Category: Economics

No Obvious Solution to Insurance-Caused Healthcare Costs

With the impending loss of the Star-Ledger Editorial Board and its opinions as a source of blog-fodder, I am trying out a one-year subscription to the online edition of the Washington Post. A few days ago, it published a guest opinion by David Goldhill, described as the CEO of Sesame, a health-care marketplace, entitled “Insurance is what makes U.S. health-care prices so high: America needs a working marketplace where patients are the primary customers.“1 I half agree with the opinion; that is, I agree with half of it, the diagnosis, but the proposed cure still seems rather vague.

The piece starts by quoting Andrew Witty, the CEO of UnitedHealth Group, who points out: “No one would design a system like the one we have. And no one did . . . .2 It’s a patchwork built over decades.”

Goldhill’s basic description of the problem is:

Health insurance was meant to work like other kinds of insurance: When policyholders got sick, they would use the collective financial resources of the healthy to cover their costs. But this model was designed to pay for emergencies such as hospitalizations — not to “share the risk” of erectile dysfunction, weight loss, lifelong management of chronic conditions, or the mental health treatment needed by 1 in 5 Americans. . . . .

It’s as if homeowners’ policies expanded from insuring against fires and floods to also covering utility bills and property taxes, or even replacing worn-out furniture.

This reminds me of the great economic trek that the hypothetical reader of this blog and I took just over three years ago. I said, “Health insurance has grown, not just in the number of insured but in the scope of its benefits. It is no longer just for major expenses (although all medical expenses are now beyond what a typical patient could afford to pay out of pocket), but it covers office visits, physical examinations and prescriptions.”

In the cental post of that extended discussion of economics, I proposed the following thesis: broad-based demand-side subsidies tend to cause the price of the subsidized commodity to increase, a proposition for which I drew further support “from what I described as the SEP Problem: the fact that ‘someone’ else is paying for something can have the effect of increasing the cost that thing, especially where ‘someone’ is someone of whom the consumer is willing to take advantage (the government or insurance companies, for example).”3

The next post applied this concept directly to healthcare:

It has long been my premise that the availability of a source of ready payment for such services means that the cost of the services will increase to absorb available funds. The insured rarely shop for healthcare based on price because the deductible/co-payment will either be a fixed amount or relatively insignificant and somebody else is paying for the balance. Health insurance itself acts as a demand-side subsidy.

So far, Goldhill and I seem to agree. His solution is that “America should get the entire [healthcare] industry to compete vigorously for customers — for patients, that is, not insurance companies.” He believes that “[c]ompetition among providers for dollars spent directly by prudent consumers would not only bring prices down but also encourage more innovative approaches to packaging care.” Perhaps so, but I must have missed how America engenders that competition and prudence. Taking the latter point, how do we encourage such consumers to be prudent? The only obvious answer that springs to mind is that they must have some metaphorical skin in the game, that the consumer must share in the cost of care. This is not going to sit well with those who push for equal access.

Jay Bohn

December 30, 2024

Copyright 2024 by Jay Bohn.

  1. The same opinion actually appeared in yesterday’s Star-Ledger. ↩︎
  2. Unfortunately, I do not have access to the source, so I am uncertain if these are three consecutive sentences. ↩︎
  3. Indeed, in his editorial Goldhill says: “Medicare, Medicaid and Veterans Affairs health care all have been dressed up as pretend insurance. Americans individually pour hundreds of thousands of dollars into the system through premiums and deductibles, yet they somehow keep believing that someone else is paying for their care.” [emphasis added] ↩︎

Recent NJ.com Article a “Three-For”

An article I saw on NJ.com Monday is interesting for three reasons.

The article, “N.J. residents actually say yes to a tax hike if it’s spent on this, new poll says” (subscriber exclusive) states that 54% of State residents (according to one poll) support the further extension of a “temporary” corporate tax surcharge to provide funding for NJ Transit.1

First, the article’s title (headline) is phrased to entice the reader to click on it to find out what spending is entitled to support for a tax hike. I have previously complained about titles that do “not adequately convey what the article is about but instead serves as a piece of “click-bait” to excite the reader’s curiosity to go to the article (thus generating ad revenue).”

Second, I have also previously posted about this particular “temporary” tax increase and the Star-Ledger’s desire to make it permanent.

Third, many of the Star Ledger’s unlabeled opinion pieces have reflected support for a dedicated funding source for NJ Transit. As a matter of policy, I oppose dedicated funding; every government agency should have to make the case for taxpayer money on a regular basis.2

Jay Bohn

October 26, 2023

  1. No doubt that support derives from the fact that someone else (large corporations) is seen as paying the tax but the people responding to the poll will benefit. As I’ve said before, the government that robs Peter to pay Paul can always count on the support of Paul. ↩︎
  2. (Indeed, I suspect that the whole purpose of the poll (and perhaps the article as well) was to claim that there is public support for NJ Transit funding; must have been disappointed that the support was only at 54%. ↩︎

“For the Price of a Cup of Coffee”: ‘Daily Value’ Monetary Appeals Understate the Cost

I’m sure you’ve heard it, such and such a social good can be had for “less than,” “only,” or “little more than” the price of a cup of coffee a day.((Of course, the price of a cup of coffee has gone up a lot since those pitches started. A Cup of Coffee Costs Almost $5 Now. Blame Inflation, and the Weather. (businessinsider.com).)) This is a form of time-unit argument, such as a personal injury attorney’s appealing to a jury to think of each day of the plaintiff’s pain and suffering.

Of course, those making this pitch do not expect that you will actually cease spending that money on a cup of coffee. (Do you hear the sigh of relief from the Starbucks of the world?) Instead, the idea is that the audience will see it as a small cost (or perhaps be shamed into thinking that if they can spend that much on a cup of coffee they should also be willing to pay it for the social good). By slicing the cost into daily increment, it is meant to seem lower.((It would be lower still of the increment were hourly or shorter, but there is no familiar hourly cost for comparison and it would rapidly get ridiculous. No, daily is the sweet spot.))

But just as the jury must multiply each day of pain and suffering by the plaintiff’s life expectancy to arrive at a verdict, the social appeal audience must multiply the “price of a cup of coffee” by the length of the relevant pay period, or month, or year, to understand the impact upon the household budget. An annual cost of $1800 is probably more daunting.

Jay Bohn

May 18, 2023

Proposal to Regulate Prior Authorization Highlights Conundrum in Paying for Healthcare

When a movie needs a group of villains, few are going to object if it turns out to be the Nazis. In non-movie life that role is often played by insurance companies.

Earlier this week NJ.com published a guest opinion by Josh Bengal, the director of government relations and staff counsel for the Medical Society of New Jersey. The point of the column was to encourage the passage of the “Ensuring Transparency in Prior Authorization Act, which — he says— “would remove barriers put up by health insurance companies, which use ‘prior authorization’ to deny coverage for care and treatment a physician deems medically necessary, but insurers consider ‘unnecessary.’”

I will get to the proposed statute in a minute, first I want to comment on something Bengal says in his opening paragraph about an ongoing review of our country’s healthcare system: “At the core of this review is an important question: How can we ensure patients have access to all the healthcare services they need exactly when they need them?” Absent a very strict interpretation of “need,” we can’t. In our society we have limited resources but unlimited wants. If you’re spending your own money, you make choices about what needs or wants take priority, but if someone else is paying, more wants have a way of becoming critical needs. Insurance policies are contracts, and patients should get the benefit of their bargain, which is not likely to be unlimited care.

As far as the prior authorization is concerned (and based solely on the description in the column — I have not read the actual bill), the proposal seems to involve only relatively modest, procedural requirements, such as prompt decisions, clear and concise requirements, and an opportunity to discuss denials with a physician. Who can argue with that? Exactly what makes me think that there are other features that may not be so benign. How to address limited resources and unlimited desires is a much more complex question.

Jay Bohn

March 9, 2023

End Limit on Number of Liquor Licenses

Sometimes a “system” will evolve in a way that would never be consciously deigned if one were starting from scratch. I believe that New Jerey’s liquor license regime is a prime example. Aside from special cases (hotels of at least 100 rooms, airports, bowling alleys, and other politically favored locations), plenary retail consumption (bars and restaurants) and distribution licenses are issued by the local municipality and limited based upon population. The time has come to end this artificial scarcity and stop treating the licenses themselves as an article of commerce.

In his State of the State speech last month (video | text), Governor Murphy had this to say about New Jersey’s liquor licensing scheme:

And I am greatly aware that some of, if not the, hardest hit businesses from the pandemic were our restaurants. And few were harder hit than the small neighborhood establishments – many, if not most, family-owned – that couldn’t get a liquor license that is so critical to maintaining a healthy profit margin.
 
There’s no other way to put it – our liquor licensing regime is antiquated and confusing. We rely on a foundation of rules written in the days immediately after Prohibition to govern a 21st century economy. That makes no sense.
 
It makes no sense to restaurateurs like Ehren Ryan, the chef/owner – along with his wife, Nadine – of Millburn’s Common Lot, where a liquor license can ensure the stability of his establishment. Ehren is with us today.
 
And so, I ask for your partnership in rewriting our liquor license laws to make them not just modern, but fair. The old rules have purposely created market scarcity and driven up costs to the point where a liquor license can draw seven figures.
 
For many small, independent restaurateurs – folks like Ehren, and many others like him in other communities, and especially those in Black and Brown communities where access to capital has historically been limited – that’s just too high a price to pay.
 
Expanding the number of available liquor licenses will not only help keep our favorite local restaurants healthy, it will also help keep our economy healthy.
 
This won’t be easy, but it will be worth it. We project that overhauling our liquor license regime will create upwards of 10,000 jobs annually and, over the next 10 years, generate up to $10 billion in new economic activity and $1 billion in new state and local revenues.
 
And here is how we can do it.
 
Right now, the number of liquor licenses allowed to be issued by any local government is one for every 3,000 residents. I propose that over the next few years, we gradually relax this requirement and expand the number of available licenses until the restriction is eliminated in its entirety and the market can work freely.
 
Meanwhile, we can maintain the local control that is so critical in making sure our downtowns retain the character that makes them so special.
 
Now, I fully recognize that some restaurants have made significant up-front investments to obtain their current licenses. We must be fair to them and I propose a targeted tax credit to support them as the supply of licenses grows.

While I am not convinced that current license holders are entitled to any compensation if their monopoly is ended, I do have a suggestion how the first part of the gradual expansion is could be effected in a way that would provide a financial benefit to them without a tax expenditure.

Suppose that we agreed to a four-year phase-in of unlimited liquor licenses. At the beginning of year 1 give every current license holder (the “mother” license) one additional license that can be used, sold, or pocketed. (For at least this phase the license could not be used in a different municipality unless both towns consented.) Then, in year 3 each holder of a mother license, whose year 1 “daughter” license is actually in use, would get another additional license. In this way current license holders will have had the benefit of six (4+2) years of an additional premises or the equivalent market value. True, the value will drop, but this will allow “mom and pop” restaurants to afford licenses, and at the end of the four-year period the numerical limitation will end.

Jay Bohn

February 20, 2023

Predictably, Increased Electric Vehicle Subsidies Lead to Increased Electric Vehicle Prices

Back in August 2021 all of my posts were on economic topics, building up to, or dealing with the implications of, this central thesis: “broad-based demand-side subsidies tend to cause the price of the subsidized commodity to increase.” The ensuing posts applied this principle to healthcare, higher education, and housing.

As part of the push to eliminate reliance upon fossil fuels, many have been urging the use of electric vehicles. (This post is not about whether that is a good idea.) One problem is that electric cars tend to be more expensive that gasoline-powered cars. The knee-jerk reaction is of course a government subsidy program, in this case a provision of the Inflation Reduction Act which grants a tax credit of up to $7500 for the purchase of an electric vehicle.

Last weekend the online version of ABC News reported “Tesla has raised prices on its Model Y in the U.S., apparently due to rising demand and changes in U.S. government rules that make more versions of the small SUV eligible for tax credits.” Utterly predictable.

One caveat here. apparently there is a price limit for vehicles to be eligible for the [full] credit, so there may be an incentive for manufacturers to rein in prices. Such features are necessary if a subsidy scheme is truly going to put the subsidized commodity into the hands of people who cannot (or choose not) to pay for it completely on their own.

Jay Bohn

February 9, 2023

So Long As Their Goal Is To Maximize Revenue, Colleges Will Never Be Truly Affordable

A college education is expensive, and that expense far exceeds the rate of inflation.((See, for example, footnote 1 of Economics 303: Demand-Side Subsidies and Higher Education: “Between 1978 (the first year in which college tuition had its own CPI category) and the third quarter of 2017, the price of tuition and fees increased by 1,335 percent. This rate of growth exceeded that of medical costs (704 percent), new home construction (511 percent) and the Consumer Price Index for all items (293 percent). [citation and footnotes omitted]”)) Student loans do not make a college education affordable; they merely defer and spread out the pain over time. We should all be more concerned about the actual sticker price and avoid feel-good subsidy programs that merely push it up. As I said before: “Imagine a carrot on a stick attached to a horse, but out of reach. Any effort to address the affordability of higher education solely or primarily by giving money to its consumers to pay whatever the sellers (that is, colleges and universities) choose to charge, is rather like expecting the horse to be able to run fast enough to get the carrot.”

In his recent USA Today article, “What happened to Biden’s free college plan? Cutting cost of higher ed out of feds’ reach,” Chris Quintana says: “The way the U.S. pays for higher education is not working. “After mentioning a few examples of federal student loan relief, the author concludes “None of these measures addresses the upfront cost of college that students, and in some cases their families, confront, in part because the federal government has limited ability to push prices down.”

That is key. A college education will only be affordable if the sticker price is realistic.((Quintana seems to agree that price is the problem: “States typically provide the majority of funding for public institutions, but in recent decades, state lawmakers have cut higher education appropriations to help balance budgets. And private universities can set tuition at whatever they think people are willing to pay for smaller classes, social connections and prestige.”)) As I have previously asserted, government subsidies only encourage schools to increase their prices.((I believe that teaching is not the primary goal of most universities, but it is rather research or some other prestige. Professors who are only good teachers are less likely to be rewarded than those who make news (or money) with research and other activities.))

The federal government conditions receipt of federal funds by colleges on many policies and actions by the school. One of these should be an affordable price. If a school equates its tuition level with prestige, it is free to do so, but taxpayers should not be asked to subsidize it.

Jay Bohn

December 29, 2022

Developers’ Escrows and the SEP Problem

During last year’s trek into economics, I posited that demand can be distorted by what I called the “SEP problem,” when someone else is paying. My thesis is that “demand” includes, but means more than, “want” or “desire” for an item; it requires “wherewithal,” the ability to pay, to be effective.((Discussed in a bit more detail in Economics 102: The Law of Supply and Demand.)) I gave as one example the means by which New Jersey municipal land use agencies pay for the services of their attorneys, engineers, planners, and other professionals in reviewing applications for development:

The applicant is required to fund (and replenish when depleted) an escrow account which is used to pay the municipal professionals. The applicant has no control over the selection of these professionals or their hourly rates and little opportunity to challenge their bills. Municipalities, which set the rates and can control the time expended on the review, have little incentive to do so, because “someone else is paying.”

The hourly rates paid to these professionals are not the biggest part of the problem because the law at least imposes some restraint. The professional is not allowed to charge the developer’s escrow at a rate greater than the professional charges the municipality when the town itself is the one paying the bill and municipalities will often pay lower rates than private clients.

The problem will usually arise in the amount of time that the professional devotes to the review and the prolixity of their reports, a long report giving the impression that the time was actually and appropriately spent. The problem becomes more acute when the professional is part of a larger firm that will assign multiple employees to work on the same review.((I have heard more than once that the municipal engineer charged more for the review of plans than the applicant’s engineer charged to prepare them.))

There is a means to dispute a charge, but it involves a challenge brought before the county board of construction appeals (not necessarily expert in this area), and what developer wants to anger the municipal review professional while the project is ongoing, or a future project is contemplated?

These jobs can become very lucrative for the professionals and despite some efforts to prevent it by “pay to play” restrictions, there is undoubtedly some sharing of revenues between some professionals and the politicians who select them. At the least the jobs are regarded in many towns as a political plum to be handed out to supporters. (There is often a wholesale change in professionals following a change in party control.)

This is not only a problem for developers; this system could lead to a tacit understanding between developers and municipal professionals: “I won’t complain about your escrow charges as long as I get my approval.” or “If you want your approval, don’t complain about my charges.”((I am saying there is a potential; I do not have any personal knowledge that this has actually happened.))

There is no structural way to assure good government, but government can be designed so that is more likely. I believe that municipalities should be given a greater incentive to control these charges by “having some skin in the game.” I propose that this be done by requiring some percentage (I don’t know if it should be 10% or 50%) of the cost be paid by the municipality.

Diverting Student Loan Relief to State Schools a Questionable Solution to a Different Problem

Last Thursday the Morning Call (a newspaper published in Allenton, Pennsylvania, for those of you who are not local((Look at me, implying not only that I have readers, but that they are geographically diverse.))) published “Invest in state schools, not in student debt,” an editorial by Eduardo Porter from Bloomberg Opinion.1

Porter’s thesis is that the federal contribution to the availability of higher education, in the form of student loans and grants, largely resulted in price increases by “[p]retty much the entire educational ecosystem”((Porter spews particular venom at for-profit schools.)) and it would now be better (although not politically palatable) to spend the $500 billion plus that President Biden’s student debt cancellation is going to cost (in the form of foregone revenue) on matching the State appropriations to their public colleges and universities.

While I certainly agree with the premise that the availability of financial aid caused a large part of the increase in college costs (because any broad-based demand-side subsidy will tend to increase the cost of the subsidized commodity), the suggested solution is objectionable for any number of reasons.

Let’s start with the one Porter implicitly recognized when he doubted the political palatability of his proposal, student loan relief seeks to a solve a different problem. It attempts to mitigate perceived financial hardship resulting from the borrowers’ past consumption of higher education, while Porter’s “investment” is aimed at preventing or limiting future price increases, directly benefiting a mostly different set of student-consumers.

Further, even if the President((Technically, the Administration’s argument is that the secretary of education has the authority, but same difference.)) has the authority to cancel student loan debt as he proposes (which is by no means certain–Nancy Pelosi herself denied in the summer of 2021), that is hardly the same thing as sending checks to States or schools.

Finally (for now), the proposal does not really increase the supply of higher education, it just subsidizes demand less directly. No institution ever thinks it has enough revenue as new spending will immediately be seen to be needed. (Look at New Jersey’s 2022-2023 State budget; lots of extra money balanced by lots of new spending (I’m sorry, “investment”).)

Jay Bohn

September 19, 2022

  1. I could not find the editorial on mcall.com, I imagine because it is syndicated, but it appears to be on Bloomberg’s own site (paywall) under the title “Deliver Students From Debt by Investing in State Schools.” [↩]

Lack of Supply Key to Unaffordable Housing

I don’t usually agree with Tom Moran, but he’s right about this: the extraordinary cost of housing is a question of supply and demand1 and the biggest bottleneck to supply is municipal zoning.2 Indeed, I said much the same thing almost a year ago.

The problem is home rule. Municipalities use their power to adopt land use regulations to implement standards that unduly restrict the ability of the market to provide housing. Often these regulations are justified by appeals to environmental concerns or “good planning,” but the biggest incentive is economic: housing equals schoolchildren equals higher property taxes.3 Therefore, the theory goes, if residential development there must be, the best kind is expensive housing that will at least pay for the increased cost of local services by its taxes.

Jay Bohn

July 21, 2022

  1. Moran also says “the crisis brought on by the shortage of housing is a blessing [for those who already own a home.] Aside from my belief that people should buy a house to live in it, not to make a profit, the inflated cost of housing blesses only those sellers who do not need a replacement purchase and perhaps downsizers, not growing families. ↩︎
  2. Moran, however, undercuts the seriousness of his argument by hurling insults; if editorialists believe that increasing polarization is bad for the country, they shouldn’t contribute to it by use of invective. ↩︎
  3. I am not so naive to think that social, racial or “prestige” concerns have or had absolutely no role in the development and continuance of exclusionary zoning, but I do think we’d have the problem without them. ↩︎