My Cognitive Surplus

The 20th Century: The Century of Population Growth

I was listening to Brad DeLong's lectures for his 20th Century economic history class.  In the intro class he says that the 20th century would be the century of economics - economic growth, economic wars, economics-based ideologies.  I'm sure that he would consider population a sub-phenomenon of the economic story, but to me the outstanding fact is the growth in population.

In 1900 the global population was 1.6B.  By 2000 it was over 6B.  It took us 100,000 years to get to 1.6B and 100 years to quadruple that.  Most/many of us were richer than our counterparts in 1900, but I'm still struck by how many more of us there are.

The Sound of One Hand Waving

I just got my Google Wave invitation.  I need to invite some people.  I think there’s a word for collaborating by yourself.

OK, so now what?

I’ve got Eclipse and R working together, R and MySQL working together and Eclipse and MySQL working together.

Health Care Plans

Why Would We Want an Employer Mandate?

Right now companies provide insurance for employees if they have to attract and retain a certain skill / education level.  Federal law AND the insurance companies typically require them to offer the plans to insure that there is no discrimination and that the insured pool at the company is a minimum of 75% of the employee base.

Effectively, total payroll is artificially lowered by about $12K per employee.  If that insurance requirement went away some employees would see their salaries rise by that $12k or possibly more, others would see them rise by less or nothing.  It's that second group that you have to cover by subsidy.  The amount of change in paycheck would depend on the price elasticity of supply of the particular type of labor on offer (database administrator vs litigator vs risk management specialist vs call center worker) which depends on the supply of that kind of labor.  For example, assume that there is a not a great excess of database administrators.  Firms will bid up the price (salary) back to the original price (salary plus health insurance).  If there is a glut, for example call center workers, firms might choose to hire more call center workers (as long as there are workers who will work for the salary without the health insurance).

So we need an employer mandate to insure the people who are currently insured even though in a sense, they are only insured because the firm wants to offer insurance to harder to get employees.  Unfortunately, this misses out on one of the bigger benefits of losing employer funded insurance - the lower cost to hire an employee and higher employment, lower costs for businesses.

By the way, you know how you know that individual insurance sucks worse than group insurance?  Because firms absorb the administrative cost of the programs as well as paying part of the premium instead of just paying people the extra money.

Why Would We Want an Individual Mandate?

The vibrant contract employee market is probably where you see the hypothetical healthy, uninsured 24 year-old (and I'd really like to see some numbers on that by the way).  This hypothetical 24-year-old is doing 2 things: 1. taking a risk which society will have to at least partially fund if something catastrophic happens and 2. not paying into the financing component of health care by essentially not saving for the health care that he/she will eventually need as a matter of course.  They can get away with this because 1. catastrophic risks are relatively rare and 2. if they eventually get into a large group plan all sins are forgiven.

Subsidies

So on one hand you've got people who can't afford insurance and would be dropped if an employer could get away with it and on the other some indeterminate number of people who don't want insurance because they think they can get away with it even if they are imposing some costs on the rest of us.

So, let's look at the subsidy level.  If you go to 300% of the poverty level you get to about $66k.  Now, if that's a household figure that means you're potentially looking at someone with an income of $45K and another earner making up the additional $22k.  My guess is that both would fall into the bucket of people who are not in high demand.  So if they fall under the individual mandate (because the employer mandate doesn't apply), they're looking at spending 18% of their income on health insurance.  If they fall under the employer mandate, they're high cost employees.

CEO Pay: Lessons from Parasitology

Executive pay comes up every year as topic of conversation as we marvel at how the top .1% lives.  One of the obvious points is that there is a disconnect between performance and compensation.  I'm sure this has gone on since the dawn of time, but as numbers get bigger it gets a little more obvious.

My initial reaction was that free markets ought to fix this problem.  And then I realized that I'm making the same mistake so many people make in analyzing evolutionary systems: they assume that the process tends towards some sort of improvement.  In fact, it does no such thing - or to the extent that it does, the improvement is very much in the eye of the beholder.  In the case of CEO pay, parasitology has something to teach us.

Parasites can influence the behavior of host organisms in ways that make them less fit.  The parasites, on the other hand do just fine.  Scientists have looked for evidence of relative fitness that parasites may confer on their hosts and they have come up dry.  In fact, parasites can destroy fitness up to and including killing their host.

Corporations in their modern form have existed for a little over a century, a time during which regulations on corporate governance have been eased fairly consistently.  Corporations can act anywhere, but their charters are regulated by states.  (If you want to understand the concern over the 'race to the bottom' in allowing health insurers to operate in multiple states, the world of corporate charters and regulation is an outstanding cautionary tale.)  The reason that Standard Oil was Standard Oil of New Jersey was not because of petroleum reserves in the Pine Barrens, but because New Jersey was the most open to allowing trusts.  Other innovations in corporate regulation have included staggered terms so that an entire board is not up for replacement at anyone time and a host of other rules which give management significant advantages in dealing with unruly shareholders. These tend to parallel the tools management uses to forestall unionization.

So the management of the company and the owners of the company have competing goals and the management wins. In his book, The Extended Phenotype, Dawkins talks about arms races and posits that the 13- and 17-year locust cycles may have come about to escape a now extinct parasite.  So if there's an arms race, how come the shareholders are losing?  The real issue is that for most shareholders, the impact isn't large enough to get excited enough to do anything about it.  If you're pissed, sell the stock.  For the CEO and his/her cronies, it's big bucks.

The solution?  Two choices, beef up the laws to encourage shareholder democracy or class action suits.  I know which one I'd pick.

How Many Health Insurers Do We Need?

Most industries have an efficient scale.  Based on commonly available technology, management processes and cost of raw materials, a competitive industry will shake out into firms of roughly comparable size.  For some industries, the efficient scale is a significant percentage of the market.  For example there are only so many car companies.  Health insurance companies tend to compete at a state level.  Some of this is driven by the structure of the Blues.

A competitive market of 'price-takers' will produce the most of a product and charge the least.  A monopoly, or price-setter, will produce less of a good and charge the most.  An oligopoly is somewhere in between.

In any event, you're really looking at 50 state sized oligopolies.  Which is probably worse than one national monopoly, certainly worse than a national oligopoly.  I'm guessing that with national competition you would see many fewer firms and a lot more insured people.  Which kind of sucks if you're an insurance executive.

Nobody Really Wants Employer Sponsored Health Insurance

Most employers have no special expertise in managing health care and no compelling reason to develop it as a competitive advantage.  According to the Kaiser Family Foundation, employers pay around 10% of payroll costs to fund health care for employees who get employer-sponsored insurance.  That's a lot of money for something that has nothing to do with your business objectives.

Losing that insurance because you change jobs or the firm elects to stop offering it is a major source of stress to most people.  When asked if they are satisfied with their insurance, 69% say 'yes', but there is an implied 'right now' in the answer.  The better question is "Are you happy getting the insurance you have from your employer, or would you prefer the same insurance at the same cost to you provided by the government?"   I'm guessing the latter would win.  And if you asked the employers if they would be just as happy to be out of the insurance buying business they would probably answer with a resounding 'hell, yeah.'

Private Health Insurace admin costs v. Medicare

Paul Krugman has a couple of good posts on administrative costs for private health care insurers vs. Medicare.

One of his commenters makes the excellent point that denying care from someone who has been paying premiums has an extremely high ROI - you get to bet after you play the hand.  It's not clear to me that that's an incentive you can easily manage out of the system.  Despite laws against discriminating against people once they make a claim, most of the recision abuse has been completely legal.

Also, someone made the point that all groups are underwritten pre-sale, I believe that's true of small groups, but large groups are underwritten after initial sale with some experience factored in going forward.  Large groups tend to benefit from the law of large numbers both prospectively when the insurer does initial pricing, and at renewal time when the averages tend to come through as expected.  Small groups taken together should as well (the idea behind community rating), but insurance companies take the win from healthy groups and claw back from groups in which there has been an illness by upping the rates (which doesn't really sound like insurance).  Overall this another case where the bulk of insurance companies bet is after the hand has been played.

Health Insurance, Oligopoly Pricing and the Public Option

Josh Marshall has been all over the point that the strongest opposition to the public option comes from Senators representing states with little or no competition.  That the health insurance companies in those states are resistant to the public option should come as no surprise.

Firms produce to the point where their marginal cost is equal to the price.  This assumes that total cost rises as a firm gets close to capacity and that it maximizes profit by selling up to the point where it makes no money on the last unit it sells.  Under perfect competition, this happens at a higher quantity and lower price than under a monopoly-dominated market.  Under an oligopoly (where a few firms dominate) the equilibrium point will be somewhere in the middle, but definitely less 'output' and higher cost in perfect competition.

Oligopoly pricing is complicated and it depends on whether firms try to drive a price level or a quantity level.  It seems to me that in health insurance firms set the quantity of output (Cournot competition), and in a future item I'm going to look at the implications of that.  The important point here is that insurance companies in states with limited competition don't operate in the kind of competition that we think of when someone says 'free-market.'  They produce less, either by insuring fewer people or by delivering worse service (recision, anyone?).  Ironically, the current model of state-sized markets, while allowing greater local control over regulation and preventing the race to the bottom we seen in corporate charter regulation, has created markets so small that they tend to oligopoly if not outright monopoly.

The right kind of public option would be an entity that would produce at a point that looks more like a business in perfect competition.  This would offer a price that would drive the price down and force competitors to produce more and price lower.    Additionally, there would be national regulation and national competition.  The bigger markets would tend to more competition with the public option as a backstop. This is a much less congenial environment for insurers to play in.  Bluntly:

Senators who come from states where there is limited competition and who oppose the public option are unambiguously taking the side of the insurance executives and shareholders against their constituents. Period.

There are a bunch of questions that need to be answered in terms of how to set up the public option, what the subsidies and incentives should be, but at the end of the day the worst model is these state-by-state monopoly / oligopoly markets.

Consumerism in Health Care

Consumerism is the theory that if individuals control their own health care spending it will get better and cheaper. In practice it has resulted in the high- deductible health programs. People enrolled in these have high deductibles in which they pay out of pocket until their coverage kicks in.

Imagine that instead of a copay for a medical visit, you pay a percentage of the total until you hit your deductible. This manifests itself in two ways: 1. High-deductible plans with an employer subsidy to a tax advantaged or other account to offset the increased deductible. 2. Plans that just flat out cost more for the consumer and less for whoever is paying the premium. Under an individual mandate I can see more of 2, but I would expect 1 to vanish entirely. This is mostly because I expect groups (which are primarily employers at the moment) to fade away.

This is actually a shame because having health care businesses which could ethically incent people to do things which could improve their health could be a good thing. There's a couple ways it could be done even in a single-payer system, but it would take a regulatory framework that is good at managing for the long-term. And in case you missed the recent financial debacle, let me assure you, we don't have demonstrated expertise in that area to draw on.