Reviewing parts one and two of this series, John Cochrane professor of finance at the University of Chicago Booth School of Business wrote a recent essay entitled After ACA: Freeing the market for health care. The essay is very interesting as it makes the case of the need for decoupling health care from health insurance when discussing the demand and supply for health care and insurance merely being a mechanism to address catastrophic losses. Others have also pointed out the need to decouple the two concepts, however Cochrane does so in such a way that points out that the supposed market failure in health care is directly related to government failure in the realm of health care due to government lead market distortions on both the demand and supply side of health care.
The next aspect Cochrane examines is barriers to entry for new suppliers of health care. In Cochrane’s words:
“So, where are the Walmarts and Southwest Airlines ofhealth care? They are missing, and for a rather obvious reason: regulation and legal impediments. A small example: In Illinois as in 35 other states, every new hospital, or even major purchase, requires a “certificate of need.” This certificate is issued by our “hospital equalization board,” appointed by the governor (insert joke here) and regularly in the newspapers for various scandals. The board has an explicit mandate to defend the profitability of existing hospitals. It holds hearings at whichthey can complain that a new entrant would hurt their bottom line.” (1) (2)
Hence we find new supply, new competitors as they were, having government stand in their way of freely entering the market. Further, in many cases current suppliers support and lobby for continued government sponsored barriers of entry. Therefore current supply becomes the status quo with “profitability” protected by government erected barriers to entry and consumers find higher prices rather than lower prices and lower quality rather than higher quality, both of which, created by intense competition. Cochrane goes onto to identify occupational licensing creates a restricted supply thereby pushing up price (by the way the subject of one Milton Friedman’s PhD dissertation):
“I’m not arguing that we have to get rid of licensing. But licensing for quality does not have to mean restriction of supply to keep wages up, including state by state licensing, restriction of residency slots, or restrictions that encourage overuse of doctors where they are not needed.”
“If you’re a parent, you’ve been through it. It’s 2 am in a strange city. The kid has an ear infection. He needs amoxicillin, now. Getting it is going to be a 3 hour trip to an emergency room, hundreds of dollars, so a “real doctor” can peer in his ear, then off to the pharmacy to fill the prescription. A nurse practitioner at the Wal clinic could handle this in 5 minutes for $15.” (3)
What Cochrane is pointing out is that basic services that could easily be supplied at much lower prices are purposely supplied at higher prices. The purposeful overuse of higher priced alternatives is government failure at its zenith.
It is becoming apparent that, if you have read the three parts to this point, a major cost driver in health care is none other than government. More succinctly, politicos through the mechanism of government have created a protected rent seeking proposition through legislation spawning regulation that drives up health care costs.
Notes:
(1) After the ACA: Freeing the market for health care.
(2) Certificate of Need: State Health Laws and Programs, NCSL, 03/2012
In reviewing part one, John Cochrane professor of finance at the University of Chicago Booth School of Business wrote a recent essay entitled After ACA: Freeing the market for health care. The essay is very interesting as it makes the case of the need for decoupling health care from health insurance when discussing the demand and supply for health care and insurance merely being a mechanism to address catastrophic losses. Others have also pointed out the need to decouple the two concepts, however Cochrane does so in such a way that points out that the supposed market failure in health care is directly related to government failure in the realm of health care due to government lead market distortions on both the demand and supply side of health care.
Supply and competition is now examined. Cochrane uses several examples of firms in sectors other than health care that have pushed the cost, innovation and quality frontier “out to its limits, and then discovering where people really want to be”. That is, what does the consumer value and at what price and hence what part of the cost, innovation and quality frontier creates maximum utility. Further, the cost, innovation and quality frontier has been pushed out to “choosing a different point on a far better frontier than we faced 20 years ago.” (1)
Problem is, the cost, innovation and quality frontier in health care is not reacting to generate what the consumer values and at what price and hence what part of the cost,innovation and quality frontier creates maximum utility for the consumer. Why? Cochrane’s explanation is very public choice theory oriented: old status quo suppliers within the health care sector are protected by government regulation and new competitors have massive barriers to entry and hence the protected firms merely collect rents with little incentive to find what part of the cost, innovation and quality frontier creates maximum utility for the consumer.
In order to change the situation, Cochrane states:
"How will this change come about? My examples share a common thread: Intense competition by new entrants, who put old companies out of business or force unwelcome and disruptive changes. Microsoft displaced IBM, and Google is displacing Microsoft. Walmart displaced Sears, and Amazon.com may displace Wal-Mart. Typewriter companies didn’t invent the world processor, nor did they adapt. The post office didn’t invent FedEx or email. Kodak is out of business. Toyota gave us cheaper and better cars, not Ford/GM/Chrysler competition. When the older businesses survive, it is only the pressure from new entrants that forces them to adapt.
My examples share another common thread. They remind us how painful the cost control, efficiency, and innovation processes are. When airlines were regulated, artificially high prices didn’t primarily go to stockholders. They went to unionized pilots, flight attendants and mechanics. Protection for domestic car makers supported generous union contracts and inefficient work rules, more than outsize profits. A look at a modern hospital and its supply network reveals lots of similar structures. “Bending down cost curves” in these examples required cleaning out these rents, through offshoring, elimination of union contracts and work rules, mechanization, pressure on suppliers, and internal restructurings.
The fact that so much cost reduction comes from new entrants, not reform at the old companies, is testament to the painfulness of this process, and the ability of incumbents to protect the status quo.” (2)
Cochrane is correct that the process which is very akin to Schumpeter’s creative destruction is by no means painless. However, it’s totally painless to status quo old firm protected by government regulation that merely pass on higher and higher prices with little or no interest in finding what part of the cost, innovation and quality frontier creates maximum utility for the consumer.
Finally, Cochrane makes an excellent point if government regulation was removed protecting old firms and allowing new competitors to enter the market at will: “The fear, so often expressed in medical contexts, that unregulated competitive suppliers will pawnpawn off shoddy merchandise on consumers seems exactly false.” Cochrane is correct. The argument is merely the argument put forward by the old firm collecting rents under the protection of government regulation. The same argument has been put forward many times by old firms in protected industries. It is by no means a new argument. His point is very correct and he points to examples such as Toyota dislodging the Big Three Auto makes was not done by selling shoddy products. Nor did Southwest airlines gain market share from United and American by selling shoddy product/service. Rather, Toyota and Southwest actually exposed the shoddy product/services of the old firms. (3)
Notes:
(1) After ACA: Freeing the market for health care, John Cochrane, 10/18/2012.
John Cochrane professor of finance at the University of Chicago Booth School of Business wrote a recent essay entitled After ACA: Freeing the market for health care. The essay is very interesting as it makes the case of the need for decoupling health care from health insurance when discussing the demand and supply for health care and insurance merelybeing a mechanism to address catastrophic losses. Others have also pointed out the need to decouple the two concepts, however Cochrane does so in such a way that points out that the supposed market failure in health care is directly related to government failure in the realm of health care due to government lead market distortions on both the demand and supply side of health care.
The essay uses the term “after” in its title as it become very apparent after reading Cochrane’s essay that coupling health insurance to health care through massive government intervention becomes a situation of government failure supposedly corrected through additional government failure. That mandating insurance does nothing more than perpetuate the underlying health care demand and supply distortions and the inherent failure of the system. Hence “after” is a term used to point out that “after” more government failure in the form of the Affordable Care Act aka Obamacare a point will come when health care will actually be repaired by the withdrawal of market distortion produced by government failure.
One of the first points in the essay, as mentioned above, is to examine health care separate from health insurance. One of the first observations in the essay is very worthy of note and one would be well advised to reflect upon the observation: why does technological innovation in other sectors either drive costs down or produce significant additional benefits at the same cost yet technological innovation in the health care sector drives cost down at a snales pace in comparison to other sectors, produces additional benefits at a much higher cost or even drives up cost ?
"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.” (1) (2)
“The White House and the nation’s most prominent charities are embroiled in a tense behind-the-scenes debate over President Obama’s push to scale back the nearly century-old tax deduction on donations that the charities say is crucial for their financial health.”
“The charities characterize the lobbying expenses as a sound investment given the money at stake: Americans donated nearly $300 billion to charity last year. The groups say they had to act because lowering the deduction would reduce giving, primarily by the wealthy donors who make the bulk of contributions. With their finances squeezed by the economy and state budget cuts, charities say this would force them to cut funding for services such as aid to the poor and artistic programs.” - White House, nonprofit groups battle over charitable deductions, Washington Post, 12/13/2012
“U.S. small-business owners' net capital spending intentions for the next 12 months plunged to -14 in November, the lowest level in more than two years, according to the Wells Fargo/Gallup Small Business Index.”
"Consistent with these negative expectations, owners' intentions are to reduce their capital spending plans and their hiring intentions over the months ahead."
Bob Woodward in his book The Price of Politics makes a grand point: Obama has no clue on how to negotiate. Upon the consequential arrival at the fiscal cliff and the negotiations thereof, Woodward’s observation is validated/reinforced. (1)
Negotiate: to deal or bargain with another or others, as in the preparation of a treaty or contract or in preliminaries to a business deal. (2)
The definition may be insightful in and of itself leading to part of the puzzle of negotiation-ability-failure. How so? The definition mentions the term “deal” twice and the term “bargain“. The definition could be argued to implicitly assume mutual self-interest [bargain] at the point of exchange [deal]. Moreover, the definition has a whiff of “the pie expands” as the term “deal” was used twice (both parties deal resulting in gain by both parties).
Considering the above, a particular political view of exchangeis: zero sum in that only one party gains at the expense of the other party. Reflect for a moment on the use of that exchange fallacy (its very much smacks of class warfare at/after the point of exchange). What ilk uses the above mentioned zero sum fallacious argument all the time and every time??? Yes, you guessed it.
Back to the beginning. It’s “negotiation time” once again for negotiation-ability-failure-man. Now consider a situation of all engines full reverse and the class warfare argument placed upon its head. That is, the same zero sum argument that is politically framed as the “rich” only becoming rich at the expense of others, the mantra as it were, is now used by the same politico [negotiation-ability-failure-man] to attempt to produce a zero sum negotiation outcome. Stated alternatively, negotiation-ability-failure-man views “negotiation” as he views “exchange”. Exchange is rejected as mutual self-interest at the point of exchange and only viewed as one party gains at the expense of the other party. Zero sum becomes dogmatic as his aggregate mysticism is predicated on the rejection of mutual self-interest at the point of exchange.
Putting the hypocrisy aside of using the same zero sum exchange concept by negotiation-ability-failure-man by merely plugging himself in as the “rich” in the one party gains at the expense of the other party mantra…..negotiation-ability-failure-man is wholly unable to negotiate as “bargain” and “deal” don’t exist in his zero sum world and bargain and deal are substituted by the only exchange he understands: one party gains at the expense of the other party.
If the above discussion has validity, then negotiation-ability-failure-man is merely a trained creature of an exogenous ideology. Critical thinking is out the window and Pavlov is merely ringing the bell.
In the main, when people discuss Milton Friedman's fourth category of spending they do so in a mistaken vacuum. How so? They forget to point out HOW other people's money came to be. Stated alternatively, other people spending other people's money on other people, the discussion thereof, many, many times leaves out Friedman's first point: coercion.
Hence one ends with an isolated discussion of how Friedman's fourth category of spending points out the careless way or ineffective/inefficiency produced by other people [politico] spending other people's money [taxpayer] on other people [recipient class]. True enough. However the isolated discussion decouples the coercion and only discusses the single phenomena without discussing [coupling] the ability of such a spending phenomena to emerge.
Think about it, how many times have you heard the discussion, in isolation, of other people spending other people's money on other people??
Meanwhile, twenty six discussions later a separate subject is discussed regarding coercion of forcibly appropriating other people's money. Moreover, the discussion of coercion many times appears in isolation from Friedman's total discussion.
Nay, nay! One must discuss both subjects as coercion must occur first and only then can one arrive at other people spending other people's money on other people.
Problem solved! Please go to 11:00 to 11:34 of the Youtube video below and hear Friedman himself discuss the two phenomena in tandem.
‘When President Obama needed a business executive to come to his campaign defense, Jim Sinegal was there. The #Costco co-founder, director and former CEO even made a prime-time speech at the Democratic Party convention in Charlotte. So what a surprise this week to see that Mr. Sinegal and the rest of the Costco board voted to give themselves a special dividend to avoid Mr. Obama's looming tax increase. Is this what the President means by "tax fairness"?
Specifically, the giant retailer announced Wednesday that the company will pay a special dividend of $7 a share this month. That's a $3 billion Christmas gift for shareholders that will let them be taxed at the current dividend rate of 15%, rather than next year's rate of up to 43.4%—an increase to 39.6% as the Bush-era rates expire plus another 3.8% from the new ObamaCare surcharge.
More striking is that Costco also announced that it will borrow $3.5 billion to finance the special payout. Dividends are typically paid out of earnings, either current or accumulated. But so eager are the Costco executives to get out ahead of the tax man that they're taking on debt to do so.’ - WSJ, Costco's Dividend Tax Epiphany, updated 11/30/2012
