Coase Colored Glasses

Sunday, October 30, 2005

Coase Colored Glasses

Alex Tabarrok at Marginal Revolution posted this nice piece on adverse selection today. BTW, we on the job health care benefits near the end of WWII when a government mandated wage freeze made it impossible to compete for workers by offering higher wages. And because people are not just pieces on a chess board (remember Adam Smith's example in The Theory of Moral Sentiments), employeers found a non-wage way to compete--health insurance. I will blog another time about the problems of third-party payers. For now, enjoy Alex's post:

Wages for low-wage workers have been flat in recent years but health care costs have been increasing. For a company like Wal-Mart, which pays many of its workers modest wages but does offer a reasonable health insurance plan, this is an invitation to adverse selection. As the value of the wage component of the Wal-Mart benefit package has declined relative to the value of the health insurance component Wal-Mart has attracted more workers who want the job for the health benefits, i.e. sicker workers. Reed Abelson writing in the NYTimes notes:

The Wal-Mart work force reflects a growing fear of many employers that the people who work for them are increasingly at risk for health problems. Many of Wal-Mart's employees are obese, the company says, and a result is rapidly rising numbers of cases of diabetes or heart disease. The prevalence of these diseases among Wal-Mart employees is increasing much faster than the national average, it says.

"The low-income population generally is not as healthy and does not engage as much in preventive care," said Diane Rowland, executive director of the Kaiser Commission on Medicaid and the Uninsured. A risk that a company like Wal-Mart faces, especially when it competes with smaller retailers that offer no insurance at all, Ms. Rowland said, is attracting too many workers who want the job primarily for the health coverage.

Wal-Mart's health care costs are rising faster than their revenues. Other companies are trying to shift some of the cost of health care onto their workers but Wal-Mart's workers are already paying more than the national average so Wal-Mart may try to reverse adverse selection by adjusting their work and benefit package. An internal memo suggests that:

...the company could require all jobs to include some component of physical activity, like making cashiers gather shopping carts. It also recommends redesigning and expanding benefits to appeal to a different type of worker, someone more interested in buying a home, say, than in getting health insurance.

Wal-Mart will probably be pilloried for this sort of thinking but you can hardly blame them when the workers are engaging in almost the identical actions in reverse. The more fundamental problem is the tying of insurance to work, a problem for which I am afraid there no win-win solution.


At 5:51 PM, Anonymous Anonymous said...

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At 12:02 PM, Blogger kilroy said...

In my view, this is just one more reason for universal health care, to take the burden off of private employers and avoid this problem of adverse selection.

At 5:16 PM, Blogger Spencer M. Taylor said...

Universal Health care?!!! Kilroy, you're killing me! With UHC there is really no incentive to stay healthy. Long lines will triumph. Sickness will run rampant. Kilroy, it's not gov't duty to take care of you.

Another good way to get rid of the problem of adverse selection would be to give each potential employee a physical. Make them run a mile, lift heavy stuff, and see how much they can eat in one sitting at The China King Buffet. That would solve the problem.

Make people earn those benefits. Does that make sense to anybody but me?

While everybody is enjoying the all-you-can-eat health care, let's socialize grades while we are at it. If you are not satisfied with they one you earned, go and whine to the teacher and he can change your grade for you, at no additional costs.

At 6:55 PM, Blogger kilroy said...

Spencer, you're unbelievable! I don't know if I should even respond, because you must be joking! "With UHC there is really no incentive to stay healthy." There are plenty of reasons to stay healthy: most people do not enjoy being sick, most people don't enjoy going to the doctor, most people don't like to die early, most people face a huge opportunity cost when they are not healthy.

Why don't you take a trip outside of this country sometime to see how universal health care works in other countries? If you don't want to cross the big pond and go to Europe, just head north to Canada. You will not find the "triumph" of long lines or sickness running rampant.

I could post statistic after statistic that would show how poor our health care system is in comparison to those in other industrialized nations that have universal health care. Just two statistics should suffice to show you that something is wrong with our system.

(1) The latest data from the Organization for Economic Cooperation and Development (OECD), which compare trends among 30 industrialized countries, show that the U.S. spent $5,267 per capita on health care in 2002—53 percent more than any other country.

(2)A broad measure used to compare health in countries is Healthy Life Expectancy. This is the basic indicator of population health used by the World Health Organization and published each year in the World Health Report. This indicator measures the equivalent number of years in full health that a newborn child can expect to live based on the current death rates and on the current rates of illness and disability. Today, 28 countries have healthy life expectancies that exceed the United States.

Let me make it even simpler for you. The U.S. spends 1 and 1/2 times more per capita on health care than ANY other country, yet our life expectancy is exceeded by 28 other countries (and I could throw in here about 10 other broad measures of health in which we lag well behind other countries).

I have to admit, though, that I always enjoy reading your baseless rhetoric, inappropriate metaphors and implausible "solutions".

At 11:59 PM, Blogger Spencer M. Taylor said...


I'm glad I can provide some entertainment for you. Let me know how this one flys.

I have been to a different country that is not in north american and that also has UHC. I have been in their hopitals sick an it was the worst experience of my life. I had to wait in long lines. People did need a doctor were seen before I.

Doctors don't get paid enough in UHC system to make it worth the medical school expenses that have piled up over the years. The intelectual elite will find some other profession where they will be able to earn a better living. Lower quality students will mean lower quality doctors. I hope this is making sense to you Kilroy.

With UHC I'm assuming you will also want free meds. Say goodnight to innovation in the presciption drug industry.

In short, I'll try to speak slow and clear so the RDDBs can understand, free health care will lower the quality (simple supply and demand-Check out Dr. Bowles' class if you need some help with this). Free meds? No innovation, that means advances or new findings, will be introduced to the market. All types of subsidies promote waste and a mis use of resources.

At 12:50 PM, Blogger kilroy said...

Spencer, you don’t need to speak slowly – you’re arguments are hardly subtle or novel. Everyone in the class, I presume, understands basic supply and demand. The problem is that the demand for health care does not neatly conform to the usual curve in which as price goes down, demand goes up proportionally. Although price has some effect on demand, the main factor that drives demand for health care is sickness and the need for health care.
Your claim that there would be no innovation if medications were provided for under UHC makes no sense. Read about the discoveries of penicillin, the vaccines for polio, rabies, smallpox, measles, and virtually every other vaccine. They were all discovered by scientists and researchers, many of whom worked for the government, many of whom worked for universities, and none of whom had any connection to a pharmaceutical company. Why you seem to think that making wheelbarrows full of money is the only incentive for people to develop life-saving drugs is beyond me. In fact, one could argue that pharmaceutical companies have the wrong incentives for innovation, particularly for vaccines. Do you really think that it is in a pharmaceutical company’s best interest to develop a cheap vaccine for AIDS? No, they would make no money if they were to develop such a cheap vaccine. They make much more money selling drug cocktails that treat the symptoms and must be taken regularly for the rest of your life than by selling a one-time shot that would prevent AIDS. In fact, vaccines are an area in which the market fails to provide (if you don’t believe this is true, check out how much money in your cursed subsidies your beloved Bush proposed to private companies for the development of vaccines – 2.7 billion).
Although your Michael Savage impression is amusing, it doesn’t mean someone is a RDDB if they recognize that America has a problem with their health care, and that other countries seem to have the solution. Closing your eyes to this reality and relying blindly on the free market to solve everything is not patriotic. Here is an excerpt from an article from today’s Washington Post – not exactly a liberal newspaper.
“Americans pay more when they get sick than people in other Western nations and receive more confused, error-prone treatment, according to the largest survey to compare U.S. health care with other nations.
The survey of nearly 7,000 sick adults in the United States, Australia, Canada, New Zealand, Britain and Germany found Americans were the most likely to pay at least $1,000 in out-of-pocket expenses. More than half went without needed care because of cost, the survey found, and more than a third endured mistakes and disorganized care when they did get treated.
While patients in every nation sometimes run into obstacles to getting care and deficiencies in treatment, the United States stood out for having the highest error rates, most disorganized care and highest costs, the survey found.
"What's striking is that we are clearly a world leader in how much we spend on health care," said Cathy Schoen, senior vice president for the Commonwealth Fund, a private, nonpartisan, nonprofit foundation that commissioned the survey. "We should be expecting to be the best. Clearly, we should be doing better."
Other experts agreed, saying the results offer the most recent evidence that the quality of care delivered by the U.S. health care system is seriously eroding even as health care costs skyrocket.
"This provides confirming evidence for what more and more health policy thinkers have been saying, which is, 'The American health care system is quietly imploding, and it's about time we did something about it,' " said Lucian L. Leape of the Harvard School of Public Health.”
Spencer, it is fine to discuss the hypothetical advantages of our health care system vs. UHC, but when you actually compare it to the UHC systems of other INDUSTRIALIZED (i.e., not your experience in South America) countries, it comes up short.

At 9:18 PM, Blogger Spencer M. Taylor said...

With UHC I forsee alot of Pork, logrolling, disincentives for some of the brightest minds of our society to enter the medical field because of the low pay, and long lines at the all-you-can-eat health buffet.

At 11:12 PM, Blogger kilroy said...

I agree that a lot of that, to some extent, would probably happen. There is always a tradeoff.

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