0:33 Intro. [Recording date: November 6, 2012.] Russ: We're taping this on election day in the United States and our topic a spectacular paper that you wrote. What we might do with health care if we eliminated not just the Affordable Care Act (ACA), known as Obamacare, but many of the restrictions that the government places on the health care market. The paper is so good I am tempted to read it out loud and just let you comment from time to time, but we'll actually have a conversation. But we will put a link up to the paper and I encourage everyone listening to read it. It is quite educational, entertaining, and very lively. Now you start by making the distinction between health care and health insurance. Isn't health insurance the key? Don't we want everyone to have health insurance? Guest: Well, the way you posed that question I think reflects something unfortunate that happened to the language. We assume that the only way these days you can get health care is if you have health insurance. People say: We need people to have health insurance so they have access. Of course, you have access to coffee because you have a dollar in your pocket, if somebody wants to sell you coffee. So, I think we need to break that link to make this sensible. So, what we want--we certainly want everybody to be able to get good quality, low cost, efficiently provided health care. Health insurance is part of that, but not the only part of that. And what insurance is supposed to do is insurance protects your wealth against the big costs of infrequent events. But to comingle the whole idea of you need to have insurance to be able to go get a bandaid put on is kind of the silly state of the world where we are at. And the article was trying to think through how we could arrange things a little better. Russ: You start off, though, with how you would restructure the insurance market if you had your druthers. And, as in the paper, I don't want to spend a lot of time on that. But you do believe there should be a market. If left alone, there would be an insurance policy that would emerge. Or do you want to regulate that? Tell me what you think the ideal health insurance problem to deal with is. To deal with unexpected large things. And I'm adding the word 'unexpected,' which you did not put in there. But I would include both 'large' and 'unexpected.' Guest: Well, I edited the paper better than our conversation. Yes. So, health insurance wasn't working that well. Now, part of why it wasn't working that well is that insurance always sits on top of a market. Your car insurance sits on top of a functioning market to get your car fixed. And health insurance in many ways doesn't. But there were problems with health insurance and we do need to think about how health insurance can and should work. And briefly the answer is: Insurance should be individual. There is no reason whatsoever that your insurance should be tied to where you work. No matter who pays for it, you should have an individual policy that insures you and goes with you when you quit your job or move across state lines or whatever. It should also be what we call guaranteed renewable, meaning that if you get sick, they won't drop you. That's not something that needs to be enforced by the government. It's something people want and is something insurance companies can and happily will provide. Russ: So, why don't we see it now? Guest: Because it's illegal. Flat out, right now, you can't do it. And in addition there is this big tax subsidy for employer-provided group insurance that is not available--if your employer buys you an insurance policy that you can take with you, he can't take the tax deduction for it. And so we've both subsidized and regulated the right system out of existence. So that's fairly easy to fix. Now, we have a big mess on our hands. Russ: And the big mess is? Guest: The health care markets. Russ: And what needs to be done there? What's wrong with it? We have pretty good health care in the United States, it seems. Guest: We have pretty good health care. But as all of us know, the way the market works is a model of lack of transparency, ridiculous prices, and so forth. In any other market--if you walk into a hospital and say: I'm a rich person; I've got a million bucks, I don't need health insurance; I'll just pay for this--their eyes light up and they start charging you ridiculous prices. These always end up with stories. My wife was fighting a bill this morning, because she was in to her dermatologist and asked the dermatologist: By the way, as long as I'm here, can you look at a wart on my foot? The dermatologist did, and then the bill ended up--a $500 extra charge was added to the bill for checking out wart. Russ: Diagnosis. Guest: Three seconds. This sort of thing happens all the time. We all know that the market for health care is horribly distorted. Which is why we all need insurance. So that's the central problem.

5:45 Russ: So, let's start, as you do in the paper, with the supply side, and then move on to the demand side later, which you just alluded to. On the supply side, as you point out in the paper, there have been some incredible revolutions in customer service and provision of quality. In retailing for example you mention WalMart and Home Depot; of course that forced their competitors to match their efficiencies. Southwest Airlines, extremely effective in the airline business. Automobile assembly. Why are hospitals seemingly so inefficient? Guest: So, hospitals are inefficient. We want to bend down the cost curve and provide things more efficiently. We also want new and innovative products to come our way, and then those costs to be driven down, like cell phones are. So, we look at hospitals, and you can tell it's a mess. What's the difference? Well, one of the big differences is lack of competition. Why can a hospital get away with not telling you how much it's going to cost before you walk in? Well, because there isn't a competitive hospital that can come in and take your business by doing a better job. And that's what we sell in the airlines. We all like to complain about the airlines, but they cost a third as much as what they cost in the 1970s. And the key to that was competition on the supply side. New innovators were able to come in and undercut the old guys, figure out that wrenching transformation of how to make the industry more efficient and grab your and my money. And that doesn't happen in the medical field. There's lots of barriers to supply side competition to come in and take your money. Russ: Now, a lot of people get uneasy when they hear about competition in the medical field: It might be fine for some things but health care--do we really want doctors trying to be cut-throat about trying to get people's business? And: that will lead to bad practices. We'll come, at the end of this conversation, to some of the common criticisms that are made of a more market-based approach, but right now, let's put that to the side and let's just ask the question: Why isn't there more competition? Which is one of the things you deal with in the paper. You are obviously right: competition in the electronics business--you refer to the fact that there's no Moore's Law for--I'm going to read this quote. You say, "Why does Moore's law not apply to medical devices? Why has the price of cell phones, GPS, and computers come down so fast relative to the prices of medical technology? Where is the home MRI? There is nothing deeply different about medical and other technology. The answer is that supply and demand -- in the current highly regulated system -- is not producing the Moore's law incentives." So, what's stopping those incentives from emerging as in a competitive environment? Guest: So, you said two things, and I want to answer them both. The first one you said is this classic [?]: won't competition lead to shoddy service and so forth. And that's the classic constant theory expressed ahead of time. But let's look at our experience on what happens in competitive markets. Competitive markets don't survive by shafting you. Competitive businesses are scared to death of a negative yelp rating. And in fact the kind of quality you get from your computer maker is remarkably high. Now, why are we not seeing competition? There's a lot of law and regulation stopping competition. And I'll give one example. It's one of thousands, but it's so clear that it really makes the story. These are the Certificate of Need Laws. And a lot of this stuff is State. It's not just Federal regulation. So, many states, including where I live, Illinois, in order to build a new hospital or even to buy a big piece of equipment like a CAT-scanning machine, you need to get a Certificate of Need from--there's state board that issues these things. The people on it are appointed by the Governor. That's always a joke in Illinois--you say 'Governor' and everybody laughs. And it's explicitly in the charter that the purpose of this is to keep up profits of the existing hospitals. So, existing hospitals are allowed to say: No, you can't bring in a specialty clinic that does dialysis cheap. You can't bring in a specialty colonoscopy practice that really knows how to get the people in and out the door and do a good job on that. Because that will threaten our profits. Well, you can imagine how happy United Airlines would be to have a Board that could review every proposed expansion by Southwest and say: No, you can't do that; that's going to hurt United's profits. Russ: It used to have one. Guest: That used to be exactly what the airlines had, back in the old days. Russ: And it was a lot more expensive. Guest: Just removing that was a key thing that brought down airline tickets by a factor of 3. That's one example of the many little subsidies we have in place. If anything it's amazing how well hospitals work. If you and I as economists looked at this highly regulated system where it's very hard for new people to come in and compete and can't compete on price, in part because so much is paid by insurance, how is it that this whole thing doesn't fall apart? Well, it's full of really dedicated people, is the only thing that I can see. Russ: Right. So why isn't that enough? We both agree that most doctors and nurses and administrators care deeply about making people's lives better. In fact, you can argue that that would be even better than what motivates Southwest employees. I think they also care about people, but they have the profit incentive also. You could argue that sometimes pushes them to cut corners. Why isn't the dedication and compassion of people in the medical business sufficient to produce the kind of innovations and improvements we are talking about elsewhere? Guest: As you said, for the same reason that the dedication of the airline employees was not enough to produce efficiencies back in the old days. I mean, efficiency is about figuring out how to schedule things carefully. It's about not paying more than you have to. So, efficiency in these other businesses was a wrenching process. Airline pilots used to be paid a lot. They aren't any more. Mechanics used to be unionized and paid a lot. They aren't any more. When you can outsource things that need to be outsourced, you outsource them, and you pay a lot less. For the suppliers, this is a wrenching process, and I think everybody in our political sphere has a hard time understanding: the point of economics is to provide cheap, quality goods for the consumer, not to give everybody a chance to keep prices up and therefore keep the profits of producers and other people like that in check. And that's really where it needs to go in order for the hospital to get like the airlines, if what we want is low prices and good and efficient service.

13:10 Russ: And let's talk about some of the processes in the medical field. You write--another quote from the paper: "On reflection, it's amazing that computerizing medical records was part of the ACA and stimulus bills. Why in the world do we need a subsidy for this? My bank computerized records 20 years ago. Why, in fact, do doctors not answer emails, and do they still send you letters by post office, probably the last business to do so, or maybe grudgingly by fax? Why, when you go to the doctor, do you answer the same 20 questions over and over again, and what the heck are they doing trusting your memory to know what your medical history and list of medications are?" So, what's the answer there? Why haven't those improvements taken place naturally? Some of them have, of course. My internist does use the equivalent of an iPad, and some kind of software that I'm sure is customized for the medical field. And he did it before the Stimulus Package passed. But it's a very slow business to adopt modern technology. Why? Guest: Yeah. So it has been a remarkably slow business; and there, too, I think there is a lot of regulation getting in the way. One of the big problems was patient confidentiality laws--fear of getting sued if the wrong information went the wrong way. Another part of it is how they are paid. So, there are restrictions on supply, which keep competition from coming. But there's also big restrictions on who pays what. If the client isn't paying and he had this in-network hospital that he goes to, well a new hospital has a hard time prying that client away. And a similar thing happens--so much of, hospitals spend a lot of time thinking about how they organize stuff, but they are organizing both to the payment rules of both the government and the private insurers. So, your doctor doesn't answer emails because he can get paid if you show up and wait in line for three hours and talk to him in person for 12 minutes and 30 seconds. But he can't get paid for answering an email. So, they weren't in the business of answering emails. And strongly discouraging doctors from answering emails. Now, if you are paying your own money, obviously they figure it out. Your dentist answers emails. Your plastic surgeon answers emails. Your vet answers emails. Because they are in a business to get your money. The doctor in in business to get the government's money, or the insurance company's money. Russ: Talk briefly about licensing, as you do in the paper. Most people think licensing for the medical profession is obviously a good idea. You wouldn't want some unqualified doctor. And yet it has some very serious costs. Guest: Yeah. And licensing--the way to get a bunch of libertarians excited late night when they've had a little too much beer is to talk about occupational licensing. In the politically realistic world, we are not going to have no licensing. And licensing can maintain a minimum standard of quality. But licensing gets used to restrict supply. And this was Milton Friedman's Ph.D. thesis: throughout many industries, groups put in licenses, and then they make the license tests hard; and then they restrict the number of people that can get the licenses. All in order to keep up the prices for the people who benefit from those licenses. Taxicabs are the most obvious example that most of us are familiar with. Cities restrict the number of taxi medallions. The result is that you pay more for taxis than you would otherwise do if anyone who wanted to could go in and get a taxi inspected and licensed and so forth, than if other people who wanted to who had them. Russ: And you give the example of a parent late at night trying to get some medication for his kid. Guest: Any time you do health stuff you get people's own experiences. So, I have four kids, and it seemed like every time we went on vacation, someone got an earache and it was 2 o'clock in the morning and I need 5 milligrams of amoxicillin and I need it now. And it's going to be a long trip to the emergency room, so that a real doctor can charge $200 to peer in my child's ear, say exactly what I know--it's red in there--and prescribe me my amoxicillin. And then I have to go down to a real pharmacist to give it to me. All at monstrous extra cost. Yup. Russ: And that could be solved in a much cheaper way by--how? Guest: Well, certainly you could go to a WalClinic. Why do I have to go to an emergency room? Why don't we have retail clinics where a nurse practitioner, duly and bonded, can look at you for $25, prescribe what you need, and walk out? Russ: There is some movement in that direction, right? Guest: There is some movement in that direction. But it's been resisted quite strongly. But when you think of where we need to go--there's this big complaint that uninsured people go to emergency rooms and charge up hundreds of dollars. Well, most of what they need could be easily handled at a WalMart Clinic for $25. But WalMart has a hard time getting into cities to sell clothes, let alone to put in WalClinics.

18:34 Russ: Now, at this point in the paper you turn to some criticism of the Affordable Care Act. And I apologize again--I have to read this, because it's so good. Guest: Well, maybe we should have just read the paper while you and I take a break. Russ: We could. I think that would be a nice supplement to this podcast, for those who won't actually read it. But let me read this excerpt where you talk about why the current regulatory regime is not going to be effective at "bending the cost curve." You say the following: The ACA and the health‐policy industry are betting that new regulation, price controls, effectiveness panels, "accountable care" organizations, and so on will force efficiency from the top down. And the plan is to do this while maintaining the current regulatory structure and its protection for incumbent businesses and employees.



Well, let's look at the historical record of this approach, the great examples in which industries, especially ones combining mass‐market personal service and technology, have been led to dramatic cost reductions, painful reorganizations towards efficiency, improvements in quality, and quick dissemination of technical innovation, by regulatory pressure.



I.e., let's have a moment of silence. And your point being that there's no reason to think that this is going to work. Guest: Yeah; go on and read the next paragraph, because I was just getting going there. Russ: It's true. The next paragraph is: No, we did not get cheap and amazing cell phones by government ramping up the pressure on the 1960s AT&T. Southwest Airlines did not come about from effectiveness panels or an advisory board telling United and American (or TWA and Pan AM) how to reorganize operations. The mass of auto regulation did nothing to lower costs or induce efficient production by the big three.



When has this ever worked? The post office? Amtrak? The department of motor vehicles? Road construction? Military procurement? The TSA? Regulated utilities? European state‐run industries? The 9 last 20 or so medical "cost control" ideas? The best example and worst performer of all, ... wait for it... public schools?



It simply has not happened. Government‐imposed efficiency is, to put it charitably, a hope without historical precedent. And for good reasons. So why don't you talk about what those reasons are? Why we should be pessimistic? Guest: Boy, I had fun there, didn't I? Russ: Yeah, you did. And as you told me before we started recording, you wrote this paper--you are not a health care economist. You are a finance and macro economist. But of course you know some price theory. So you are kind of dabbling in other people's territory. And I'm sure they were not so happy to hear this. But why should we be skeptical? Maybe this time will be different. Guest: Maybe. Well, I think it was said that the second marriage is the triumph of hope over experience. Russ: That's right. Guest: Well, there are reasons why. And I don't want to sound like I am an anti-government anarchist. The government does stuff fine. Russ: That's my job. Guest: The government does stuff fine. It repaved the road outside of my house. I could tell it paid three times as much as it needed to, but it got the road paved. Stuff that we can't do otherwise, the government can do. But no one has ever thought of government as being the way to get stuff done efficiently. We thought of it as being the way to get stuff done--to fight WWII--stuff that has to be done, at horrendously inefficient cost, but they have to do it. Now, reasons. Yes. Governments have to listen to everybody. So all the stakeholders are there. So, imagine a government saying: You have to outsource these jobs to China because it's cheaper and will give us lower prices for consumers. There's no way--you have to bust up this union and move production to a non-union state because that's cheaper for consumers. You have to let lots more people into medical schools or let foreign doctors practice so that we'll drive down how much you guys make. Governments by their nature have to listen to everybody, and the consumer is always last in line. I think I would put that as Reason 1 why that approach just doesn't work. And can't work. Russ: But you point out, correctly, that in the market place--you drive a Lexus and I drive an Accord and someone else drives a Hyundai, and somebody's in First Class in the airlines and somebody's in the back and somebody else is on the bus, to make that trip. And we tolerate that distinction when we talk about most goods. But we are a little uneasy doing that for health care. Do we really want a world where the rich people get the best health care and poor people get lousy health care? Guest: Yeah, well this is the hard fact about health care. And the hard fact about the political allocation of everything. Health care is a personal service. It's not like filling the pothole out in front of your house, where it's kind of clear and everybody gets the same thing. It's the most important personal service you can get. Its quality varies enormously. In the economy as we have it people get different qualities of stuff according to their willingness to pay, mostly, and their ability to pay, a little bit less. And we'd like to say: Oh, the best for everybody. And I don't think you can say anything less than that in the political sphere. But the fact is there's only so much GDP to go around, and the best for everybody just can't happen. We can't all fly on private jets. Some of us got to go Southwest. And I'm one of those people. I'm in economy on Southwest. Why? Because it's not worth it, and I'd rather have the money than a private jet. But Southwest gets me there. It's not a heartless terrible economy that I have to fly in the middle seat in the back of Southwest. I get where I'm going at reasonable price and very good safety, but a government can't possibly allocate health care that way. Russ: And they don't. So I think the real issue is, there's a tradeoff between-- Guest: They promise the best for everybody. And that money not being around, we sort of get the worst for everybody. Russ: Or something in the middle. And some people would say that's better than some people getting not very good at all. And I think the question is: how bad is it for the average person relative to wealthier people, and I think the Southwest airlines, or the car example--being, suffering through driving a Hyundai is not suffering. Guest: So, these industries have done a very good job faced with competitive pressure of figuring out what dimensions of quality are really important and what dimensions of quality really aren't important. So, for example, suppose that one person gets to have their MRI two blocks from his office at 1 o'clock in the afternoon, and somebody else has to have it at 9 o'clock at night across town. We both get the same MRI. Now, if that costs a lot less, is it really so unjust? And that's what Southwest has figured out. I'm willing to put up with being in the back of the cattle car but having a very safe trip, because I pay a lot less to do it. Russ: And it's on time. Guest: Of course, if the government said: John, you've got to economy class, and Russ, you get to go business class. Well, we'll be out in the streets fighting that out with pitchforks. It turned out that paying their own money, people were willing to sit in tiny seats. And remarkably unwilling to pay $20 or $30 to get seats that are slightly farther apart. Yet can you imagine the government seat-selection board saying: All seats shall be 27 inches apart? Russ: Well, they might. Because those seats are going to be very inefficient. And that's the best they can do. They can't--I think the real tradeoff here is between the innovations that competition produces, which usually means that the average person gets a great deal--there are some people who get a better deal than that, though, obviously in the private market. As you point out, your Lexus is more comfortable than my Accord, but we both get a really nice, safe car that is very reliable. I think that's a pretty good world; that beats all of us driving a Yugo, or a--I can't remember the Soviet car; is that the Lada? It's ugly, it's expensive, and it's not very reliable. And that's what I worry we get when we say: Let's give everybody the same quality, because health care is too important to leave to the market. Guest: Yes, and because what you don't do is you don't squeeze the efficiency frontier. And in fact, so the private industries have done a remarkably good job of socialism--of taking from rich people and giving it to poor people. Look at business class. Those guys out in the front are ridiculously overpaying, by my mind, for the slightly wider seats. But what you and I get sitting in the back of economy class is--they cover most of the fixed costs of the flight, and you and I are being cross-subsidized up to the hilt by the people up in business class. Now, if a government said: We're going to tax the rich, if you will, and they are going to have to pay 3, 4 times what we pay for what looks the same, people would be up in arms. Yet we voluntarily do this. And similarly innovation. The system for innovation, in the rest of the economy is people who are either willing to pay or rich or slightly in the money subsidize the innovations. And then it trickles down to the rest of us. And that's how we get--if you are just willing to wait a year or two, you actually get stuff. Well, that's again a thing that the government planning board couldn't possibly do. Yet the result is none of us get the innovations.

28:38 Russ: We're moving into the demand side. Let's fully go there. What's wrong with the demand side of health care? Why is it so distorted? Guest: Well, lots of reasons, to tell the story. Health insurance became health payment plans. So, your car insurance doesn't pay for your oil changes. For all sorts of good reasons. Imagine if in order to get an oil change you had to call up, and your primary mechanic had to diagnose that you needed an oil change, and send you off to the oil change specialist; and then you had to wait 6 weeks and then fill out three forms and FAX them in and provide your car's maintenance history. And then argue over the co-pay. We don't do that. Yet health insurance turned into being this way. And the reason is because of the tax deduction. By making regular expenses part of insurance, then everyone can get the tax deduction for it that they wouldn't otherwise get. But then once the market is all paid for by insurance, nobody is paying their own money. This is fairly obvious stuff, and if people aren't paying their own money then both they don't have the incentive to economize, but more importantly, suppliers can't make money by inventing the Southwest Airlines and saying: Look, I can give you the same thing, with a little inconvenience, but I can cut the price in half. You and I say: Why should we bother with that? And furthermore, a hospital has to choose one or the other. You can be an all cash hospital or you can be an insurance hospital, but you can't be half and half. Because the whole insurance company game falls apart if you actually list the prices. So, that just kills that method--the fact that we are all paying for our expenses is turned into payment plans, that hurts the demand side and hurts the supply side and gums up the works on everything. Russ: Yeah, but some people would argue that that's a good thing, just having the insurance paying for everything, because health care is what you need. We don't want people making decisions to economize on their health care. That's the reason we want it to cover everything. That's a horrible thing; people would have to make decisions, life and death decisions, about whether to go to the hospital or not? That sounds awful. Guest: You're serving me empty softballs here, aren't you? Russ: That's my job. Don't worry. I tell the listening audience: we have Marcia Angell coming on in a few weeks; she'll give the other side, I'm sure. So we will hear someone from the other side of the spectrum. I love it when people complain that we have too much free market health care coverage on this program--because, you know, there's so much of it everywhere else; why would you need it? But my view is: If you want to hear the other side, it's everywhere. So, I like to think maybe we could use a little more of this bottom-up, emergent story as a possible health care improvement. So, carry on. Guest: You are right. It's kind of funny. It's seen as radical, yet the free market applies just absolutely everywhere else. It's kind of funny that it's out of the conversation even though it seems fairly straightforward. So need and who can shop and so forth. I think one of the biggest problems is you tell these anecdotes, like: people in life and death situations can't shop. But what fraction of health care expenses are actually made in the heat of a life and death situation? Answer: practically none. That doesn't say why health insurance should cover my annual dermatology checkup. Or why I can't be asked if I am going to see my doctor do I have to do it over here or across town. Or all the many other little conveniences of daily in-and-out care. And so much of health care is not, I broke my arm, I had a heart attack; patch me up. All the expensive stuff is chronic, long-term conditions where there's a whole range of different things we might do for you. None of it really works. Which kind of side effects does it have? Where the convenience aspect of treatment is as important as actually which drugs you get and when. The dirty little secret is how little compliance there is among patients for long term regimens. And that sort of thing is all very amenable to people shopping and to suppliers trying to offer the bright package of cost and convenience. But the dirty little secret is people have to be paying on the margin out of pocket. That you have to see the economic consequences of your choices if we are ever going to get the kinds of process efficiencies that can bring the costs down. As long as you are letting me go, let me--I think if we phrase this the right way, rather than saying, you have to pay for that expensive test, suppose that your doctor says: You need an MRI. And the insurance company is going to get billed $5000. So, what happens if the insurance company says: Look, you can have the MRI or you can have the $5000 cash right now. Or, you can have the $5000 bucks but if you are willing to go across town and get it at 2 o'clock in the morning, you can get $2000 bucks cash. A lot of people would pick that. The MRI is typically something that you don't have to have this instant anyway. Well, on the margin--I'm telling the story to try to get the 'can't afford' stuff out of your mind--but on the margin, people making those kinds of choices is the only way that we are going to get the costs and inefficiency down.

34:32 Russ: So, let me read another excerpt here, which I think highlights a very useful perspective on insurance that I think we often forget about. You are giving this paper at a conference of health care folk, and you said, Nobody in this room really needs health insurance for anything less than catastrophes. We pay for transmission repairs, leaking roofs, and vet bills out of pocket. Most people in this room send our kids to private schools, throwing away our right to expensive public education. We could easily "afford" most of our routine medical expenses, and even pretty big unplanned expenses, especially if we were paying commensurately lower health‐insurance premiums.



But we all have health insurance, and deal with the paperwork nightmare.



Why? You don't need an "insurance" company to negotiate your cellphone contract, home repair and rehab, mortgage, airline fare, legal bills, or clothes, and pay as we do for health.... So, you raise the question, you make the point that a lot of what health care insurers are doing is doing the shopping for us. And that is nuts! We take it as: Well, of course I don't look at the price; my health insurance company did that. And that's a remarkable change from 50 years ago when it was different. And prices were lower. Guest: You started this conversation with: Don't we want everyone to have health insurance. And let's go back to that. Because I think it is an important, eye-opening question. Why do relatively well-off people, why do they have health insurance? It used to be health insurance had a million dollar lifetime cap. So, if you had $5 million bucks, why do you need health insurance? The most they are ever going to give you is a million bucks. Well, now you know why even rich people wanted health insurance. Because if you walk into the hospital, you are just a mark ready to be squeezed. Which is kind of sad. For example, I don't know about you: I don't have collision insurance. I have a 10-year-old Honda. Why do I need collision insurance on it? If it crashes, I'll either dump it or I'll go buy a new car. I have $10,000 worth of risk-bearing capacity there. And health insurance ought to be the same way, because then you save on--my example of filling out the forms for the oil changes. Well, as you know, you walk into a hospital and say, I'm paying cash, and they say, Hallelujah! They'll charge $500 for a bandaid. Why? Because we are in this system of cross subsidies. Medicare and Medicaid pay far less than they cost. The insurance companies, which are fairly uncompetitive at this point--there's not that many of them left--they are willing to go along. They pay medium rates. They have negotiated rates with the hospitals. They know they are paying more than they should, because they are cross-subsidizing Medicare and Medicaid. But hospitals' not being a competitive business, there's no way to get around that. But then they have these big, negotiated rates. And you can't tell what they are actually getting. They have this system of rebates for this, that, and the other thing. And then the poor guy who walks in and wants to pay cash, he faces this huge sticker price. Which nobody's actually paying. A lot of that is so we can put a chit in the door--when the indigent guy goes bankrupt then we can say: Well, I'm not going to charge you $500,000; how about you pay me $2500 and we'll get rid of it? Russ: I remember when, one of the times my wife was delivering one of our children: The orange juice, I think it was $500. Actually, I looked at the bill. Of course, I didn't pay it. It came out of my insurance. But I actually looked at the bill and it said something like $500. Now, part of the problem is, like you say: I think it's a made up number. The reason I think it's a made up number is, obviously, I'd be thrilled to bring own orange juice and get a $430 rebate, or a $480 rebate, or something. And the insurance company would be happy for me to do it if it really did cost $500. So I don't even know-- Guest: I'm going to try this--bring orange juice and say: Oh, no, no; $500 bucks? How about I sell to you. Russ: And we'll knock the bill down. And you'd think--that should be happening all over the place. The fact that it's not tells me that those are fake numbers. And that it's not realistic. Guest: And fake numbers means you are looking at a completely uncompetitive market. Russ: Correct. So, you did mention that there aren't that many insurance companies. Doesn't that make you uneasy about a private market for insurance and a less regulated, less subsidized world? Guest: Well, I think there are very few because it is such a regulated and subsidized world. They've been driven to large economies of scale--you can only have a couple of them left. We're heading to--unfortunately where we are also heading in finance as well--to deal with the regulations you have to have lots of lobbyists and lots of connections in Washington. And that highly regulated system seems to end up with 5 big banks, 5 big insurance companies. All in cahoots with the government. Too big to fail, too big to compete: Certainly we're not going to let new upstarts in to try to take business from them. Russ: And aren't there a lot of restrictions on interstate competition among insurance companies? Guest: Yeah. There inter-state and there's intra-state. Sort of the obvious one that got some political traction is: Wait a minute; why can't I shop across state lines? Which also more deeply means: Why can't I keep my insurance when I move across state lines? That immediately dumps you into pre-existing conditions the minute you move across state lines. But there's all sorts of regulation on insurance within states. So, in Illinois, health insurance has to pay for acupuncture. And therefore my premiums go up to pay for your acupuncture. Whose fault is that? That's the state insurance commission, that's not yet the Federal regulations. Now the Federal regulations add layers of all kinds of stuff, too. Russ: It's coming.

40:37 Russ: Let's turn to some of the objections that people have to letting markets emerge here. A good friend of mine is a doctor and he's free market oriented, but he says: Well, health care, that's different. I think we may even have used your actual example: What are we going to do about the homeless person who has a heart attack? If we had a private market in health care that person would just die in the street. Guest: Well, when a doctor tells you, health care is too important to be left to economics, you answer: Great; we'll put you on a $20,000 salary from the Federal government, because it's too important to ask you to actually take money for something so important as health care. Let's see what he says. Russ: That's correct. He would not like that. Guest: The straw man of the homeless guy who is going to have a heart attack in the street. There's so many of these little straw-man anecdotes pervading this it's very frustrating. But that's not what we're talking about with the ACA and with the vast majority of the regulation of health care. We need a system of charity care. And charity health care has been around for at least 800 years, if not longer. In fact, it mostly was charity for a long time. But in order to solve the problems of a homeless guy with a heart attack, I don't see where it's written that the Federal government has to mandate that your and my health insurance has to provide wellness benefits and acupuncture treatments. Or that no hospital may ever compete. So, yes, we do need a system of charity care. But this is not about charity care. It's about a huge middle class entitlement. It's about fundamentally, rather than average, middle class Americans, who might earn $40,000-$80,000 a year, rather than saying, Look, you are going to pay for your regular stuff and you are going to have an insurance policy that covers the really catastrophic stuff, we are saying to those people: No, it's all going to be--you are going to pay taxes. Someone's paying. There's no government that pays. We are going to pay for this stuff through your taxes and then this is all going to be provided for you free. And you don't need to create a huge middle class entitlement with commensurate tax payments in order to solve the problems of charity care for homeless people. Russ: And of course, if we weren't subsidizing health care so dramatically as we currently do, those market prices that would emerge, which would be real prices, would be much lower. Not only would they not be $500 for an orange juice, they wouldn't be $80. They'd be $3 or $4. Or $5. Guest: Right. My trip to the emergency room to get amoxicillin for my child's ear infection ought to cost about $25. It shouldn't cost $500 and 4 hours of my time at 2 in the morning. And I think a competitive system would go a long way towards providing better stuff for poor people. When we protect an industry, who ends up hurt the most is always the poor, who are not allowed to be served by bare bones but effective and low-cost services. Russ: What about adverse selection? You mentioned that also--the idea that insurance markets won't work for health care because the sickest people will be the ones who want the insurance; they know that; and then the market will just collapse. What's wrong with that argument? Guest: Yeah. It's a good example of how a little bit of economics is a bad thing. We all trundle through the economics classes and then you get your supply and demand, and then the teacher's following the textbook and says: Now, there's a monopoly and there's adverse selection and moral hazard. So, we remember all these little stories. Even though it's not clear that those stories have anything to do with the actual problems in the real world. So, adverse selection happens when you know more about your health than the insurance company. So then people who know they are sick sign up for insurance; people who don't know that they are sick, who know they are healthy, don't sign up for insurance--because the prices are too high. You only get the sick people in insurance, and the insurance market supposedly falls apart. Nice theory. Now, let's look at the real world. First of all, do you actually know more about your health than an insurance company that has access to all of your medical records and maybe your last physical? Or do maybe they know a lot more about your health than you do? Second, why is it that insurance companies charge everyone the same price? They don't condition on the health that they can plainly and obviously see. Fat people don't pay more than thin people; smokers don't pay more than non-smokers. All sorts of things they don't condition on. Why? Because the government forces them not to. They are forced to offer the same product to everyone at the same price. So we do have adverse selection, but it's not because of the information problem you learned about in an economics class. It's imposed by the government. And the ACA is doubling down on that idea. Everybody gets health insurance. No pre-existing conditions. And, everyone has to pay the same amount for it. Well, that's adverse selection waiting to happen. Russ: Although, I think you can get a discount if you don't smoke. I think there are some--they don't put you on a scale and charge you different amounts. Guest: Oops. I may have got my facts wrong on the smoking. Russ: Not important. Guest: Got to get the facts right. But yes, they don't fully rate you. They don't look at your medical history and your last physical and then say: How much is this going to cost you? Because they are not allowed to. Russ: And I just want to mention in passing, you give such a nice example. This difference between theorizing and the real world, which George Akerlof, Nobel Prize winner whose most famous paper is "The Market for Lemons": because of asymmetric information between the buyer and the seller there should be no used-car market. Of course, somehow that problem gets solved. The market finds ways around that problem. I don't want to be unfair to Akerlof; I don't know if he really said there should not be one. But obviously many people jump from that kind of theoretical result to the implication that the market would never be able to provide this. And it provides it just fine. Guest: Yeah, no, George's paper--and I'm a big Akerlof fan--is brilliant for showing here's the problem unless we find some way to fix that problem. And it turns out the markets have found ways of fixing that problem. Or, it turns out, as in the case of health insurance, it's not obvious that there really is a big information asymmetry--that you know so much more about your health than the health insurance company knows. That it can happen. And I think the same is true increasingly in used cars. You don't really know a whole lot more about how good your car is than the purchaser can. It's best if he has a mechanic look at it and look over the records. That's how the used car market works. Russ: We know a few things. But of course, if you are buying my used car, you are going to work really hard to find out what I might know. And there are a lot of different ways you can do that. I'm selling my car today, actually, as it turns out. And there are a couple of things I know that aren't obvious, which I will reveal--because I am an honest person--but I understand that not everybody's honest. And in a world where people are not totally honest, other people are going to look. The question is how effective that is. It's an empirical question, and most of the time it seems to work pretty well. Guest: And then we have insurance. We have insurance for all sorts of things. Asymmetric information does not make car insurance fall apart. It doesn't make home insurance fall apart. So, it's not obvious why you can't have health insurance because of asymmetric information.

48:38 Russ: What about the complaint that we don't know enough about our health care generally? We don't want to become experts. Let's let the government decide what the best treatments are. I should get the diagnosis from experts, and if people could shop around they are going to make a lot of stupid mistakes. They are going to throw away money. They are sometimes going to skimp on health care and preventive care and therefore hurt themselves. Much better to let the experts decide from the top down. Guest: Well, you threw a whole lot of things in there. Russ: Yeah, we could spend another whole hour on that. But do your best. I'll give you five minutes. Guest: Right. So in health care we are buying a good where the seller knows more than we do. Although my doctor cringes every time I show up with a whole bunch of stuff printed out from WebMD and Wikipedia. That's changing. But throughout the economy we purchase services from people who know a lot more than we do. We buy lawyer services; we buy tax accountant services. We buy financial services, home repair services. I can't tell A-grade from B-grade plywood. And somehow we are able to buy services from people who know more than we do, and that works fine. It's not obvious why that can't work. That works for vet services, where you pay your own money; and it works for dental services, where you pay your own money. And plastic surgery, where you pay your own money. Why does the government have to run it? And conversely, all of these things--there's this funny thing that happens where you come up with one straw man where the market doesn't work and suddenly, I therefore accept that the government has to decide what we all need. Wait a minute! We are comparing two different institutions. Russ: Both flawed. Guest: How good is the home repair advisory board going to be at figuring out what kitchen counters you need? And just which kind of 'fridge do you want; and which kind of fixtures should go on the lights? As opposed to you doing your best. And especially health, the one thing that's most important for your whole life. We've got to remember: I think there's this vision in people's minds of health being very simple and easy to figure out. You know, you have a pothole, you need the pothole fixed. You have a broken arm, you need it set. No. Most of what we do with health is--it's not clear what you need. It's not even clear how much diagnosis do you need. We've all been running around from specialist to specialist, getting that right, and then which course which treatment do we need? It's not at all something that that kind of personal service couldn't be supplied from top down. If you don't think that government could provide you home rehab--here, our rehab counselor will come in and take care of it for you--I mean, goodness gracious, why wouldn't they be able to tell you what kind of health care you need? Russ: Well, you could argue that the color of the granite is a personal preference, but the color of your splint or cast is irrelevant. And so I'm not sure that that's the right analogy. Obviously--and I think the other criticism that you'd hear is: They work pretty well, those markets in the private sector like home repair and car repair, but they don't work very well--they don't work nearly as well as buying a shirt or the tools at Home Depot or the shirt at WalMart. Those markets work a lot better than these more complicated service provisions where you are not sure what's wrong. You take your car in; it's making a funny noise. You've got a chest pain. These markets are prone to mistakes, some of them honest, some of them not so honest. So, I think it's an interesting challenge for those of us who would want a more bottom up health care system to make that case more definitively. Because I think most people would argue that the car repair and home repair markets are full of thieves, and it can be a frustrating business. Guest: I think that's a good point, that the markets for services like these, especially those with a wide divergence of expertise, are troublesome. And they haven't really been corporatized. Airline service is kind of a service; but taxis are still kind of a disaster as far as quality is concerned. But nonetheless, the alternative of government deciding what you "need" and then prescribing it for you--it sounds great if you have in mind a broken arm. But if you have any of the modern diseases, it's kind of a dream that there's some panel of experts who can say: Here's exactly what you need and what you don't need. Especially with so many things that we have where we are kind of on the edge of understanding what works and understanding what doesn't work. How many experimental treatments do you need versus not need, when we're not really going to be able to fix you? Russ: It's very complicated. You give the example in the paper of back pain. We can think of lots of examples. Chronic pain generally is a bit of an art, and not so much of a science. And it's not--I think the right conclusion to draw is that the private sector works fairly well. Not as well as it does in other areas, but it works fairly well. And: Would the government sector work better? Not: Oh--as you say--the private sector is flawed so we have to replace it. Show me that the public sector will have the incentives to do what's best for me or what's best for most of us. The other comment that you hear is: it's okay for you to come in with your WebMD stuff, but the average person isn't smart enough to do that, and they'll be taken advantage of by doctors. Guest: It's horribly patronizing. It's offensive. Russ: I agree with that. Guest: Oh, we the aristocracy need to take care of them because they are too stupid to make their own decisions. But of course that doesn't apply to us. Or us in the health policy field. We have the connections; we know how to do this for ourselves. Russ: Yeah, I find it insulting, too. But they don't. The people who make that argument feel virtuous about it. We don't find it so virtuous. Guest: Well, we've got to be practical. So, let's try to find examples where: has that ever worked. Especially in something where personal preferences matter as much as health care. And I think the answer is no: where you have things where governments decide, especially at a national level, here's the kind of car everybody needs. Here's the kind of air travel everybody needs. The results have been pretty catastrophic. The Trabant versus even the Chrysler. Russ: That's right.