Julian,

I don’t want to belabor the medical insurance issues, because I’m much more interested in this new issue that we’ve stumbled upon. But a few brief comments about the Health Care Mythology article:

1. (Costs Are Soaring). Argument is misleading. Allopathic medicine has certainly made some big strides in the past 50 years. When I was a child (1960’s), people referred to cancer as “The Cancer” — it carried the definite article, and it was a death sentence. Yet here I type, about 10 centimeters shorter (in certain dimensions) — still pretty feisty and looking to be so to a ripe old age.

However, it doesn’t matter how much I get for the cost, if I can’t find anything I can afford. If I need a car, don’t tell me about how much more Bill Gates gets when he buys a Ferrari. I can’t afford a Ferrari; I want a used Chevy. Asness says dismissively that 1950’s care (the Chevy) is still available. It isn’t. I could write at length about this, based on our recent experiences.

American allopathic medicine is becoming a suburb — a thing that cannot function at all without a tremendous level of expensive and high-tech support. This is currently causing real problems. Like the suburb, it is going to cause a lot more hardship in the near future because, like the suburb, it is going to collapse when the economy enters the next stage of crisis (or the one after that).

2. (Canadian Drugs) My profession calls this NRE (Non-Refundable Engineering) costs. I’m very familiar with it. As a contractor, I charge this up-front, and it isn’t negotiable, because I need to money to do the work. Companies that have captive engineers generally budget for and carry the NRE themselves, out of their cash, or through borrowed money (stock issue, loan, whatever).

I don’t know what Big Pharma is doing. Asness doesn’t adequately describe what is causing this behavior, and most of this section is pure sarcasm: I suspect he doesn’t know, either. Normal practice is to uniformly lower the price over time as NRE is recovered through sales — lowered price increases the market size, and companies shoot for a maximum in the price/volume curves, balanced against NRE recovery, government tax credits, amortization of equipment, manufacturing scale-up costs, on and on. Throughout this, however, you have to be very careful with your distributor pricing, or you create back-channels where your distributors start poaching on each other. You could theoretically even create a black market for running product across national borders. That normally isn’t good business.

What Big Pharma is doing in Canada is bizarre, Asness’ description is weak, and I don’t know enough about what is really driving it to comment.

3. (Socialized Medicine Works) Disagree — this is a Red (haha) Herring. This comes back to the idea of financial ruin, and I’ll talk about it in a later e-mail.

4. (Cost per GDP) Long section, good logic and bad logic mixed. I’ll have to hit these one by one:

4.a. (Lower GDP Growth) Specious. How much GDP growth is enough? The US, of course, is chasing the exponential curve of the money supply, and we’re falling behind at an exponential rate. So no reasonable growth rate will ever be enough. A nation should be able to survive indefinitely with zero “economic growth” (above base population growth). Growth itself is inherently neither “good” nor “bad.” Are we still in a Cold War Race to Ruin with someone? If we win, do we get a toaster oven? [Sorry — End sarcasm alert]

4.b. (US Is Subsidizing World) Mostly agreed. If he’s right. He doesn’t know, and neither do I.

4.c. (Other Countries Are Healthier) This gets downright silly. There are no fast-food or exercise laws in any of the countries where he alleges people are healthier, nor does that alleged increase in general health translate into the 2X cost differential reported. If I were being equally silly, I would throw out the argument that American free-enterprise is what causes obesity, and as soon as we go to socialized medicine, people will stop stressing so much about their jobs and will start walking and eating better. [End silly sarcasm alert]

4.d. (US Could Be Better With A Simple Fix). So give us the simple fix, already. [He hasn’t got one.]

4.e. (End-Of-Life Care). Specious. This deserves an essay on its own. Since I just went through much of this process with my father’s senescence and death last February, maybe I’ll write about it at some point.

4.f. (Insane Tort Law) Agreed. But then, I actually know nothing about it, so my agreement means he’s probably completely wrong.

4.g. (Government Can’t Beat Private Enterprise) Specious and misleading. Markets cannot find efficiencies that are not there. In any enterprise that is fundamentally incapable of turning a profit, the government will do a better job, in theory and in practice. I believe economists call this the “economics of second best,” and I’ve read that they really don’t like to talk about it, for some reason having to do with the fact that it doesn’t follow any of their economic models. I seem to recall that health care is one of the textbook examples. Sounds suspiciously like what we’re seeing here.

5. (Public and Private Co-Existence) Agreed. The public option will kill the health insurance industry. IMO, the sooner, the better, which is where Mr. Asness and I part ways. Just because it’s called a “business” doesn’t make it good for individuals or society at large. This “co-existence” argument is a transparent political attempt to kill insurance while maintaining an innocent look. The alternative “fine” system is the counter-offer by the insurance companies to back down on pre-existing conditions if they are offered the government teat. It’s deplorable, but isn’t this how Congress “functions?” It’s why I’m not really a socialist.

6. (Rationing) Agreed. “Rationing” is a scare-tactic pejorative for what the medical community calls “triage.” Every ER practices it. Insurance companies do it. Medicare does it. Households do it when they decide whether to pay the mortgage or the heating bill. Unavoidable.

7. (Health Care Is a Right) Mostly agreed. But he sidesteps the critical ethical questions in a flurry of purple rhetoric.

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I don’t know if these are really “myths” that actually drive misunderstandings, or if these are just straw men that Asness has ready-made sarcastic comments for. When I strip out all of the True Religion and the inflammatory comments about communism, freedom, and Norwegians, I’m mostly left with a feeling of, “Yes, and …?”

The core issue to which I have heard no answer is this: who cares for the sick? Give me an acceptable market answer to that question, and I’ll consider embracing the market. But I haven’t yet heard that answer. The tacit admission I’m hearing, even from Asness, is that the market doesn’t do this. Consider:

Finally, while again we may choose to provide a minimum standard of health care to our neediest, we should not be ashamed that better health care, like all material goods, comes with success.

Who is this “we” who are “choosing?” Who or what provides this minimum standard, and who or what decides when “minimum” has become “too much” or “too little?” I’ve never seen any evidence that the market does this or anything like it, from Dickens’ London through this modern retooling of the same issues. The market rewards only players. Illness sidelines you (as does, generally, poverty). When that happens, who cares for you?

More generally, how do we distribute the burden of hardship? I can pay for my own damn in-good-health check-ups, thank you very much. What scares me is what happens if an uninsured driver runs a red light, and I end up with a torn rotator cuff. Cut off from typing, I can’t work. Without work, I can’t pay my way — not medical bills, not insurance premiums, not groceries. Borrowing that kind of money leads to bankruptcy, which benefits no one. Yet without some professional care, I face a distinct possibility of never regaining my productivity. Time to shoot me? That’s the answer I hear from the free market. If that isn’t right, then tell me: who cares for the sick?

As with me, so for the country. We aren’t all going to get hit by uninsured drivers — caring and caring well for those who do isn’t going to bankrupt the country. But there is no way to predict which of us will, and which will not, and there needs to be some mechanism for sharing that risk.

What insurance companies are supposed to do isn’t such a terrible thing: they hedge against that risk. This seems to work reasonably well with homeowners’ insurance, auto insurance, property insurance. It isn’t working with medical insurance. Medical insurance premium costs are escalating uncontrollably, deductibles go up and up, coverage is getting severely flaky — including, with many companies, what appears to be overtly fraudulent breach-of-contract — and the entire enterprise simply isn’t there for you when you need it. That isn’t insurance.

What is the marketplace supposed to do when a product is this shoddy and overpriced? It’s supposed to breed competition that gives you better product at better prices, right? It isn’t happening. There’s lots of “competition” — all of it is garbage, some verging on confidence games, and all of it is unaffordable. My wife got stung by MegaLife, out of Texas, which took thousands in premiums and then weaseled out of nearly all of their payments, leaving us stuck with the major bills. This is quite commonplace.

I’ve yet to see any free market analysis that acknowledges this and satisfactorily explains why the market isn’t doing what it is supposed to do. Quoting again:

I blame this mostly on excessive regulation, a complex employment-based insurance system strongly encouraged by tax law, and litigation for the benefit of trial lawyers rather than patients or anyone else.

This is a gag-reflex, containing nothing of substance. I assume these are boilerplate free-market talking-points, so maybe there’s substance behind the code-words that I’m not aware of.

Pick a single specific regulation that needs to be rescinded to make this all work better. Pick the top ten. Or the top twenty. But show me why those particular regulations are creating this particular mess, and how rescinding them will fix the problem. That I’d be interested in seeing.

I’ve no idea what Mr. Asness is saying about employment-based insurance. There’s nothing complex about the employment-based part of it: as an employer, it’s just a number that goes right next to salary and the 7.65% FICA tax you have to pay as part of the total compensation package. I also don’t know what he’s talking about by “strongly encouraged by tax law.” Companies don’t spring for health insurance because of taxes — they do it because it’s customary and expected and therefore retains employees, or because they are required to do so by state law. It’s a hideous expense. Small companies don’t provide it at all. Large companies that must, do so grudgingly, but they also work around it by hiring “part-time” workers for 30 hours a week, or pay only independent contractors, simply to avoid the expense. Having insurance based on employment is completely wrong-headed, but it isn’t “complex.” What’s complex is finding an insurance plan that isn’t ripping you off.

The litigation may be a real issue. You’d know more about that than me. But isn’t that a little like blaming that darn Mr. Sun for all that sunlight? Do you have any suggestions for actually effecting tort reform? That seems like a self-contradictory task to me, given that tort law is almost entirely based on precedent (isn’t it?). Does it actually even make sense to say that the woman who was awarded the hot-coffee case against McDonald’s shouldn’t have been? She was, it’s now a precedent in case law, and we’re bloody well stuck with it. How do you “reform” that? Start reversing decisions? Pass billions of statutes that override case-law, case by case? What does “tort law reform” even mean?

There are two answers that make sense to me, as to why the market isn’t working.

One is that the marketplace rules are inverted for health care — it’s an example of the “economics of second best,” or some other such thing that simply doesn’t fit the Free Market credo — and trying to let the marketplace sort this out is like letting a feedback howl run free. Instead of stabilizing at an optimum solution, it is driven to a bad corner-case solution. This is my hypothesis.

The other is that this mess is actually the best thing possible. The problem is unsolvable, and as it gets worse, it is simply reflecting the increasing impossibility. That one I don’t believe at all.

Either way, the market isn’t going to sort this one out. Time to turn to government. For now.

If your numbers are correct, it really doesn’t make much difference — it’s all pretty short-lived, and we’re going to have a whole different set of problems soon.

— Themon