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Tuesday, April 12, 2011

Why the welfare state can't work

From this iSteve thread:
I'm sorry, it is you (and unfortunately Steve) who do not understand the medical insurance business, and by extension the medical business.

There are many layers of confusion here, so let's take a look at some facts.

1) Most people lose money on insurance, because most of the time insurance doesn't pay out more than it takes in.

2) Thus, a "good" policy is a catastrophic-coverage-only, high-deductible policy, where most payments are out of pocket. This is a policy that protects you against the downside risk, but where you lose a lot less on average.

3) This is because the purpose of insurance is to protect yourself from *catastrophe*, not to make routine purchases.

4) For example, if you went to Best Buy and whipped out your home insurance card to get a new flat screen TV, everyone would look at you as a crazy man. "Don't you know that home insurance is only for fires and floods, and not for routine purchases?"

5) And so it should be with health insurance, because you'll actually -- *provably* -- pay less with a high deductible plan for all but catastrophic conditions.

6) Indeed, the most innovative and technologically advanced areas of medicine are ambulatory areas in which people feel that markets are "ok". These are paradoxically the most trivial areas: lasik, plastic surgery, dermatology, dentistry, even veterinary medicine.

7) Why are these areas so advanced? Because people pay cash money, because they choose based on quality, and because they are *able* to choose -- i.e. they aren't being wheeled up to the hospital in a gurney in a no choice scenario.

8) Moreover, with every technology ever, from cars to cell phones to air travel to computers, things that start out expensive become cheaper when enough people demand them. With medicine it seems to bite more that money means differences in care. But at the end of the day doctors, patients, nurses, drugs, ambulances...all that stuff means real resources, and a refusal to do explicit computations just results in massive waste as costs are shunted to a place where no one looks at them.

9) How insane is it, for example, that in this age of internet shopping that you can't do comparison shopping on a hip replacement or a physical on the internet? It has to do with the irrationality that surrounds the concept of paying for the most valuable service of all: for someone saving your life.

10) Now let's consider the elderly. The big problem here is that there IS going to be a catastrophe that hits them with probability 1. It's called dying from being old.

11) If you know anything about medicine, you know that futile care is a ridiculous proportion of healthcare expenditure.

12) Now, in the abstract everyone is all about taking care of the elderly. Witness eh's bleeding heart:

"Were they to offer profitable policies to old people, the premiums would be unaffordable."

The whole point is that *old people are going to die* with probability 1. So let's take those evil capitalists are out of the question, and assume for now that no innovative entrepreneur could figure out something win/win for his own grandpa. ...
Now we are in the realm of social justice. Which sounds so nice in the comments section. Until eh answers the question: how much of his children's money does eh want to spend on futile care for 83 year old Emma in Ohio? For 74 year old Bill in Texas? For countless, endless, unnamed others?

Because, eh, you can spend ALL of your money on futile care. Literally every last penny.

So now eh says, "well, of course there have to be limits".

And here we come to the nub of the matter.

This is h-bd land. We are adults. We understand hard facts.

One of those hard facts is that until Aubrey de Grey really gets on the hop, people *are* going to die.

The question is whether they die when THEY and their family run out of money -- localizing the catastrophe -- or whether every single one of them is connected to a public purse that they can draw down without consequence.

Because draw it down they will.

You see, for most of us, if our own mother was on a deathbed, if we had the ability to tax and steal from Joe and John and James to keep her alive we wouldn't think twice about it. Because even if took a million dollars in stolen tax money a day to keep her alive, well, hell, then I guess they'll just have to work harder.

The problem, of course, is when everyone thinks this way.

Because what quickly happens is that once you've given the government access to that giant pool of money, they make damned sure that no one ANYWHERE is spending that money other than them...and then too only for the express purpose of the vote-buying schemes that our esteemed host has bought hook, line, and sinker.

That money is not spent for saving any more mothers.

Not for actual care.

Not for innovative treatments.

Not for anything other than the necessary minimum to keep up the facade, to buy people's votes.

But hell, what does it matter, right? At least now we're all equal. Equally poor in health. We've defeated the Magic of the Market. We can now allocate scarce resources not through merit or money, but through queues and connections and politics.

Like this:

http://blogs.wsj.com/health/2008/10/17/lance-armstrong-and-bill-clinton-help-fred-baron-get-tysabri/

Biogen Idec is running an early-stage trial of the drug in multiple myeloma, but Baron doesn’t meet the criteria to participate.

Baron’s a prominent donor to the Democratic party, and many of his powerful friends, including Lance Armstrong and Bill Clinton, made appeals on his behalf. And the family agreed not to sue if anything goes wrong.

Ultimately, his doctors at the Mayo Clinic worked directly with the FDA to find a “legal basis” for giving Baron Tysabri. The deal was announced on Baron’s son’s blog late yesterday. The details remain unclear.

Fantastic work, all of you. We've now taken the profit out of health care. No more profit motive to encourage ambitious young geniuses to develop miracle drugs rather than program social networks.

Instead it's just pure politics.


Sailer's post is actually about how the GOP is preparing to insure its electoral defeat by cutting Social Security and Medicare, entitlement programs for which older white voters have paid for decades and now feel, well, entitled to them.

It is an awful dilemma. The State, having assured the taxpayers that their geriatric needs would be met, must now breach its covenant with its citizens. As several commenters noted, there is no way out.
... As a society we are suffering tremendously because we forgot that the best retirement program is to have 6 children and teach them how to be prosperous and then stay on the good side or at least a few of them.


I have my own fantasy of a nice little country that extracts the minimum taxes necessary to fund its military and maintain the social safety net. I'm sure that has been the selling point trotted out by every welfare state politician since Bismarck. But inevitably it seems, net tax consumption increases, birth rates fall, the culture shifts to high time-preference, and the State inflates the currency and runs deficits--further distorting the productive economy--to keep the Ponzi scheme going.

3 comments:

discoveringmybeliefs said...

Great post. The Welfare State is not sustainable, nor is the large government in existence today.

Like your name too by the way.

Four Aces said...

You misunderstand human nature, and you will never win the argument on grandpa. Here's why: It's not that we wouldn't yield if we had to decide between keeping grandma alive and going bankrupt - it's that the voters will never allow it to come to that. They'll never allow it to arrive at that decision point. This is why we have socialized medicine in virtually every civilized democratic country on earth- in spite of the relevancy whether it's solvent or not.

DMC said...

"Most people lose money on insurance, because most of the time insurance doesn't pay out more than it takes in." How insightful. I hope you realize that insurance wouldn't exist as a business if, most of the time, payouts exceeded premiums (what the insurance company takes in). The point of insurance isn't to make money or a net gain in value, it's for the risk averse (most people) to mitigate risk by transferring it to a third party for a fee.
Insurers discourage too much unnecessary healthcare consumption with co-pays, deductables and limits of the number doctors visits.
That's not even the problem. The problem is paying for the healthcare of all people over 65 in payer system that incents doctors to prescribe any and all treatments regardless of need, where patients are insulated from the true costs of their care (thus don't make informed market decisions), and therefore guarantees overconsumption/inflated demand for healthcare and ever rising prices. Also healthcare delivery (supply side) doesn't function like other markets - no one knows what the market price of check up or a hip replace is because care is not standarized and price information doesn't flow to market participants and influence behavior like standard efficient markets for other products.