At one time, President Obama noted similarities between his presidency and Ronald Reagan’s, but these days it seems his administration is more often compared with Nixon’s. The Benghazi coverup, followed by the IRS scandal that targeted right wing groups, followed by the revelation that the Department of Justice seized the telephone records of Associated Press reporters without any notification, is reminiscent of the Nixon White House and the Watergate scandal that eventually ended the Nixon presidency.

Bloggers here at The Beacon are normally not reticent about criticizing government, so it is interesting that until this post, nobody here has said anything about these events that have so dominated the news recently. Two possible explanations are that, first, they have received so much news coverage that, well, what more can you say? And second, many of the bloggers here look at these events and say, “What’s surprising? That’s the way government normally operates.” I will include myself in that group.

Give some people power over others and they will use that power to further their agenda, and to protect themselves from attack, without regard to the consequences of those others. Maybe I’m being even a bit too generous here. The president has often referred to those who hold opinions different from his as his opponents, so more than just not having any regard for consequences to others, there is the suggestion that it would not be bad if those opponents suffered some in the process.

Now, another apparent abuse of power has come to light. Federal prosecutors are investigating James Rosen, a reporter for Fox News, who reported on North Korean missile launch plans that may have been classified information. The New York Times, not often thought of as a right-wing newspaper, has been critical of the administration’s possibly unconstitutional attack on the press in this case.

Cases like this (and the seizing of the AP phone records) seem bad for the administration, because they are aimed at a group — the press — that has a substantial ability to strike back, reach a wide audience, and do so in a way that does not appear partisan.

Going after right-wing groups? Sure, those extremists deserve it! Going after the press? Not only does the press appear non-partisan, the administration counts on their support to generate popular support for the president’s agenda. Why antagonize the people you are counting on for support? This seems like bad strategy.

If it is bad strategy, why does the administration pursue it? Partly, it is the tone the president sets at the top. He’s not working with Congress, he’s battling his opponents. If it is us against them, you do what you can to bring “them” down. Combine that with the fact that those in government can use their power toward that end, and it is not surprising that they use it. Power corrupts.

Even though prices don’t have the same meaning in the medical marketplace that they do in other markets, they still have the power to influence provider behavior.

Take Medicare, which has a list of some 7,500 separate tasks it pays physicians to perform. For each task, there is a price that varies according to location and other factors. Of the 800,000 practicing physicians in this country, not all are in Medicare, and no doctor is going to perform every task on Medicare’s list.

Yet Medicare is potentially setting about 6 billion physician fees across the country at any one time.

Is there any chance that Medicare can set fees and approve transactions in a way that does not cause serious problems? Not likely.

What happens when Medicare gets it wrong? One result is that doctors face perverse incentives to provide care that is costlier and less appropriate than the care they should be providing. Another result is that the skill set of our nation’s doctors becomes misallocated, as medical students and practicing doctors respond to the fact that Medicare is overpaying for some skills and underpaying for others.

Every lawyer, every accountant, every architect, every engineer—indeed, every professional in every other field—is able to do something doctors cannot do. They can repackage and reprice their services. If demand changes or if they discover a way of meeting their clients’ needs more efficiently, they are free to offer a different bundle of services for a different price. Doctors, by contrast, are trapped.

Suppose you are accused of a crime and suppose your lawyer is paid the way doctors are paid. That is, suppose some third-party payer bureaucracy pays your lawyer a different fee for each separate task she performs in your defense. Just to make up some numbers, let’s suppose your lawyer is paid $50 per hour for jury selection and $500 per hour for making your final case to the jury.

What would happen? At the end of your trial, your lawyer’s summation would be stirring, compelling, logical, and persuasive. In fact, it might well get you off scot free if only it were delivered to the right jury. But you don’t have the right jury. Because of the fee schedule, your lawyer skimped on jury selection way back at the beginning of your trial.

This is why you don’t want to pay a lawyer, or any other professional, by task. You want your lawyer to be able to reallocate her time—in this case, from the summation speech to the voir dire proceeding. If each hour of her time is compensated at the same rate, she will feel free to allocate the last hour spent on your case to its highest valued use rather than to the activity that is paid the highest fee.

Now can you see why Medicare misallocates scarce healthcare resources and delivers inconsistent levels of care? It’s shouldn’t be a mystery. What’s puzzling is that too few people understand the problems that arise when third parties set the fee schedules and a genuine price system is not allowed to operate and perform its invaluable role.

For details, please see my Independent Institute book, Priceless: Curing the Healthcare Crisis.

[Cross-posted at Psychology Today]

The orthodox approach to health policy is obsessively focused on the burdens of price barriers to care, and at the same time inordinately oblivious to the burdens of non-price barriers. Yet non-price barriers to care can be very costly. This is an important point that dooms many healthcare proposals, as I explain in my book Priceless: Curing the Healthcare Crisis.

In Britain, for example, hundreds of thousands of patients relying on the British National Health Service are waiting months for hospital surgery. Many are waiting in pain. Many are risking their lives by waiting. The cost of such waiting for many of them is undoubtedly greater than the cost (to the government) of their surgery.[1]

Not only is rationing by waiting costly, it is usually socially wasteful. To employ a numerical example, consider a hospital emergency room where people come for free primary care. Let’s say the real cost of a doctor visit is $100 per patient, on the average. In a normal market, the market-clearing money price of care would also be $100—and that would be the fee patients pay.

If the services are free, however, a much larger group of patients will try to take advantage of them, including patients who value doctor visits at only $5 or $10. Since demand greatly exceeds supply at a price of zero, the doctor’s time is available in this example only to those who are willing to wait the longest. How long will people wait, on the average? Someone who values a doctor visit at $100 will be willing to spend $100 worth of time. (Consider a patient who values his time at his wage rate. If he is paid $20 an hour, he will wait five hours; if he is paid $25 an hour, he will wait four hours, and so on.)

Just as price rationing produces a market-clearing money ­price ­of care, rationing by waiting time produces a market-clearing time­ price ­of­ care. In this example, the market will clear at $100 worth of time for the marginal patient. But remember, other people (probably taxpayers) have to pay the doctor $100 in money. That means that the care ­is­ being­ paid­ for twice:­ once­ with­ time­ and­ again ­with­ money. Non-price rationing, in this example, effectively doubles the social cost of medical care.

By the way, a surprising number of patients—about one in five, on the average—get discouraged and leave emergency rooms without ever being seen. Just as people at an auction get outbid by others who are willing to pay a higher money price, patients in emergency rooms often get outbid by others who are willing to pay a higher time price for their care.

Notes:

1. “Hospital Waiting Times/List Statistics,” Department of Health, United Kingdom, 2nd Quarter, 2008/2009, http://www.performance.doh.gov.uk/waitingtimes/index.htm.

[Cross-posted at Psychology Today]

I received a postcard in yesterday’s mail. The first paragraph reads:

“The City of Tallahassee’s Office of Cross-Connection Control monitors actual or potential backflow via cross connections with non-approved water sources. We are committed to the quality of water delivered to our customers, and your drinking water remains clean and free of contaminants [sic]. Our records indicate that your backflow prevention assembly is due for annual testing. Please have this test performed by a certified backflow prevention assembly tester who will forward copies of the test results to our office. Failure to respond to this notice could result in discontinuance of your water service.”

The remainder of the postcard explains how I can locate a city-approved certified tester, cites sections of the Florida Administrative Code and City of Tallahassee Code Ordinances, and concludes, “Thank you for your cooperation in this important matter for our community.”

I have lived in the same house in Tallahassee for 25 years and have never had my “backflow prevention assembly” tested. I don’t even know whether I have one. Why am I required to have this test now?

I don’t see how this can be a problem. First, the city water lines are under pressure, so the water only flows one way. As long as the pressure is maintained in the city lines, how there can be any backflow? Second, all the water in the lines in my house came from the city line, so even if there was backflow, it would just be water that came from the city mains going back that way. Where is the problem?

If someone knows more about water systems than I do, feel free to explain to me why this testing, which hasn’t been done in the quarter century I’ve lived in this house, is in the public interest now. I know this is a minor issue in the big scheme of things, but I am a blogger here at The Beacon, so I’m using this opportunity to carp about it.

My current plan is to throw the postcard away and do nothing. Do you really think they would cut off my water? My best guess is that nobody even checks to see if I comply. I’ll let you know if anything comes of my passive resistance.

What I call health policy orthodoxy is committed to two propositions: (1) The really important health issue for poor people is access to care, and (2) to ensure access, waiting for care is always better than paying for care. In other words, if you have to ration scarce medical resources somehow, rationing by waiting is always better than rationing by price.

(Let me say parenthetically that the orthodox view is at least plausible. After all, poor people have the same amount of time you and I have, but a lot less money. Also, because their wages are lower than other people’s, the opportunity cost of their time is lower. So if we all have to pay for care with time and not with money, the advantage should go to the poor. This view would be plausible, that is, so long as you ignore tons of data showing that whenever the poor and the non-poor compete for resources in almost any non-price rationing system, the poor always lose out.)

The orthodox view underlies Medicaid’s policy of allowing patients to wait for hours for care in hospital emergency rooms and in community health centers, while denying them the opportunity to obtain less costly care at a walk-in clinic with very little wait at all. The easiest, cheapest way to expand access to care for millions of low-income families is to allow them to do something they cannot now do: add money out of pocket to Medicaid’s fees and pay market prices for care at walk-in clinics, doc-in-the-boxes, surgical centers, and other commercial outlets. Yet, in conventional health policy circles, this idea is considered heresy.

The orthodox view lies behind the obsession with making everyone pay higher premiums so that contraceptive services and a whole long list of screenings and preventive care can be made available with no co-payment or deductible. Yet, this practice will surely encourage overuse and waste and, in the process, likely raise the time prices of these same services.

The orthodox view lies at the core of the hostility toward Health Savings Accounts (HSAs), Health Reimbursement Arrangements (HRAs), and any other kind of account that allows money to be exchanged for medical services. Yet, it is precisely these kinds of accounts that empower low-income families in the medical marketplace, just as food stamps empower them in any grocery store they choose to patronize.

The orthodox view is the reason so many backers of Obamacare think it will expand access to care for millions of people, even though there will be no increase in the supply of doctors. Because they completely ignore the almost certain increase in the time price of care, these enthusiasts have completely missed the possibility that the act may actually decrease access to care for the most vulnerable populations.[1]

The orthodox view is the reason there is so little academic interest in measuring the time price of care and why so much animosity is directed at those who do measure such things. It explains why MIT professor Jonathan Gruber can write a paper on Massachusetts health reform and never once mention that the wait to see a new doctor in Boston is more than two months.[2]

This neglect would matter little if not for one thing: the evidence, as I explain in my book Priceless: Curing the Healthcare Crisis, suggests that the orthodox view is totally wrong.

Notes:

1. John C. Goodman, “Emergency Room Visits Likely to Increase under ObamaCare,” National Center for Policy Analysis, Brief Analysis No. 709, June 18, 2010, http://www.ncpa.org/pdfs/ba709.pdf.

2. Jonathan Gruber, “The Impacts of the Affordable Care Act: How Reasonable Are the Projections?” National Bureau of Economic Research, NBER Working Paper 17168, June 2011, http://www.nber.org/papers/w17168.pdf.

[Cross-posted at Psychology Today]

I had earlier posted about the SNAFUed boondoggle also known as the Eastern span of the Oakland-San Francisco Bay Bridge (here and here), but the bad news just keeps rolling in.

Yesterday it was revealed that the tower supporting the entire self-anchored suspension bridge rests on bolts that are likely to fail, causing the tower to move. A “veteran seismic engineer” has helpfully pointed out:

That’s something you don’t want.

It seems that Caltrans, the agency building the $6.4+ billion bridge, after guessing that engineers could figure out how to build its arty design safely, then guessed that bolts banned from use in bridges would be OK if they were manufactured under a slightly different process.

Problem is, instructions for the altered manufacturing process failed to get passed along to the Alabaman manufacturer.

Thus the banned bolts arrived, got embedded in concrete on top of pilings in the Bay, and the 525 foot tower was lowered on top of them. Where they can now not be inspected.

Throughout, Caltrans continues to insists its quality control has been “pretty rigorous.”

The California State Senate suggested an investigation by a “truly independent third-party,” such as “a panel of University of California professors or an independent, nonprofit think tank,” but the Feds know better, and now the Federal Highway Administration is going to come in and investigate.

Asked about the prospect of $6.4 billion not being enough to deliver a bridge that can actually be used, Jerry Brown, governor of our most-taxed state (and in his previous post as mayor of Oakland an early proponent of form over function in advocating for the designer bridge), succinctly philosophised: “s— happens.”

Guess our taxes won’t be headed down anytime soon.

Barring legal maneuvers, a fringe party becomes part of a country’s mainstream politics for one of two reasons: because it sheds or conceals its extravagant views or because mainstream politics shifts in such a way as to make it relevant. The UK Independence Party, which won an average of 25 percent of the vote in the seats it contested in the recent local elections in Britain, belongs in the second category.

Prime Minister David Cameron, who once famously described UKIP as “a bunch of fruitcakes, loonies and closet racists”, felt forced, the day after the stunning results, to say, “We need to show respect for people who have taken the choice to support this party.” The move from the early dismissal to the recent recognition of UKIP by the authorities is an ironic illustration of how the organization led by Nigel Farage, a relatively young former commodities broker who serves in the European Parliament, has transited from the margins of British politics to the center. And it has done so without shedding or concealing its ideas, which are essentially three: immigration is a scourge; the United Kingdom must leave the European Union, and the welfare state needs to be rolled back.

What has happened? The traumatic post-bubble scene in Britain and Europe has helped Farage’s cause, of course. So has the blurring of the ideological lines between the three dominant parties, including the Conservatives and the Liberal-Democrats, who used to be at opposite ends of the spectrum but have been, since the 2010 general election, allies in government. More fundamentally, however, what has happened is that UKIP now lies at the intersection of two powerful though mutually exclusive sentiments that have been gathering steam for many years in contemporary Britain: individualism and nationalism.

The first sentiment is a healthy reaction against the growth of government and social engineering, which have gradually interfered with, or even replaced, the old tradition of voluntary association and community that is a hallmark of the country’s democracy. The second sentiment is a fear of the disruptive forces of globalization, a distrust of things foreign and different. Of course, the lines are not always clearly demarcated: there is in part an individualistic ingredient in the xenophobic reaction against outsiders, mostly the disgust with the European bureaucracy in Brussels.

The point here is that UKIP has managed to capture a growing share of the electorate (we will have to wait until the general election of 2015 to see whether this phenomenon has long legs) because the mainstream parties have not been able to address these two sentiments. Even if they had tried, it would not have been an easy task at all because there is a contradiction at heart between wanting to push back the state (both the British and the European states) and rejecting the consequences of the free circulation of goods, services, capital and people.

This contradiction is tearing apart the mainstream parties themselves. As is well known, the Tories have been deeply divided over Europe for a long while. So much so that at least one hundred Conservative MPs in Westminster, about one third of Cameron’s party, are much closer in ideological terms to UKIP than to the government they support. Because he knows this, Cameron has promised a referendum on whether the UK will stay in the European Union after the next general election if he wins.

Numerous voices in Britain are dismissing the recent elections as a typical case of mid-term discontent rather than a sea change in British politics. Nobody knows for sure. But the connection that Farage has established with the two potent sentiments that have taken grip of a large chunk of the electorate suggests the traditional parties need to do a lot more than hope this is a passing fad.

Despite the fact that prices in healthcare do not play the same role as they do in other markets, there is a tendency on both the political right and the political left to ignore this fact.

The right, for example, issues frequent calls to make prices transparent. A number of proposals would even require doctors and hospitals to post their prices. Doctors find these proposals perplexing because they know that there are no prices at a typical physician’s office. There are only different payment­ rates. What possibly could be gained by posting these rates on the wall? If you are a BlueCross patient, how does knowing what an Aetna patient is paying help you in any way?

On the left, a common view is that health costs are too high because health-care prices are too high. They believe that the way to control costs is to push prices down. This idea is actually written into the Affordable Care Act. All kinds of efficiency ideas are included in the new law, but when all else fails—and most knowledgeable people believe that all else will fail—ACA will try to solve the problem of rising Medicare costs by squeezing the providers. Medicare’s chief actuary predicts that by the end of the decade, Medicare fees for doctors and hospitals will be lower than Medicaid’s.[1] And it may not end there. At least one organization advocates imposing Medicare-type price controls on the entire healthcare system.[2]

The problem with this way of thinking is that prices in healthcare are symptoms of problems, not causes of problems, in the same way that a high body temperature is a symptom of a fever. Just as it would make no sense to try to treat a fever by lowering the body’s temperature, it makes no sense to try to control prices while ignoring why they are what they are. Plus, when we treat symptoms rather than their causes, there are inevitably unanticipated negative consequences. For example, if we tried to impose low fees on every provider for all patients, we would begin to drive the most capable doctors out of the system—into alternative pay-cash-for-care services and perhaps even out of healthcare altogether.

But there is an even more fundamental problem with trying to solve the problem of cost by suppressing prices. The suppression of provider payments is an attempt to shift costs from patients and taxpayers to providers. Even if we get away with it, shifting­ costs is not the same thing as controlling­ costs. Doctors are just as much a part of society as patients. Shifting cost from one group to the other makes one group better off and the other worse off. It does not lower the cost of healthcare for society as a whole, however.

Finally, both the right and the left—but especially the left—too often assume that the ideal price of care for low-income patients is zero. After all, if price is a deterrent to care, doesn’t it follow that you maximize access by making healthcare free at the point of consumption? Not necessarily. I will explain why in my next blog post. Until then, please see my Independent Institute book, Priceless: Curing the Healthcare Crisis.

Notes:

1. John D. Shatto and M. Kent Clemens, “Projected Medicare Expenditures under an Illustrative Scenario with Alternative Payment Updates to Medicare Providers,” Centers for Medicare & Medicaid Services, US Department Of Health & Human Services, August 5, 2010, https://www.cms.gov/ReportsTrustFunds/downloads/2010TRAlternativeScenario.pdf#page=7.

2. Michael Ettlinger, Michael Linden, and Seth Hanlon, “Budgeting for Growth and Prosperity: A Long-Term Plan to Balance the Budget, Grow the Economy and Strengthen the Middle Class,” in The ­Solutions ­Initiative, Peter G. Peterson Foundation, Washington, DC, May 2011, 40–47, http://www.pgpf.org/Issues/Fiscal-Outlook/2011/01/20/~/media/4595173EB72C47EF9E8E85DE680A22B0.ashx.

[Cross-posted at Psychology Today]

If you ask a hospital in your neighborhood to give you a package price on a standard surgical procedure, you will probably be turned down. After the suppression of normal market forces for the better part of a century, hospitals are rarely interested in competing on price for patients they are likely to get as customers anyway.

A foreign patient is a different matter. This is a customer the hospital is not going to get if it doesn’t compete. That’s why a growing number of US hospitals are willing to give transparent package prices to foreigners, and these prices often are close to the marginal cost of the care they deliver.

North American Surgery (an enterprise that facilitates medical tourism) has negotiated deep discounts with about two dozen surgery centers, hospitals, and clinics across the United States, mainly for Canadians who are unable to get timely care in their own country. The company’s cash price for a knee replacement in the United States is $16,000 to $19,000, depending on the facility a patient chooses.[1]

Now here is what is interesting: The same economic principles that apply to the foreign patient who is willing to travel to the United States for surgery also apply to any ­patient who is willing to travel. That includes US citizens. In other words, you don’t have to be a Canadian to take advantage of North American Surgery’s ability to obtain low-cost package prices. Everyone­ can­ do ­it.

US patients willing to travel and able to pay cash may get an even better deal by taking advantage of the online service, MediBid. People register and request bids or estimates for specific procedures on MediBid’s website for the services of, say, a physician, surgeon, dermatologist, chiropractor, dentist, or numerous other medical specialists. MediBid-affiliated physicians and other medical providers respond to patient requests and submit competitive bids for the business of patients seeking care. MediBid facilitates the transaction, but the agreement is between doctor and patient, both of whom must come to an agreement on the price and service.

The company facilitated more than fifty knee replacements in 2012. Each request got an average of five bids, with some getting as many as twenty-two. Most prices were between $10,000 and $12,000, and the average was about $12,000.[2]

The implications of all this are staggering. Many US hospitals are able to offer traveling patients package prices that are competitive with the prices charged by top-rated medical tourist facilities around the world. (You don’t have to travel to Thailand, after all.) However, I would insert this note of caution: Although a hospital with excess capacity gains by charging the marginal ­customer the marginal cost of care, it may not cover the full costs it needed to stay in business if it charges every ­customer that price. So the prices we are looking at may not be long-run equilibrium prices.

The final question is: Why are US employers and insurers overpaying by so much, and why does the amount they overpay vary so much?

In part, because in the entire medical marketplace, there is no natural evolution to uniform, market-clearing prices, the way markets work in other sectors of the economy. Even MRI scans vary by over 650 percent in a single town. Furthermore, most providers don’t even know how to price their services because they don’t know what their costs are.[3]

Market prices plays a critical role in coordinating economic activity, but not so much in the healthcare system. The reason is that their effectiveness has been hampered by a variety of government interventions, including those that have fostered the third-party payment system. As I explain in my book Priceless: Curing the Healthcare Crisis, unless we liberate prices and allow them to do their job, reforms that are supposed to significantly improve healthcare will fall far short of that goal.

Notes:

1. Devon Herrick, “Medical Tourism: Have Insurance Card, Will Travel,” National Center for Policy Analysis, Brief Analysis, No. 724, September 22, 2010, http://www.ncpa.org/pdfs/ba724.pdf.

2. MediBid.com website, correspondence, and discussions with Ralph Weber, president and CEO of MediBid.

3. Kelly Kennedy, “Healthcare costs vary widely, study shows,” USA­ Today, June 30, 2011, http://www.usatoday.com/money/industries/health/2011-06-30-health-costs-wide-differences-locally_n.htm.

[Cross-posted at Psychology Today]

This bridge took 5 years and $936 million to build

I have written before about the amazing saga of the new span for the Oakland-San Francisco Bay Bridge, now 24 years and $6.4 billion in the making...with no end in sight. A full account of its background can be found here.

The “signature design” never before built and of dubious seismic stability in one of the Continental U.S.’s most earthquake-prone areas, now faces a new round of problems: 2,300 bolts holding it together are likely to fail.

Bolts that the agency building the bridge had itself banned from use on bridges.

This bridge has been 24 years and $6.4 billion in the making

But rules—when you’re the government and they’re your rules—are made to be broken. As explained by the Director of the California Department of Transportation (Caltrans):

Generic specifications are for a run-of-the-mill bridge, and this bridge is not run-of-the-mill.

Indeed it’s not. It’s “art,” and pesky notions like safety and engineering principles must simply understand.

Almost from the get-go, safety and engineering have taken a backseat as politicians hijacked the bridge-replacement process. Under their guidance, designers came up with an asymmetrical self-anchored suspension bridge with unique cabling features—a design that has never been built, but nevertheless carried the politicized vote of approval.

An architect serving on the panel offered this explanation for the final vote:

“The novelty factor kicked in, especially with the engineers. And everyone was getting a bit tired by then.”

Fast-forward 15 years: the resulting bridge is supposed to be opened for traffic this September, with a final price tag somewhere north of $6.4 billion—nearly five times that projected. The general perception is that if it doesn’t open on schedule it will be a black eye for somebody—though I’m not sure for whom, since none of the original political gamesmen seems to be standing up—and one wonders if safety will now, finally, be allowed to trump politics.

An earlier safety whistle blown was quickly silenced. The Sacramento Bee conducted an exhaustive investigation, reviewing 50,000 technical files, and consulting with the world’s leading experts in bridge construction, to reveal significant questions regarding the safety of the bridge’s concrete foundations.

Questions that have never been answered.

Contrast this with the Tsing Ma Bridge in Hong Kong, for example, built in 5 years, at a cost of $936 million. Similarly a suspension bridge, it is longer than the Bay Bridge’s new span and has two decks: one for cars, one for rail and emergency access, and was built to withstand typhoons.

Though it may not meet Bay Area bureaucrats’ standards as a “signature design,” according to the China Attractions website, this “spectacular bridge ... has become a favorite scenic spot as well as a landmark.”

Whenever the ribbon is cut on the new Bay Bridge’s span, one wonders who is going to be first across the seismically unsafe bridge with questionable foundations and held together with banned bolts. Not my family.