The Socialized Medicine Scheme: Bending the Cost Curve

Diagram of Marginal Cost

Proponents of the socialized medicine scheme offer a talking point entitled Bending the Cost Curve. Sounds impressive does it not? However, is the talking point put forth of bending the cost curve merely price controls in disguise?



Definition of Cost Curves:


(1) Short run and long run average cost curves are U shaped,

(2) Short run cost curves are U shaped because of diminishing returns,

(3) Long run cost curves take on a U shape because economies and diseconomies of scale. (1)


Shape of the Cost Curve?

Bending the Cost Curve, that "U" shaped curve in the diagram above, can surely be a different shaped "U". However, the shape will always be "U". Which means marginal cost rises. (2) (3)

Its not about Cost Curves

The concept of a cost curve is being hijacked by politicos when they use the phase "Bending the Cost Curve". That is, there is a complete disregard for the economics of the cost curve itself and merely a catch phrase has been developed that sounds as if sound economics are being applied.

The vast majority of those using the talking point Bending the Cost Curve have no earthly idea what a cost curve is nor the economic theory surrounding the cost curve. In other words, in the current heath-care debate, bending the cost curve is not economics nor political-economy. Its pure politics. Its political speak.

Serious Discussions of Changing the Cost Curve of Health-Care

There are serious discussions on how to lower costs within the realm of health-care. Sound strategies exist that pertain to cost factors such as more efficient organization, physician supply, institutional factors, comparative effectiveness of research, reform medical liability, etc., etc.. In other words, strategies that directly effect a cost curve. (4), (5), (6).

There is a sea of research on how to effectively reduce health-care costs. Ideas and procedures that really do address the concept of a cost curve.

Enter the Politicos

With the political speak talking point of Bending the Cost Curve firmly in hand, politicos merely take the path to price controls. In other words, when politicos say bending the cost curve they really are talking about price controls.

Politicos want votes not real results. Rather than addressing the true problem associated with cost, its more politically expedient to merely apply price controls. Politicos end up with a price argument even though they began with a cost argument. Remember, we are going to bend that mean old cost curve. Forget that, attack price.

The political argument for price controls is articulated with sub-talking points such as the percentage of Gross Domestic Product the USA spends on health-care in comparison to other economies (argued that total price is too high), affordability (argued as price being too high), that the uninsured are uninsured do to price, etc., etc. The point being the politicos make a price argument not an argument for strategies regarding cost factors i.e. bending the cost curve gets thrown out the window in favor of a price argument.

The economic disconnect is that final price is made up of a series of costs. That if you concentrate on cost factors, and truly bend the cost curve then you will have materially changed final price.

However, if you attack final price, and make price a political issue, then somehow artificially reducing price will affect cost? That's the cart before the horse.

Price Control Strategy

You are going to be very hard pressed to find one case in economic history where price controls have ever worked. (7) (8) Then why use price controls? Because really bad economic ideas never die they merely get recycled and sold to the gullible.

What the politicos want you to think is that they have a concern with cost (don't forget that bending the cost curve mantra) but in fact their argument is price and the solution is price controls.

What do Price Controls Produce?

Price controls always end with the same result: depressed supply of the item. Supply falls and rationing of the item occurs.

Sure seems like the rationing argument crops up over and over again within the health care debate. Odd huh?

Price Controls with Increased Price?

As mentioned above, really bad economic ideas such as price controls never die. However, really bad economic ideas can be made even worse. Really? Sure! Why not increase the price first, add some taxes to further increase the price, take the increased revenue produced by the increased price and redistribute to millions of uninsured and make them insured hence creating a demand shock, then slap on price controls and have a real mess. Sounds like a plan!

No Price Control Scheme is Complete without Big Government

When you discuss price controls you are talking bureaucracy. If you are going to control price, you will need plenty of rules and regulations. No rules and regulation manual is complete without an army of government bureaucrats. The current health-care legislation creates upwards of 110 new government departments. Now that's bending the cost curve!

Summary

Politicos are using a the slogan "Bending the Cost Curve" with no real understanding of the economic theory of cost curves. (9) That politicos want you to feel they are concerned with cost when in fact their strategy boils down to price control.

(1) http://www.economicshelp.org/blog/economics/diagrams-of-cost-curves/

(2) http://www.economicshelp.org/microessays/costs/diminishing-returns.html

(3) http://csob.berry.edu/faculty/economics/CostCurves/CostCurves.htm

(4)http://content.healthaffairs.org/cgi/content/abstract/28/5/1260

(5) http://www.kaiserhealthnews.org/Daily-Reports/2009/July/17/CBO.aspx

(6)http://www.brookings.edu/reports/2009/0901_btc.aspx

(7) http://freedomkeys.com/pricecontrols5.htm

(8) http://austrianeconomics.wikia.com/wiki/Price_controls


(9) http://www.politico.com/livepulse/1009/CBO_Bend_the_cost_curve_what_does_that_even_mean.html

Socialized Medicine Scheme: Universal Coverage does not equal Universal Access

The socialized medicine scheme is based in part on the premise that universal coverage creates universal access. What would be the true costs of universal coverage if it truly created universal access?

Defining Terms

(1) Universal Coverage: health insurance coverage for all persons in a state or country, rather than for some subset of the population. It may extend to the unemployed as well as to the employed; to aliens as well as to citizens; for pre-existing conditions as well as for current illness; for mental as well as for physical conditions. (1)


(2) Universal Access: universal access can be defined as access for all to quality health services if need be, with social health protection. Universal access is not, by itself, sufficient to ensure health for all and health equity. The roots of health inequities lie in social conditions outside the health system’s direct control, to be tackled through intersectoral collaboration. Universal access however is the necessary foundation within the health sector on the road to health for all and health equity. (2) (3)

Universal Coverage and Universal Access

From the definition above one can see that universal coverage is on the demand side of the equation. Demand for health-care products and services would certainly increase with universal coverage.

From the definition above, Universal Access is related to supply. Supply of health-care products and services would need to adjust to the increased demand caused by universal coverage.

The Missing Determinant

The missing determinant of universal coverage in relation to universal access, is price. That is, to achieve universal coverage a price (cost) must be paid for those currently uninsured. To achieve universal access an incentive price must exist for supply to accommodate demand.

Price/Cost
To achieve universal coverage a price/cost must be paid. To fully insure the entire population, income and/or wealth must be redistributed. The political class attempts to make the moral argument that redistribution of income/wealth must occur from the producer class to the recipient class as the recipient class is uninsured in large part due to price/cost. That is, the uninsured are in large part uninsured due to affordability of health insurance.

However, the price of health insurance is directly related to the cost of producing/providing health-care. In other words, in the free market, the demand for health-care intersects the supply of health-care, at point price. The price point of health care is known and hence the "price" becomes the cost of health insurance. That is, the risk of facing the price of health-care is then a major component of determining the cost of health insurance.


Price Controls

In the scheme of socialized medicine the argument routinely put forth is that the price to provide health-care is too high. That is, even though demand and supply produce price, the price point is too high. In other words, the natural or true price created by demand and supply becomes a socio-economic argument. As the argument goes, the price is too high because only a certain percentage of Gross Domestic Product (GDP) should be allocated to health-care. That somehow and some way, if the percentage of GDP allocated to health-care was lower, then the subsection of consumers uninsured would find coverage affordable. The argument goes on to compare costs in one country to costs in another country and/or percentage of GDP spent on health-care in one country to another country (one economy compared to another economy). Note that it is a price argument.

Welcome to artificial pricing. In a command and control economy "price" is set artificially regardless of demand and supply. Price can be set artificially too high or too low in a command and control economy. In the socialized medicine scheme argument, "price" is artificially set below the price produced by the previous free market for health-care.

Arguments for artificial pricing are artificial by nature. If consumers value an item then they demand the item. For example, if the Chinese economy demands rice, and rice makes up 20% of GDP, why is 20% wrong and 12% right? Price controls always backfire. (4)

Artificially Set Prices in the Socialized Medicine Scheme

As previous pointed out, in a free market, demand and supply intersect at price. The price point can be afforded by most consumers but a subsection of consumers can not afford price due to their particular command of resources (income). For example, the demand and supply of 42 inch flat screen TV's produce price (p). Price (p) attracts certain consumers while other consumers do not have the resources to allocate to a 42 inch flat screen TV.

In the realm of socialized medicine the political class argument is put forth that in order for the subsection of consumers to afford price, income and wealth (resources) needs transferred to to this subsection of consumers (redistribution of income and wealth). However, the producer class resists the redistribution to the recipient class. Further, the redistribution causes the producer class to have less disposable income to pay for health-care. In other words, the price point of health-care then becomes unaffordable for some producer class members due to the redistribution of income. That is, some of the producer class now slips into the recipient class due to redistribution of income and wealth.

Enter political-economy. If price is artificially set below the free market price, then the redistribution of income and wealth from the producer class can be set low enough to cut resistance and to stop the slippage mentioned above of producer class members falling into the recipient class.

The Effects Producing Universal Coverage through Artificial Pricing and Redistribution

When universal coverage is achieved through artificially pricing and redistribution of income the proponents of socialized medicine then promote that they have given the masses universal access. That universal coverage is the avenue to universal access.

However, access is supply driven. If Price is distorted (artificially set below the market) the supply, which is the summation of suppliers, now faces a disincentive in the form of an artificially low price.

Existing suppliers now have to decide to stay in the health-care field or allocate their resources to other ventures. If price is too low, some suppliers leave the market place. Further, with price set artificially low, many other potential future suppliers e.g. future doctors, nurses, medical device makers, pharmaceutical research companies, etc. shift their resources to other more profitable fields where price is set by the free market. However, other supplier will enter the health-care field but enter on "cost". That is to say, the cost sensitive supplier offers cut rate services, service quality below service quality that was available at Price (p) set by a free market. (5)

Hence artificially low prices set by command and control then causes supply to dry up and/or become of lower quality. The ability to access health-care is then diminished for the entire group of universal coverage participants as demand engulfs supply. Price (p) can not function as the rationing agent as it has been set artificially. Therefore, among an array of rationing agents, time (t) becomes a component of rationing. For example, at artificial price (aP) the supply of hip replacements is 1000 per day. However, universal coverage has created a demand for hip replacements of 5000 per day. Time must pass before the hip replacement can occur for the majority of demanders due to restricted supply.

Summary

Universal Coverage through redistribution of income and artificial pricing leads to a universal access that is rationed through time and the Universal Access is generally of lower quality. That the only way to create un-rationed universal access is to allow the free market to determine price through demand and supply.

However, if price is allowed to be the determinant, price set by the natural forces of demand and supply in a free market, then un-rationed universal access would have a price tag of redistribution of income and wealth that would break the back of the producer class. (6)

Hence universal coverage, with price set artificially low, as proposed by proponents of the socialized medicine scheme, actually leads to rationed universal access for the entire group of participants.

(1)http://www.mondofacto.com/facts/dictionary?universal+coverage

(2) http://www.becausehealth.be/becausehealth/PDF/seminar2009/becausehealth_140509_concept_bc_ws.pdf

(3) Advancing and sustaining universal coverage. In: Primary health care: now more than ever. The World Health Report 2008. Geneva, World Health Organization, 2008. http://www.who.int/whr/2008/whr08_en.pdf

(4)http://www.ncpa.org/sub/dpd/index.php?Article_ID=8146

(5) http://www.dailymail.co.uk/news/article-1234276/Britain-sick-man-Europe-Heart-cancer-survival-rates-worst-developed-world.html

(6) http://www.dailymail.co.uk/news/article-1234660/Pre-Budget-report-Clobbering-middle-earners-national-Insurance-raid-mean-40-000-find.html

The Socialized Medicine Scheme: Distortions in Risk Management and Pure Risk Transfer

Does The socialized medicine scheme, through mandated one-size-fits-all health care coverage, distort the individuals ability to deploy risk management and consequently distort the pure risk transfer mechanism ? In this article we explore the following questions:

(1) are the individuals decisions regarding risk avoidance, risk reduction, risk mitigation and risk retention being distorted by mandated coverage and the distortions leads to the immediate pure risk transfer aka purchase of insurance?

(2) does the socialized medicine scheme of mandate coverage reverse the proven process of insurance theory and practice and require the immediate transfer of risk (purchase of insurance) with risk management deployed after the fact via through tax disincentives ?

(2a) does the reversal of the proven process of insurance theory and practice lead to risk management becoming a cost item rather than a cost reduction item?

Defining Terms
(1) What is pure risk? A category of risk in which loss is the only possible outcome; there is no beneficial result. Pure risk is related to events that are beyond the risk-taker's control and, therefore, a person cannot consciously take on pure risk. (1)

(2) What is risk management? Risk management is the application of tools and procedures to contain risk within acceptable limits. (2)

(3) What is insurance? A promise of compensation for specific potential future losses in exchange for a periodic payment. (3)


Risk Management
Its well established within insurance theory and practice that one needs to review and employ risk management concepts and techniques before the consideration of the transfer of pure risk (insurance).

Risk management techniques reduce the need to transfer portions of pure risk. The less pure risk transferred means the lower the consideration paid (premium) for the transfer of risk. Hence risk management lowers costs.

Risk Avoidance

The first risk management technique one needs to explore is risk avoidance. This is simply avoiding the risk all together. For example, if you never want to sustain a football injury, then do not play football. However, risk avoidance has it limitations as not all risks can be avoided.

Risk Reduction
If the risk can't be avoided or you want to benefit from an endeavor that involves pure risk, then you need to go to the next step of risk reduction. That is, can one reduce the chances that pure risk might occur.

For example, risk reduction of operating and/or owning a motor vehicle includes taking drivers education, taking an advanced defensive driving course, reducing/combining trips to reduce miles driven, owning snow tires,etc.. Hence the pure risk of an auto accident can be reduced through safety.

Risk Mitigation

Risk mitigation is an exercise in risk management. Since the pure risk exists, and if the pure risk occurs, we need to mitigate the loss. Fire does occur. Owning a fire extinguisher, being trained in the proper use of a fire extinguisher, and placing the extinguisher in fire prone areas can mitigate the scope of the loss if fire occurs.

Risk Retention

Risk retention is the concept that if pure risk exists, and given the other risk management techniques have been deployed, then how much of the ensuing potential financial loss of the pure risk can you reasonably absorbed? This differs per individual. If the maximum potential loss is $100,000,000 can you retain $1000, $5000, or $10,000 of the risk? That is, given an individuals financial situation, what portion of a loss can be financially absorbed before it becomes financially disabling?

Therefore, before one ever explores the transfer of a risk (aka the purchase of Insurance), one must go through the risk management process to access risk avoidance, risk reduction, risk mitigation, and risk Retention.

The Transfer of Risk

Only after you exercise the steps of risk management can you intelligently determine that a particular pure risk exists and how to financially treat the risk. That you can or can't avoid the risk, that you have determined how much you can reduce the risk, that you have determined how much you can mitigate the risk, and a determination has been made on the amount of pure risk that can be financially retained.

Once you have passed through the risk management steps, and determination has been made that X amount of pure risk needs transferred then at this point one must attempt to find a ready market to transfer the portion of the risk that one can not retain i.e. purchase insurance.


The Dynamics of Risk Management and The Transfer of Risk Regarding the Individual
Applying risk management and determining the need to transfer pure risk is going to yield many and varying results among differing individuals with differing circumstances. For example, John Q. Buffet can likely retain the majority of pure risks whereas on the other end of the pure risk curve Jane Q. Public needs to transfer the majority of pure risk. Between John's situation on one end of the spectrum and Jane's situation on the other end of the spectrum are an endless series or risk management and pure risk transfer scenarios.

Enter the Socialized Medicine Scheme
The socialized medicine scheme proposed in the US House of Representatives and Senate imposes a one size fits all risk management and transfer of pure risk scenario which minimizes the incentive for risk management. The known dynamics that exist within risk management and pure risk transfer among differing and varying individuals are disregarded through the use of one-size-fits-all pure risk mandated coverage. The mandated coverage requires a relatively low set deductible and relatively low set out-of-pocket cost. The proposed plan also includes ancillary coverages such as relatively low doctor office co-pays and relatively low prescription card co-pays. The predetermined coverage with relatively low deductibles and co-pays causes little room for risk management. The predetermined mandated coverage design pigeon holes all risk management although its well known that individual risk management needs vary widely.

Consequently, the theory of risk management and pure risk transfer is violated by predetermined mandated coverage. The process of risk management immediately leading up to determination of the transfer of pure risk is minimized .

What are the Consequences of Minimizing the Risk Management step?
Inefficient Allocation of Resources

One very important consequence of minimizing the risk management step is the inefficient allocation of resources for individuals. For instance, why would John Q. Buffet want to allocate $10,000 per year for the transfer of pure risk when in fact he would rather retain the risk? The $10,000 is now transferred from other activities John Q. Buffet values to an activity John does not value. This becomes an inefficient allocation of resources for John Q. Buffet. The same inefficient transfer of resources cascades across the entire spectrum as the vast majority of individuals would have chosen deductible and plans different than the mandated plan and deductibles.


Incentives created to Minimize Risk Management Techniques

Another aspect of a one-size-fits-all approach which consequently minimizes the risk management step immediately prior the determination of pure risk transfer, is the effect on risk management techniques. When risk management becomes a minimized procedure so do the risk management techniques become minimized. Assume for a moment that John Q. Buffet wanted to retain the entire risk while Jim P. Public wanted a very high deductible major medical plan and retain a relatively large portion of the risk. John and Jim are now required to outlay resources they had allocated elsewhere in the past. This is an additional cost to John and Jim. John and Jim are now incentizised to minimize rather than maximize risk management techniques they otherwise would have employed in the past.



The risk management techniques, that would have been paramount when retaining an entire pure risk or retaining a major portion of a pure risk, are now minimized by the relatively low deductible mandated coverage. John and Jim now have an incentive, through low deductible insurance, to minimize risk management techniques. That is, John and Jim don't deploy risk management techniques as they have in the past.

John and Jim rigorously deployed risk management in the past when they were retaining all or large amounts of pure risk. The retained risk is so low under mandated coverage that John and Jim have no incentive to rigorously deploy risk management. Lets say John always wanted to sky dive. However, as a risk management techniques John avoided sky diving. Why not sky dive now as the risk of injury is covered by insurance on a relatively low out of pocket dollar basis. It boils down to the following sarcastic comment you have surely heard in the past when a person is questioned about a risky endeavor: "...why not, I have insurance"!

Incentives Introduced to Recover Cost (to over utilize)

Another item creeps into the realm of pure risk when insurance is mandated and risk management is minimized: return on the dollar invest in insurance. The theory of insurance clearly points toward buying insurance for the catastrophe. When insurance is purchased for everyday items, consumers of insurance then have an incentive to maximize what they perceive as cost/benefit. In other words, if a consumer is forced to buy insurance with a low deductible, with plenty of benefits, but at a perceived high cost, then the consumer will attempt to recover cost through utilization of benefit.

Attempts to Deploy Risk Management After the Fact via Tax Disincentives

In the socialized medicine scheme an attempt is made to deploy risk management after the fact. As discussed above, the mandated coverage of the socialized medicine scheme creates an incentive to minimize risk management techniques. From the consumers point of view, all the risk management in the world will not reduce the cost of the relatively low out of pocket cost under mandated coverage.



Proponents of socialized medicine attempt to deploy risk management through a cost increase to mandated Insurance consumer. Rather than risk management being used as a cost reduction technique for the consumer of health-care, they use risk management as a cost increase item for consumers of health-care.


The proposed Soda Tax is an excellent example. Proponents of socialized medicine believe the consumption of soda leads to health problems. Hence to reduce consumption of soda they propose a tax. Hence risk management suddenly becomes a monetary increase in cost to the consumer rather than a monetary reduction in cost to the consumer.


Many proponents of socialized medicine also support taxes on fast food. That fast food leads to weight gain and hence is unhealthy. Enter the tax as a risk management technique to reduce fast food consumption. Once again we have a back door, after the fact, risk management method that increases cost to the consumer rather than decreasing costs through traditional risk management.

Summary

Risk management has been distorted and minimized as a proven step in the determination of pure risk transfer through mandated coverage. Hence the method of deploying risk management after the fact becomes a cost increase rather than a cost decrease method.



(1) http://www.investopedia.com/terms/p/purerisk.asp


(2) http://msdn.microsoft.com/en-us/library/cc500392.aspx


(3) http://www.investorwords.com/2510/insurance.html

The Administrative Cost Argument of the Socialized Medicine Scheme

Proponents of the socialized medicine scheme (aka single payer, public option) make an argument that "administrative costs" would be lower under a socialized medicine scheme vs. private insurance. Is this a valid argument or are terms and conditions skewed? Are the mathematics/statistics of the argument presented incorrectly? Are monopolistic pricing powers being confused/included within the term "administrative costs"? What about the item dislocated labor markets?


Administrative Costs Defined

First of all what are "administrative costs" within the field of insurance? One needs to know the terminology.

The "load" is the term that refers to administration cost in the field of insurance. "Loading" is the addition of the administration cost to the pure cost of insurance. Here are two widely used definitions:

(a) addition to the pure cost of insurance that reflects premium taxes, administrative costs associated with putting business on the books, and contingencies,

(b) the amount included in the premium to meet liabilities beyond anticipated claims payments to provide administrative costs and contributions to reserve funds and to cover contingencies such as unexpected losses or adverse fluctuations. (1)

Socialized Medicine Administrative Cost Argument

One of the arguments put forth by proponents of socialized medicine is: the "administrative costs" will be lower with socialized medicine vs. private insurance. The problem is that proponents of a socialized medicine scheme have shaped their arguments around differing definitions of "administrative costs" none of which match insurance theory or practice.


Administrative costs arguments put forth by socialists:

(1) in argument number one Administrative Cost are the traditional costs of the broad concept of general paper work administration,

(2) in argument number two administrative costs are more comprehensive including advertisement and claim administrative costs, screening of applicants, general paperwork, billing,

(3) in argument number three, which appears to be their most common argument, they define administrative costs the same way as in one and two above, then leave the realm of administrative costs, and include within the argument, the monopolistic pricing power of a socialized medicine scheme. In other words, they add in an exogenous variable monopolistic pricing power related to the pure product which has nothing to do with administrative costs,

(4) none of the arguments add in contingency costs,

(5) all arguments rely on a statistic from medicare pointing to the low cost administration of Medicare,

(6) all arguments exclude service level/service value and the consumer's ultimate satisfaction with "administration".




Reverse of the Original AT&T Break Up?


Looking at the subject of administrative costs from a historical perspective, and given history is always a good teacher as well as a good story, let us discuss monopolist powers.

Atlantic Telephone and Telegraph was the only "provider" of telephone services 30 years ago. For those of you under 45 years of age, imagine a time when there was only one Internet Service Provider (ISP).

The consumer received one and only one menu of choices and the one and only one customer service from exactly one provider known as Atlantic Telephone and Telegraph.

Bonus: you received one and only one price.

Say for instance you thought there should be more choices or better customer service. Sorry. one choice and this is how it is.

The consumer got fed up with one choice and authoritarian customer service. In the 1970's everyone complained about "the phone company". If you are under 45 years old, everyone hated the one and only ISP.

Along the way, the one and only provider, Atlantic Telephone and Telegraph, became administrative fat. Oh yes! Pork and Union diet only. Why not! There was no competition!

When the AT&T break up occurred, the new competitors ate AT&T's lunch. The biggest lunch plate item? Oh yes, AT&T's administrative costs.

Welcome to the telephone competition of today. You have an endless menu of options from multiple providers. Providers that offer good customer service (or you have the choice to change providers). Providers who run very lean operations and administrative costs in comparison to AT&T before the break up.

In other words, from an economics perspective, after the break up of Atlantic Telephone and Telegraph you received choice at a lower cost vs. monopolistic powers.



Monopolistic Administrative Costs Argument of Socialized Medicine

The argument for monopolistic administrative costs of socialized medicine is articulated by Erza Klien in his June 8th article in the Washington Post. (2) He summarizes as follows: "Moreover, public insurance is simply more efficient. Medicare holds costs down better than private insurance".

Senator Bernie Sanders argues for monopolistic administrative costs of socialized medicine by stating "...you have to deal with the enormous amount of waste that is currently within the private health insurance industry. The estimate is about $400 billion a year in administrative costs, billing, in profits, CEO compensation, in advertising--all of these things which have nothing to do with the provision of health care..." Senator Sanders goes on to say "In California, my understanding is that 1 out of every 3 dollars of premium goes to administration". (3)

What about the Medicare administrative cost argument? Is it true or false? False. Medicare administrative costs are higher, not lower, than for private insurance. (4) (5)

What about the 33% administrative costs as asserted by Senator Sanders? False. California Private Insurers average 12.7% administrative costs .(6)


Monopolistic Pricing Power of the Pure Product

One must note that the argument put forth that socialized medicine would have lower administrative costs purposely becomes entangled with monopolistic pricing. That is, the argument leaves the realm of administrative costs and attempts to include in the argument the exogenous concept of pricing the pure product.(7) The argument is invalid as administrative costs are items you add to the pure cost of the product.

In Klein's article he states "...act as a public insurer. To use market share to bargain down the prices of services much as Medicare does". Monopolies do not bargain. Monopolies set the price suppliers will be paid. Take it or leave it. In other words, Medicare is basically a monopoly and sets the price it will pay for services. Either accept medicare patients at price "X" or don't accept Medicare patients.

What in the world does the exercising of monopolistic pricing power to suppliers of the components of the pure product have to do with administrative expenses? Nothing. The argument is a separate argument unrelated to administrative costs.


Impact on the Labor Market of Monopolistic Administrative Costs

Exactly what is the labor demographics of the private sector health insurance administrative mechanism? (8) By and large the administrative labor force is female. Would this largely female work force be dislocated by a monopolistic administration within socialized medicine? Yes, large labor dislocations at an enormous cost. (9)

Hence we dislocate hundreds of thousands of predominantly female non-union workers at an enormous cost, and replace these workers with a unionized government labor force. Does that sound like administrative cost savings? What about the start up costs for the new government unionized administration? (10) What about the ensuing chaos of untrained administration workers, with a new procedural manual, in a newly formed bureaucracy, that now needs to provide service to millions and millions of people. Chaos is an understatement.

Also, many of the private sector female administrators are telecommuters. That’s right, they are mom's that work from home. Its a cost saving tool for private insurers and the workers like the idea. What about the indirect cost to the family of dislocating these workers? Do government workers telecommute? Largely no. Only 6% telecommute. (11) Why does the government not use this cost saving and labor satisfying technique?


Summary

The argument that a socialized medicine scheme would have lower cost is incorrect. That monopolistic pricing of the pure product is out of place in the administrative cost argument. That the socialized medicine scheme would create a monopoly in administration with unintended consequences for consumers. Finally, the socialized medicine scheme argument for monopolistic administration would dislocate hundreds of thousands of workers at an enormous cost and replace a largely female non-union work force with a high cost unionized government work force.

(1) http://www.answers.com/topic/loading

(2) http://voices.washingtonpost.com/ezra-klein/2009/06/health_care_reform_for_beginne_3.html

(3) http://www.thenation.com/blogs/edcut/440938/a_seat_at_the_table_for_single_payer">

(4)http://www.heritage.org/research/healthcare/wm2505.cfm

(5) http://www.wellsphere.com/healthcare-industry-policy-article/rhoads-what-administrative-savings/598029

(6) http://www.lao.ca.gov/2008/hlth/sb840/SB840_analysis.pdf

(7) see (1) above

(8) http://www.dllr.md.gov/lmi/industryclusters/financedemographics.pdf

(9) and (10). see (6) above

(11)http://www.wharton.universia.net/index.cfm?fa=viewArticle&id=918&language=english

Hyper-Debt and Unemployment as a Lagging Indicator

Unemployment is a lagging indicator when Economic Recovery begins. That is conventional wisdom. (1) (2) (3)

(A) Unemployment as a lagging indicator is true in a normal Business Cycle.

(B) Unemployment is a lagging indicator in a normal debt level situation of households, businesses, and government.

(C) Unemployment is a lagging indicator when leverage begins to become readily available as recovery begins in the business cycle.

Conventional Wisdom gets upset from time to time. (4)(5) As the business cycle tries to move into a recovery stage, what if Unemployment is not a lagging indicator? Hmmm.

Is this a normal Business Cycle Recovery?

Consider these items:

(a) businesses and households are deleveraging,

(b) fixed overhead-capital values having fallen in value by Trillions of dollars,

(c) other wealth items having fallen by Trillions of dollars,

(d) sprinkle in some major open market operations aka Quantitative Easing,

(e) add in a falling dollar and the specter of rising taxes.

(f) plummeting Government Tax Revenues and Expanding Expenditures creating unmanageable deficits.

(g) State, Local, and the Federal Governments having over spent for decades while simultaneously creating unfunded entitlements creating an unmanageable accumulated debt level.

(h) looming inflationary pressures.


What is a Published Unemployment Rate of 10.2% and a Real Unemployment Rate north of 16% really indicating?

Given a Real Unemployment rate north of 16%, what about the sharp increases in Underemployment, Part Time Employment, Structural Unemployment? What about discouraged workers increasing at an increasing rate? What is being "indicated"? What about the remaining employed having an average work week of 33.2 hours? What does this all "indicate"?

Unemployment is not acting as a lagging indicator this time around? This time around Unemployment as a Lagging Indicator is a statistical outlier?

Hyper-Debt

Of the items mentioned above affecting this particular Business Cycle, the summation of accumulated debt, that is the past use of debt to accelerate future consumption into the present, may in effect be a major influence on unemployment.

We certainly know that "debt" is a drag on any economy. What if the summation of accumulated debt becomes so large its referred to as Hyper-Debt? From Social Security through the Great Society Programs, through the transition to a "service economy", through decades of Keynesian Deficit Government Stimulus Plans , through decades of Politicians buying votes via Pork Barrel Spending, to the decades of the Financial Sector, Consumers, and Businesses over leveraging......that surely the accumulation of too much debt sends up an "indicator" at some point in time.


If borrowing is viewed as accelerating future consumption into the present, that consumer goods, business goods, and government goods can be enjoyed in the present by borrowing from the future. Then at some point future consumption is affected by past borrowing.


However, if you mismanage debt, that you mismanage to the point of reaching a Hyper-Debt state, there are consequences. One consequence of hyper-borrowing, hyper accelerating future consumption into the present, is that you find yourself in the future (time marches on) with no funds to support past consumption patterns. If you over borrow, that is, over consume in the present at the expense of future consumption, and do it on a regular basis, then future consumption must suffer at some point.


Debt is a drag on an economy. Then Hyper-Debt is a Hyper-Drag on an economy.

We may very well have reached that point, upon the time line of Hyper-Debt, that the past borrowing, of accelerating future consumption into the present, has caused present consumption to look completely different than past consumption. That past consumption patterns now effect current consumption patterns.

Consumption of goods and services, the Demand for goods and services, directly effects the amount of human capital employed. If you accelerate too much future consumption into the present then the level of employment of human capital mirrors this over acceleration of future consumption into the present facilitated by Hyper-Debt. When the Hyper-Debt becomes unsustainable, that the cost to service the Hyper-Debt and the need to retire Hyper Debt trumps any further leveraging, then deleveraging becomes vogue.

However, if past employment levels were strongly associated with over accelerating future consumption into the present, and the accelerating of future consumption into the present via leveraging abruptly ends, then employment must fall.



Further, its one thing to deleverage from debt and yet another thing to deleverage from Hyper-Debt. The cost to deleverage from Hyper-Debt is extreme. Hence the new consumption pattern is devoid of acceleration and actually decelerates as the high cost of Hyper-Debt deleveraging demands a greater share of current and additional income, income that otherwise would have, in large part, been used for consumption.



Moreover, its not deleveraging from Debt, its deleveraging from Hyper-Debt. This deleverageing causes a demand for goods and services that is unlike past demand patterns. That deleveraging from Debt takes time, that deleveraging from Hyper-Debt takes a long time. Therefore the new level of demand requires less employment of human resources. That the old level of demand was false due to Hyper-Debt over accelerating future consumption into the present causing an employment level that was accelerated.



Rather than Unemployment being a lagging indicator, Unemployment will remain high and persistent and comparisons of current unemployment to past unemployment figure are apples and oranges as past employment was based on Hyper-Debt over accelerating consumption into the present and causing employment levels to over accelerate.

If in fact Hyper-Debt, over time, is deleveraged and debt levels return to manageable debt levels, then income once used for deleveraging Hyper Debt by Businesses and Households will become available for consumption. The question becomes how long will it take to deleverage from Hyper-Debt to Manageable Debt?



(1)http://www.dmiblog.com/archives/2009/09/leading_with_lagging_indicator_1.html

(2)http://seekingalpha.com/article/114201-unemployment-numbers-losses-were-awful-but-jobs-are-a-lagging-indicator

(3) http://www.ncsu.edu/project/calscommblogs/economic/archives/2009/08/unemployment_as.html

(4) http://latimesblogs.latimes.com/money_co/2009/07/wall-street-opens-this-week-less-confident-that-a-turning-point-for-the-economy-is-on-the-near-horizon-after-last-thursdays.html

(5)http://seekingalpha.com/article/141937-unemployment-as-a-lagging-indicator-not-this-time

Socialized Medicine Scheme and Central Planning: Purple Marbles.

The socialized medicine scheme that recently passed the US House of Representatives is an attempt at central planning. That is, socialized medicine is centralized planning. Central planning is an attempt to allocate resources by "scheme" rather than allowing the free market to allocate. The 1994 pages of the socialized medicine scheme should have been paired down to "1984" pages so one could more easily identify it with "misery".


All one needs to do is study the former Soviet Union’s central planning, decades and decades of central planning, and one will find the best intentions, elaborate schemes, “planning”, etc. failed miserably.

What does a central planning scheme look like?


















If you didn't spend much time studying the former Soviet Union, central planning may be a foreign concept to you. The diagram above is a short version of a central planning scheme. Schemes inevitably gain a life of their own as the scheme can't allocate resources correctly. The final centralized planning chart will be much larger and much more complicated? Of course. Further, there will never be a "final chart". Schemes can not account for all the dynamics of free market allocation. Hence the chart will be amended over and over again yet never solving the problem of efficient resource allocation to competing ends.

Central planning always fails as regardless of the intricacy, elaborate modeling, planning, etc.: central planning always fails to allocate scarce resources to competing ends.

Regardless of the economic frame work, the ends are always competing. In the former Soviet Union, in the beginning of the fourth quarter of an annual cycle, the managers of different industries would on their own, outside the central planning frame work, begin to barter for scarce resources among themselves.

Why did they begin to barter for resources in the centrally planned system?

Every year, without fail, the central planners would mis-allocate resources. Some industries would have stock piles of unused items while other industries would have to halt production as they had no more inputs. Bartering would begin among the managers of the varied industries in an attempt to reallocate scarce resources. Of course bartering is a highly inefficient system. Hence some resources would be reallocated but most resources sat idle. The result was inevitably too many purple marbles and not enough eye glasses.

The allocation of scarce resources to competing ends is most efficiently done in a free market. Maybe the framers of the central planning document known as socialized medicine should read some philosophy from a fellow named Milton Friedman. They might find that economics is the study of incentives as well as the study of the allocation of scarce resources to competing ends.

However, when Economics is supplanted with politics, ideology, and agenda, when resources are not efficiently allocated.....well maybe the Picture Chart below explains the concept/result:

Schemes: Unintended Consequences

The Socialized Medicine Scheme as proposed and passed by the US House of Representatives is full of unintended consequences. That is, when you create a Scheme (1990 pages of Scheme) to replace a Free Market you immediately face the phenomena of unintended consequences and cascading unintended consequences.

This article merely looks at one immediately known unintended consequence regarding fines for not purchasing Health Insurance.

Take a look at the article below regarding "uninsured motorists" in regards to auto insurance. There is little new information in the article for the exception of Web Based Tracking Pilot Programs. There has been a zillion articles written on the topic of uninsured motorists. However, please keep in mind the gist of this article is enforcement and fines regarding the uninsured motorist.


http://articles.moneycentral.msn.com/Insurance/InsureYourCar/wanted-auto-insurance-outlaws.aspx


Also keep in mind that when arguing for the Socialized Medicine Scheme, proponents like to compare Compulsory Auto Insurance to Socialized Medicine. That argument is invalid. The non-validity of the argument is explained here:



http://thelastembassy.blogspot.com/2009/10/socialized-medicine-scheme-compulsory.html


Martin Feldstein of Harvard University recently wrote an article stating that the Socialized Medicine Scheme, as proposed and passed in the US House of Representatives, creates an incentive for paying the fine and skipping the purchase of Health Insurance. Please see that article below:

http://www.nber.org/feldstein/washingtonpost_110909.html


Now, think about Martin Feldstein's recent article regarding people being incentivized to pay the fine and avoid buying health insurance under the Socialized Medicine Scheme. You pay the fine then buy coverage when you are sick as the Preexisting Conditions clause is invalidated.


Feldstein's article makes the assumption that HomoEconomicus makes the rational decision to pay the fine as outlined in his article.

What if Feldstein's assumption of paying the fine is replaced by the decision not to pay for anything at all. In other words, just like the phenomena of "uninsured motorists" you have the "uninsured and non-fine paying" health insurance non buyer.

Will the "uninsured and non-fine paying" phenomena occur in the Socialized Medicine Scheme? Absolutely. Hence that takes you back to the discussion in the uninsured motorist article (above) regarding "enforcement and fines".

"Enforcement" costs money. Who pays? Lets look around. Yes, you pay! If one is going to enforce the payment of fines, one must create a mechanism to collect the fines. More Bureaucracy? Of course!

Lets say we develop an Enforcement Bureaucracy and they track down and fine a non-insured and non-fine paying person. What then? Suspend their privilege to have health insurance? They, by definition, have no health insurance. If you suspend their privilege then they are part of the uninsured which supposedly is the reason for the Socialized Medicine Scheme (cover everyone). Gets murky does it not?


OK, we collect back fines as the enforcement. We further fine the back fines (a fine on a fine). However, the vast majority of Uninsured Motorists are uninsured as they can't afford insurance. It would be the same phenomena in non-insured and non-fine paying in the Socialized Medicine Scheme i.e. non-insured and non-fine paying people can't afford the fine or the insurance in the first place. What are the chances of collecting a fine on accumulated non paid arrears fines from a person that can't afford the fine or the insurance in the first place? Gets more murky does it not?


Can't pay the fine on the fine and the back fines? We throw the person in jail. Ops! The jails are already full! Ah, the evil of it all!


It should become clear that replacing a Free Market with a "Scheme" is absolutely full of unintended consequences. The phenomena mentioned above is merely one of hundreds and perhaps thousands of unintended consequences of the Scheme known as Socialized Medicine. Any good unintended consequence worth its salt will interact with other unintended consequences causing Cascading Unintended Consequences. Schemes generally end up a messy proposition.