Topic: General

Medicare, Only More Fun

On Thursday, Cato will host a book forum for Medicare Meets Mephistopheles, a new book by Cato adjunct scholar David Hyman. Medicare Meets Mephistopheles takes a satirical look at the crown jewel of President Lyndon Johnson’s Great Society.

Hyman is a rising star in the field of health law and policy. A lawyer and a doctor, he is professor of law and medicine at the University of Illinois Urbana-Champaign. In 2004, he was the lead author of Improving Health Care: A Dose of Competition, the first joint report by the Federal Trade Commission and the Department of Justice. This year, he guest-edited an issue of the Journal of Health Policy, Politics and Law devoted to that report. Prof. Hyman also has a habit of quoting Austin Powers in his law review articles.

Ted Marmor, one of Medicare’s leading advocates, will comment, as will Robin Wilson, a visiting professor of law at Washington & Lee University.

The forum will be held at noon this Thursday at the Cato Institute, and will be followed by a luncheon. Other details, including how to preregister, are available here.

Nanny vs. Nanny

It’s time for a war on thinness!

On the eve of London Fashion Week the growing trend for “size-zero” models in the fashion industry is causing grave concern.

Experts say legislation is now needed to protect the health of the models and of the teenage girls and young women who are influenced by them.

They are urging London to follow the lead taken by Madrid — and likely to be adopted by Milan — of banning models below a certain size from the catwalks.

Under any ban, super-thin models such as Lily Cole would be barred. London Fashion Week, which begins next week, has so far refused to follow suit.

[…]

Steve Bloomfield, spokesman for the Eating Disorders Association, said today: “We do think legislation is needed.

“This is about protecting the young women and men who work in the fashion industry, as well as those who are at risk of an eating disorder and can be influenced by the pictures that they see.

Given that skinny women are hopelessly manipulated by the fashion industry, and that obese women are hopelessly manipulated by the food industry, I propose the following magic-bullet legislation:

The government should buy every obese person subscriptions to the top fashion magazines; meanwhile every skinny person should be forced to sit through a dozen McDonalds, sugary cereal, and Hostess cupcake commercials.

In six months, we’ll all wear the same size, and everyone will finally be equal.

It’s worth noting that despite all of this talk about childhood obesity, the average adolescent today is between 200 and 1,000 times more likely to have an eating disorder than Type II Diabetes (eating disorder ranges from the National Institute of Mental Health and diabetes statistics from the CDC). The state of Arkansas recently won wide praise from the public health community for a new policy of weighing all the state’s public shool kids, then sending a kind of obesity “report card” home to parents. Given the above numbers, there’s probably a pretty good chance that policy’s doing more harm than good, no?

Indeed, Britain and Australia have both seen a recent uptick in eating disorders in young girls as a result of both countries’ hysterical anti-obesity hype:

Girls as young as five are unhappy with their bodies and want to be thinner, according to a study which blames peer pressure in a child’s early years at school. Most girls thought that being slim would make them more popular, claimed the research in the British Journal of Developmental Psychology. They would also have no hesitation in dieting if they gained weight. The study was conducted among five- to eight-year-olds in South Australia, but experts said last night that British children felt “paranoid” about their weight - partly because of the Government’s anti-obesity message.

Dr Andrew Hill, of Leeds University Medical School, said research among more than 200 eight-year-olds showed a high awareness of the campaign against obesity. “Children have absorbed anti-fat messages loud and clear”, he said. “To get people to listen about a condition, you talk it up, and we have got obesity on the health agenda.

Just another example of the unintended consequences resulting from paternalistic government.

Topics:

The Blunt End of Paternalism

Kudos to both the Washington Times and North Dakota state GOP Rep. Jim Kaspar for opposing the Republican Congress’s wrongheaded attempt to ban Internet gambling. There are at least a few folks on the right who still understand that there’s more to “limited government” than revoking the estate tax.

Sen. Frist is justifying his misguided, pre-election move on the grounds that it’s the government’s responsibility to protect us from bad behavior. Said Frist on the floor of the Senate, “Internet gambling threatens our families by bringing addictive behavior right into our living rooms.”

At risk of delving into libertarian cliches, even if you buy the dubious notion that protecting us from “addictive behavior” is a legitimate function of government, even the most well-intentioned of paternalistic legislation is, ultimately, enforced at the point of a gun. The people who break these laws are arrested. The people who resist arrest risk getting shot. The end of result of legislation like Frist’s is, absurdly, that government will eventually use violence against American citizens to “protect” them from violating Sen. Bill Frist’s morals.

Here’s a real-world example: At last week’s forum for my Overkill paper, I met Salvatore and Anita Culosi, parents of Sal Culosi, the Fairfax, Virginia optometrist shot and killed by a SWAT team earlier this year. The SWAT team came to Culosi’s home to enforce Virginia’s prohibition on gambling, ostensibly designed to “protect” Virginians like Sal Culosi from wagering their own money on games of chance. Culosi, an accomplished, single man who had the means to back up his wagers, had been placing bets on football games with friends. He’s dead because there are people in Virginia’s government who fail to see the absurdity of sending a military unit to arrest a man guilty of nothing more than spending his own money in ways some people find unseemly. That’s it.

Culosi’s family is still understandably devastated. Mrs. Culosi still can’t talk about her son without fighting back tears. I choked up several times just listening to her. I can’t imagine the rage that would come with losing an adult son to such a stupid and hypocritical policy. Horrible.

The Culosi outrage has been compounded by the insensitive and unaccountable behavior of many in Fairfax County government since the incident (are you reading, Justice Scalia?). It’s been seven months now, and the Fairfax County police department still refuses to cooperate with Culosi’s family.

Frist’s legislation is aimed primarily at financial institutions. But like all prohibitions on consensual crimes, it will fail. And so over the next several years we will inevitably see attempts by Congress to expand and strengthen the gambling prohibition, to the point where, as is now the law in Washington state, the prohibition will be aimed squarely at gamblers themselves, not just the companies that profit from gambling.

Perhaps Senators Frist and Kyl, and Reps. Leach and Goodlatte should sit down for a few minutes with Salvatore and Anita Culosi. It would at least help them understand the inevitable consequences of using the blunt instrument of government to impose their own values and morals on the rest of the country.

Public Health & Economic Literacy

My former research assistant is now pursuing a master’s degree in public health at Harvard. She recently blogged about her economics course:

During econ class today, the professor explained in great detail the ways in which the federal government tinkers with agricultural output, like price floors and crop restriction and so forth. A lot of my classmates were genuinely surprised at the extent to which government messes with food production to placate the farm lobby, and that, in turn, surprised me. I thought most people — or most well-educated grad students and medical residents, who make up my class — knew all about concentrated benefits/diffuse costs, and why we probably pay more for milk than we should. At one point, a student from India, astonished, said, “You mean the government actually sets aside these funds every year for this purpose?” Professor: “Of course not. We run deficits.”

Again, these students made it all the way to Harvard without any exposure to such things. Makes me wonder if any research has been done on the economic literacy of the public health profession. (E-mail me mcannon [at] cato.org" href="mailto:mcannon [at] cato.org">here if you’re aware of any.)

Let’s just hope that Adrienne’s econ class is a required course.

Furmanology

CHICAGO—The only nice thing about being stuck on an airplane (aside from free soda) is the chance to catch up on one’s reading. On this trip, I (finally) turned to Jason Furman’s article “Our Unhealthy Tax Code” from the premiere issue of Democracy. I address Furman’s objections to health savings accounts in a recent paper. (Refreshingly, we actually agree on one or two things.) But Furman also commits what I think is an important error when discussing tax deductions for health care. 

Congress exempts employer-provided health benefits from income and payroll taxes, which costs the federal government an estimated $200 billion per year in lost tax revenue. Furman describes this as the federal government “spending approximately $200 billion annually in subsidizing employer-provided insurance.” But that is flat incorrect. A tax deduction allows workers to keep more of their own income, provided they engage in a desired behavior — in this case, obtaining employer-sponsored health insurance. It is not government spending because the government cannot spend money that it never possesses. Nor is it a subsidy, because to subsidize means to transfer resources, and again the government never possesses those resources. The tax deduction may have the same effect on government revenues (and the economy) as government spending for the same activity. But that still doesn’t make it spending

Suppose I robbed Peter and gave his money to Paul. Suppose alternatively that Peter gave his money to Paul because I threatened to punch him in the nose unless he did. In the first scenario, I would be spending Peter’s money on Paul. But in the second, Peter would be spending his money on Paul.  I wouldn’t be spending anything. I merely would be threatening to assault Peter unless he did what I said. 

A more precise way of describing such tax deductions would be to say that they create price distortions between favored and non-favored activities. If a health insurance policy and a plasma TV each have a nominal price tag of $5,000, the fact that health insurance is tax-deductible reduces its price relative to the TV. (If the price distortion is greater than my preference for the TV, the tax deduction will induce me to consume the less-valued option, creating economic losses.)

The distinction might seem semantic, but it has important normative implications. Furman despises the tax deduction for employer-sponsored health insurance on equity grounds: The wealthy get larger tax deductions than lower-income workers. (I despise it too, for different reasons.) A government spending program that disproportionately subsidizes upper-income workers would be offensive to more people than a policy that merely lets some workers keep more of their own money. The former description suggests (assumes?) that the money belongs to the state, and that the state has the right to spend it on something else at its discretion. The latter suggests (correctly) that the money belongs to the people who earned it, and for the state to spend that money would require a $200 billion tax increase.

To anticipate a predictable objection, I am aware that the federal government itself prefers the former description, and the term tax expenditures. It is hardly surprising that the federal establishment chooses the description that presumptively increases its claim on society’s resources. That it is a convention makes it no less incorrect.

More Evidence on Coinsurance and ‘Skimping’

PHOENIX—In a recent paper on common criticisms of health savings accounts (HSAs), I discussed the concern that, since HSAs encourage greater price-sensitivity, they will encourage patients to forgo necessary medical care. I found that most of the evidence points to the opposite conclusion: Price-sensitive patients do not seem to “skimp” on necessary care.

The latest issue of Health Affairs includes an article that adds more weight to that conclusion. Dana Goldman and colleagues examined the effect of different levels of cost-sharing on privately insured patients with at least two of the following diagnoses: cancer, kidney disease, rheumatoid arthritis, and multiple sclerosis. The out-of-pocket costs for specialty drugs that treat these diseases can be quite high. For example, median out-of-pocket drug spending for cancer patients was $336 dollars (in 2004), but ran as high as $12,000 for some cancer patients.

What was striking about this study was that greater cost-sharing did not cause those patients to cut back on their drug expenditures. According to the authors:

[C]oinsurance did not significantly affect the level of spending at all once a patient initiated specialty drug use. What is most striking about these results is how inelastic demand is — that is, how insensitive patients are to price — in comparison to traditional pharmaceuticals, for which it is not uncommon to see responses of 30–50 percent when copayments double.

For emphasis, the authors include the following figure, which shows pharmaceutical spending among kidney patients as a function of the coinsurance rate:

Effective Coinsurance Rate For Kidney-Related Products And Spending, 2003–04

The coinsurance rate seems to have little effect, which suggests that when patients need medical care, they don’t cut back when exposed to more of the cost.

Despite these results, the authors argue against greater cost-sharing for specialty drugs, both because the drugs tend not to be used by patients who would not benefit, and to protect those patients from financial hardship. Yet that recommendation does not seem to follow from their findings. First, those drugs may not be subject to overuse at present. However, as the authors recognize, the market for specialty drugs is set to expand dramatically, which increases the potential for moral hazard when cost-sharing is low. Second, if those patients are suffering serious financial hardship, it isn’t apparent from this study: They are still able to obtain the drugs they need.

The authors seem to have a preference for pooling the cost of specialty drugs — which is fine. Personally, I’m agnostic: I think consumers should make that choice according to their own preferences. But this study’s empirical results do not illuminate whether it is better to have individual patients bear those costs, or to have those costs borne by the entire insurance pool — an option that could possibly make coverage unaffordable for other patients, whether now or in the future.

More on the Ideological Neutrality of Behavioral Economics

Below, Mark links to a fascinating-looking paper pointing out that government regulators are human, too, and therefore subject to the same cognitive foibles as the rest of us.

It might seem pretty surprising to Cato-style classical liberals that this sort of application of behavioral research didn’t immediately leap out to researchers. But on reflection, it makes sense that the first bunch of policy implications to be suggested from a new area of research will tend to reflect the ideological preferences of the investigators. This need not imply any kind of willful axe-grinding bias. This kind of unwitting bias, in fact, illustrates a few of the main points of behavioral economics: We don’t have unbounded cognitive capacities, the mind uses lots of quick and dirty rules of thumb, and we can’t count on those speedy cognitive tricks to conform to canonical standards of rationality. Even brilliant economists and sage government regulators simplify the complexity of the real world by passing it through sometimes shoddy ideological filters — even while attempting to draw out the implications of that very phenomenon.

Here are a couple more examples of papers drawing on behavioral research that don’t have an obvious ideological tendency. In a paper under review at Public Choice, “Behavioral Economics and Perverse Effects of the Welfare State” [doc], Bryan Caplan and Scott Beaullier write:

Critics often argue that government poverty programs perversely make the poor worse off by discouraging labor force participation, encouraging out-of-wedlock births, and so on. However, basic microeconomic theory tells us that you cannot make an agent worse off by expanding his choice set. The current paper argues that familiar findings in behavioral economics can be used to resolve this paradox. Insofar as the standard rational actor model is wrong, additional choices can make agents worse off. More importantly, existing empirical evidence suggests that the poor deviate from the rational actor model to an unusually large degree. The paper then considers the policy implications of our alternative perspective.

The policy implications would make Charles Murray smile. And here is a working paper by Daniel Benjamin, Sebastian Brown, and Jesse Shapiro showing that

… higher cognitive ability — especially mathematical ability — is predictive of much lower levels of small-stakes risk aversion and short-run impatience. For example, we calculate that a one-standard-deviation increase in measured mathematical ability is associated with an increase of about 8 percentage points in the probability of behaving in a risk-neutral fashion over small stakes (as against a mean probability of about 10%) and an increase of about 10 percentage points in the probability of behaving patiently over shortrun trade-offs (with a mean of about 28%).

And what are we to make of that? The authors somewhat tepidly suggest that better education might improve poor cognitive ability a bit, though they recognize that differences in ability run deeper than differences in schooling. More intriguingly, their results go to the heart of the currently raging inequality debate. Because the more “cognitively able” are less likely to make errors relative normative standards of risk and expected utility, they’re likely to do better at choosing the elements of an investment portfolio:

Our results also suggest additional reasons why the overall returns to cognitive ability may be underestimated by focusing solely on the labor market returns … we might conjecture that a one-standard-deviation increase in cognitive ability is worth about 0.3% of lifetime wealth due to improved portfolio allocation alone. Since portfolio choice is only one of many important household decisions that are affected by cognitive ability, the total value of cognitive ability’s effect on decision-making could be quite substantial.

If changes in the economy have increased the payoff to the decisions affected by cognitive ability, that might explain some changes in wealth inequality.

Behavioral economics done right is just good science. The real peril is in the transition over the gap from psychology to policy. Big philosophical and ideological assumptions lurk in the gap. It’s very important to make those assumptions explicit, and defend them. Unfortunately, that’s too rarely done