Death Spirals

Go, go, go, said the bird: human kind

Cannot bear very much reality.

So said Eliot and he was certainly correct. Much of what we take for human culture is an elaborate defense mechanism allowing us to avoid facing the reality of our existence. I suppose there’s nothing wrong with it. Our species has carried on a good while now so there must be something of value to the trait. Still, it is not without its downside.

An example is in this story on US health care.

The Supreme Court decision in King v. Burwell, the case challenging the Obama administration’s decision to award tax credits for health insurance sold through federally established exchanges, could turn on the question of whether a ruling that ends the tax credits on federal exchanges might cause something known as a “death spiral” in health insurance markets.

The good news is the answer is probably no, but the bad news is that’s only because the death spiral has probably already started.

A death spiral generally occurs when insurers are forced to raise premiums sharply to pay promised benefits. Higher premiums cause many of the healthiest policyholders, who already pay far more in premiums than they receive in benefits, to drop coverage.

When healthy policyholders drop coverage, it leaves the insurer with little choice but to raise premiums again because they now have a risk pool that is less healthy than before. But another premium increase means many of the healthy people who remained now drop their policies, too, and this continues until the only people willing to pay the now-very-high premiums are those with serious medical conditions.

Europeans, to their credit, have accepted the fact that the laws of supply and demand apply to health care, just as they do every other product and service. That means there must be a rationing mechanism. Europeans prefer their authoritarianism straight so they turn the rationing over the to the state. Americans can’t accept that supply and demand applies to health care so we keep inventing new crackpot schemes that promise to suspend the laws of nature.

Health care reached the point of diminishing returns about fifty years ago. 100 years ago America spent 3% of GDP on health care and people lived to about 60. Today we spend about 15% on health care and people live to about 80. A good portion of that increase in life expectancy is due to better food and less violence. It is axiomatic that as things like health care improve, the cost of further improvement escalates. The marginal return on investment declines.

This is true in all areas of human endeavor. The initial burst of productivity from the Internet was cheap. The phone lines existed and most Americans could read and write. As we have gone on, the cost of further productivity gains have escalated as new infrastructure has to be built out and new skills mastered. Again, this is phenomenon that social science has documented for a long time. Marx, while not framing it the same way, was talking about it in the surplus value of labor theory.

The fact is, we have about as much health care as we need. Until genetics begins to offer up solutions that reset the baselines, spending more on current health care is a negative investment. That’s the defect of the central planning model of Europe. There’s no hope for new technologies to reset the baselines and spur new high return investments. It’s why all the heavy lifting is done in the US these days.

This brings me back to the supply and demand aspect. Rationing is best done by price. People want BMW’s more than they want Dodge Darts and that is reflected in the price. No everyone can have a BMW so the clearing price determines who gets a BMW. In the American health care system, this process is retarded by government intervention. The result is rising prices and diminishing services. That’s the real death spiral, the death spiral of the monopolist.

America has the greatest health care system on earth. It is super cheap, with lots of options and a high degree of customer satisfaction. It is called veterinary medicine. American pets get better health care that 95% of the world population for pennies. The reason is there are few barriers to suppliers so there are many options along the price curve. There’s also incentives to innovate. My Vet has world class lab equipment because it helps attract business.

But, we would rather pamper our pets and starve out children than accept the reality of the human condition.

6 thoughts on “Death Spirals

  1. Pingback: Thursday morning links - Maggie's Farm

  2. Pingback: » Marginal improvements

  3. I have a feeling Veterinary type health care for Americans would be just fine with Obama. Best not to give him any ideas.

  4. I’m not prepared to give credit to Europeans for accepting rationing, and in truth the American socialists elite fully anticipate rationing. They love rationing–the rationing of others. Major bonus points for pulling the plug. Nothing can save a centralized health system so much money as removing unproductive citizens from an unproductive system. There is some long German word for that. Maybe one of your readers knows it.

    Veterinary medicine is a winner in demonstrating the way forward for health care to the uninformed, the misinformed, and even the malformed.

  5. In the UK we are told — very firmly told — that we have the best healthcare model in the world. The politicians insist we believe it, even though there is little evidence our NHS is copied anywhere else.

    In fact healthcare is the greatest single factor in any general election. In early May we go to the polls again (my, how five years passes so swiftly) and all the things that worry the population — or at least the sensible, able to vote sector of Britain — will largely be ignored in favour of trumped up ‘crises’ such as global warming and of course, the NHS. All the main political parties support the NHS, each promising to outdo the other. Better targets for care, improved waiting times, greater accessibility, more cleanliness… the arguments spin like a cloud of gnats on a summer evening.

    Certainly once the NHS was started after WWII it has increasingly become the sole magnet for discussion at every end and turn. When the Chancellor presented his budget the other day Labour rounded on him for ‘not mentioning the NHS.’ It might be perceived that all the commitments were already there to the NHS but Labour desperately wanted something to beat Osborne with. Cameron then came out with a promise for an improved 7 day a week access to the NHS for all (yes, including all the health tourists who fly in for an operation or to have a baby and then flee back to their own homeland at the first chance, before any money changes hands). Thus healthcare provision dominates everything here, but then as the nation’s largest employer (and favourite toy of the unions) it matters so much to many.

    When you launched Obamacare I thought then that all you were doing was bringing a major debate into your politics — one that will eventually eclipse all else. Eventually like our NHS arguments — and all claim to love it more than anything — it will despite of any other pressing issue, become the one football to be kicked around by all sides, in every way, all the time. It will dominate your political discourse. Billions will be pumped in, billions more promised, billions of words issued about it.

    Will your people be healthier? Will they ever be satisfied? Only time will tell, though time tends to have one medical outcome whatever happens.

    • Two things we have going for us in the States. One is we have 15% of the population who make demands on the other 85% that can never be met. This anchor population tends to sink all socialist projects within a generation. The other thing is we really suck at socialism. It really is incredible just how awful we are even the most modest schemes.

      In that regard, diversity is our strength. Socialism works fine within kin groups. The Scandinavians could make it work when it was just them nestled up there near the arctic. Now that they are importing lunatics the whole thing will fall apart into an ethnic spoils system. That’s what you see in America.

      With regards to ObamaCare, we may have caught an additional break by having it designed by a committee of our least fit citizens.

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