Diatribes of Jay

This is a blog of essays on public policy. It shuns ideology and applies facts, logic and math to economic, social and political problems. It has a subject-matter index, a list of recent posts, and permalinks at the ends of posts. Comments are moderated and may take time to appear. Note: Profile updated 4/7/12

04 October 2009

Health Insurance That Isn’t

[For a brief comment on Ireland’s approval of a stronger Europe, click here.]

1. Monopoly
2. Competition
3. Oligopoly
4. Natural monopoly and regulation
5. The uniqueness of insurance
6. Our broken system
7. How to fix it
8. Innovation and health

Why is our health-insurance system so hard to fix? The answer lies in the “dismal science” of economics. From an economic perspective, our system is not even “insurance.” It’s very structure contradicts the most basic characteristic of insurance: building the broadest risk pool possible to share risk as widely as possible.

From an economic perspective, any insurance industry—health insurance included—is special. Its special characteristics as insurance run counter to modern economic understanding about how best to structure and run industries generally.

This contradiction is intrinsic and fundamental. There is no magic wand—and certainly no legislation—that can make it go away. The only thing anyone can do is try to deal with it intelligently.

The contradiction between how insurance works and general economic learning is responsible for another apparent contradiction. Except for our own, virtually every developed nation has substantial government involvement in health insurance. In many, the government runs the system.

Nearly all of these nations (for example, Japan and the EU nations) have free-market systems, just as do we. They understand the benefits of private enterprise, free markets and competition just as well as we. They are not stupid. But they have chosen greater government involvement because of the unique characteristics of insurance as a product and an industry.

In contrast, we have tried to square the circle. We have ignored the fundamental conceptual contradiction between the very nature of insurance and the usual rules for free markets. There may be ways to round the corners and make the square look more like a circle. But the system we have is probably the worst that one could imagine. It provides health insurance that doesn’t really insure, i.e., health insurance that isn’t.

Worse yet, none of the bills now before Congress even addresses this fundamental contradiction. The Baucus bill would make it worse, much worse.

To appreciate all this, even in bare concept, takes a bit of explaining. So stay with me.

1. Monopoly. The starting point for understanding how markets and industries work in free-market economies is the notion of monopoly. Simply defined, a “monopoly” is an industry run—or a market served—by a single firm without competitors.

We all know that monopoly is bad, but few know in detail why. Modern economic theory does. It teaches that monopoly—as compared to competition—provides higher prices, lower output, slower innovation, reduced responsiveness to customers, and reduced product variety. These are the “evils” of monopoly, known to economists by a less loaded name: “inefficiencies.”

With the help of a few graphs and a bit of calculus (one first derivative), economists can actually prove the first two evils—higher prices and lower output—mathematically. But classical economics generally accepts all of them as non-controversial consequences of monopoly for industries and markets in general. There are a few exceptions (one of which we discuss below), but these principles work well for the vast majority of industries and markets. In most cases, they accurately describe the real world.

It is vital to appreciate that these evils have nothing to do with greed or human motivation. The graphical-mathematical proof that monopolies produce higher prices and lower output than competitive industries assumes that all firms have the very same profit motive. It assumes, if you like, that all businesses are equally greedy. Monopoly produces lower output and higher prices not because of some special human fallibility, but because of the way that markets work.

Although most educated folk are vaguely aware of these evils, they are not always conscious of their precise consequences. There is still a lot of confusion, for example, about why Communism failed decisively in both the Soviet Union (now Russia) and China. The reason is not so much government control of industry as monopoly.

Communism failed primarily because state ownership and control of the whole economy produced universal monopoly. Under Communism, every industry, from cars to canned food, was a monopoly. In the entire economy there was no competition at all. That was the real problem, not government control.

The politicians who ran the show in these Communist countries were not demonstrably greedier, stupider or more corrupt than their counterparts in free-market societies. Many (although obviously not Stalin and his ilk) were smart, dedicated people who had their societies’ best interests at heart. But the bare fact that their system created a monopoly in every industry gave them the worst of all industrial worlds. They could no more overcome that decisive economic disadvantage—built into the very structure of their system—than a fish could swim outside the water that surrounds and supports him.

2. Competition. Competition is the antithesis of monopoly. As compared to monopoly, it produces lower prices, higher output, faster innovation, greater responsiveness to customers, and greater product variety. The more robust the competition—the more competitors there are and the more vigorously they compete—the greater these benefits.

As with the evils of monopoly, economists generally accept these benefits of competition as proven in both theory and practice. Innumerable theoretical and empirical studies verify them, with few exceptions. They are the reasons why free-market societies have been so much more successful than monopolistic ones, whether of the left (Communism, state socialism) or of the right (fascist or “corporatist” states).

3. Oligopoly. Today many understand the evils of absolute monopoly and the benefits of pure and robust competition. But real-world markets seldom mimic either of these two extremes precisely. A pure monopoly would have only a single firm in an industry. Pure competition would involve tens or hundreds of firms, all competing vigorously. Very few industries have either extreme structure; most have somewhere between two and a dozen firms, which sometimes compete and sometimes cooperate.

So how can we classify and understand industries in the real world, which seldom fit either extreme theoretical model? Enter the “oligopoly.”

A “oligopoly” is a shared monopoly, in which several independent firms participate. The number of firms can be anywhere from two to a dozen or more, although usually it is less than a handful. But in identifying oligopoly the number of firms is less important than their behavior. Even a two-firm market can seem competitive or oligopolistic, depending on the two firms’ behavior.

For example, consider Airbus and Boeing. They are the world’s only two firms making big, long-range commercial aircraft. Yet despite their government subsidies (about which both sides complain), they both develop new airplanes continuously, and they compete vigorously for sales. They even produce decent product variety. For example, Airbus offers the huge, 600-passenger, double-decker A380, while Boeing is in the final stages of developing the smaller and more efficient “Dreamliner.” Both aircraft are designed for long-haul international travel, and all airlines are considering them seriously. These sole two firms are competing vigorously despite considerable government involvement in their financing and operation and the fact that their products are among the most complex and challenging to design and produce in all of industry.

It would be nice if the Russian industry begun over half a century ago by the great aircraft designer Tupolev had not dropped out of international commercial competition. Then we would have a three-firm industry and even more vigorous competition. But the industry we do have, with only two-firms, is about as competitive as any two-firm industry could be.

In contrast, consider the very same industrial sector (air travel) in a different market. Suppose you live in a medium-sized city served by only two commercial airlines. If both have flights between your city and the nearest major-city airline “gateway,” chances are you will find their prices for flights identical, often down to the penny. Why? Because they are comfortably sharing their joint monopoly in flights between your city and the gateway, in which no other airline competes.

If the route is too long for convenient car, bus or train travel, then so much the better for them. Then the two firms have a complete duopoly (two-firm shared monopoly) in the travel market between your city and the gateway. Their duopoly shares all the evils of monopoly, including lower output, higher prices, slower innovation, reduced responsiveness to customers and lower service variety.

You can understand all this without being an economist by watching what happens when a new firm enters this duopolistic market. Prices go down, output goes up, traffic increases dramatically, and places in the airport parking lot become harder to find. Just ask anyone who lives in a smaller city with monopoly or duopoly air service when an aggressive competitor like Southwest or Jet Blue moves in.

So that’s how you identify oligopoly: by the evils of monopoly spread among a small number of firms. It’s not the number of firms that counts, but their behavior and their market’s performance. By their performance ye shall know them.

4. “Natural” monopoly and regulation. So far we have discussed three economic “models” of industries and markets: (1) monopoly, in which a single firm dominates, (2) competition, in which a number of firms compete, and (3) oligopoly, in which a small number of firms cooperates to share a collective monopoly, rather than competing. You can tell how well real-world markets match each of these models by looking at both the number of firms in the market and the market’s performance in price, output, innovation, customer service and product variety.

But what happens when the very nature of the industry accommodates only a single firm? Examples are water and power. It wouldn’t make much sense to have multiple firms competing to build, maintain and operate separate water mains or electrical trunk lines, plus a myriad of separate branch and supply lines to every house and business. That approach would be duplicative and wasteful. It would also cause gargantuan administrative expense and governance nightmares.

So it makes sense to appoint a single firm to deliver water or electrical power (or natural gas) to your door, and to give that firm a monopoly of distribution. Circumstances (namely, the duplication, cost and waste of doing otherwise) compel allowing a monopoly in these cases. Economists call such industries or markets “natural” monopolies.

But the mere fact that a monopoly is “natural” because competition would be duplicative and wasteful does not reduce the “evils” of monopoly one iota. The resulting “natural” monopoly still produces higher prices, lower output, slower innovation, reduced customer service and less variety than would a hypothetical competitive industry that would be duplicative and wasteful in other ways.

In other words, the evils of monopoly don’t vanish simply because the nature of the economic activity precludes competition in practice. In fact, they may get worse. Water, for example, is a necessity of life with a highly inelastic demand curve. If an unrestrained private firm controlled its delivery to your home, it could charge whatever it pleased, including a substantial fraction of your income, for supplying you with the water that keeps you and your family alive.

So far economic science has found only two general solutions to this dilemma. The first is to outlaw the profit motive and have the government (or a nonprofit company under some degree of government control) own and operate the monopoly on a nonprofit basis. That’s what most cities and towns do with their systems for distributing water and electricity.

The second solution is to keep the natural monopoly privately owned and operated—and allow it to make a decent profit—but to regulate its prices and other aspects of its business so as to protect the public that it serves. That approach is called “regulated natural monopoly.” It is widely practiced with respect to such things as water, electricity, gas, telephone and cable TV today.

The theory of regulated (private) monopoly, as distinguished from government ownership, is that the profit motive provides greater impetus for private investment in innovation, plant maintenance and good service. Of course the incentives for those benefits depend directly on how much profit the government regulator allows the private industry to make. In regulated natural monopolies, the government determines that profit in long, complex and contentious public hearings. The result, sometimes, is a serious time lag between changes in technology or economic conditions and changes in the allowed profit to accommodate them.

Regulated natural monopoly is thus a complicated, unwieldy system that takes a lot of expertise, patience and educated government management. The best that can be said for it is that it is often better than the alternatives, i.e., unregulated (and therefore predatory) private monopoly or government ownership and control, without any incentive for private investment or innovation. Many states and localities run their water, power, gas, telephone, and cable TV industries in part or in whole as regulated utilities, i.e., regulated natural monopolies.

5. The uniqueness of insurance. After all this discussion, we now have four fundamental economic models under our belt: monopoly, competition, oligopoly and regulated natural monopoly. We will soon analyze which of them our health-insurance markets most closely resemble. But before we do that, we must explore how the nature of insurance itself affects that analysis.

The basic theory of insurance is simple. An insurer collects premiums from a group of people who fear a particular, rarely-occurring risk. When a risk becomes real and one of the group members suffers an insured loss, the insurer uses the collected premiums to pay that loss, up to the limits of the insurance policy. If the insurer does its homework and properly estimates the level of risk, it will be able to pay all the losses in the group, plus its management and administrative expenses, and still have something left over for profit. That, in essence, is the insurance business.

It doesn’t matter what the risk is. It can be a risk of fire, property damage due to inclement weather, theft or crime, or (in the case of health insurance) the risk of disease or injury. As long as losses are rare enough, and the cost of each loss (even if high individually) is low enough collectively for the aggregated premiums to cover it, plus expenses and profit, the business is viable. The insurance company covers its expenses of operation and makes a profit, and the insurance protects every insured person against a rare but possibly devastating loss.

There is, however, something special about the insurance business. It works only when the customer base—the group insured—is large enough. If health insurance covered only the group of people waiting for liver transplants, for example, its cost would be astronomical. In fact, if every insured were waiting for a transplant, each premium would have to include the average cost of one, plus a pro-rata share of expenses and profit. In that case the insurance would be useless: the “customers” would do better by paying for their own transplants and saving their shares of the insurer’s administrative expenses and profit.

Health insurance can work—even for liver transplants—as long as the whole population is insured and the need for liver transplants among the general population is small. Then every insured person chips in a small premium against the small chance that he or she might get incurable liver disease and need a transplant. If the pool of premiums (and insureds) is large enough, it can cover all the enormous expenses of transplants for those few who need them, plus the insurer’s administrative expenses and profit.

If health insurance is to work, it has to cover all the injuries and ills to which we humans are heir, not just liver disease. Doing so requires a very wide pool indeed, in order to make the premiums affordable.

And there’s the rub. There are so many ailments requiring prevention, diagnosis and treatment, and so many possible wounds and injuries, that only the broadest pool of insured people will do. Perhaps there is some maximum size after which the same statistical occurrence of each type of loss merely repeats itself, so that further increases in pool size do not further lower the average risk, and therefore the required premium. That is, there may be some maximum size of health-insurance pool, after which further increases in size pass the point of diminishing returns.

If it exists at all, that point of diminishing returns surely must be in the many millions. Yet only thirty of our fifty states have populations over three million people, and seven have fewer than a million. So the optimum size of a health-insurance pool probably exceeds the populations of a substantial number of states.

Those facts are unfortunate for two reasons. First, at present we regulate health insurance almost entirely at the state level. Regulators in each of our fifty states license health insurers, fix the terms and conditions of their operation, inspect and discipline them and often (depending upon the state) prescribe detailed rules for their operations and the insurance they can issue. These terms, conditions and rules vary widely from state to state.

The second reason why these facts are unfortunate is more important. State-by-state regulation creates separate and individual health-insurance markets in each of the fifty states. Many, if not most, of those separate markets would be suboptimal in size even if only a single health insurer served them. But people seldom buy more than one policy of health insurance, so a customer of one insurer is lost to another. As a result, having more than one insurer in each state “splits” the pool of insureds even more than state regulation and makes the size of the risk pool even less optimal. The more firms that compete in a single state’s market, the more they split the pool, and the less adequate each of the splintered pools becomes.

As this analysis shows, the very nature of insurance, especially health insurance, contradicts the general economic command that competition is best. The more competitors in a limited market, the more they split the pool of possible insureds, and the less effectively works the fundamental concept of insurance—spreading the risk of loss over the widest possible pool. The fundamental goal of insurance thus contradicts the general economic rule that competition is good, and the more the better.

In this respect, insurance markets resemble natural monopolies. Risk-spreading works best when the entire at-risk population is in a single risk pool. This point applies especially to health insurance because the risk of getting sick or injured is much higher, for example, than the risk of a destructive home fire or an auto accident. Therefore the optimal size of a risk pool for health insurance is much larger than that for home or auto insurance.

So any insurance industry has some aspects of natural monopoly. Needing a larger risk-spreading pool, the health-insurance market resembles a natural monopoly far more than other insurance markets.

But now recall the usual “solutions” for natural monopoly. Only two have wide acceptance both in economic theory and in practice : (1) government ownership of the industry and (2) government regulation of private industry. This analysis gives us a hint why virtually all other developed countries have opted for government-sponsored health care, government insurance of private health care, or substantial government participation in private insurance of private health care. Other nations need single markets even more than we do because their populations are smaller. (In population, the United States is the world’s fourth largest single market, after China, India and the EU.)

6. Our broken system. We Americans think we are different. Our myth of “American exceptionalism” leads us to believe that the principles that apply to others don’t apply to us. Because we idolize free markets and competition, we have ignored the fundamental contradiction between competition and the nature of insurance. So we have tried to square the circle. We have tried to have our cake and eat it, too.

The result? We pay twice as much per capita for health care as any other nation and we have no better results. In fact, for infant mortality and post-60 life expectancy, we are among the worst of developed nations.

Some of this dismal performance derives from inefficiencies and perverse incentives in our health-care system. Some of it derives from the extraordinarily privileged position in which we place our physicians, who (except for the rare malpractice action) have less institutional public accountability for their actions than any other profession, with the possible exceptions of priests and tenured professors.

But insofar as concerns health insurance, the failure of our system derives directly from our failure properly to consider the nature of insurance itself. Insurance is an industry whose rules of operation contradict the fundamental rule of free markets in general: that competition among many firms works best.

Not only have we failed to appreciate that fundamental contradiction. The health-insurance system we have built in America directly flouts the most basic command of all insurance—increase the size of the risk pool!

It does so in four ways. First, our state-by-state regulation has balkanized what might have been a huge national pool of 307 million insureds into fifty separately regulated and managed jurisdictions, 29 of which have fewer than five million people. Second, within those jurisdictions, we have further fragmented risk pools by organizing health insurance around employers, nearly all of which have far fewer employees than an optimal risk pool would. Third, within those twice-balkanized pools, we have further balkanized each employer’s pool by trying to create competition for its employees’ business. Each employer offers several separate health insurance plans to its employees, which further divide the risk pool to provide “consumer choice.” Last but not least, we have allowed our insurers to further divide even these thrice-balkanized risk pools by cherry-picking customers which such things as age requirements and pre-existing-condition exclusions.

To appreciate how much this state of affairs contradicts the basic notion of insurance, do a little arithmetic. We have a total population of some 307 million people. If each state has only twenty different insurance plans (say, four each for five major employers), there are 1,000 different policies in our nation. The maximum pool for each would be 307,000 people, even if all signed up, which of course they don’t. It doesn’t take much statistical intuition to understand that numbers like that (several hundred thousand) are far too low to provide an adequate risk pool for all the innumerable ailments, conditions and injuries to which flesh is heir, and all the even more innumerable preventatives, diagnostic tools, and treatments that might result.

If you set out deliberately to design a system that would create the maximum number of badly sub-optimal risk pools, and that would maximize duplication, waste and inefficiency, it would be hard to design a “better” health-insurance system than the one we have. A rational person, knowing the economic goals of health insurance analyzed above, would have to conclude that either a madman or Satan designed our health-insurance system.

7. How to fix it. With this analysis is mind, we can now understand why so many of our developed-country competitors have adopted “single-payer” systems for health insurance. A single-payer system maximizes the risk pool, thereby spreading the risk as widely as possible. This point has particular importance in many foreign countries, some of which have smaller populations than our larger states.

A single-payer system avoids balkanizing the risk pool and therefore the temptation to cherry-pick “customers,” for example, by disfavoring unfortunates with pre-existing conditions or by charging them higher premiums.

But risk-pool balkanization is not the only evil of an atomized system of health insurance relying on multiple, separate private firms. Such an atomized system also increases administrative costs dramatically. With a single set of computer protocols, a single maintenance service, and a single set of (preferably digital) claim and other administrative forms, a single-payer system permits obvious administrative savings as compared to the balkanized, poorly digitized and therefore exorbitantly inefficient system that we have. In addition, a single-payer system can be run on a non-profit basis, thereby also avoiding the extra expense of private profit and the further administrative expense of accounting for it. This is why careful studies show administrative costs for private systems three or four times larger than those for single-payer systems.

People who prefer a single-payer system don’t prefer it because they like “big government,” government in general, or big organizations in general. They prefer it because a single-payer system spreads the risk of loss as broadly as possible, reduces administrative expense with uniform software, computer systems and administrative tools, and (because of the resulting standardization in forms and computer systems) provides the greatest transparency and accountability.

In the insurance business, size matters. Bigger is better because bigger better spreads risk and administrative cost over a wider customer base.

The very same rationales underlie the push for a “public option” for health insurance. It doesn’t matter much whether the public option is owned and operated by the government or given a bit of initial seed capital and pushed out of the nest to fly on its own. What matters is that the public option have as many customers as possible, so as to lower each one’s proportionate share of risk of loss and administrative expense.

It helps if the public option is nonprofit. Then its premiums will be lower still—by the proportionate share of profit that a for-profit insurer would have demanded. But even if you have a theological preference for private profit, private capital and capitalist incentives in the boring business of health insurance (as distinguished from health care), we could do a whole lot better with better industry structure.

The issue is not profit versus nonprofit, capitalistic incentives versus government politics, or free enterprise versus socialism. The issue is size. Bigger risk pools lower per-capita risk and administrative expense, and therefore premiums. Bigger risk pools also lower administrative expense generally by standardizing computer systems and protocols and administrative procedures. That is, they have economies of scale.

8. Innovation and health. I hasten to recall that we are talking about health insurance, not health care. Our largely private health-care system also has enormous administrative inefficiencies which derive from its balkanized—if not atomized—institutional structure. When every medical group and hospital, if not every doctor and nurse, operates privately and separately, there are obvious sources of waste and duplication. They include thousands of separately owned and maintained (and therefore mutually incompatible) computer and administrative systems, and the further administrative waste of accounting, in detail, for all the individual profits of owners and shareholders of thousands of separate and independent legal entities.

But there is one valid argument for private profit incentives in health care. They may help keep our largely private health-care system innovative. No one has even begun to prove that proposition in any quantitative way, but it is plausible. The resulting increase in innovation, if real, may justify the enormous waste inherent in an atomized system that is largely dysfunctional in terms of administration and computer compatibility.

But that’s health care. Even if private incentives increase the rate of innovation in health care enough to justify the enormous waste of resources in an atomized private system, there is no evidence of—and not even any credible theory for—a corresponding tradeoff in health insurance.

One reason is that there’s not much with which to innovate in health insurance. It’s a boring business of recording, verifying, assessing and paying claims of loss. It makes banking look exciting and innovative.

And in any event the historical record of innovation in health insurance is abysmal. Scientists and engineers began automating in the 1970s, lawyers and small businesses in the 1980s. Yet my own insurers were still using paper forms as recently as a year ago, although some of them now have websites (of widely varying quality and utility). If you were to grade the health-insurance industry on innovative use of digital computers—a fifty-year-old technology!—you would have to give it an F.

So the need for and record of innovation in health insurance, as distinguished from health care, hardly justifies the demonstrable evils of wildly sub-optimal risk pools and the waste of extraordinary administrative expense in accounting for thousands of separate firms and policies, all in the service of private profit.

Conclusion. A rational and thorough examination of our nation’s largely private health-insurance system compels the conclusion that it is wildly and extravagantly inefficient. It fragments risk pools by state and employer. In the name of free enterprise, it further fragments risk pools by inviting multiple competitors into each of these fragmented markets. The result is risk pools of suboptimal size, and in many markets wildly suboptimal size.

At the same time, as the President himself has noted, the industry structure in many states resembles monopoly or oligopoly far more than competition. So in practice the cost of suboptimal risk pools doesn’t even buy the benefit it is supposed to provide, i.e., effective competition. The result is the worst of both worlds: fragmented markets with small risk pools that operate as monopolies or oligopolies, with little or no effective competition.

If the Baucus bill becomes law, it will make all this still worse. It will further fragment risk pools by pre-existing conditions. By requiring those conditions to be covered but not regulating how, it will invite atomized private insurers to offer a different policy, with a different premium, for each serious pre-existing condition (e.g., diabetes, heart disease, cancer, HIV/AIDS). The result will be badly suboptimal risk-pool size, as in our liver-transplant example above. It would be hard to imagine a more counterproductive approach to insurance and one that more strongly contradicts the very nature and purpose of insurance itself.

The risk pools in our system are already too small to offer affordable premiums to the vast majority of consumers. If the Baucus bill passes, they will become even more so. The ban on pre-existing condition exclusions may increase coverage in theory, but in practice few consumers with pre-existing conditions will be able to afford the premiums that multiply balkanized risk pools will produce.

There are only two rational economic justifications for such a counterproductive system. One is the enormous profits that it provides a select few. The second is the employment it provides to otherwise unemployable workers who, like clerks in Dickensian England, use centuries-old paper methods to process claims in the Internet age.

It should be apparent even to the dimmest-witted member of Congress that continuing this madman’s system for another few decades will not promote the general welfare. The real question is how to take something so fundamentally flawed as the Baucus bill, which doesn’t even attempt to address any of these fundamental conceptual problems, and make a silk purse out of a sow’s ear. Without a public option to provide a large risk pool and some semblance of competition, the best approach may be to junk the bill and start over.

Unfortunately, the competing bills moving through the Senate are not much better. All fail to come to grips with the fundamental conceptual contradiction that makes our American insurance system so much less effective than its foreign counterparts. “Solutions” based on failure to understand a problem have a habit of not working. When part of their motivation is campaign contributions from people with a vested interest in it not working, so much the worse.

Short Subject: Europe Rising.

Although unrelated to the vital (to us) issue of health care, an enormously encouraging thing happened yesterday, on which I cannot refrain from commenting. I refer to Ireland’s belated approval of the new EU treaty, which would vastly expand the scope of European integration.

It’s hard to overemphasize how important and inspiring this news is. In a recent post, I outlined how the EU, like the US, was designed on rational principles, independent of race, ethnicity and the agonies of history. In the long sweep of human affairs, Ireland’s decision to make the EU stronger may be one of the most important things to happen in this decade, if not our whole new century.

We Americans have a young society. Like youth everywhere, we believe we are special and exceptional, immune to the forces of history. In contrast, Europe is mature. Countless wars and social upheavals over two millennia have chastened it and made it wise.

Unlike us, Europe has no fear of abstract labels. It has tried both socialism and fascism and has seen their results first hand. Now, much like China, it enjoys a mature pragmatism that suspects abstract ideologies and respects what works (in health care as in other things).

As our intractable structural problems push us Americans deeper into social and economic decline, an effective counterweight to advancing China—let alone one based on the Western Enlightenment—will be enormously beneficial to global progress. Peaceful competition is a good thing, and competition based on great ideas is even better.

Any student of science or mathematics knows that most of the great advances of the nineteenth and twentieth centuries came from Europe. America’s predominance in the twentieth century owed much to Europe’s great wars and social upheavals, which drove its brightest minds in refuge to our shores. Several of those great minds worked in the Manhattan Project that gave us atomic weapons. Many of them stayed in our great universities to learn and teach.

Now that Europe is getting its peaceful act together, maybe advancement of human knowledge will shift back there, as well as to China. The Large Hadron Collider sits at Europe’s very center.

All is not yet certain. Poland and the Czech Republic still have to vote. But the Times reports that Poland’s “approval is all but assured.” As a people at the epicenter of every upheaval of the last century, the Czechs should know what is good for them, too. In the meantime, let every civilized person raise a glass and shout “Erin Go Bragh,” within the context of a strong and peaceful Europe.

Footnote: In his health-care speech before the joint session of Congress, the President said:
My guiding principle is, and always has been, that consumers do better when there is choice and competition. Unfortunately, in 34 states, 75% of the insurance market is controlled by five or fewer companies. In Alabama, almost 90% is controlled by just one company. Without competition, the price of insurance goes up and the quality goes down.”


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  • At Sunday, October 4, 2009 at 9:38:00 PM EDT, Anonymous life insurance broker Canada said…

    Hello, I don't think that the health insurance system shouldn't be under monopoly. On the contrary, it shouldn't be under monopoly at all. In Canada, as in other countries, especially in Europe, we have a single-payer system and I must say that I see many advantages of such a system comparing to the American one. First of all, it is much cheaper (not even 10% of the Canadian GDP while the US pays more than 15% of its GDP), but mainly it provides 100% insurance coverage.

    Take care,


  • At Monday, October 5, 2009 at 5:41:00 PM EDT, Blogger Steven Messer said…

    Wow, you make a lot of very interesting points. You don't, however support your theory of optimal or suboptimal size groups. I also feel there is no way you can possibly support the idea that the federal government would be able to take over something as mundane as collecting premiums and processing claims and do it efficiently, it sounds good in theory, but for example look at the IRS. Something that should be very simple, assessing and collecting taxes has become one of the most complex administrative nightmares in the history of civilization and all in the name of fairness. Can you imagine that a government takeover of our health insurance system and in effect the healthcare system would be any different? No matter which side of the political isle you are on it seems everyone wants to assume there are just a few problems that if addressed will solve all problems. There exist multiple problems that will require multiple fixes and I do not believe that the federal government will EVER be able to deliver the goods. Our healthcare system IS the best in the world, and we are different. I for one don't want to be like the rest of the world. It has nothing to offer that is not better here. We need to come up with better solutions from the free market system in COOPERATION with the federal government to develop a system that will maintain our status as the envy of the world. We should not settle for a substandard "everyone else is doing it attitude."

  • At Wednesday, October 7, 2009 at 2:23:00 AM EDT, Blogger Jay Dratler, Jr., Ph.D., J.D. said…

    Dear Mr. Messer,

    I appreciate your taking the time to write a comment. But I disagree strongly with everything in it but the first sentence.

    Like much of the rest of your comment, that sentence is your opinion, to which you are entitled. But as Senator Daniel Patrick Moynihan once said so well, you are not entitled to your own facts. All the factual statements and implications in your comment are demonstrably false.

    For starters, there is no comparison between the IRS and health insurance. Federal taxes are a legal battleground between 307 million citizens (and their lawyers) trying to pay as little as possible and the IRS, which tries to get them to pay what they owe. Its disorganization derives from those essential facts. Health insurance operates in an entirely different universe.

    You might say that private health insurance is similar on a small scale, as hundreds of private insurers draft thousands of policies and fight (sometimes in court) to pay as few claims as possible. But a single-payer system or public option would destroy even that limited analogy. It would replace an atomized profit-seeking industry with a single entity whose primary goal would be just paying claims.

    Government is very good at that. Even the IRS pays tax refunds on time, by direct wire transfer if you give it the information.

    A much better analogy to a single-payer or public option for health care would be Social Security, which regularly delivers tens of millions of checks, in all the right amounts, to the elderly and disabled, many by direct deposit. That agency is a model of efficiency and effectiveness on which millions happily rely.

    More generally, your underlying implication that government is incompetent is simply untrue. In a separate post, I have listed thirteen monumental achievements of our own government over the last 70 years, which private industry did not and probably could not accomplish. You should study them, for they represent some of the human race’s most stunning achievements, including eliminating smallpox, visiting the Moon, and developing the Internet. The notion that government—especially our government!—is a bumbler is a lie concocted by twisted politicians for the purpose of getting people like you to vote against your own economic self-interest and in the interests of the moneyed folk who bought them.

    As for your assertion that “[o]ur healthcare system IS the best in the world,” that, too, is demonstrably false. We pay twice as much per capita for health care as any other nation, and we get worse results. Forty-four other countries, including most of the developed world, have lower infant mortality than we do, and our post-60 life expectancy puts us dead last among 23 developed countries.

    I’m sorry to say that you’ve been brainwashed about both the “incompetence” of government and the “superiority” of our health-care system. In that you are hardly alone.

    Your writing a comment suggests you may be open to learning. If so, you might follow the links in this reply (and the sources they cite). You might also read T.R. Reid’s recent book, which compares our health-care system with other nations’ objectively and in depth. It might open your eyes.

  • At Sunday, May 5, 2013 at 10:34:00 AM EDT, Anonymous Screwzer said…

    I stumbled on your blog in search of optimal insurance pool sizes. Your post gives an excellent view of the market and makes a good argument for the largest insurance pool possible.

    I do think there's more to explore here, since my own observation indicates there is an upper limit to the efficiencies of a large insurance pool.

    As with welfare and other "entitlements", the moral hazard of an increasingly anonymous patron and recipient compels more folks to take advantage of the system.

    This plays out in a variety of ways, from Welfare cheats, to Medicare billing fraud.
    In nations that have adopted nationalized healthcare, the most successful ones are amongst heterogeneous populations (Denmark would be a good example) where risk factors are genetically limited, and there's more of a tribal spirit. No one wants to be accused of stealing from family, so to speak.
    As these heterogeneous nations open themselves up to immigrants, these social programs come under pressure, both in terms of expanded risk factors to cover, and a population that has a reduced incentive to remain honest.
    One is far more likely to rip off an anonymous institution, than the local charity.

  • At Monday, May 6, 2013 at 12:37:00 PM EDT, Blogger Jay Dratler, Jr., Ph.D., J.D. said…

    This comment has been removed by the author.

  • At Monday, May 6, 2013 at 12:44:00 PM EDT, Blogger Jay Dratler, Jr., Ph.D., J.D. said…

    Dear Screwzer,

    It would be nice to have more specifics about your “own observation [that] there is an upper limit to the efficiencies of a large insurance pool.”

    Common sense (and mathematics) suggest just the opposite. The larger the pool, the broader the range of casualties the insurance can handle, and the lower the premium. As for administration, large pool size promotes standardization and uniformity in claim forms, reimbursement, computerization, and communication.

    Standardization and uniformity are the bases of administrative savings. Maybe that’s why studies show administrative costs of private health insurers to be two to three times higher than those for Medicare.

    As for “Welfare cheats [and] Medicare billing fraud,” the first are irrelevant to health insurance, which is not welfare. The second exists but is numerically negligible compared to the high cost of unnecessary tests and procedures prescribed by doctors or the high cost of things like liver and heart transplants.

    Notwithstanding your complete sentences and fluent writing, your “analysis” sounds a lot like Fox’s propaganda. And, to be honest, it also sounds a bit like racism.

    No credible evidence that I have seen proves that billing fraud is more prevalent among immigrant or “heterogeneous” populations. To the contrary, most new immigrants are self-reliant and unaware of free benefits offered by their asylum-providing host governments. They are therefore less likely than natives to claim those benefits. Your view is a convenient myth devoid of evidence (some might say a canard).

    More to the point, multiple studies have shown that billing fraud and deliberate overuse, even where they exist, add negligible amounts to the cost of health care. The big numbers come from the high cost of care and honest but erroneous overprescribing, including so-called “defensive medicine.”

    Large insured populations dilute these high costs; small ones don’t. That’s simple arithmetic.



  • At Monday, May 6, 2013 at 1:37:00 PM EDT, Blogger Jay Dratler, Jr., Ph.D., J.D. said…

    This comment has been removed by the author.

  • At Monday, May 6, 2013 at 1:59:00 PM EDT, Blogger Jay Dratler, Jr., Ph.D., J.D. said…

    Dear Screwzer,

    I wanted to make sure you understand that my remarks about Fox and racism were not directed at you personally.

    What triggered that line of thought was your mention of ”Welfare cheats.” They have absolutely nothing whatsoever to do with health insurance. Next you mentioned immigrants and “heterogeneous” populations. They don’t have much to do with health insurance, either.

    What do all these groups have in common? They are disfavored and occasionally despised groups, which serve as excuses for bailing out of our social obligations.

    No healthy person likes to pay for strangers’ health care. But that’s what every healthy insured person does, whether the insurance is private or governmental. You pay so that, if fate hits you hard, you’ll be covered, too.

    If you’re a strong backer of private insurance, as Fox is (because mega-billionaire Rupert Murdoch is), you want people to resent those payments, and to direct their resentment against governmental, rather than private, insurers. The way you do that is to overemphasize (or make up) cases of cheating and freeloading, and to “distinguish” private insurance as immune from fraud and overuse, and a manly act of self-reliance.

    Of course all that’s nonsense. You pay for insurance either way, and you pay more if the pools are smaller, as they are in private insurance. And there’s no evidence that government programs are any more prone to fraud tha private insurance, let alone enough more prone to cancel out private insurance’s two-to-three-times greater administrative costs.

    But the ploy makes perfect emotional sense. By suggesting that you are playing by the rules while others are not, it excites your self-interest and sense of indignation.

    Sure, we have laws and punishment for transgressions. But in the end civilization depends on everyone minding the rules voluntarily because they believe that everyone else does, too. When you think others don’t, you are ready to do battle—maybe even willing to pay more for your own insurance—just to hit back at those imaginary cheats and freeloaders.

    When Fox and like-minded propagandists undermine your trust and belief in a fair system (as fair as it can be in the real world), they are not just telling lies without evidence. They are getting you to do their backers’ bidding.

    At the same time, they are giving you powerful emotional reasons to do so, too. All the better if they can inflame your resentment by pointing the finger at disfavored groups, like blacks, Hispanics, Muslims and other immigrants.

    Do you see now how it works? And do you see that the end result is to get you to pay more—willingly and angrily—so that their patrons, including Big Insurance, can get rich at your expense?



  • At Sunday, January 5, 2014 at 9:02:00 PM EST, Blogger Unknown said…

    Individual Health Insurance in the United States is far too expensive.The Affordable Care Act is attempting to address the cost factor and hopefully change the entire system for the better.

  • At Tuesday, January 7, 2014 at 5:36:00 PM EST, Blogger Jay Dratler, Jr., Ph.D., J.D. said…

    I agree with your comment.

    For a more recent analysis of how the Affordable Care Act might help, and how it could hurt, see the two posts on this page.


  • At Saturday, August 12, 2017 at 2:40:00 AM EDT, Blogger Jeff Silverman, Linux sysadmin said…

    It's been a few years since you wrote this essay. I want to thank you for articulating what I have often felt to be true, but could not quite get my arms wrapped around it. I knew that insurance was different than other industries, but I didn't really understand how or why. Now, thanks to you, I know.

  • At Tuesday, August 15, 2017 at 4:34:00 PM EDT, Blogger Jay Dratler, Jr., Ph.D., J.D. said…

    Thanks for your comment.

    Yes, insurance is different. Competition doesn’t help, unless each competitor is so big as to have an optimal or more-than-optimal risk pool. With the variety of diseases and injuries to which humans are heir, we don't know what’s optimal; and as diagnosis and treatment grow with advancing technology, the optimal risk pool is a moving target. That's why every advanced nation but ours puts all its citizens in a single risk pool, in order to maximize coverage and minimize premiums.




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