Matthew Holt

Health Affairs makes an apPaul(y)ing choice

Health Affairs ran a couple of partisan analyses last week. Joseph Antos, of AEI, Gail Wilensky, former Bush 41 HCFA administrator, and Hans Kuttner labeled the Obama plan as excessive tax and spend socialized gulag regulation.

In the other analysis, four liberal academic wonks — Thomas Buchmueller, Sherry A. Glied, Anne Royalty, and Katherine Swartz — derided the McCain plan as the counter-productive ravings of a right wing nutjob. OK so they didn’t exactly say that, but you get the message. No surprises here.

The McCain plan is so far out of the mainstream that, when Bush proposed something very similar in 2006, he could not even get it introduced into a Republican-controlled Congress. Obama’s plan is a wishwashy centrist Democrat plan that doesn’t even pretend to get to real universal coverage and ignores the fact that the vast majority of Democrats prefer a straight single-payer plan (and so does he when scratched hard!).

So who does Health Affairs chooses to create a middling compromise between these two?

It chooses Mark Pauly, the only leading academic health economist
among the Ivy League elite who’s a paid up member of the right-wing
free-marketeer club. Here’s what I wrote about Pauly in a much longer article about Malcolm Gladwell a while back:

He makes a lot of the influence of Mark Pauly. Pauly is a complete idiot respected health economist at Wharton, who earnestly believes both that the individual market works well for 80% of the people forced to be in it and is therefore OK, and that the reason
we spend so much money on health care in America is a result of the
fact that the rest of our economy is so dang efficient
(Both in serious studies published in Health Affairs — I shit you
not). And his article on moral hazard is supposed to be the most
influential ever published in the health policy literature, and that’s
why the right has bought into it.

Since then there’s been a Health Affairs article where Pauly—sitting in his risk-free tenured position at U Penn with great group health insurance—provided data that showed
that the individual private insurance market was egregious and
discriminatory in the way it did its risk pooling. But he essentially
declared that private insurers were OK because if they were any good at
their jobs they could have been even more egregious and discriminatory in their risk pooling!

Of course in reality he missed the behavior of health plans in that
individual market place where they showed themselves to be very good at
being discriminatory by retroactively kicking out individuals who were poor risks. Luckily for the rest of us Lisa Girion was paying attention.

So now Pauly is the moderate in the middle? That defies belief, but it’s worth taking a cursory look at what he’s says.
He of course dismisses single payer, and sets up a fake dismissal of a
counter-weight which forces everyone moves to HDHPs and HSAs—even
McCain isn’t crazy enough to suggest that (especially not after last

The bit that I find most interesting is when he attacks Obama for
advocating pay or play—and for his desire to keep employer-base health
insurance around. Now (along with Maggie Mahar channeling Uwe Rhienhardt) I’m no fan of employer-based health insurance, but Pauly’s reasoning reminds me of another smackdown I issued a while back. He says:

There is considerable confusion (from an
economic perspective) among policymakers, employers, and workers about
how employer-sponsored insurance really works. The economic analysis of
employment-based benefits is as clear in economic theory and empirical
work as it is muddled in the public debate: theory and econometric
studies both say that workers pay for the majority of health insurance
costs, through lower money wages as well as through explicit premiums.


The Obama plan, in contrast, generally seems
to view employer payments as do many employers: as the employer’s
money, which would otherwise become part of profits if it were not paid
out for health insurance.


In the tragic paradox of health reform (as
illustrated most recently in Massachusetts), substantive employer
mandates kindle fierce employer opposition, even though, according to
economics, employers are not the major stakeholders but are primarily
conduits for payment for workers’ health insurance.

This is bunk.

In Paulyworld any time a union wants to increase health benefits,
the employer happily does it and correspondingly reduces wages. In
Paulyworld the proportion of corporate income extracted for profit and
returned to shareholders (and executives) is constant.

In reality Wall Street will tell you that the proportion of revenues
going to corporate profits increased dramatically in the early to mid
2000s while the share allocated to employees’ wages fell. Of course
that’s the continuation of a pattern where real wages for the vast
majority of Americans have fallen over the past 30 years while
corporate profits (and the “wages” for those that own corporations)
have dramatically increased. The proportion of profits to revenue
matters because it dramatically impacts stock prices, and stock prices
determine how senior corporate executives and shareholders get paid. So
for Pauly to tell you this doesn’t matter is just not true. Which is
why in the real world disputes over wages and health care benefits are
such a big issue.

Pauly and the other theoretical economists (including the one I ripped a few years back) will tell you that this allocation will sort itself out in the long run. I’ll just remind him of what a rather greater economist said about how we’d do in the long run.

Give him his due, Pauly does say one sensible thing about the
politics of McCain’s proposal to remove tax deductibility on health
benefits. The Democrats are rightfully calling that a tax increase on
some people (not that I’m opposed to that!)

The most obvious problem is the questionable
political attractiveness of a proposal to abolish a popular
upper-middle-class tax loophole, one that delivers more than $200
billion a year in avoided taxes, primarily to higher-wage Americans. It
might be preferable to begin by capping the exclusion with a cap that
does not grow as fast as premiums, and thus gradually withdrawing the

Funnily enough that was how Maggie Thatcher got rid of mortgage tax
deductibility in the UK. But when comparing the segmentation strategy
that McCain envisages, or the closer-to-universal pooling concept of
Obama, it’s not hard to guess where Pauly ends up.

My judgment is that community rating
is inferior to the combination of guaranteed renewability and high-risk
pools, assuming the latter could be subsidized sufficiently, with
financing from general revenue taxation, but that the Obama-proposed
coverage of high risks through what is effectively free reinsurance
also has merit. Some combination of all three desirable features might
be best.


Perhaps a compromise would have
guaranteed renewability for people renewing coverage, while new buyers
from a given insurer (whether coming from group insurance or
uninsurance) would face three corridors, depending on how much risk
differs from average: a corridor where risk rating would be permitted
for people of moderately-above-average risk, a corridor where community
rating would forbid further premium increases, and a corridor where
much higher risks are referred to a well-subsidized high-risk pool.

This needs serious parsing. Pauly’s basically OK trusting
segmentation “corridors” in a separate-but-equal mode where the really
sick are going to be sent off to risk pools. We know two things about
those risk pools.

  1. As set up currently they do not work and provide incredibly expensive limited coverage to far fewer people than need them.
  2. There is no proposal in the McCain campaign (or it seems in the Pauly doctrine) for how to change that fact

It will also be important to ensure
that regulation intended to limit risk segmentation not be used as a
subterfuge to disqualify less generous plans that special interests
(provider groups, public health advocates) do not like

Now Pauly finally he says something I can agree with. We should
indeed be cautious about the ability of providers to gouge the
system—after all they’ve had 43+ years  practice at it.

Unfortunately Pauly neglects to notice that those nations which have
succeeded in avoiding the “generosity” of the public’s largesse to the
heath care system to the extent we’ve seen in the US, have done it
precisely because they use one integrated risk pool, or a very close
approximation of the same thing (e.g. in Holland). That pooling
prevents those more advantaged from cutting those “separate but equal”
groups adrift in their leaking lifeboats—as happens in programs for the
poor here (to wit Medicaid). That’s why Ted Kennedy is so determined to
keep everyone in Medicare, and that’s why the rest of the world
believes in some variant of single pooling.

But to be fair, anyone reading the name of the author here would
know what we were going to get and would know that it would not be a
sensible proposal, but instead a “compromise” twisted by Pauly’s
peculiar view of the health insurance system. At best we would we might
have expected a “lets’ report both sides” story similar to what most
media outlets do — even though one side is clearly operating on the
fringes of both political and economic reality (and that’s not to say
Obama is that much better).

The real question is why Health Affairs chose Pauly, rather than a
sensible middle of the road academic, to write what could have been an
important piece?

Categories: Matthew Holt

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10 replies »

  1. It saddens me that after all these decades, such a large segment of voters – ordinary people who are themselves at risk financially and physically under our broken health care system – continue to buy insurance lobby propaganda about the innate benevolence and wisdom of unregulated “market-driven” health insurance and how we’d all suffer terribly under the obvious solution of a single-payer system, which is portrayed as somehow un-American in a kind of anachronistically Communistic way. The tacit implication seems to be that we become a Marxist state and reject American Values if we go with a single payer plan.

  2. Rbar,
    You can’t separate the suppliers of health care i.e. the physicians from the demand i.e. the payers otherwise the equation doesn’t work. Milton knew this 50 years ago and David knows that now, but it would interfere with his plan. It’s only a minor detail to leave out the sector that controls 80-90% of the healthcare spending in America. To pretend that health care reform is just a matter of every one having insurance is ludicrous to say the least. Dumping more money into the system (either candidates plan) without changing the delivery system will accomplish 2 things, make physicians richer/hospital margins bigger and rapidly increase the growth curve in healthcare spending all without changing overall outcomes. As a physician I’ve got no problem with the first part, as an American quite frankly it has me worried. There never has been a free market in health care providers. The numbers of doctors and nurses have been tightly controlled at all levels for almost a hundred years. Money and insurance are not the demand drivers in healthcare but the way we ration care. Take away that rationing to allow the real demand to manifest itself and you are going to have one hell of a problem. Ask yourself this question. When in the history of healthcare in America has the so called free market EVER provide for all the people? Answer, NEVER and probably because a market never really existed. Canada, UK, Australia, France they will and are becoming more like us and we are becoming more like them so there really isn’t any present system to turn to that will solve the problem over the long run, say 50 years out. Don’t believe me ask the CBO. As far as reform, given how close this election will be, the fact that none of the principle parties concerned on either side of the aisle are going to fall on the sword for reform and that just about any of the big players in the fight for the pie who are unhappy can block the legislation in any one of the 7 or 8 various committees a reform bill must navigate, chances of passing a decent effective bill, ZERO!

  3. I have a pretty good idea which Harvard economist on Obama’s team jamesd is talking about and I was one of those pulling out the little that’s left of my hair when I found out that he was Obama’s healthcare adviser!

  4. I prefer natural medicine which in most cases is never covered by medical insurance. It has helped me far more than the medical field has, but it’s all at my expense. It has only been within the past few years that insurances have started to cover Chiropractors and that is only a few insurance companies. I would love for insurances (individual or through your employer) give the patient the right to choose how they receive ‘medical’ care. In closing I believe no one should have less medical attention due to their finances. It happens, I use to be in the medical field. That may be one and only one reason I prefer alternative medicines.

  5. JamesD, I don’t really understand your problem with the Harvard economist’s answer. It is a platitude, but the “free market” in health care/insurance is something completely different than the free job market in health care (look what they have in Canada). Or do you think that the shortage is a problem of that extent that any reform is impossible? Please explain.

  6. Quick, name a “sensible middle of the road academic” health policy person. . .

  7. Matt,
    Interesting post. Isn’t Money the driving force for all these plans no matter what point of view you’re looking at? With the pie at 2.5 trillion and growing it doesn’t take a genius to see what’s going on and it has nothing to do with health care. Whether you’re a free marketer (where one doesn’t exist) or a universal payer (take a look at those countries ER crowding and medical error rates or there unemployment rate) just follow the money and figure out who gets more, who gets less and who is backing who. Health care is just a sideline. Even the AMA, AAFP/ACP, ACEP, other medical organizations, or the unions it’s all about the money. I doubt that after almost 100 years of blocking universal health care that the AMA has had a moral epiphany or the unions after blocking the best chance for universal health care in the 1970’s are now willing to do what’s best for the whole country. There is plenty of blame and blood to go around. As for McCain’s and Obama’s health care plans, my daughter’s high school debate team could come up with a better plan where patient care/health care would have the most impact. How either plan has survived so long can only be because neither man expects them to pass and in that they are probably right. Remember, their plans aren’t proposed to fix health care, but
    to get them elected and are geared to their select constituencies. How McCain’s plan
    (and I’m a McCain supporter) has been allowed by the Democrats to even survive is beyond belief. It has no relevance to what is going on and those that would stand up for it are either blind or using some smoke and mirrors to disguise their real intentions. How can a man who so clearly saw and correctly the need for a “Surge” in Iraq,
    be so critically blind to a more desperate need for a “Surge” in health care for America? It is amazing and one of my biggest disappointments. Lets not leave the Democrats out. This one you are going to love. After bashing the free market policies of the Republicans, one of Obama’s leading health care policy experts, and a famous Harvard economist when asked how the present shortages in physicians and nursing staff effect his policies and economic plans his response after a pregnant pause was one that all economist use when they don’t know. You guessed it “ the market will determine the numbers of providers and nurses”. I know this because I asked the question and it’s on tape. There is no hope in this election cycle and maybe that is a good thing. Without really looking at the whole health care system providers, payers, patients and the diseases no plan is better than those plans being offered.

  8. It never ceases to amaze me, the amount of energy that can go into a project just to avoid doing the right thing. The best, simplest, least costly, most effective thing we could do is expand what has been working so well for years, Medicare. You get sick, you get care, and the caregiver gets paid. Nothing could be simpler.
    But follow the money and you’ll find why the politicians don’t like it a bit. They get their money from insurance interests.
    See Forget about Canada, we can do better!
    Jack Lohman