers and sellers to enter or exit the market, and where “all” sellers sell products or services that are similar enough so that it is relatively easy for buyers to comparison-shop for the best product at the best price. In this system, sellers have incentives to lower costs and prices and to increase quality in order to attract customers to their products. Companies that do this well are rewarded with profits; companies that don’t do this well go bankrupt. The incentive to lower costs and prices and to increase quality diminishes when it is difficult for buyers to compare products and services — that is, when it is costly for consumers to shop around, and when companies know it is costly for consumers to shop around — and when it is difficult for potential sellers to enter markets — that is, when there are barriers to market entry. The health care system is rife with problems of comparison shopping and market barriers. That is, the health care system is not a great model of markets and competition, and it won’t be anytime soon.

The root cause of the problem with contemporary health care is the thing Americans like most about it. We pay a monthly fee for health insurance. Then when we get sick or need health care services, we might pay a nominal fee (e.g., $20) in return for health services, while most of the cost of care is paid by insurance companies whose revenue comes from the thousands of patrons paying the monthly fee. Once we have health insurance, we have no incentive to shop for the best healthcare product at the best price, but rather the best healthcare product at any price, because the primary cost of service is paid by the insurance company. The insurance company does not have a strong incentive to induce health care providers to lower costs because the company can pass costs on to patrons.

Even when individuals want to know the cost of a particular medical procedure or service, it is nearly impossible for them to get a straight answer. “How much will the physical therapy cost?” I once asked a clerk at the reception desk? “I don’t know. It depends on the contract your insurance company has with us,” was the reply. “What is your normal rate, and what discount does my insurance company offer on that rate?” I asked. “I don’t know what our main charge is. Your discount will depend on your co-pay and co-insurance.” The conversation never got any better. Only after I got the bill did I learn what the cost of the service was.

Transparency in pricing for medical care will help here. Giving individuals an incentive to price-comparison shop will help, too. Health savings accounts can do this. Recently I have been scrutinizing our health insurance bills because we have a health savings account. It’s time consuming because there are so many individual charges, most of which I do no understand. In one instance we received a bill for a doctor’s visit on a day we could prove no one in our family was at the clinic. If I was not paying out of a health savings account I would not have thought twice about questioning the bill. The insurance company would have paid it. But I did question the charge and was able to get it removed.

I understand the health care system is very complex. But economic principles are not.

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Utilitarian pushers are a miserable lot

Each spring semester I teach an applied ethics class called “Ethical Issues in Agriculture.” Today we discussed one of the most famous thought experiments in applied ethics—the trolley dilemma (a Youtube.com presentation of the issue is here). In this dilemma, a trolley is running out of control on a track where five men are working. In one variation, you are told you can save the five by pulling a lever to divert the trolley onto another track, where one man works, thus killing him. In another variation, you are told that you can push a very fat man off a footbridge onto the track to derail the train, thus saving the five.

Would you pull the lever to save five while causing the death of one in the first case?  Why? Would you push the man off the footbridge to save the five in the second case? Why?

I have used the trolley problem for many years in class. Most students are willing to pull the lever in the first case, but most are not willing to push the man in the second case. According to students, it is better to save five at the expense of one by pulling the lever, since five versus one seems to be the only pertinent factor in the first trolley case. This is classical utiliarian thinking. Utilitarianism is the idea that a decision is right if a greater good is served, such as more people benefiting than being harmed. Inflicting extreme pain on a person for information that could save thousands would be justifiable under utilitarianism. However, non-utilitarian thinking applies in the second trolley case because there are other things to consider. For example, in the first case all workers have preexisting harm since they are on track, whereas in the second case the man on the footbridge is not in harm’s way; our pushing him introduces him to harm. Diverting the trolley is what saves the five in the first case, whereas the death of the man is necessary in the second case. We also need to consider the rights of the man to decide for himself whether to leap or not–that is, we should not use him as a means to an end without his consent.

What is interesting with the trolley problem is people who use utilitarian thinking in the second case, choosing to push the man in order to save the five.

I read a study a few years ago that shed some light on people who are predominantly utilitarian thinkers. The study is “The mismeasure of morals: Antisocial personality traits predict utilitarian responses to moral dilemmas.” The researchers wanted to know how people who selected a utilitarian outcome to the trolley problem scored on personality assessments. Over two hundred college students were recruited for the study. The study showed that people who consistently adopt utilitarian solutions to moral dilemmas are more likely than others to have indications of psychopathic personalities or to feel that life is meaningless.

Most respondents in the study did not think it was right to push the fat man to save five workers. However, respondents who consistently chose the utilitarian solution to the different variations of the trolley problem also scored high on personality assessment indicators that suggested a high degree of psychopathy, emotional detachment to others, and a sense that life is meaningless. In other words, utilitarian pushers (people who believe it is acceptable to push the fat man off the footbridge) are not pleasant or happy people. In fact, we might even say their psychological profiles are troubling.

It is interesting that economics as a profession pushes the utilitarian framework (choose actions where the benefits exceed the costs). It’s our fundamental way of thinking as economists. Maybe this is why the 19th century historian Thomas Carlyle referred to economics as the “dismal science.”

In case any of you are worried, it’s okay to have an economist as a friend … as long as you don’t take walks along trolley tracks together.