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Archive for the ‘Government’ Category

Small Government: Lesser of Two Evils

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Like many libertarians, I feel that small government is an eminently practical rule of thumb proven by hundreds (if not thousands) of years of observation. So when Rafe recently posted in response to a presentation that David Cameron made at TED, it got my dander up. Calling the small government philosophy, “… ivory tower idealism,” felt like a blatant misrepresentation.  But then I wondered. Maybe Rafe had formed the honest (though mistaken) impression that small government advocates think that reducing government functions will lead to some sort of emergent order utopia?

I don’t know exactly what Cameron said because I can’t find a public video archive. This Guardian account indicates that he mostly hung platitudes on the scaffolding of giving people more choice and transparency.  Choice is a big part of small government, but I thought it would be worth outlining what I think is the non-politician’s version of the libertarian small government ideology. It’s far from ivory tower.  More like back alley.

It’s based on two observations: (1) local knowledge is important to good decision making and (2) concentration of power leads to abuses. I think few  students of  political history and organizational behavior would argue against these points, so I won’t detail them here.  However, if anyone honestly thinks they are in doubt, I’d be happy to cover them in a subsequent post.

So, any time society assigns a role to government, it incurs the costs of (1) and (2).  These costs tend to increase over time and as a situation departs from the ideal future path. So the expected net present value of these costs can be substantial. Libertarians therefore conclude that  the benefits that the government brings to a role should, as a general rule, be quite large before we even consider it as an option. Notice that this does not imply no government at all. Rather, it implies we should use government sparingly.

The repeated pattern observed by libertarians goes like this. A problem arises. Everyone (even libertarians) agree that it is problem. Progressives push through a government program to address it. Initially, the program somewhat ameliorates the problem. However, the problem turns out to be trickier than first believed, so the benefits are usually not as great as expected. Over time, the problem evolves and adapts, further eroding program benefits. The government program evolves and adapts too, but more to promulgate its own survival than address the problem.

So we are left with much lower benefits than forecast and significant unforeseen costs (in the form of an everliving, mostly useless program). Libertarians conclude that in many cases the “cure” is worse than the disease.  Not that it doesn’t suck having the disease. The irony of course is that the progressives then identify the results of an old government program as a new problem that requires… another government program (cough, cough, government intervention in financial markets, cough, cough).

Of course, some illnesses are actually bad enough that the (painful) cure is better than the disease.  In those cases, bring on the government program. But let’s be realistic about the long term benefits and costs.

Written by Kevin

February 15, 2010 at 9:19 pm

Even More Reason to Be a Skeptic

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Things just got worse if you put your faith in the “consensus” about catastrophic anthropogenic global warming (AGW).  You’ll recall that the disclosure of internal emails undermined confidence in both the surface temperature record and the peer-review process that qualifies research for inclusion into the blue ribbon International Panel on Climate Change (IPCC) reports.

Now we find out that some of the more sensational claims about potential consequences contained in the IPCC AR4 report are not actually backed up by peer-reviewed research. Instead, they come from assertions made by advocacy groups such as the WWF and Greenpeace. Then there’s the dependence on anecdotal newspaper and magazine reports.  Oh, and an amusing reference to a boot cleaning manual from an Antarctic tour operator.

It all started with the infamous, “Himalayan glaciers will be gone by 2035,” claim, which was substantiated solely by a WWF report. Not cool because IPCC rules state they should only reference peer-reviewed research from respectable journals.

Things get worse.  Bear with me here.  The story is a bit involved, but it reveals how feckless the guys at the top of the AGW food chain can be. India’s environmental minister tried to call BS by referring to, you know, actual measurements of glacial retreat.  But the chairman of the IPCC called this “voodo science.” Of course, the scientist who lead the development of that section of IPCC AR4, eventually admitted that the claim about glaciers disappearing by 2035 was not supported by peer-reviewed research. And it turns out that the chairman of the IPCC was actually informed about the problem months earlier.

Now for the cherry on top of this crap sundae. The chairman of the IPCC runs an institute that received a ton of money based on… wait for it… the claim that Himalayan glaciers would be gone by 2035.

I realize that people want to defer to the leading scientists in an area.  It’s perfectly rational. In fact it was what I did before I started looking into AGW myself.  But there should be some evidence that will cause you to update this position. I think we’ve reached that point.

Written by Kevin

February 3, 2010 at 3:17 pm

Posted in Climate, Government, Science

Quest for Insurance Part II: The Coverage

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The trials chronicled in Part I have a happy ending.  I eventually obtained an excellent individual plan from Assurant Health. I followed my own advice and got a high deductible plan that covers no primary care. I thought it would be worth comparing to the traditional PPO coverage I had previously.

The table below shows the salient aspects of each plan.  To compare apples to apples, I had to estimate the 2010 premiums for the previous plan. I used a 9% increase over 2009, which is what a PricewaterhouseCoopers survey says will be the average for employer sponsored plans. Note that this is less than the 10.8% actual increase my company saw from 2008 to 2009 on this plan.

Insurer Aetna Assurant Health
Annual Premiums $17,593 $7,760
Deductible $2,000 $10,000
Co-Insurance 20% None
Out-of-Pocket Maximum $8,000 $10,000
Office Visits $35 $0, after meeting deductible
Generic Drugs $15 $0, after meeting deductible
Brand Name Drugs $35 $0, after meeting deductible
Lifetime Maximum $6M $15M

We see something very interesting here. The annual premium on the new plan is $9,833 less than the estimated annual premium on the old plan. Now, we all get checkups each year.  Also, my wife and son have monthly medications they take for allergies.  Adding in the copays for those yields extra $500 on the old plan, pushing us to $10,333 more guaranteed expenditures on the old plan than the new plan. Obviously, this excess is more than the new plan’s deductible.

So there’s no way I can loose on the new plan.  If we stay healthy, I get to pocket $10,333 minus the cost of routine visits and medications.  If something bad happens and someone has a major medical issue, I save at least $8,333 due to the deductible and coinsurance on the old plan. Probably much more due to co-pays for additional office visits and prescriptions, which are not limited by the out-of-pocket maximum.  I actually ran the scenarios and there’s no way I don’t save at least $5,000 per year.

Moreover, the new plan is much better at insuring against catastrophic loss.  The lifetime maximum is 2.5 times as high.  That’s a real selling point for me. I don’t want the plug pulled on my ventilator because my insurance ran out.

How can this be? Why do we even have PPO plans? You may think the tax deductibility of employer-paid premiums is the reason.  But this doesn’t explain why employees wouldn’t choose an employer-sponsored version of the high deductible plan. Those are paid with the same pre-tax dollars.  (It also doesn’t affect me because I’m technically self-employed and deduct my premiums anyway). It certainly explains why the CEO of Whole Foods is absolutely right to offer his employee’s a high deductible plus HSA plan.  It saves everyone money. The math speaks for itself.

The only explanation that makes sense is that people want to spend more on health care when it doesn’t come out of their own pockets. A combination of moral hazard and mental accounting. On the moral hazard front, they go to the doctor more often than they otherwise would because the marginal cost to them is so low. On the mental accounting front, the automatic monthly deduction from their pay is less painful than personally writing checks to pay doctors. But it’s irrational.

Perhaps some marketing wizards should figure out how to pitch high-deductible plus HSA plans in a way that the average person would find attractive.  How about an infomercial that promises to save you thousands of dollars every year with a proven system and throws in a set of handy dandy steak knives if you act now?

Written by Kevin

January 20, 2010 at 3:14 pm

Quest for Insurance Part I: The Search

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As you may recall, I previously posted about my recommendations for fixing health care (Part I, Part II, Part III). Recently, I had to navigate the current system and thought I’d share my experience in the context of those recommendations. You see, COBRA ran out on my health insurance from the last startup I founded and the new one hasn’t set up a company health plan yet. Thus I had the, um, “pleasure” of trying to obtain individual coverage.

I started by going to eHealthInsurance and hitting up the big three companies: Aetna, Anthem (BlueShield/BlueCross), and HealthNet. My first disappointment came when I discovered that there is no universal application. You have to type in roughly the same information in substantially different formats for each company. What value exactly is eHealthInsurance adding here?

My second disappointment came when they all rejected the applications for different reasons. There are four people in our family. One of them was rejected by two companies, two of them were rejected by one company, one of them was not rejected at all. The reasons were allergy shots, acne, possible acne, and being underweight. The first two are minor ongoing issues.  Considering we were applying for $10K deductible plans with no office visit or prescription coverage, it’s hard to see what the problem is. The second one was unconfirmed by the first doctor, totally minor, and subsequently excluded by a second doctor. The last one is the only one that should have been of any concerned and a check with that person’s doctor would have eliminated the concern.

My working hypothesis is that these companies don’t actually want to offer individual health coverage. For regulatory or political reasons, they have to appear to offer such coverage. But unless an individual is so low risk as to be obscenely profitable, why go to the effort? It’s so much easier to focus on selling group coverage to employers.  This is a side effect of the tax deductibility of premiums for most companies but not most individuals.

Luckily, there are niche providers that pursue opportunities that are not attractive to the largest players. One of them is Assurant Health. After filling out the online application at their Web site, I received a call from their underwriting department within two days. They wanted to review the medical records for the two family members receiving allergy shots to make sure these were not indicative of larger issues. No problem, we had signed a release and I had no objection to paying a premium based on actual risk.

Now, the story takes a funny turn. Apparently, HIPAA has made doctors so paranoid about penalties for breaching patient privacy, that they don’t want to give out your medical records to anyone. Despite the general release we signed, two medical clinics wanted us to sign special releases. It took a month to actually get these special releases so we could sign them. Even then, one of the clinics also required us to call them on the phone and give them verbal permission as well. Government intervention strikes again! If the government had clearly specified the mechanism for releasing medical records, there wouldn’t have been a problem. Even better, if the government hadn’t distorted the market for insurance toward employer-sponsored coverage, this transaction would be so routine that the free market would have solved the problem

The story has a happy ending.  In Part II, I will analyze the excellent coverage we got from Assurant in the context of my previous recommendations.

Written by Kevin

January 14, 2010 at 4:17 pm

Why You Should Be A Skeptic

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As you may have heard, an unknown hacker breached the Hadley Climatic Research Centre and disclosed a large volume of email and documents, thus giving us a peek inside the sausage factory. First, let me say that the breach itself rather concerns me. We’re talking about a government sponsored research facility. Somebody virtually waltzed right in and and took everything but the kitchen sink. Heads should roll in the information security department.

Second, the email correspondence is pretty damning. It won’t affect my position much because I was already fairly sure these types of shenanigans were going on. But if you put your faith in the “consensus”, you should consider updating your position. There are numerous instances of three types of egregious behavior from senior scientists:

  • Coordinated efforts to portray all results as supporting the conclusion that anthropogenic global warming (AGW) is a serious threat. Such efforts included the spinning of results, application of statistical “tricks”, and selective use of data.
  • Coordinated efforts to suppress professional dissent. Such efforts included going after editors of journals that published articles supporting a skeptical view and lobbying university administrations to pressure researches who didn’t toe the line.
  • Coordinated efforts to evade Freedom of Information Act requests and destroy data that might support the skeptical position if disclosed.

By themselves, these actions should be alarming because they obfuscate the real answer to the question of how serious a threat AGW presents .

But the real take home point is the tone of many emails. These are leading scientists in the field. Yet they clearly hold bitter contempt for colleagues who don’t agree with them. This isn’t business.  This is personal.  To paraphrase, Robin Hanson, climate science isn’t about the science of climate. It’s about social status. The AGW proponents see themselves as an “in group” and AGW skeptics as an “out group”. They are more concerned about destroying the out group than actually figuring out what’s going on with the climate.

Given this attitude, it’s hard to have any confidence that we’ll get a rational, scientific answer any time in the near future.

Written by Kevin

November 23, 2009 at 1:16 am

Posted in Climate, Government, Science

Tagged with , ,

Fixing Health Care III: Hospitals

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Having addressed the uninsured and doctor’s visits, the next health care problem on my list is hospital spending. It represents the largest share health care costs, $696.5B in 2007 or roughly 32%.

Now, it’s worth repeating that I don’t object to increased spending per se. It might be perfectly normal given personal preferences and growing wealth. I do object to distortions caused by the current system. I have identified three areas where we could save money through eliminating distorting policies.

Barriers to Competition

Hospitals are a highly protected industry.  I found this Forbes article an excellent overview of the problem. Generally, competition from so-called “specialty hospitals” improves care and reduces costs for both specialty hospital patients and community hospital patients (see this overview of the relevant research). However, like most businesses, community hospitals don’t like competition so they engage in anti-competitive practices and regulatory capture games.

Eliminating such abuses could save 2.4%, the cost reduction that the entrance of specialty hospitals into a market produces  according to this study.  That would be close to $20B/year.  But I would go farther.  I would require all hospitals to publish costs and outcomes for different treatments.  Moreover, they would have to further disclose the price discounts they offered to insurance networks. A more transparent market would drive costs down even farther.

The standard objections to these measures are typical anti-competitive propaganda. Opponents say specialty hospitals duplicate infrastructure, which drives up costs.  Tell that to PC manufacturers.  They had to duplicate all their infrastructure but look at how costs have plummeted due to competition.  Why are hospitals any different?  Opponents say that doctors who own hospitals have a conflict of interest.  Tell that to Apple who has to make phones that people really want if they are going to make any money.  Why are hospitals any different?  And the list goes on…

Drug Development Restraints

Excepting cosmetic procedures, almost everyone would prefer to avoid consuming hospital care if they could at reasonable cost. The biggest substitute for hospital care is taking drugs that prevent hospitalization. Unfortunately, the market for drugs (and medical devices) is tightly controlled, increasing costs and stifling innovation in the drug market. I contend that these factors increase hospitalization beyond the efficient level.

This review article claims that $100B/year worth of hospitalization stems from people not adhering to their medicine regimens. Obviously, formulations and devices that improved adherence would reduce this number.  Moreover, I believe it also implies that there are a substantial number of other hospital admissions that could be avoided if more drugs were available.

As I’ve advocated before, eliminating Phase III trials (in favor of some sort of probationary approval) and reducing the term of patent protection would accelerate drug discovery and reduce costs.  I also think that streamlining the approval of drug delivery devices in particular would help address the issue of adherence.

Inability to Commit to a Lower Standard of Care

Lastly, we the problem of end-of-life care. There has been a lot of angst over the so-called “Death Panels” discussed as part of health care reform. I admit that it gives me the willies.  But I think the problem is that the government is pursuing an interest in getting you to die quietly.

But consider a private alternative.  You’re somewhere between 40 and 60.  You’re pretty healthy.  You have a choice of two major medical insurance plans.  One covers heroic end-of-life measures for terminal conditions.  One doesn’t.  The second one is 30% cheaper.  Personally, an extra few months hooked up to machines in intensive care plus a vanishingly small chance of a miracle recovery isn’t worth it to me.  I prefer to spend my money on safety and prevention thank you very much.  But that’s just my personal choice.  You could chose differently.

This decision doesn’t give me the willies.  People make all sorts of decisions that statistically shorten their lives by this amount: where they live, what activities they pursue, and what jobs they do. This is a completely voluntary decision well in advance of the event.  The only problem is that providers must be convinced that such agreements are enforceable. Otherwise the providers can’t count on the savings and premiums remain high. This is a problem the government can do something about: assign rights and enforce contracts.

All in all, I think these three measures might save a couple of hundred billion per year.  They would certainly lead to a more efficient outcome.

Written by Kevin

October 17, 2009 at 12:24 pm

Must Read Paper On Overconfidence

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Via the indispensable Tyler Cowen, a new paper from Johnson and Fowler explores whether overconfidence is, in fact, adaptive. They show that it it is under some very reasonable assumptions.  They model competition for resources as a two-player game and then analyze the evolutionary dynamics of populations playing this game.

The basic result is that overconfidence is beneficial in proportion to two factors: (1) the size of the payoff relative to the cost to play and (2) uncertainty about competitor capabilities.  There are two optimal strategies for a population, overconfidence (which minimizes unclaimed resources) and underconfidence (which minimizes conflict costs).  Unbiased self-perception is always dominated by these strategies. However, an overconfident person can successfully invade an underconfident population while the reverse is not true.  So overconfidence is the stable solution.

The direct implication is that resources get destroyed.  It is optimal for an individual to be overconfident, but then he ends up fighting with other overconfident individuals, which imposes costs.  If you think about it for a minute, this is a pretty important fundamental problem.  All of the big societal decisions we face have potentially big payoffs (or avoidance of costs), but it’s really unclear who has the best expertise to make a recommendation.  So we get a bunch of “experts” telling us they are absolutely right.

Note that if it is public knowledge how “good” someone is, the “overconfidence premium” goes to zero.  This is why forcing experts to make public predictions is so important.  Then you can figure out how good they really are.

Written by Kevin

September 24, 2009 at 8:27 pm