ObamaCare: the error of categorical risk management

In the world of risk management households and firms exercise incremental risk management. That is, decisions are made on the cost-benefit of increasing levels of risk management. For example, should a firm such as a distribution warehouse have fire extinguishers available every 100 feet, 50 feet, 5 feet? Should a household install smoke detectors on each level or in each room of their principle residence?

Households and firms make decisions regarding risk management by looking at what point does the current cost and future maintenance (rising costs) of a particular risk management technique outweigh the incremental risk reduction gained.

This incremental approach has an implicit assumption that nothing is absolutely safe. This is very true. However, items and situations can be reduced to a level of reasonable safety at a reasonable cost.

However, other institutions outside the household and firms exercise categorical risk management. Categorical risk management appears when the "cost" component of the cost-benefit approach to risk management is born by an exogenous entity. That is, when the institution making risk management decisions has no cost basis they opt for categorical risk management. The implicit assumption to categorical risk management is that no risk can be taken. Items and situations must be absolutely safe. (1)

What institutions have no cost basis, exercise categorical risk management, and make the assumption that absolute safety must exist? Government agencies, public interest private organizations, and public interest movements have no cost basis and exercise categorical risk management. The cost basis used by these organizations is taxes, donations and in some cases law suit proceeds.

When you have no cost basis in risk management (using other people's money) your incentive to produce the product of risk management is no longer cost-benefit based. The incentive becomes purely benefit based. That is, the public must be made safe at any cost.

How does this difference in incremental risk management and categorical risk management relate to ObamaCare? Beyond ObamaCare being a price fixing scheme, the health-care reform legislation comes from the same group of institutions that have the mind-set of categorical risk management. The mandated coverages, deductibles, co-insurance requirements, the requirement everyone must buy coverage or else be fined, etc. comes from the exact same organizations that perceive absolute safety at any cost. In other words, the absolute coverage mandates, the exercise of categorical risk management, the deletion of incremental risk management, is due to the years and years of making risk management decision with other people's money.

Hence one of the drivers of the future increased cost of health-care via ObamaCare, which is becoming increasing evident, is in fact due to the framers of such legislation exercising categorical risk management based on their prior experience of of using other people's money, leading to incentives to produce purely benefit based items with disregard to cost-benefit incremental risk management.

(1) Applied Economics, Thomas Sowell, pages 144 - 145

ObamaCare: behind the price fixing scheme

ObamaCare is widely understood to be based on a price fixing scheme. Price fixing schemes merely result in quantitative and qualitative reductions in supply. Further, every and all price fixing schemes in all of recorded economic history have failed.

Then "why" choose a public policy response of a price fixing scheme which is bound to fail?

The choice of a price fixing scheme by politicos is related to the immediate consequences of public policy. That is, the immediate consequences of public policy many times create the illusion of economic success in the very short run whereas the long term cascading unintended economic consequences of public policy generate dismal results e.g. Social Security, Medicare, Medicade, etc.. However, the short run results of public policy match the time horizon of politicos. That is, the politico's time horizon is the next election which is always just-around-the-corner.

Price is generally considered an economic phenomena. However, looking at price through a political lens, price is generally associated with and/or attached to the immediate provider of a good or service. Hence if a price is considered too high in a political sense, the price is not analysed in regards to all the economic components making up the perceived high price. Perceived high price is merely attached to the immediate provider of the good or service. For example, if a gallon of gasoline is $4.00, in a political sense the perceived high price is associated with the oil company. However, in fact the price is made up of demand and supply and the associated components that make the demand and supply curves intersecting at a $4.00 price per gallon.

Politicos realize price is associated with the immediate provider of the good or service, and if price is perceived to be high, politicos merely play politics with price and vilify the immediate associated provider, and disregard the economic components that make up price. The politics, which one must remember are associated with a sort term time horizon of politicos which is the next election cycle, is merely to offer a short term public policy solution to match the politicos election time horizon and not a long term economics based policy solution.

If product X is perceived to be expensive, and product X is associated with firm Y, then the immediate politico policy response is to vilify firm Y and declare the price must be reduced which means a price fixing scheme. The politico then publicizes the price has been reduced through his/her efforts and gains short term political capital. Then a certain section of the electorate see the immediate price reduction and perceive the problem of the high price has been solved.

Hence price fixing schemes, ObamaCare included, is merely a known failure scheme, based on politics not economics, directly related to the politicos election time horizons. The electorate later realizes, as the public policy of the price fixing scheme unfolds, that quantitative and qualitative supply reductions are something they are left to deal with on a daily basis. However, the politico in the long run is long gone. The politico leaves the electorate/tax payer with the long term costs associated with short term public policy results, that in fact, were based on the reelection needs of the politico's short term election time horizon.