Employer Mandates, Individual Mandates and the Return of the Edsel.

The debate over health care reform is almost over. Other than a few minor modifications that will be needed to reconcile the House and Senate bills, the long battle is over. Although I’m reluctant to predict what the final product will look like, there are two reforms that will most likely survive the sausage-making process: employer mandates and individual mandates. As Charles and I suggested in our paper The Modern Health Care Maze, given the perverse systemic incentives present in our health care system, individual and employer mandates are unavoidable. Here’s what we can expect from these mandates.

EMPLOYER MANDATES: It’s not clear is how the government will be able to force small businesses to offer “quality health insurance” at a "reasonable cost," without incentivizing those employers to either: drastically reduce the wages of their employees, cut back the number of full-time employees, or filing for bankruptcy. The only way to prevent any of these adverse responses is for government to either subsidize health insurance for small businesses, redefine “quality insurance,” or both. Both strategies will be in the final bill. No one knows how much future small businesses will be willing or able to spend on employee health insurance. My best guess is that most small-business owners will need nearly a 100% subsidy in order to stay in business. And, let's not forget that the vast majority of small businesses will go bankrupt, regardless of health care reform. Government will try to control health insurance costs by redefining “quality insurance.” A 40% tax on “Cadillac Health Insurance Plans” offered by large employers will almost certainly be in the final bill. But I have very little faith in our legislators’ ability to distinguish between Cadillacs and Edsels. I do predict that Congress will end up with Cadillacs and most of the rest of us will have Edsels.

INDIVIDUAL MANDATES: No one knows how much young, healthy individuals will be willing or able to pay for mandatory health insurance, without defaulting on their student loans, defaulting on their car loans, or defaulting on their home mortgages. Without a 100% subsidy, my best guess is that we’ll see either a massive default rate on loans or a radical decline in college enrollment, new car or home purchases by young, healthy people. Therefore, if I’m right, government will be paying for most of the insurance that it mandates for young, healthy individuals.

So between employer and individual mandates government will be paying for a lot more or Edsel quality health care. And given that there is nothing in the health care reform bills that will force providers to compete based on quality and price, those subsidies will merely add to the inflationary spiral.

Why the American Hospital Association and the American Medical Association Oppose Lowering the Age Requirement for Medicare

As health care reform continues it's steady decent into oblivion under the watchful eye of a swarm of lobbyists, let me offer a few comments on a recent news article announcing that the American Medical Association and the American Hospital Association will oppose the expansion of Medicare as an alternative to the proposed “public option.” As reported by David Espo on December 11: "The American Hospital Association and American Medical Association have both criticized the proposed Medicare expansion since it was announced Tuesday night, saying the program pays health care providers less than private insurance companies, and warning against increasing the number of patients."

Although I personally stand to benefit from the proposed lowering of the program's age requirement from 65 to 55, I really can’t defend an expensive government program infested with fraud and grossly over-budget: even if it is popular among those who benefit from it. But I would like to point out that the opposition voiced by the AHA and AMA is exactly what you’d expect from any artificial monopoly.

Artificial monopolies thrive, not because they provide higher quality products and/or services at a lower price than their competitors, but because they convince government to disable competition. It’s a lot easier and less expensive to dispatch an army of well-paid lobbyists to Washington than it is to compete head-to-head. That’s also why the quality of health care in the United States has been in decline while the price continues to rise.

In the case of hospitals and physicians, competition has been long disabled by an extraordinarily convoluted and opaque pricing system. The cornerstone of this system is called price-discrimination, whereby sellers conveniently set their prices based on the buyers’ ability to pay. In the health care industry it’s based the size of the risk-pool. (Keep in mind that price-discrimination only works under conditions where buyers cannot simply refuse to buy these products and services: think cancer treatment!) Hence, under a price-discriminatory system, providers charge different prices to different buyers and buyer groups. If your private health insurance policy has a large enough risk pool, it can force the sellers to charge less. Of course, providers always prefer to negotiate with small risk-groups, and their lobbying efforts invariably reflect that preference. If you are not part of a group you’ll pay to the teeth!

Private insurance companies are currently regulated by state governments; which obviously limits the size of buyer groups. But under this bizarre pricing structure, no one really knows what that final price will be until long after the product or service has been provided. (Go ahead, call around town and ask how it costs to get an MRI!) Imagine going to your auto repair shop and asking how much a new muffler will cost, and the mechanic responds by saying: “Well the price depends on the size of the risk pool that backs up your auto insurance. We currently charge 37 different prices. We’ll replace your muffler and then figure out that price and send it to your insurance company, then they’ll decide how much they’ll pay, then you’ll get a bill for the difference.” After you get through laughing your ass off, you’d probably decide to fix that muffler yourself, or simply drive a noisy vehicle.

So what’s the story with Medicare? Well, it’s a single-payer system (and a so-called "public option") which means that it draws on a national market and has enough bargaining power to negotiate a lower price from providers. It also forces providers to charge a set fee that clearly reflects what Medicare will pay for that product of service. It’s a lot like going to your auto repair shop where the prices are posted on the wall and on their website, and everyone pays the same price. This kind of a pricing structure actually forces providers to compete based on quality and price. Of course, if you are a provider you’d prefer to be paid more per-buyer than less-per buyer, which is why many successful providers simply refuse to take on any Medicare patients. As the number of providers that refuse to participate in Medicare increases, it gets more difficult for elderly patients to find willing providers. When they do find one, they'll probably spend several hours in the waiting room! However, there is one class of providers that thrive on Medicare; that is, dishonest providers that charge the program for unnecessary products and services or for products and services that they never provided. And the government's inability to monitor the system, attracts dishonest providers.

So what’s the solution here? Well, I would argue that the health care industry ought to operate under the same legal pricing constraints as other industries. Most other countries have outlawed price-discrimination and therefore force providers to post their prices. Of course, that won’t happen in the United States because The American Hospital Association and the American Medical Association would descend on Washington like a swarm of locusts.

The Illusion of Costless Benefits: Mammograms, Pap Tests, and the Inspection of Goat Entrails

Last week the results of two major research studies challenged the utility of two cancer screening tests: mammograms and Pap tests. As a libertarian philosopher, I thought I’d add a few caveats.

Scientific predictions of impending downward spirals are subject to two kinds of costly errors that waste time, effort, and resources: false positives and false negatives. Mammograms and Pap tests are subject to a high incidence of both, which raises two questions. 1.) Under what conditions does it make sense for an individual to undergo these imperfect screening tests? 2.) Under what conditions does it make sense for government to encourage or discourage the use of these imperfect screening tests? The cost/benefit ratios for these tests are enormously complex and include both biological and economic determinents. Recent scientific evidence indicates that for individuals, the utility ratios for both mammograms and Pap tests vary based on one's medical history, family history, and age. If you have had cancer before, or if you have a strong family history of cancer, evidence suggests that you probably ought to be tested.

Once it is determined that you ought get routine mammograms and/or Pap tests, then scientists must then determine at what age routine testing ought to begin and end, and how often you ought to be tested? Surprise! The corporations that manufacture these tests and the specialists that interpret the results prefer that more women get tested more often. Third-part payers prefer fewer women being tested less often. As scientists gather empirical evidence over time, the cost/benefit ratios for various groups change and the status quo becomes subject to revision, and some women who were previously recommended for routine may no longer be routinely tested, and/or some who were not recommended for routine tested may be routinely tested.

Although about 3-4 million Pap tests are performed annually, only about 13, 000 cases of cervical cancer are diagnosed, and 4,000 women die from it every year. In the case of mammograms, 1,900 women must be screened for a decade in order to save a single life. In light of this body of statistical evidence, under what circumstances might government encourage women to undergo these tests, or mandate insurance companies to pay for these tests? Here lies the political problem.

For better or worse, we have all been culturally programmed to ignore the economic dimension of health care: an ideology that is reflected in the often cited moral pronouncement: “Regardless of how much it costs, if we can save one life… it’s worth it.” This high-minded ideology has had, not only a devastating effect cost of health care, it has also undermined scientific medicine. Based on the “save one life principle,” if we screen 100 million persons and save one life, it’s worth it! Or, if we spend $50,000 keeping 95 year old Uncle Joe alive in an intensive care unit for three more months, it’s worth it. And, of course the “save one life principle” becomes even more pernicious when someone else pays for the tests and/or hospital bills.

We Americans are more likely to want and/or undergo any screening test if a third party (private health insurance, Medicare, Medicaid etc.) pays for it. Economists call it “moral hazard.” So how do third-party payers decide which tests to pay for? Well, state and federal governments usually decide for them by force third-party payers to pay for certain tests. How do legislators decide which tests to mandate? We would all like to believe that scientific evidence plays a prominent role, but that’s not how our political system works. What usually happens is that the manufacturers of the tests and the would-be beneficiaries of low-probability, costless benefits get together and form coalitions that vigorously lobby state legislators. How hard is it for male legislators to refuse to cover Pap tests and/or mammograms when confronted by an army of female lobbyists?

Libertarians are critical of any system where government presides over the distribution of "costless benefits." If the goat industry and a group of patients that believe in the prognostic value of the inspection of goat entrails could form an effective lobby, third-party payers could be forced to pay for those tests. The fundamental problem in the United States is that health care policy is often forged on the basis lobbying acumen, often at the expense of science. As the goat industry plans its lobbying campaign to force third-party payers to cover the inspection of goat entrails as an alternative to mammograms and pap tests, we can begin to understand why the quality and cost of health care in the United States will remail suboptimal.

Group Bias in the Distribution of Health Care in the United States

As I suggested in an earlier blog entry governmentally subsidized health care in the United States is already being rationed. I think it is distributed based on an indefensible group bias; that is, politicians control access to subsidized health insurance based on arbitrary group association. Let's take a closer look at that.

Since the twentieth century, politicians have granted subsidized access to specific groups. In the 1940s, the first “group” to gain that access was comprised of individual white, male workers that worked for large unionized corporations. Later, politicians expanded access by including other groups including: the elderly, the poor, veterans, Native Americans, employees of government, and children. As a result of this irrational group-based allocation system, we now have a “maze” of health care tax-supported programs that provide various levels of health care coverage to most Americans. The current problem is that we now have a growing number of individuals that need access to health care but do not fall into any of these arbitrary groupings. Therefore, in order to gain access these “outsiders” have had to manufacture their own “group,” and lobby government for equal recognition. This new group is comprised of everyone that is not employed by a corporation that offers private health insurance, not elderly, not poor, not a veteran, not Native American, not employed by government, and/or not children.

Now any rational person that is against health care reform within its current framework must argue that these outsiders are not entitled to health coverage, even though these other groups already enjoy subsidized health insurance. Of course, no politician is going to take subsidized health care away from workers, the poor, elderly, soldiers, or children. But many politicians are opposed to adding “outsiders.” Interestingly the rest of us rarely demand that those politicians justify the inclusion of one group and the exclusion of another. Why?

Academic Dishonesty in Higher Education

Walter Williams is my favorite syndicated columnist. I look forward to reading his column every Sunday in the Cincinnati Enquirer. One of his favorite targets is the sorry state of higher education in the United States. His most recent rant, titled, Academic Dishonesty, shines a bright light on grade inflation at elite colleges and universities and how those very expensive institutions manipulate statistics to maintain their high rankings. Rather than rehash my hero’s arguments I thought I’d add a few caveats. As a professor at a small private liberal arts college, I can offer a slightly different perspective.

Like it or not, students at small private colleges compete with the graduates of these “highly ranked” programs; for jobs and for admission into graduate programs. But how can we compete with those institutions when they give all of their students A’s and B’s? Realistically, can we give our students a lot of B’s and C’s? Moreover, if you are a junior faculty member that hopes to earn tenure at a small college that emphasizes “good teaching,” how can you earn stellar student evaluations if you give out mostly B’s and C’s? Or better yet, if you are a Program Chair or an Academic Dean responsible for granting promotion and tenure, would you promote “easy-grading” professors with high student evaluations or “hard-grading” professors with lower evaluations; especially, knowing that low GPAs will not get your best students into high-paying jobs or graduate school?

So although it is tempting to attribute to the decline of higher education in the United States to simple dishonesty, it is actually much more complicated. At least part of the problem can be attributed to publically funded universities that spend millions of dollars in tax money on attractive new buildings and expensive athletic programs. And of course, those institutions must then take in more students to help pay the bills. Without expensive remedial programs, many of these new students flunk out the first year. One inexpensive way to make up for feeble remedial programs (and poor secondary education) is to lower academic standards. In other words, grade inflation is an effective solution to sagging retention numbers.

In my view, the only way to fix this mess is to accept the fact that higher education is an industry. This requires a major shift in governmental policy away from subsiding inefficient state institutions (and driving small public institutions out of business) and toward a less intrusive role consisting in promoting fair competition between private institutions. Realistically, will that ever happen? Well Walter, what am I going to do? Am I going to start giving out a lot of C’s and D’s in order to rescue academic honesty in higher education. If you said no, go to the head of the class.

The Non-Debate over Health Care Reform: Or, Why the Status Quo Will Prevail

Historically, health care in the United states has always been highly decentralized and forged on the basis of political action committees and paid lobbyists that represent specific groups: Medicare (the elderly), Medicaid (the poor, ) Children's Health Insurance Program (children), Veterans Health Administration (veterans), the Indian Health Service (native Americans), and Federal Employees Health Benefits Program (federal employees). Others are covered by employment-based private health insurance. All of these programs are tax-supported to various degrees. And all of them are either running deficits, infested with fraud, inefficiency, or a combination of all three. Despite shortcomings, these programs are also highly coveted by their respective constituencies, and therefore no one in Congress can reasonably propose replacing this patchwork with a single system. In other words, the health care reform movement in the United States is not about creating one single system, but rather adding other programs to that patchwork. The powerless constituencies that are currently left out this patchwork include: employees whose employers do not offer health insurance, patients with pre-existing medical conditions, employees that are under-insured (but don’t know it yet), and an undetermined number of young, healthy employees that choose to forego purchasing health insurance. Whatever happens under the guise of health care reform, I can promise you that none of the current programs will be eliminated. In other words, whatever it is that’s taking place in Washington under the guise of “Health Care Reform,” it is really about maintaining the status quo. At this point, there is no reason to debate the question of whether a centralized system is preferable to a decentralized one. That’s because no one in congress is really pushing for a centralized system. What's the problem? It's the way we go about forging public policy in the United States. Can we really afford to continue to allow Congress unlimited access to tax dollars and dole out political favors to powerful groups represented by well-paid lobbyists?

NON-COMPLIANCE WITH TITLE IX

This morning, an article in the Cincinnati Enquirer caught my eye: “Playing Field Still Not Level.” Basically, it exposes the fact that the state of Ohio does not enforce Title IX (1973), the legislation which mandates that public high schools offer male and female students an “equal opportunity” to participate in sports. Although I am both an avid “sports nut” and a supporter of gender equity, I am nevertheless puzzled by our disproportionate emphasis on sports in public high schools and the costs that are passed on to taxpayers; especially when most public schools are struggling to offer decent academic programs. Obviously, some sports are more expensive than others. Although I am a football fan, there is no good reason to offer this expensive sport in cash-strapped public schools (or any public school!). Without boring you with numbers I’ll merely point out that it’s very expensive to: build and maintain a football stadium, transport 75-100+ students to and from practice and games, buy equipment, pay coaches, and pay liability insurance premiums. It is the king of deficit sports. Unfortunately, football is also a “Y Chromosome sport,” and therefore any school that has a football team of, say, 150 male students, equality of opportunity would require 150 opportunities for females. This usually means that any school that takes Title IX seriously will not be able to offer other male sports such as wrestling, track and field, or lacrosse. If Ohio’s level of seriousness in respect to title IX is indicative of what’s going on elsewhere, public high school athletics is still overwhelming male dominated.

My basic argument is more subtle. I would argue that it makes more sense to offer athletic opportunities through private, non-profit voluntary associations than tax-supported schools. In fact, most communities already offer sports for pre-high school children outside of school, especially Pee-Wee Football, Little League Baseball, and AAU soccer, basketball, and track. In order to pay for these opportunities, parents pay a fee and/or raise money via bake sales, candy sales etc. Most coaches are parents that volunteer. The beauty of this arrangement is that the costs are incurred by those who receive the benefits. But today, these private endeavors are crowded out by public, tax supported high school teams. (Talk to any “select soccer coach!”) Now I can’t guarantee that football would survive privatization. It’s probably too expensive for most parents. In other words, football would not survive exposure to the free market, which is precisely why it is socialized. Think Amtrack…

One reason why I am a critic of public schools is that an inordinate amount of coercively obtained tax money is expended on sports and other extra-curricular activities. In fact, many schools that lack science laboratories, and/or air conditioning have a full array of expensive athletic teams. But then again, labs and air conditioners do not provide subsidized after-school adult supervision for mischief-prone teenagers!

Now back to title IX… If Cincinnati decided to eliminate all high school sports, parents that want their children to participate in sports would have to pay directly for these activities. Interested parents and students would have to set up these voluntary associations and volunteer to help coach, sell concessions, wash uniforms, mow lawns, etc. If the parents of female students are less-willing to get involved, that is not “discrimination.” It’s called “parenting.”

Unfortunately, the cultural drift of American society makes it difficult for high schools to cut back on extra-curricular activities, because colleges and universities now base admission and scholarships on participation in these kinds of activities. High schools that merely offer top-notch academic programs do not compete very well based on this mindset. How many student play high schools sports, cheerlead, or march in the marching band hoping to earn a college scholarship? When the stakes are that high, those voluntary coaches and band leaders are quickly replaced by paid “professionals.” And finally, many public schools are so bad that students won’t show up for school unless they can play sports, cheerlead, or play in the marching band. Well, Professor Serafini, what do you have to say about all of this? And “HAPPY BIRTHDAY!”

Tragedy of the Commons, Part 3: Over-Pollution

The second manifestation of the “tragedy of the commons” is the problem of over-pollution. When human beings either extract resources from the environment or transform resources into artifacts a certain amount residual material is left behind. That residual material deposited in the earth, air, or water can be useless, useful, harmful, or harmless. We usually call the useless, harmful, residual “pollution.” Knowledge of whether that residual material is (in fact) useful or useless, and/or harmless or harmful is contingent upon conducting costly scientific research and acting based on that research. Moreover, in many cases the natural environment is capable of reducing or eliminating the harmfulness of pollution. Knowledge of Mother Nature’s timeline for the transformation of waste can often be discovered via research, but sometimes not. The holy grail of human extraction and production is to develop techniques that minimize; or, at least expel waste at a degree and rate within Mother Nature’s ability to transform it into more useful and/or less-harmful byproducts. Call it "sustainability."

The basic problem for the social and political management of pollution is how to provide incentives and disincentives that lead extractors and producers to conduct the research necessary to limit and or reduce pollution, and act based on this research. The “tragedy of the commons” predicts that political stewardship over the “commons,” is invariably inefficient and/or ineffective. Hence, when extractors and producers expel useless and/or harmful waste into “commons” there is little, if any incentive to conduct the research necessary to transform it, eliminate it, or act on that research. Here’s why. If it costs less to pollute than not pollute, extractors and producers will usually choose to pollute. They will invest in research to minimize pollution and/or convert it, if and only if, the cost of conducting that research, and the prospects of that research “paying off” is less than the cost of continuing to pollute with impunity. For example, it is difficult to extract minerals from the earth without polluting the adjacent air and water. If there is little cost associated with polluting the commons, mining companies will continue to pollute, and/or transfer the cost of cleaning up the mess to others (usually government). Therefore, pollution control policy is all about providing extractors and producers with incentives and disincentives that lead to acceptable levels of pollution.


There are two ways for societies to provide these incentives: one entails “more government” the other “less government.” Unfortunately, neither strategy is likely to succeed at a global level. There are two “more government” strategies that are often employed to raise the cost of polluting the commons. One way is to simply tax or fine polluters. This strategy entails that government "cap" pollution levels, monitor and enforce compliance with these caps, and either tax or fine extractors or producers that exceed those limits. This raises serious practical problems. At what level will government set those pollution limits? (Set caps too high and there will be no extraction or production.) How much will it cost for government to effectively monitor and enforce compliance with pollution limits? (It could cost more to monitor and enforce pollution laws than it would cost to clean up the mess.) At what level will the government tax or fine violators? (Set taxes or fines too low and there is no incentive to not-pollute, set it too high and black market polluters will appear.) Who pays the cost of monitoring and enforcement of pollution standards? (Taxpayers, polluters, stockholders, retailers etc.)

The second “more government” strategy is the policy now being pursued by the Obama administration, called “cap-and-trade.” The general idea is to “cap” pollution at a certain level, but then allow extractors and producers that generate pollution levels lower than the cap to “trade” or sell “pollution credits” to those extractors and producers that are unwilling or unable to meet those standards. This creates an artificial market, that in theory, provides an incentive to become a seller of pollution credits, and a disincentive to become a buyer of credits. Although, this resembles a free-market approach, it is really a contingent upon where government sets the pollution limits, how government manages the pollution credit market, and how much government spends doing all of this. Since the sellers of the credits are the primary beneficiaries of cap-and-trade, the question remains of how to pay for the army government watchdogs responsible for implementing this convoluted cap-and-trade system.

Critics of taxation, fines, and “cap and trade” argue that most serious problem with any strategy that involves setting, monitoring, and enforcing “caps” is that these standards are usually set by industry lobbyists rather than scientists, and therefore reflect political expediency and not science. Other critics argue that the cost of monitoring and enforcing the caps would require hiring an army of monitors and enforcers, which would require a massive tax increase, user fees of some kind, and/or increased borrowing from China! And, of course, all libertarians will point out that in recent years the United States government has proven to be less than reliable steward of the "public good" and an ineffective and inefficient monitor and enforcer of laws governing other undesirable forms of corporate behavior.

Libertarians therefore argue that the best “less government” strategy for the reduction of pollution would be to simply transform public property in private property, and thus eliminate "the commons." But private ownership of earth, air and water will not necessarily reduce pollution in the United States. If the short-term (or long-term) benefits of extraction outweigh the perceived costs of continuing to pollute, extractors and producers will continue to pollute. Moreover, if extractors and producers were required to pay the owners of the earth, air, and water, to clean up the mess, or purchase earth, air, or water from the owners, it would almost certainly reduce pollution levels, but where? If United States adopted this strategy, the most likely consequence would be that extractors and producers would simply move extraction and production to other countries that maintain “public property,” where government officials earn a handsome profit from graft and corruption. So when pollution is exported to nations that allow their governments to exercise stewardship over publically-owned earth, air, and water, “tragedy of the commons” predicts that pollution levels will rise in those countries. So although private ownership in the United States may reduce pollution levels in the United States, global pollution would continue to increase. In other words, global pollution will require global cooperation between nations and/or universal abandonment of "the commons,"which are both highly unlikely. Am I a libertarian or a cynic? What do you think?

Tragedy of the Commons, Part 2: Over-Extraction of Resources

One manifestation of the “tragedy of the commons” is that human beings tend to over extract resources. Resource depletion can often be blamed on the fact that we often have imperfect information, as to the exact quantities of available resources at our disposal and the natural capacity for replenishment. How many salmon can be extracted before the species is no longer able to sustain itself? I wish imperfect information was the only source of unsustainable resource depletion. Unfortunately, we all over-extract in order to reap known short-term benefits at the expense of the unknown long-term costs. As evidenced by the universality of this kind of behavior, I’m afraid that human beings (individually and collectively) are naturally predisposed to unsustainable over-extraction.

In a free market, one would expect that the extraction of increasingly scarce resources would become prohibitively expensive and, therefore, extractors would be incentivized to pursue less-expensive substitutes. However, technology extends the ability of extractors to find increasingly scarce resources, while other technologies make it possible to efficiently over-extract those remaining resources. Hence, technology also plays a role in over-extraction. Governments encourage investment in these technologies by offering tax write-offs and other less visible incentives.

But then again, we might question whether the long-term extinction of any one resource is necessarily tragic. Although the over-extraction of oil would be tragic to the oil industry and its stockholders, over the long-run, it would be a godsend to the coal industry and other alternative energy industries. If those alternatives turn out to be onerously expensive, we can always alter out consumption patterns. Unfortunately, this natural process is often short-circuited by governmental tax policies, subsidies, and licensing that provide perverse incentives that lower the cost of continuing to extract increasingly scarce resources at the expense of other potentially viable substitutes. Libertarians argue that viable substitutes must be discovered via free market competition. But welfare liberals cling to the false belief that government experts possess perfect information, and therefore can choose the best substitutes. When governments choose the wrong substitutes, we invariably end up with resource shortages, higher prices, and/ or higher taxes. F.A. Hayek called this governmental tendency to over-estimate its ability to manage markets, “The Fatal Conceit.”

In the United States, the over-extraction of natural resources is also fueled by public ownership of resources, coupled with the government charging favored extractors ridiculously low license fees to extract publically-owned oil, coal, and timber. Sometimes these “sweetheart deals” can be attributed to outright corruption of public officials, but most often it’s a matter of legislators trying to protect extraction jobs in their districts by artificially lowering the cost of extraction and thereby fighting off viable competing substitutes offered by other districts. Hence, onerously expensive off-shore drilling for increasingly scarce oil is incentivized by government by lowering extraction fees, water pollution standards, and taxes etc. Despite years of tragic over-extraction, environmentalists continue to express unbridled faith in governmental stewardship over resource extraction, while in reality they are more likely to end up with “corporate welfare,” which is how governments make the “tragedy of the commons” even more tragic.

Environmental Policy and the "Tragedy of the Commons" Part I

Any libertarian-based environmental policy begins with a foundational principle called the “Tragedy of the Commons.” Let’s break it down into its basic components: “commons” and “tragedy.” In the Western world, the cultural origin of the concept of collective environmental ownership can be traced to the Biblically-based tenet that God gave the earth to mankind. Over the centuries this has been interpreted to mean that caring for the earth is our collective responsibility: call it “stewardship.” Unfortunately, the problem with collective responsibility is that we have repeatedly proven to be irresponsible stewards. That’s why when human beings assert collective dominion over the environment the consequences are inevitably tragic. Hence, the familiar libertarian mantra, “When everyone owns it, nobody owns it.”

Human beings utilize our common earthly environment in two different ways. We extract resources and expel waste. Throughout human history, environmental tragedy has resulted from our over-extraction and over-expulsion. In recent years, the over-extraction and over-pollution have become more problematic than in the past because we’ve become much more efficient extractors and polluters. The root of the problem is that, when given the option, we humans would rather reap benefits than pay costs. In the case of over-extraction and over-pollution the costs are usually transferred (shifted) to other humans, and most often to future generations. Most libertarians argue that the only way to avoid “tragedy of the commons” is to abandon collective ownership and stewardship in favor of private ownership. I’m not sure about that. Private ownership alone will not necessarily lead to non-tragic environmental policy. After all, individual owners are also prone to over-extraction and over-pollution of their own property, as they willingly risk less-certain long-term tragedy in pursuit of certain short-term benefits.

So the real problem arises when opportunistic owners over-extract and over-expel at the expense of other adjacent property owners. Therefore, other libertarians argue that private ownership must be accompanied by the empowerment of adjacent property owners to exact retribution. When my neighbor builds a dam upstream to divert water for his private fishing pond, why can’t I sue him for over-extraction? When the coal-fired utility plants along the Ohio River pollute the air over my property why can’t I sue Duke Energy Corporation for polluting my air? But it's not that simple. The two manifestations of the “tragedy of the commons” are so different that they require more detailed, separate analyses. Therefore, my next two blog entries will cover over-extraction and over-pollution, respectively.

The Cost of Health Care

Critics of our health care system point to the ever-rising cost of providing health care in the United States, in comparison to other industrialized nations. In 2007, the Kaiser Family Foundation reported that the cost of providing health care in the United States has grown from 7.2% of the nation’s economy in 1970 (or $356 per person per year), to about 16% in 2005 (or $6,500 per person). This is nearly twice the cost of providing care in Canada ($3,161), France ($3,191.), Australia ($3,128.), Japan ($2,358), and the United Kingdom ($2,560.). (Kaiser 4). But there are hidden complexities here as well. How much health care spending is too much for an individual patient, family, city, state, or a nation? Is it economically and/or politically undesirable to have so many Americans employed in the health care sector of the economy? What exactly is the quality of the health care that we purchase at this cost? So what does it really mean when we say that our health care system costs too much? Let’s take a look at that!

In the real world, the access and quality of a health care system cannot be separated from its cost, at least not for very long. How do we decide whether the “price is right?” In the Real World, that depends on how much we, as individuals, value health care products and services at the quality and price that they are being offered. For any other product or service other than health care (and perhaps education), when a product or service is priced too high, buyers simply refuse the offer and gravitate toward other sellers. Although I am a pro football fan, I have never attended a Bengals game. Frankly, the product being offered is not worth the ticket price. So I spend that money on other leisure activities that are “worth it,” mostly concerts. Even if the Bengals were great, I still wouldn’t attend a game at the prices offered today. I prefer to watch them for free on T.V. I might attend those games if they were free, or $10. But probably not. I hate the other "opportunity costs" such as traffic and parking problems. The Bengals will stay in business as long as at least a few fans continue to show up at Paul Brown Stadium on Sundays, and as long as the T.V. networks are willing to carry the games. In short, the Bengals must compete for our money. As individual buyers, we make purchasing decisions based on our beliefs about both quality and price. If I say that a new automobile is too expensive for me, what I’m really saying is that, the quality of the new vehicle does not justify the price that I’d have to pay for it. Hence, I’d prefer to keep my old car, or buy a less expensive used vehicle and spend those savings on the fulfillment of other wants and needs; perhaps a family vacation.

So what is the “value” of health care and or “health?” Our assessment of the value of health care has been shaped by a four-party party payment system that fosters both quality-insensitivity and price-insensitivity. In today’s economic environment, many young, healthy, middle class Americans, that do not get less expensive health insurance through a fourth party (employer) value other goods more than they do health insurance. Therefore, they spend their paychecks on new vehicles, spacious homes, higher education, high-quality food, alcohol, tobacco, or extended summer vacations. Therefore, when we say that our health care system is too expensive, what we are really saying is that many Americans value health insurance (of unknown comprehensiveness) less than other things. If I choose to spend my money on a vacation at Disney World, I at least have a good idea the quality and price of my purchase.

So the fact of the matter is that all Americans have “access” to health care, they just are not willing to buy it at the quality and price that it is being offered. And of course, many young, healthy Americans will never buy health insurance, no matter how much it costs because they would rather spend their money on those other things. This underlying reality has inspired a movement to offer “free universal health care,” through a government program like Medicare or Medicaid. However, the fact of the matter is that these programs are neither free nor high quality. Indeed, libertarians argue that the best way to insure universal access to low quality health care (or education) at an unreasonable cost is to force all Americans to pay for it through taxation. Here's another blog entry on health care reform: http://freedomsphilosopher.blogspot.com/2008/10/health-care-reform.html

The Quality of Health Care

The most idealistic health care reformers tend to focus upon expanding access to products and services without reference to the quality, or costs associated with providing that access. In the real world, when we make a purchase we do so based on quality and cost and providers are forced to compete based on the basis of either quality or cost. Unfortunately, this mechanism has been disabled by the U.S. government and the health care industry.

Let’s agree that no one wants universal access to low quality health care. While this sounds reasonable enough, the quality of health care is notoriously difficult to measure. The word “quality” raises the question of value and is expressed as “good” or “bad.” A necessary condition for the determination of quality is the capacity of the buyer to judge between good and bad: call it quality- sensitivity. Access to reliable qualitative information is a necessary condition for quality-sensitivity. In health care the quality-sensitivity of individual buyers is shaped by many factors. However, patients actually have notoriously imperfect information about the quality of their insurance, products, services, and providers.

As stated in my previous blog, the quality of health insurance is usually measured in terms of comprehensiveness, and most Americans have very little reliable information at their disposal in respect to the quality of their health insurance policies. In other words, you usually become quality-sensitive to the comprehensiveness of your insurance AFTER your providers file a claim, it’s rejected by your insurance company, and you get a bill from a provider. Although in recent years insurance language has become a bit more penetrable, it is still notoriously difficult for buyers to make informed decisions about the quality of the insurance products they purchase. The ability of the insurance industry to disguise the quality of its products behind a wall of impenetrable jargon has produced an epidemic of quality insensitivity within that industry. Unfortunately, we do eventually become quality- sensitive after we discover that out health insurance lacks comprehensiveness.

If we lack sufficient information in regard to the quality of our health insurance, we are equally ignorant of the quality of the products and services offered by its providers. The quality of the products and services is based on “safety and effectiveness,” which are determined by scientific investigations supervised by an understaffed and under-funded Food and Drug Administration. We also lack reliable qualitative information in regard to the providers of health care; especially the quality of physicians, allied health professionals, and hospitals. Information in regard to malpractice lawsuits and infection rates of hospitals are systemically well hidden. Given the elusive nature of the quality of health insurance, products and services, providers, and institutions the quality of our national health care system is ultimately inscrutable.

National reformers typically cite statistical data indicating that the U.S. system lags behind other industrialized nations in certain qualitative measures such as: infant mortality and life expectancy. But the basic problem is that national statistics mask local and regional variation: especially in large populous nations. Obviously, the United States has a much larger and has a more diverse population than Canada and European countries, and therefore, we would naturally expect to find a lot more local and regional variation in terms of infant mortality and life expectancy.

As stated in my earlier blog, national statistics also mask variation in access to health care between rural and urban areas. Based on commonly cited statistics, the United States (as a whole) ranks 32nd in infant mortality: with rate of about 6.3 per thousand births. Iceland ranks first with a rate of 2.9, followed by Japan at 3.2. However, this less than flattering statistic masks local and regional variation. For example, despite having one of the best neonatal intensive care units in the world (Children’s Hospital) Hamilton County, Ohio has an infant mortality rate of 13.9, or about twice the national average. Another problem with these rankings is the reliability of the reporting. In Cincinnati, the infant mortality rate says more about the lifestyles of mothers than it does about access to high quality of health care products and services.

As for life expectancy, the U.S. ranks 38th with Japan and Hong Kong ranked first at 82.6. Again, life expectancy in the United States is almost certainly influenced more by culture than the quality of health care. Highly variable infant mortality rates, murder rates, and cancer rates also tend to drag down life expectancy rates in the United States.

Certainly one indication of quality in any national health care system is its comprehensiveness; that is, the sheer number of products and services can be accessed in any geographical location. If sheer comprehensiveness were the only measure of quality, the United States would lead the world. However, comprehensiveness alone may not be the most enlightening measure of quality. Much of the comprehensiveness of the U.S. health care system includes both medical therapies that cure diseases (cancer drugs), but also medical enhancements that improve the quality of our lives (erectile dysfunction drugs, motorized wheel chairs, in vitro fertilization). Although this distinction between therapy and enhancement seems to be fairly objective, it is far from crystal-clear.

Another often-cited indication of low quality of health care is the incidence of medical mistakes, malpractice lawsuits, and the corresponding rise in the cost of malpractice insurance. However, the incidence of medical mistakes is highly variable. It is certainly true that some medical specialties are more susceptible to catastrophic error than others. Obstetrics, for example is especially prone to error, not because of professional incompetence, but because of cultural forces that encourage high risk pregnancies such as: postponed parenthood, poor prenatal care, and religious beliefs that expound the infinite value of fetuses. Our perception of medical mistakes also has a lot to do our overly idealistic expectations, coupled with a staggering number of predatory lawyers that stalk the deep pockets of health care providers. While it is certainly true that many medical mistakes are avoidable to the extent that practitioners can be better trained and facilities can be more fully staffed, these reforms are not costless. Not every mid-sized city can afford high quality neonatal intensive care units, cardiac units, or state-of-the- art trauma centers served by a fleet of helicopters.

Finally, there has been very little discourse concerning the relationship between the quality of health care products and services and the scientific research and development that generates those products and services. Characteristically, most qualitative appraisals of the health care system in the United States discount what we do best. To the extent that it makes sense to talk about nation states in a global scientific and economic environment, research laboratories in the United States still account for most of the comprehensiveness of health care worldwide. For better or worse, governmental agencies such as the National Science Foundation and the National Institutes of Health provide funding for most of that research. Moreover, many of the best medical schools and research universities laboratories are located in the United States. In short, if we bracket issues of “access” and “cost,” the U.S. has the most comprehensive health care system in the world. Indeed, that’s why desperate patients from all over the come to the United States for “state-of-the-art” medical treatment.

Much of the comprehensiveness of the “medical model” of health care in the United States is rooted in “heroic medicine.” But the quality of state-of-the-art heroic therapies is difficult to measure, especially in light of the variable quality of the Food and Drug Administration’s efforts to regulate the research and development of new drugs. As health care in the United States becomes increasingly “heroic,” we can expect a higher research and development costs and a higher incidence of treatment failure and more malpractice lawsuits.

In the United States, quality sensitivity has also been undermined by cultural forces that allow low quality providers (physicians, hospitals, pharmaceutical corporations, insurance companies etc.) to control the flow of qualitative information. Although, much of this machinery has been undermined by mass media, especially Internet sites (WebMd.com), it is still very difficult to access useful qualitative information on physicians, hospitals, and pharmaceutical products.

Access to Health Care

In the United States, the stated goal of health care reform debate has been to provide universal access to high quality health care at a reasonable cost. However, most of the rhetoric has focused myopically of universal access. Unfortunately, in the real world proponents of universal access must also take into account the quality and cost of that health care. After all, no one aspires to provide universal access to low quality health care or universal access to high quality health care that no one can afford. Unfortunately, any reasonable account of access, quality, and cost of health care generates mind-boggling complexity. Let’s start with access.

Today, about 55% of all Americans gain access to health care via private health insurance purchased through their employers, while 45% gain access to public insurance via Medicaid, Medicare, Veterans Medicine, and SCHIP. (poor, elderly, veterans, and children). In 2005, the Census Bureau reported that at least 44.8 million Americans were without either private or public health insurance coverage. By 2006, that number rose to 47 million: a 15% increase. Since, 2000 the number of uninsured Americans has grown by 8.6 million: an increase of about 22 percent. The largest segments of uninsured are employed young adults 19-29 and older adults 45-64. The uninsured rate among young adults, signals a corresponding rise in the number of uninsured young children; which has led to the recent reauthorization of SCHIP. Due to the ongoing economic recession the number of privately-insured Americans has decreased and the number of publically insured has increased. Although the public policy goal has been to increase the ranks of the insured, what is the precise relationship between “access to health insurance” and “access to health care? That answer is hardly straightforward.

When reformers call for universal access to health insurance, presumably they mean “good health insurance.” In an ideal world, “good insurance” is “comprehensive insurance” that covers every possible health care need (or want). Conversely, “bad insurance” covers nothing. So in the real world, the mere fact that you have health insurance does not necessarily guarantee that you have access to the health care products and services that you may need or want. Therefore, what most of us really want is universal access to comprehensive health insurance. But in the context of health care what does “comprehensive” mean? Does it include “all health care” or just “basic health care?”

Well, what precisely is this alleged distinction between “comprehensive” and “basic” health care and who decides? Does “basic” include access to all known preventive care, including: annual physicals, vitamins, and all known tests, imaging technologies (eye exams, hearing exams, MRIs, mammograms etc.), and vaccines? Does it include access to all known treatments, including: laser surgery, stem cell therapy, and genetic therapy? How about doctor’s office visits for minor illnesses such as colds and flu? Should everyone have equal access to: state-of-the-art trauma centers, organ transplants, hip replacement surgery, physical therapy, fertility treatment, psychiatric treatment, eye glasses, vision correction surgery and cosmetic surgery? Should all Americans have access to both new and old drugs, including: AIDS drugs, and diabetic drugs? How about access to weight loss therapy (including surgery), smoking cessation programs, and mental health treatment? Does basic insurance cover Tommy John’s surgery for 53 year old beer-league baseball pitchers, motorized scooters for the morbidly obese, or psychiatric drugs for children diagnosed with Attention Deficit Disorder or depression, erectile dysfunction drugs for old men, or chemo and radiation therapy for all cancer patients (including for ninety year-olds)? In Vitro Fertilization, abortions, or birth control pills for the poor? Does basic health insurance include unimpeded access to experimental, futile, and/or low-quality treatments (that are less-than safe, or less-than effective)?

Therefore, it seems obvious that the distinction between “basic” and “comprehensive” insurance is far from clear. Even if you are a member of congress that has the most comprehensive health insurance coverage in the world, there is still wide variability in access to specialists and state-of-the-art technology. That’s because access to health care products and services depends largely upon where you live. Our current health care system has evolved to serve major urban populations. Therefore, even insured congressmen from rural districts may not have access to the health care they need or want. Other rural patients have “access” to specialists and state-of-the-art technology, but only to the extent that they are willing (and/or able) to wait for an appointment and/or travel to a distant urban area. And, of course, rural patients that are uninsured (or under-insured) have access to health care to the extent that they are willing or able to pay for both the trip and the treatment. So one might argue that rural patients in the United States have “access” to a vast market of health care products and services, but only to the extent that they are willing (and/or able) to overcome geographical and financial barriers. Now is that really “universal access to health care?” If not, how would congress go about addressing this alleged injustice?

Although most patients with health insurance believe that they have access to health care, most policies cover much less than they think. That’s because, “good insurance,” which is comprehensive is very expensive and difficult to sell employers, especially to small businesses. Therefore insurance companies adapted by devising innovative marketing strategies that help them sell that “bad health insurance.” Their solution: disguise the quality of their insurance policies behind a veil of complex, obscure jargon that only insurance adjusters can decipher. Systemic obscurantism has no doubt contributed to the growing number of uninsured and under-insured patients. Why buy expensive health insurance, if you don’t know what it will cover? Therefore, one area more than ripe for reform is the restoration of transparency in health insurance.

In conclusion the single-minded pursuit of universal access to health insurance is really an overly-simplistic basis for health care reform. We must also take into account quality and cost of that insurance and the actual health care covered by those policies.

HEALTH CARE REFORM: IDEALISM V. REALISM

In light of President Obama’s efforts to reform health care in the United States, and given the fact that I’m teaching a graduate course on Health Care Policy this summer, I decided to dedicate the next four blogs to health care reform.

This initial installment will suggest that the conceptual framework underlying much of the health care reform debate is based on discourse that is overly-idealistic and incompatible with health care as it currently exists in the United States. I shall, therefore, propose an alternative model of discourse: Health Care Realism, or the Real Model. Although the Real Model has already begun to take root (whether we like it or not) the lingering remnants of the Ideal Model continue to cloud our thinking.

The long-prevailing Ideal Model is rooted in the ethereal belief that health care is a moral system rooted in the Judeo-Christian and Hippocratic virtue of “care.” Historically, this model implied on systemic paternalism, which has been long embedded in doctor-patient discourse. Paternalism generally posits a rights-based moral relationship between “fatherly” physicians and “childlike” patients. Within this ideology, physicians are represented as self-sacrificing, duty-bound moral agents dedicated to healing their patients. In other words, patients have an inviolable, “right” to health care and physicians have a corresponding “duty” to provide it.

One of the corollaries of many duty-based (or rights-based) moral arguments is the underlying assumption that moral imperatives always trump economic imperatives. In other words, if it’s the right thing to do, then we are morally required to do it, regardless of how much it costs. This web of discourse is usually anchored by the Judeo-Christian and Kantian belief human life is of infinite value and that the cost of preserving it is morally irrelevant. Once it is established that a patient “needs” medical treatment moral discourse ends and the cost of filling that need becomes morally irrelevant. Throughout most of the twentieth century, this complex equation based on interlocking rights and duties contributed to spiraling health care costs, as physicians liberally prescribed non-competitively priced products and services (owned by other providers) to their needy, price-insensitive patients. This meant more tests, more drugs, and more hospitalization and a feeding frenzy for providers.

As long as health care providers were able to earn a comfortable living by charging non-competitive prices to price-insensitive payers, and as long as patients were insulated from those prices, the Ideal Model appeared to be a “win-win” arrangement. The Ideal Model began to erode in the 1990s when government programs (Medicare and Medicaid) and quasi-private insurance companies (Blue Cross and Blue Shield) became increasingly price-sensitive. That’s when physicians were first saddled with the added responsibility of serving as duty-bound “gatekeepers.” So while patients expected paternalistic physicians to selflessly, provide health care; public and private payers expected them to reel in costs. This steadily eroded public trust in physicians and the gradual collapse of the Ideal Model.

Although many physicians and other health care professionals and institutions still attempt to live up to the Ideal Model, the real world always has a way of undermining all otherworldly ideologies. After all, in the real world, health care providers are just as “worldly” as the rest of us. They must earn a living to support themselves and their families. Most must pay back enormous college loans, malpractice insurance and other business expenses (not to mention local, state, and federal taxes!) They also have personal mortgages, car payments, and also hope to save a few bucks for their children’s college education. Health care institutions are equally worldly. Hospitals, research laboratories, and colleges and universities still have to pay their employees, stockholders, suppliers, insurance companies, and lawyers.

As health care reform unfolds over the next year, lingering remnants of the Ideal Model will continue to obfuscate health care discourse as Idealists focus debate on providing “universal access to high quality health care at a reasonable cost.” My next three blog entries will discuss access, quality, and cost from the standpoint of idealism and realism.

The Swine Flu Epidemic and Personal Liberty

As the Swine Flu Epidemic threatens to upend civilization as we know it, I thought it would be worthwhile to squeeze in one last blog before we all revert back to hunter-gatherer lifestyles. Although this specific strain of influenza originated in non-human species (swine and birds) we’re not supposed to call it “swine flu,” for fear of adversely affecting the pork industry. Fact: You cannot catch swine flu from bacon, sausage, or pork chops! Thank God! So let’s call it by its less-threatening name: “Type A H1N1 Influenza.” So what should we make of this impending epidemic and the various governmental responses? First of all, let’s face the unpleasant reality that human beings have been dying from “seasonal flu” since the Pleistocene era. According to the Centers for Disease Control about 36, 000 Americans die every year from seasonal influenza: mostly the very young, very old, and very unhealthy. If you trust the Food and Drug Administration’s oversight of clinical trials, there are anti-viral drugs currently on the market that moderate symptoms, and perhaps shorten its duration. There are also flu vaccines available. Unfortunately, it takes 6 months to manufacture these vaccines and therefore, every year the World Health Organization guesses which three strains might be presnt in any upcoming flu season in various regions. Last year, I had the flu shot, but caught a strain that was not covered by the immunization. So although modern science has developed vaccines and drugs may help you avoid getting the flu and perhaps lessen its symptoms, there is no cure for it. Viruses evolve much faster than clinical research. They also have an uncanny ability to survive on hard surfaces for over 24 hours. Despite these daunting limitations, governments, have the power to drastically reduce infection rates, and limit the number deaths. Of course worldwide, governments have already been actively working to limit the spread of the new strain of influenza. Egypt has ordered the extermination of its entire pig population (although there is no evidence of pig to human transmission). Many governments have banned public gatherings: closing down border-crossings, restaurants, mass transit, schools, sporting events, and air travel. Even Joe Biden’s family is avoiding all air travel. Indeed, modern governments are deeply committed to the reduction of all public health risks. And there are a lot of other risks out there as evidenced by the recent spike in apocalyptic warnings. Over the past few years, governments, scientists, and the mass media have issued a steady stream of urgent warnings predicting: terrorist attacks (especially on airlines), global warming, bird flu, SARS, global recession, and an endless series of food, drug, and toy recalls. So far, the human species has survived the onslaught! My question is this: “Is there a point where the social and economic costs wrought by public health initiatives outweigh benefits?” Governments certainly have the power to eliminate not only the impending flu epidemic, but all future “flu seasons.” Simply shut down schools, public transit, sporting events, shopping centers, restaurants etc. In short: let’s just stay home 4-5 months a year. Maybe that’s a bit extreme. When we leave the house let’s just wear rubber suits, gloves, and gas masks. Once we eliminate the threat of infectious diseases and save those 35,000 lives, then let’s address those other threats to human life. What about those notoriously dangerous automobiles? Solution: 25 MPH speed limits, body armor and helmets. Or, better yet, walk! Breast cancer: no smoking and mandatory mastectomies for all females at puberty. Heart disease: veggies, no meat, compulsory exercise. Libertarians do not doubt the fragility of human life and do not deny that many risks can be easily avoided. However, one of the most serious risks we humans face is the unbridled expansion of the powers of government in pursuit of an idealized vision of public health. If there is no objective threshold for public health initiative, and if we accept the moral principle that human life is of infinite value and that government has a moral obligation to protect human life at all costs, what would our risk-free lives be like? A long, risk-free life at home playing video games and watching old videos may not necessarily be a life that’s worth living.

WARNING: OUR HEALTH CARE SYSTEM CAN BE HAZARDOUS TO YOUR HEALTH

Last January I finally got around to getting my annual physical. Same story…in terms of overall health, I’m among the top 5% of all men my age. Other than an occasional bout of labile, stress-related blood pressure, I am in great shape. That was good news, until I checked the mail in February and found a bill for $500 from the lab that processed the blood test that confirmed my excellent health. I immediately called Employee Benefits at my college to make sure that our new health insurance covers “blood tests.” She confirmed that lab tests are covered, and explained that there is often lag time in communication between the insurance companies and providers. In short: "not to worry!"So I ignored the bill. But I kept getting more of them. So I called our family doctor’s office and asked the receptionist what she thought had happened. She had no idea. But she was sure that she had forwarded my insurance information to the laboratory. Then a few days later, I received an automated phone message from a collection agency in regard to an overdue account that belonged to “Ronald Wade.” Of course, I am “Ronald White,” so I hung up. Then it called again, and, again, etc. So I called my insurance company to check up on the status of that mysterious bill. After waiting on hold for 10 minutes, I spoke to an agent that determined that the laboratory never submitted a $500 claim, but that my physician’s bill had already been paid-in-full. Then, I decided that I’d better contact the laboratory. The bill stated that I should use the company website. I quickly confirmed that I owed $500, and I was urged to pay off the account by credit card. After about 30 minutes of searching the website, I found a phone number. I called it and I was immediately captured by one of those endless option loops. Finally, after optioning for 20 minutes, I stumbled upon the option that I wanted: “speak to a customer service representative.” Elated, I pressed option #4 and hit the “pound key.” “We’re sorry, but all of our representatives are busy assisting other customers. Please wait for the next available representative.” Then I was treated to 30 minutes of soft rock, interrupted every 2 minutes by an automated female voice urging me to remain on the line. Finally, a company representative with an Indian accent asked me how he could assist me. I read off my 14 digit patient code and he pulled up my file. Sure enough, I owed $500 to the laboratory. I explained that I had health insurance and that the insurance company had no record of the lab submitting a claim and that my physician had forwarded the insurance information to the lab. Perplexed, he read off a 17 digit insurance number and asked me if it corresponded to the one on my insurance card. It didn’t match! It had two wrong digits. He immediately corrected the typos and told me that he would resubmit the claim with the correct number. Then I politely asked him why the laboratory didn’t contact the insurance company, or the doctor's office; and how the lab could reasonably expect me to figure out that someone at the lab miscopied a 17 digit insurance number? He couldn’t answer! Then, I respectfully complained to him about the endless loops on the website and phone system. He responded: “We’ve had many complaints about our website and phone systems.” So what’s wrong with our health care system? Well, we have a four-party system: first party patients, second party providers (physicians, labs, drug companies etc.), third party payers (private insurance companies, Medicare, Medicaid etc), and fourth party insurance payers (employers that purchase health insurance for their employees.) Can you imagine a more convoluted way to provide an annual physical? Wait a minute, I have to answer the phone…I’m back! That was that pesky collection agency again. Let’s make that a five-party system. Whew! I’m sure glad I’m healthy: even if my blood pressure is now 150/90. Check out my forthcoming essay (co-authored by Charles Kroncke) on our four-party health care system system. It will appear in the summer issue of the Independent Review.

The Somali Piracy Industy

Has anyone noticed the recent surge in piracy activity off the coast of Africa? What does this phenomenon suggest about human nature and how might it impact your 401k? As usual, let’s start with some basic assumptions. First, let’s acknowledge that piracy on the high seas is a perfectly natural human activity as old as the shipping industry. Like any other industry, it is an enterprise that thrives under certain environmental, economic, and cultural conditions. Piracy is most profitable under favorable climatic conditions. I can’t recall an episode of “Deadliest Catch” where the captains had to negotiate with pirates. The International Pirates Union now refuses to work in that part of the world. The weather on the North Sea is too cold and the seas are dauntingly dangerous. Moreover, fans of the T.V. show know that these burley and (obviously fearless) crab fishermen only get paid if they bring home a catch, and therefore are not likely to be easily intimidated into giving up their valued cargo. Even if pirates managed to successfully commandeer a vessel, the cargo is vulnerable to spoilage. It is notoriously difficult to sell pirated crabs, even on the black market. In 2007, the two competing franchises that operated in the North Sea filed for bankruptcy protection under Chapter 11, and are now receiving federal bailout assistance. President Obama fired both CEOs (Blackbeard and Captain Hook) shortly after their profanity laced tirade before the U.S. Senate. Although North Sea operations are now defunct, the pirate industry is now thriving off the coast of Somalia. The weather is predictably pleasant and the calm waters of the Indian Ocean make it relatively easy for pirates to identify ships from a distance. Somali pirates know that their most valued cargo ships (food and oil) are unarmed and that the unionized crew members would much sooner give up their cargo than resist. Crews also know that their cargo is insured by AIG, and that they will get a paycheck, even if their shiment is hijacked. Well-trained pirates also know that maritime merchants would rather pay a ransom, than deal with high-priced lawyers and tight-fisted insurance underwriters. Somali pirates have little fear of having operations interrupted by the recent arrival of naval patrols. It is impossible to protect a million square miles of ocean and the “rules of engagement” tend to favor the pirating industry. The Somali government is heavily invested in piracy and subsidizes the industry by providing not only a safe haven for swashbucklers, but also access to well-maintained smuggling routes and money-laundering services. Advanced technology is also fueling the bull market in piracy. Cell phones and Global Positioning Systems now make it much easier for pirates to coordinate their attacks, and inexpensive, high-speed boats shorten the commute to and from work. Low gas prices also pad the bottom line. A healthy black market in state-of-the-art weaponry provides pirates with an endless supply of AK47s, surface to air missiles, torpedoes, plastic explosives, and helicopters. Indeed, the piracy industry has been so successful that it has been entering other lucrative markets such as hostage-taking, illegal weapon sales, money-laundering, and extortion. What can the maritime industry do to protect itself from pirates? Experts agree that it must somehow raise the costs of piracy. They could alter their shipping routes, which would require a longer commute for would-be pirates. Shippers could also increase costs by installing radar technologies that could warn the merchant crews up approaching vessels; equip ships with torpedoes, and arm crew members with AK 47s. Unfortunately, this strategy would only precipitate an expensive arms race with the pirates, which would increase the value of their investments in illegal weapons. Pundits of the piracy industry argue that the recent death of three Somali pirates in an ill-advised confrontation with a freighter protected by a brave captain, a crew armed with ice picks, and a U.S. Navy warship portends a dark future for the industry. However, in light of AIGs recent decision to underwrite the pirate industry, most financial advisors now agree that piracy stocks offer a recession-proof, tax-free, addition to your 401k.

A Libertarian Perspective on "Too Big to Fail"

As the government continues to “bailout” failing corporations such as General Motors, Chrysler, American Investment Group (AIG), and a host of other financial institutions, the “too big to fail principle” has been cited as the primary justification for these rescue packages. This is a utilitarian principle that implies that the costs of “allowing” these corporations to fail outweigh the benefits; that is, if they fail others will fail and unemployment will rise. Although most economists seem to accept this utilitarian justification, no one has offered any explanation of how these corporations got “too big to fail.” Let’s explore two alternative explanations. The free market explanation is that corporations get “big” because they offer higher quality products and/or services at a lower cost than their rivals. These natural monopolies get “big” because they defeat their competition. In the absence of competition these monopolies raise prices and earn windfall profits. But natural monopolies are usually short-lived because other corporations can see their success, copy their strategies and/or improve upon those strategies. This process of weeding out the “unfit” (inefficient) competitors and inspiring competitors that are more “fit” (efficient) is called “creative destruction.” Unfortunately, there are other ways for corporations to “destroy” their competition. The second way to “get big” is to raise the cost of competing in a market by artificially raising the cost of others entering the competition. The easiest way for “big” corporations to stifle competition from smaller, more innovative companies is by lobbying government officials to raise the cost of competing by imposing costly regulations. These artificial monopolies can maintain their stature, regardless of their actual “fitness.” In fact, most artificial monopolies are downright inept: U.S. Postal Service, Public Schools, Public Utilities, etc. Now, how did AIG (American International Group) get “too big to fail?” Did it “take-over” its competitors because it was more “fit” or because it was more adept at lobbying government? The basic problem with the “too big to fail principle," is that if a corporation is “too big to fail” in the eyes of the government, it can take risks that other smaller, risk-sensitive corporations cannot. This leads to the proliferation of large, inefficient corporations that are protected from failure. Then, these maladapted corporations proceed to takeover over smaller, more efficient corporations. In short, the “too big to fail principle” tends to undermine “creative destruction.” Libertarians argue that when governments artificially prop up obviously inefficient corporations that take irrational risks, and reward incompetent executives with bonus pay, they also drive good corporations out of business. Would you rather invest in, work for, or buy from an inefficient corporation that is “too big to fail;” or invest in, work for, or buy from an efficient corporation that will probably be driven out of business by an inefficient corporation that is “too big to fail?” If you owned a smaller, more innovative, and more efficient competitor would you rather continue to compete with a corporation that is “too big to fail,” or agree to a lucrative takeover offer? The libertarian view on the “too big to fail principle” is that it undermines “creative destruction,” and leads to endless cycles of future government bailouts. But more than that it gives rise to an enormously destructive corollary the “too small to succeed principle.”

Nadya Suleman's Octuplets: An Exercise in Moral Hazard

We libertarians rely heavily on the linkage between the concepts of “liberty” and “personal responsibility.” The underlying assumption is that our lives are the product of risk-management. Sometimes our lives are shaped by our own decisions and sometimes by others. Libertarians argue that within the bounds of legality, individuals must be allowed to reap the benefits of “good risk-taking decisions” and/or pay the costs for “bad risk-taking decisions.” But in the real world, we often rescue one another from the painful consequences of our bad decisions under the guidance of morality. Unfortunately, when we exercise beneficence under these circumstances, we encourage future risk-taking on the part of the beneficiary and other aspiring future risk-takers. Economists call this predictable incentive pattern “moral hazard.” Nadya Suleman’s Octuplets provide a valuable case study on how government programs, charitable organizations, and a doting mother can lead to an unfathonable degree of morally hazardous behavior. Because of confidentiality laws, we don’t know all of the details, but here’s what I’ve been able to gather. Nadya is a 33 year-old, unemployed single mother. Before the octuplets were born she already had six children via two separate vitro fertilization procedures. On average IVF yields live births about 30% of the time and costs about $15,000 per cycle. Most “live births” require more than one cycle. In order to increase the odds of having a “live birth,” clinics often insert multiple embryos into the uterus, which can lead to multiple pre-mature births. Premature births require the services of neonatal intensive care units (NICUs), which cost on average about $475,000 per child. Although clinics do not pay NICU costs, the American Fertility Society recommends the insertion of no more than 2-3 embryos at a time. However, desperate mothers with limited financial resources often request more than two embryos to avoid multiple IVF cycles. Inefficient clinics often insert multiple embryos to cover up their inefficiency and/or increase their published “live birth rate” Nadya’s doctor apparently inserted 6 embryos for those two initial multiple birth pregnancies, and for the cycle that yielded the octuplets (which allegedly included 2 sets of twins). So who paid for the IVF and NICU costs of the first two pregnancies, and who will pay for the octuplets? Private insurance companies rarely cover IVF treatments but are required by law to cover NICU costs. They usually limit that exposure to $1 million. Nadya is unemployed so forget about that! If uninsured, Medicaid (and a raft of other state assistance programs) usually covers most of these costs. Again, we don’t know who paid the medical costs for those first two IVF and NICU services, but we do know that she now receives Social Security Disability Payments for three of those children (one is autistic) and that she collects $480 in food stamps. We also know that Nadya also owes $50,000 in student loans. Her mother Angela has been trying to financially support Nadya and her six children. But Nadya’s home, which is owned by Angela, is currently $23,000 behind in mortgage payments and under foreclosure by the bank. The family has filed for bankruptcy. Given the uncertainties surrounding the Nadya’s ability to care for these 14 children, it is not clear if or when Child Protective Services will allow the octuplets to leave the NICU, or where they will live. “Angels in Waiting” a charitable group of nurses offered free 24 hour-a-day assistance (worth $130,000. a month) for all 14 kids, which would have avoided action by Child Protective Services. But self-reliant Nadya refused that offer. So how will she pay for all of this? Back in 1999, Nadya apparently suffered a back injury at work and has filed for permanent disability. She is also planning to take out more student loans so she can return to graduate school at Cal State Fullerton to finish her degree in counseling, while her mother continues to provide free care for her 14 children under six years old. Nadya also hopes land a lucrative T.V. offer and/or book deal. So what can a lifelong libertarian say about all of this? Absolutely nothing!

Positive and Negative Rights

In the United States there is a strong moral tradition that favors rights-based discourse over public policy. Given that this tradition is usually invoked without much philosophical clarity, let’s take a closer look. First of all, rights-based claims imply duties imposed upon others. There are no rights without corresponding duties. Failure to fulfill one’s duty constitutes a rights violation. Libertarians differentiate between two classes of right-based claims. If you claim a positive right, you are implying that another individual or community has a duty to expend time, energy, and/or resources on your behalf. For example, if you have an unqualified positive right to vote, but are unable to get to the polling place, then someone else must have a duty to pick you up at your house, bring you to the polling place, and then bring you home. Positive rights raise a number of puzzles. Suppose you are “able” to get to the polls, but are “unwilling” to expend your own time, energy, and/or resources to get to there. How might that affect the duties of others? Hence, if you invoke positive rights, you must specify how much of your own, time, effort and resources will be expended before a duty upon others is imposed. In short, there is always a grayish area between “able” and “willing.” If you live a half-mile away and are “physically able” to walk to the polling place, but are unwilling to do it, does the duty on the part of others automatically kick in? If so, then how does one decide exactly whose duty it is to drive you to the polling place, and how much of their time, effort, and/or resources are morally required to fulfill that duty. If you claim a negative right, then you are merely imposing a duty on the part of others to not interfere with your own efforts to act on your own behalf. If you have a negative right to vote, it implies a duty on the part of others to not interfere with your quest to get yourself to the polling place. Obviously, if I tried to forcefully prevent you from voting by either physically restraining you or by threatening you, then that would clearly invade your negative right to vote. That’s why poll taxes are widely regarded as rights violations. (Interestingly, no one questions whether the U.S government’s failure to declare Election Day a national holiday constitutes a voting rights violation.) Generally speaking, we are more likely to claim a positive right when we believe that we really need something than when we merely want something. Most of us are willing to accept the fact that the distribution of at least some of the good things in life are best left to the free market, while at least some things ought to made available to us through the good will of others, as a matter of duty. Americans do not have a positive right to own a Mercedes, ocean front property in Florida, or a Harvard education. But they do have a negative right to pursue those things without outside governmental interference. Finally, there is one more dimension to rights-based claims; namely, “How will that positive or negative right be monitored and enforced? If you have a positive or negative legal right, then that right is monitored and enforced by government. If you have a moral right, then compliance will be enforced by a moral community alone. Sometimes the duties that support rights are sufficiently supported by morality and sometimes legality is necessary. That’s why our most important rights are legally enforced. Libertarians argue that there are no positive rights, only negative rights.

Is There a "Positive Right" to Health Care?

The “Right to Health Care” will be one of the mantras of the forthcoming debate over health care reform. Let’s explore that mantra in light of my previous blog. Obviously, we must address several issues. Do we have a right to health care? If so, who has a duty to fulfill that right? Is the right to health care a positive or a negative right? If it is a positive right, then who has the duty to provide it, and at what cost? And, is this positive right a legal right or a moral right? There are several options. Many argue based on the Hippocratic Oath that under “certain circumstances” health care providers have a duty to provide health care to others. But what are those “certain circumstances?” Well, one might argue that the "duty to provide" kicks in when a patient “needs” medical treatment but is “unable” to afford it. However, recall that the line between “unable” and “unwilling” is murky at best. Many young healthy Americans are “able” to purchase health insurance, but are “unwilling” make the economic sacrifices necessary to pay the premiums. (Forego buying that new car or new house while still in college!) If a health care provider has a duty to provide health care, does fulfilling that duty imply providing it for free or at a discount rate? If providers of health care do not have a duty to provide health care, then what about other third parties such as relatives, friends, employers, private insurance companies, and/or government? If it is a third party, which party and how much are they obligated to pay those second party providers? My mother-in-law is a cancer survivor. Hoping to prevent the return of cancer, her physician prescribed a drug called Aromasin. The drug costs about $10. per day. Interestingly, this drug is usually (if not always) prescribed to elderly female cancer-surviving patients. The safety and effectiveness of all drugs is expressed in terms of a cost/benefit ratio. Although the drug's stated purpose is to prevent her cancer from recurring, the statistical evidence in support of this claim was impossible for to decipher and act upon. Now, if she has a positive right to this drug then who has a duty to provide it? Here are some of her options: Medicare, her co-insurance company (the private insurance that covers the Medicare gaps), my father-in-law, my wife and I, or a charitable organization? She is almost certainly “able” to pay that $10 a day, if she and my father-in-law were “willing” to cut back on other things such as: their other prescription drugs, food, clothing, shelter, or transportation. Given the obscure cost/benefit ratios presented, she decided that the benefits did not justify the costs. Fortunately, a non-governmental organization the Susan G. Komen Foundation decided to pay for it. Although, everyone is thankful for that charitable intervention, one might reasonably question the price of that drug. Given that almost all of the patients likely to “need” this drug will be about in approximately the same economic situation as my mother-in-law, one might accuse the providers of monopolistic price-gouging. But libertarians are more inclined to blame the government for those overly-generous twenty-year drug patents and prescription drug laws that protect them from competition. There is something disingenuous about arguing that someone has a positive right to health care, and that third-parties have a duty to provide that care, when the providers are do not have a duty to moderate their prices. So what’s the lesson here? Well, maybe that whole eighteenth-century moral framework based on interlocking rights and duties is not a very illuminating in the area for twenty-first century health care.

President Obama and the War in Afghanistan

President Obama inherited two ill-fated wars from President Bush. Today, he stands poised to exit Iraq “with honor” and refocus efforts on “winning” the war in Afghanistan. In both cases, Obama has stated that his decisions will be contingent upon the advice he receives from his generals. The underlying assumption here is that these wars are primarily “military events” and that these decisions require “military expertise.” Let’s explore these assumptions. First of all, military generals are loath to lose wars. The military code of honor does not condone losing, and therefore Obama should realize that his generals will not admit that the war cannot be "won" militarily, but they will request more time and more resources, especially troops. The underlying the military perspective is that war resembles a “game,” in fact the lexicon of war is rife with sports metaphors. (war strategy, war games, victory, defeat, etc.) At the root of this vision is the assumption that there are rules of war and that victory is marked by a decisive “final score.” Historically, that final score has always been tabulated based on military criteria: body counts, territorial control, etc. In the end, there is a ceremonial event where the “losers” surrender and sign a peace treaty that acknowledges the “winner.” Throughout human history military generals have always approached war from this “winner-loser” framework. However, this military interpretation is necessarily blind to the fact that war is ultimately a political event, and therefore, “winning” must relate to the realization of political goals. In my view, the wars in Iraq and Afghanistan have been waged based on the pursuit of vague, and unrealistic political goals. In fact, if you look closely at the stated goals of the Bush administration for Iraq you’ll note that they changed over time from eliminating weapons of mass destruction, to removing Saddam Hussein from power, to establishing a democracy, to restoring urban security. Now we can’t blame the military for meandering political goals. Given that the civil war between the three Iraqi religious factions has subsided (thanks to the implementation of a successful military strategy: "the surge"), the most recent political goal (urban security) appears to be within reach. Obama feels as though we can soon leave Iraq “with honor” and pursue victory "with honor" in Afghanistan. What might "victory with honor" in Afghanistan mean? Well... military victory would require a final score based on the realization of military goals, such as killing large numbers of Taliban soldiers (and their sons) and holding territory. In the end, we’d have that ceremony where a Taliban leader admits defeat and signs the proverbial peace treaty. If there is one, single, powerful leader that can sign that treaty I’m sure our politicians know where to find him. A political victory would be marked by the realization of our stated political goals for Afghanistan. What exactly are those goals? Well, again we have that notoriously vague notion of establishing a democracy in a culture that has been dominated by religious authoritarianism. The current “elected” government has been marked by corruption and ineptitude. The assumption is that all Afghanistan really needs to do is militarily defeat the Taliban and elect a new crop of honest and efficient political leaders. But democracy is not a cure-all for all of Afghanistan’s social, political, and economic woes. For centuries it has been one of the poorest nations on earth. Most of its income today is derived from the illegal drug trade and arms dealing. Education in Afghanistan is monopolized by religious leaders. Therefore, their schools do not produce doctors, lawyers, engineers, chemists, or biologists that go to work every day providing goods and services. When there is an election, voters will elect more religious leaders. Women will not go to school and they won’t vote. But they will produce more male children that will attend these religious schools and thus perpetuate the status quo. Therefore, as we move our troops into the Afghan wilderness, Americans must demand clarity in terms of both our military and political goals. What do we really hope to gain for Afghanistan (or the United States) by removing the Taliban from power? How will we know when the war is over? And, most importantly, who will sign the peace treaty? My modest view is that President Obama cannot expect our military generals to answer these questions for him.

The Imagination Recession

Although, the current Recession is very real, it is considerably more than an economic malaise. My view is that the root cause of that Economic Recession is our failure to exercise and implement our imaginations; call it the “Imaginary Recession.” Let me explain. Buyers and sellers make decisions based on quality and price. Businesses go bankrupt when they try to sell goods and services that buyers don’t buy. Over the past few years, entrepreneurs have survived in highly competitive markets, not by offering imaginative new products and services, but by recycling what has already been done. When those old ideas didn’t work, they simply borrowed money to stay afloat. Just look around at the kinds of stores that occupy strip malls. Sometimes over-priced, low quality products and services that compete in saturated markets survive (for a while) with the help of imaginative marketing campaigns, but in the long run the “chickens come home to roost.” The borrowing frenzy worked as long as financial institutions were willing and able to lend money to unimaginative entrepreneurs. The current economic recession began when those chickens showed up. Honestly, if you look objectively at most markets you’ll note a stark lack of imagination at the grass root level. How many franchised fast food restaurants can that market support? How many auto dealers, heartburn medications, gas stations, banks, coffee shops, hospitals, rock bands, sports stadiums, airports, or highways? Health care reform debate doesn’t focus on new ideas, but on whether we should copy health care systems in Canada, Great Britain, France, or Germany. Everyone is trying to “cash in” on old ideas. How long will we continue to burn oil, gas and coal before imaginative engineers come up with a whole new technology? As things stand, we have a long wait! One major reason why we still burn fossil fuels is that our public school systems do not produce imaginative scientists. In fact, I would argue that our educational system punishes creativity and rewards conformity. Why does almost every high school in the United States have a football stadium, but very few have a state-of-the-art science laboratory? Why not expend that same of time, energy, and resources promoting math and science? But in the final analysis, its government that bears most of the responsibility for stifling imagination, thwarting innovation, and upholding the status quo. It does it by stealthily imposing regulations that make it more difficult to compete in markets dominated by old ideas. That’s why it’s a lot easier for a restaurateur to open a Subway franchise than a family restaurant, easier to get a research grant to study heart surgery (or drug treatment) than for stem cell research. My jaded view is that if we expect to survive the Economic Recession we’ll have to minimize the government’s ability to protect the status quo from imagination and innovation.