Markets and Merchants’ Guilds: Which is the Chicken? Which the Egg?
This post was provoked by a moment of frustrated pique, another in a series of ‘shakes cane at clouds’ moments as this classic New Deal Liberal is driven to craziness by otherwise sensible social liberals who still fetishize markets. And yes I am pointing fingers right at Erza K, Matt Y and Kevin D. But in this case directly at Kevin and his piece today that should raise hackles at the very sight of its title: A Conservative Medicare Plan Liberals Could Love Here is the core proposal:
What to do? Via Reihan Salam, Yuval Levin proposes a revised version of Ryan’s plan that’s based on a genuine conviction that market forces can work. Each year, Medicare would define a minimum benefit level, and then providers in each Medicare region (there are four) would bid for business:
The level of the premium-support payment in each region for that year would be set at, for instance, the level of the second-lowest of the bids. Seniors would then be able to apply that amount toward the purchase of any of the plans on offer in their area. Thus, in each region, there would be at least one option that would cost less than the Medicare benefit, and seniors choosing that option would get the difference back as cash in their pockets; there would be at least one plan that cost the same as the benefit, so that seniors could obtain it with only the same out-of-pocket costs they have today; and there would be other plans that cost more (perhaps because they offered more, or because they failed to find ways to drive greater efficiency in their networks of doctors and hospitals) and for which seniors would pay an additional premium if they chose.
….In such a system, the premium-support benefit would grow exactly as quickly as required to provide a comprehensive insurance benefit, since the growth rate would be determined by a market process rather than a preset formula…. If market forces did drive costs down, as conservative health care experts expect, the reform would save the government an enormous amount of money….If market forces did not drive costs down, then we would have to find another way to address our entitlement costs. We would be back where we started, which is where Democrats want to end up anyway. Whether the reform succeeded or failed, seniors would have a guaranteed benefit and essentially no added financial risk.
Generally speaking, there’s no reason this idea should offend liberals.
Well as I said over there maybe just one tiny reason. I call it “the whole effing history of market relations” reason. Rant continues below.
My question is inherent in the post title. Historically did free markets precede artificial market barriers and price fixing? And in the European context the answer is clearly no. As the historical record dawns in the West long range trade is firmly in the hand of the Phoenicians and their colony in North Africa Carthage. Firmly because enforced by swords and fighting ships. Which in turn means harnessing state military power to enforce market barriers. And this model never changed over the three plus millennia to follow. Whether you take the Athenian Confederacy, the Roman Empire, medieval merchants guilds, the English Staple, the Hanseatic League, the East India Company in each case you have a cartel backed by or buying off state power to control entry to markets. And with enforced market barriers you have price fixing in more or less rigid form, competition on price always bounded.
Which doesn’t mean no competition at all, there will almost always be some level of internal price variation as well as external competition from smugglers and itinerent travelling merchants but the former were often treated as simple criminals to be punished by state power while the latter mostly relegated to openly marginalized groups, in Europe historically the Jews, the Roma/Gypsies, the Irish Travellers alternately grudgingly tolerated for specialized skils like tinkering or money lending or brutally suppressed, but never or very rarely simply accepted within the literal or figurative walls that protected major commodity markets.
Real economic historians please chime in with counter-examples, clarification, or simple vilification, AB is a blog, we exist to start conversations. But in the case highlighted by Drum the gaping flaw is obvious. All it takes to game this system is for the cartel of health insurers to decide who is going to be the number two in any given market, who is tasked to undercut him marginally and so be the ‘low-cost’ provider, while anyone else is free to adopt or try to leverage off the price level set by no 2. Which price doesn’t have to have any particular relation to cost of providing services or marginal productivity or any of the other fetishes of free-market absolutists. Instead any time you have a commodity based production commodity whether that be rice, wool, or simple labor supply, where withholding that commodity is not an option in real terms, not when the producers are at or near subsistence levels, the price of wholesale and retail is set by the market controllers. Because in the case of these basic commodities neither supply nor demand is infinitely or even partially elastic, the farmer needs to sell his crop, the village or urban worker needs to eat, and in between is the merchant’s guild backed by state power as necessary. And certainly health care for seniors falls into this must have category, and doubly so if the actual funding is mostly external to the end consumer.
It has always been such since Egyptian faience glass was exchanged for Baltic amber or either for tin from the Pretannic Isles (the Greek name for Britain). Historically there have always been middle men and in all cases in which I am familiar those middlemen had some sort of internal coordination on both pricing and in keeping competing cartels out of their market by all means necessary.
I am grateful to Bruce for his historical perspective. Damn sight better than the “human nature” the pffree marketeers are always telling us about.
At first glance the “market based” proposal looks similar to something I proposed at one time. The difference is that I proposed the government draw up the specifications for a health insurance plan and then invite bids from the insurance companies to manage the day to day. The difference is that I would expect the government to be able to provide the expertise to examine the plan and the bids. I would not expect my 80 year old grandmother to be particularly sharp about what was “in” one plan and “not in” another that might bite her.
But perhaps more fundamental, my 80 year old grandmother is not making any money today that would be enough to pay for her “expected” costs of medical care on a month to month or even year to year basis.
The beauty of Medicare is that people pay for it while they are working, in the dollars that are not only current in terms of inflation, but also current in terms of health care costs .. which may in fact rise for perfectly good reasons having nothing to do with dollar inflation.
This is insurance indeed. It means that after a lifetime of paying premiums, which collectively paid as we go for the current medical needs of the elderly population, when a person becomes elderly himself, he does not have to depend on current wages, or savings that “kept up” to pay for his medical care. He has already paid for it.
And if his care costs more than he “paid for,” the difference can be picked up by the present working generation, who will not be losers by the deal, because they will in effect be paying for the higher costs they will incur when they retire… with the difference between what they pay and what they will need, again being picked up by the following generation.
This can go on forever. It is not a Ponzi scheme. If the cost of Medical care does not rise faster than the general wage level, it can be paid for with no increase in the tax rate. If it rises faster than that, the people can either decide that the “improvements in medical care” are worth the price, or they can pressure their government to bring prices down.
“market solutions” to Medicare are either bone headed or just another scam by which the rich imagine they are saving money. No reason that poor people should expect the same quality of medical care that they get. Just as there is no reason for the servants to even want to retire.
I should note that this analysis applies to all the goddam “cuts” in Medical care currently on the table from either the right or the left: a total failure to understand the concept of insurance. Or the power of pay as you go.
The biggest substantive problem here is not having any actual evaluation of the bidding at all by the paying customer, which in this case is mostly the Government/Medicare. Instead the second highest bid just is accepted as some magic market set benchmark. When instead you are just looking a just a variant of the no-bid cost-plus contract that the defense industry gloried in back in the day. Or for that matter KBR gloried in the day before yesterday in Iraq.
Christ at least Cheney had the excuse of crony capitalism, that Drum not only bought into this claptrap but suggests liberals just follow him over the cliff is horrifying.
But Dale not nearly as horrifying as LZ Grandison’s SS piece on CNN just now. I’ll e-mail you the link and a quote, but suggest you take a blood pressure pill before reading it. It just shows the penetration power of the Leninist Strategy. I asked our DC friends to have someone push back on this right away.
i hope no one thinks i am arguing with Bruce about this. He is right. But i’d suggest the biggest substantive problem is the complete failure to understand what Medicare is and how it is supposed to work, and why that is better than the pfree market.
I saw a lot of bridges built by “free enterprise” that had submitted a bid to the nasty old government that provided the specs, the money, and oversight. Now I didn’t live in Alabama, so I don’t know first hand what can go wrong with corrupt bidding and oversight, but in Oregon as far as I could see the bidding and oversight was at least honest if ultimately subject to human entropy.
I don’t want to make this an opportunity to tout my “health care plan” based on a similar model.
But I will state again that insurance you pay for while you have the money that pays you in your time of need is the whole point of insurance. Private companies cannot afford to take in the money over a whole lifetime and pay it out forty years later when the market has changed. The federal government can, with pay as you go. And this does not cause any injustice to the later generations who are “paying for” “someone else’s granny.” Because soon enough they will be someone else’s granny and the next generation will be paying for them… again with no injustice, because soon enough… well you can see how it goes. Unless you can’t.
Nor is pay as you go any different in the sense that money you put in the bank is still paid back to you later by someone else. Money you put in stocks, is paid back later by someone else. That is how money works. The beauty of pay as you go is that it eliminates risks… except for the politicians who trade on the people’s inability to understand how it works. Mostly people who will never get old. And will be rich when they do. And love their jobs right up to the day the knackers van arrives at the farm.
I’m 68, in near perfect health. I believe I see here an opportunity to take my little skin problems, my occassional edema, my in-grown nails, my occasional indigestion, my often achy knees, my exzema, and many many etcs to doctors and always chose the the lowest cost option and pocket the difference. Maybe churn about a grand a month using Drums “system”?
sounds good, but what you will pocket is the ten dollars a year difference between the premiums for option 1 and option 2.
when you get to the doctor you will find that option 1 does not cover your exzema, and the co pay for your achy knees is ten thousand dollars.
Ah, Mr. Farmer, you forget the cost of deductibles and copays. In your case, it’s likely that you would have a very high deductible because you are generally healthy and your problems are relatively minor. To make money on you, which is what the market requires, you would also have to pay a substantial copay. This would discourage you from overusing services, or in the best case, using services at all.
Of course, should you become seriously ill, you’d be stuck for huge bills. Go figure. Besides every doctor in a particular area or region is perfectly aware of what everyone else charges and insurance companies will pay to remove a precancerous skin lesion, for example. Your chances of beating the pros at this game is about the same as your chances for beating the house at blackjack in Vegas. Maybe not as good. I’ll stick with some pokey little government plan that will pay the same for everyone for the same service and last as long as I live. NancyO
I am glad to see folks pointing out the fallacy in Kevin Drum’s “logic”. I gave up on him in 2008 over his shortsighted view of the mortgage mess.
Right, Dan. Exactly what’s wrong with the patient having the best bargaining position by participating in the largest possible pool? The public option allowed this advantage to the consumer and was never discussed precisely because it takes the advantage away from the insurer. Capitalism doesn’t promise to give anyone an even break. But, that doesn’t mean that we should passively accept the necessity of having to pay more when we very well might pay less and get better care. NancyO
I addressed some of that with my “market” based proposal: The government collects a tax, writes a health plan, and invites bids to handle the day to day. the government oversees that day to day at a step removed. the bids assure competition. the government assures no-fraud, and the whole deal gives the big pool you are talking about. though i might manage it regionally.
people should be in the pool without regard to prior condition.. and that’s fair, because your perfectly wonderful genes could lead you to step in front of a buss and end up just as expensive as someone with a known risk. and the “tax” probably ought to be a straight percent of wages with a reasonable cap… just like social security. that provides a good compromise between ability to pay, and not expecting “the rich” to pay for everything. also it can be rationalized as an extra premium to cover the chances that you could fall into a situation where you couldn’t afford the basic — health cost –premium.
done on a pay as you go basis, we would simultaneously pay for our future health care (which is what all insurance does) while paying directly for the current needs of people.. likely to be heavily weighted toward older folks. this would be perfectly fair, and not really different from what a regular insurance company does… except that the costs can be spread over a much longer time than a private company can afford to risk. it would be fair because as health care costs rise, as they will, each generation gets a boost from the following, better paid, generation. sadly, those who can’t think will call this a ponzi scheme. but it is just a way a “large pool” can take advantage of the growth in the economy to pay for rising costs.
Aw come on folks! The evidence is overwhemling.
Free markets do some things well. Governments almost certainly should not run department stores. Free markets also do some things very badly and healthcare is clearly one of those things. Let’s get the free market out of healthcare, and get on with our lives. It’ll take a few decades for the consequences of our past stupidity to die away, but in the long run, we’ll end up with healthcare that is cheaper, better, and universal.
on the whole i agree. i would prefer to keep some element of the free market involved even in health care if it helps keep the government honest.
that balance of powers thing.
Well, the free market ain’t free, Coberly. But, insurance companies could offer policies to whisk patients off to foreign health care resorts like Rio and Singapore for complex or unapproved treatments and surgeries. And, anyone who could afford them could buy in. Sounds like it would meet your requirements. NancyO