Captive Consumers in Oligopolies Do Not Make Effective Markets

In a post citing liberally from a Matt Yglesias post naming me,  Ezra takes on the argument that the health care bill, as currently conceived by President Lieberman, would be a bailout of the insurance industry.

There’s an argument on the left that the health-care bill represents a “bailout” to the insurance companies. Matt Yglesias puts this in the proper context:

I’ve seen Marcy Wheeler characterize the plan as an “industry bailout.” And, indeed, if I were a small government conservative one political tactic I would employ would be to start characterizing all initiatives involving government spending as a “bailout.” You could say that [the stimulus]’s provisions funding K-12 education are a “bailout for teacher’s unions.” You could call [cap and trade] a “bailout for windmill makers.” And you can call the health care bill an “insurance company bailout.” But the mechanism by which insurers can get extra money under reform is that … more people get health insurance at a price they can afford.

For the record, I’m not positive I’m the one who did say that, but I’m not opposed to the invocation of my name in that context. I do, however, find Matt’s insinuation that I’m making the same kind of cynical argument conservatives do disingenuous at best. Particularly coming from a guy who claims that requiring middle class families to pay almost 10% of their income in premiums alone–more than 3 times as much as some experts say is affordable–is “a price they can afford.”

Ezra, for his part, argues (again) that profit is not in and of itself a bad thing.

To put this a bit more sharply, if I could construct a system in which insurers spent 90 percent of every premium dollar on medical care, never discriminated against another sick applicant, began exerting real pressure for providers to bring down costs, vastly simplified their billing systems, made it easier to compare plans and access consumer ratings, and generally worked more like companies in a competitive market rather than companies in a non-functional market, I would take that deal. And if you told me that the price of that deal was that insurers would move from being the 86th most profitable industry to being the 53rd most profitable industry, I would still take that deal.

Now, I’ve got a few nits. Ezra may not have seen the CBO directive that Jon Walker pointed to the other day, which suggests Harry Reid will be unable to insist on a 90% Medical Loss Ratio, the provision that would have forced insurers to spend 90% of premium dollars on care. And there are reasons to doubt that all the measures pressuring providers to bring down costs incent the right behaviors; while some are much-needed reforms, some may actually lead to more spending. But those nitpicks aside, Ezra rightly points out the aspects of this reform that a real improvements over what we’ve got now.

That said, Ezra’s further examples (and Yglesias’) just prove the point those of us opposed to the bill in current form have been making, because they show the importance of functioning markets.

The profit motive is not, in and of itself, a bad thing. The Apple computer I’m typing on, the Netflix movie I wish I were watching, the pork buns I wish i were eating — it all comes from profit. But Apple isn’t allowed to have slaves build its computers, Netflix can’t destroy the incentive to make films by pirating all of its DVDs, and Momofuku can’t let rats infest its kitchen because exterminators are expensive.

First, let me deal with Matt’s analogies. Some stimulus money goes to schools. That money is either appropriated at the state level through regular somewhat democratic appropriation processes (in which case it’s a bailout for states, and the teacher’s unions will be put in position of negotiating for fewer job cuts or wage decreases). Or it will be awarded to school construction contractors in localized markets that are both competitive and (because of transparency attached to the stimulus) very transparent.

Cap and trade has, in fact, been called a bailout–but of Wall Street, not wind turbine manufacturers, because it’ll just create another big derivatives market. But for companies trying to reduce their greenhouse gas emissions to meet caps, yes, they may choose to buy wind turbines. Or they may choose any number of other ways to generate power releasing fewer greenhouse gases. The point is, though, there are many choices, and some, but not all of those choices, are markets in which there is real competition (and utilities are big enough they’ve got some power to influence these markets).

Now onto Ezra’s analogies. I’m most intrigued by his Momofuku parallel, because it does point to one aspect of health care reform–the regulations requiring insurers reveal a lot more information about their businesses, which hopefully will make it easier to pressure health care providers to improve their practices. But the analogy fails on a key point: consumers’ source of pressure on Momofuku not to let rats take over its kitchen is twofold. We trust health inspectors will find the rats and issue a report making the rats public. And, very importantly, Momofuku has to compete with hundreds of other restaurants, and any hint that it’s got a rat problem would make it competitively disadvantaged compared to these other hundred restaurants. Unlike Momofuku, Blue Cross in most markets has only a few other competitors. So a better analogy than Momofuku is probably school lunch programs, which are regulated by the USDA, but which aren’t exposed to real competition. And, as it turns out, school lunches don’t match the quality of meats offered at fast food restaurants which are exposed to competition.

In the past three years, the government has provided the nation’s schools with millions of pounds of beef and chicken that wouldn’t meet the quality or safety standards of many fast-food restaurants, from Jack in the Box and other burger places to chicken chains such as KFC, a USA TODAY investigation found.

The U.S. Department of Agriculture says the meat it buys for the National School Lunch Program “meets or exceeds standards in commercial products.”

That isn’t always the case. McDonald’s, Burger King and Costco, for instance, are far more rigorous in checking for bacteria and dangerous pathogens. They test the ground beef they buy five to 10 times more often than the USDA tests beef made for schools during a typical production day.

That’s not rats, but it is a significant issue affecting quality. Increased transparency is not sufficient to force larger bureaucracies to improve quality. It’s an important element, but it’s not enough.

Then there’s Netflix. Now, I would describe Netflix’s service not to be making movies, but distributing them for home viewing. Netflix’s genius in devising a completely different way to deliver that service has now given it the market force to set certain market services. Maybe, if we’re lucky, someone will think of a totally innovative way to deliver health care and find a way to break into the concentrated market.

Finally, there’s Apple. Perhaps for obvious reasons, Ezra doesn’t consider the area where Apple’s shared monopoly–the iPhone–has made it a real target of customer dissatisfaction of late (though with the advent of Android, Apple will probably now become much more responsive to consumers). But his claim that Apple isn’t allowed to have slaves build its computers? While 80-hour work weeks are not quite slavery, the young women building keyboards for a bunch of other computer companies would have a few things to say about how profit incents some loathsome employer practices. NGOs have long sought to bring consumer pressure to bear on manufacturers of all sorts to make sure these kinds of working conditions don’t occur–but they do occur, and the profit motive is one of the things driving that.

I went through all of these not to contest the claim that there’s no inherent problem with profit (though when I used to consult for the pharmaceutical industry, they gleefully manipulated the regulatory process to push drugs they knew were less effective than other drugs in the name of making profits, and those drugs remain best-sellers). Rather, it’s that if you’re relying on profit as a motivator to produce lower prices or higher quality, there must be a real market. And that lack of that is the source of why this is different from stimulus or cap and trade or much other government spending. (It is similar in some ways to the defense industry, which is an important analogy since a number of our defense contractors are ungovernable and since costs are so high there, too. But there, at least, the government uses its own market power to protect state’s interest.)

Which brings us to the end of Ezra’s piece.

Health insurance suffers from market failure in part because it suffers from regulation failure. We’re adding the regulations now and we’ll see, in 10 years, whether people hate insurers somewhat less, or whether they’ve embraced the nonprofit model, or whether they’re clamoring for public insurance. Either way, putting insurers into a structured market where they’ll have to compete against one another and users will rate them should make things a lot better. Public insurance might be the best way forward, but an insurance market that works for consumers is progress nevertheless.

He rightly admits that there is a market failure right now, but suggests that regulation will “in part” fix that.

And while I agree that the transparency measures in this bill give consumers one tool with which to force insurers to compete, the bill, as President Lieberman has dictated it must be, fails to use this opportunity to inject real choice into markets that are currently failures.

More importantly, the health care bill will make this far worse by depriving consumers of a key form of choice they currently exercise in huge numbers: the choice (painful as it often is) not to carry insurance.

Our society long ago decided that profit could, in situations in which there was a real market, motivate corporations to provide society with something of value. And so, in cases where there was a functional market, society would be willing to pay a profit in exchange for the efficiencies that system offered. But even Adam Smith recognized that markets don’t function with monopolies. And this bill exacerbates the problem of concentration by depriving consumers of one of the last choices they have–not to participate. Right now, insurance companies lose out on consumers who have decided their products are too expensive for what consumers get in return. The current bill requires consumers–a significant chunk of them facing precisely the same prices that today led them to choose to go without insurance–to enter a market with no real competition, one that, therefore, would not be required to pass on the profits resultant from a mandate to consumers.

I understand the logic for a mandate. But right now, there is little disagreement that concentration in the industry means consumers don’t have the kind of power that our society uses as the very justification for profit. More importantly, by making markets less competitive by forcing everyone to participate, no matter the cost, you cede one of the only tools the government has (aside from effective regulation with legal consequences, which this bill doesn’t have) to ensure that the health industry passes on the benefits that a mandate is claimed to produce.

So whether or not I’m the person who said this was an insurance industry bailout, I do believe this. The government is about to make insurance markets less competitive in a significant way, even while designing a system that depends on that very competition to produce the benefits it promises. A mandate makes sense–if insurance is affordable, if there are real choices in the market, and if the government has some means to get insurance companies to share the benefits of that mandate. Right now, aside from the poorest consumers, who get subsidies large enough to make this affordable, none of that is true.

Right now, millions of consumers are exercising one of the only market choices they have in the current market–to tell insurance companies their products are too expensive, given the benefit consumers get in return. The government is about to tell many of them they can no longer exercise this market choice, yet it is doing far too little to change the other part of the equation, making the insurance affordable (in some ways it provides more value, but with 60% actuary plans acceptable, not all that much). That’s one of the key problems with the mandate: it violates the entire premise behind our society’s support of profit, and given our market structure, does not provide enough choice in the system to make the market work.

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42 replies
  1. bmaz says:

    Well then. When chastised by such old, wise, sage and grizzled veterans as Klein and Yglesias, I guess you have really been put in your place.

    Or, you know, not so much.

  2. earlofhuntingdon says:

    There you go, again, assuming that capitalist theory is the way capitalists act. *g*

    “Efficient markets” may be defined, in theory, as open competition, among competitors, customers and suppliers, all of whom have perfect knowledge and who react rationally to it, where market power is constantly adjusted via such things as quality, price, terms and delivery. Whereas, every bidnessman could tell you that the perfect market is one without competition, where the monopolist or oligopolist sets the price and terms of sale, and buyers have nowhere else to turn for alternative products or services.

    As you say, one obligation of credible health care reform is to remove insurers’ reprehensible exemption from the reach of anti-trust laws. It also requires a concomitant administration commitment to take its several anti-trust departments out of the deep freeze they’ve been in since the Clinton administration, re-staff and refund them, and give them the juice to do their jobs.

    Given that Mr. Obama and Eric Holder have resoundingly failed to do just that with the corrupt DoJ they inherited from Bush, Mukasey, Gonzales and Ashcroft, I’d say the chances of that happening are about the same as Joe Lieberputz changing his mind and becoming a tireless advocate for universal, single-payer health care.

  3. Peterr says:

    The government is about to make insurance markets less competitive in a significant way, even while designing a system that depends on that very competition to produce the benefits it promises.

    Put this in bold, Marcy.

    Obama, Rahm, and the Senate ConservaDems have stripped out every mechanism to make the markets more competitive — single payer, public option, medicare buy-in, etc. — while forcing consumers to buy into what in most areas is a near monopolistic insurance system [pdf, pp. 3-4, footnotes omitted here]:

    The American Medical Association reports that 94 percent of insurance markets in the United States are now highly concentrated. Contrary to industry assertions, these mergers [400 in the last 13 years] have undermined market efficiency; premiums have skyrocketed, increasing more than 87 percent, on average, over the past six years. . . .

    According to a nationwide survey by the Government Accountability Office, the median statewide market share of the largest insurer selling coverage to small employer groups increased to 47 percent in 2008 from 33 percent in 2002.

    At the local level, where distinct provider markets exist in metropolitan areas, the health insurance industry’s market concentration is even more severe. The U.S. Justice Department considers a market “highly concentrated” if one company holds more than a 42 percent share of that market, a level that is common in Virginia and more than 30 other states.

    The table on page 5 is brutal.

  4. earlofhuntingdon says:

    Well, we all know how well federal government inspections help prevent the spread of BSE and e. coli. When was the last time you bought peanut butter or Chinese toothpaste or ate steak Tartar? Ezra should pick another analogy.

    Information is good, but only if it comes with the juice, the notoriety, the infamy, the regulatory, tort and criminal law consequences that follow negligent or intentionally harmful conduct. These days, as with torture, spying and selling tainted products, it simply makes the seller of foul products or practices more brazen and more able to rely on the decrepit “buyer beware” common law that was displaced decades ago.

    Stiff consequences for wrongful conduct – corporate and governmental – no longer flow. In fact, both the Obama and Bush administrations take or took great pains to hide that conduct and prohibit consequences. That was not true twenty years ago, after the S & L scandal. Instead of 2000 bidnessmen going to jail for scamming the public and the feds, today we get one Bernie Madoff in jail for life, and Jack Abramoff in a pear tree, still unsure of his sentence because he’s “helping police with their inquiries.”

    Ezra needs to click the refresh button on his Apple, if his model has one.

  5. fatster says:

    So glad you brought Adam Smith into the discussion, EW. The Invisible Hand cannot work its magic if there is interference in the system, including manipulation of markets, deals behind closed doors, and so on. Just as Marx & Engels underestimated the ability of capitalism to adapt, Smith underestimated the agility and rapidity of system interferences to obstruct the Invisible Hand. And now the political class is trying to force the people to deliver to the insurance companies, who have a stunning amount of control over the political class, a large share of their hard-earned income. Sucks all the way around, except of course for the insurance companies.

    • Adam503 says:

      You wanted to talk to me? I’m Adam Smith. Seriously. Just a pain in the butt being far left politically with that name hung on you, so I don’t use it online.

      Today, Adam Smith says it’s time for a general strike, though.

      • skdadl says:

        Well, this lefty who also read the C17 and C18 thinks you’re actually a pretty cool guy (and I see that EW and fatster agree), so you wear that name with pride. As fatster says @ 10, our Adam just wasn’t grubby enough to anticipate the protection rackets. (Well, she says it better than that, but we seem to have some High Enlightenment agreement here, always a nice thought to go to sleep on.)

        Anyone checked the pitchfork market lately? Tumbrils and torches?

        • Ishmael says:

          Not sure you are being fair to Enlightenment Adam Smith about corporate protection rackets ! :)

          The proposal of any new law or regulation which comes from [businessmen], ought always to be listened to with great precaution, and ought never to be adopted till after having been long and carefully examined, not only with the most scrupulous, but with the most suspicious attention. It comes from an order of men, whose interest is never exactly the same with that of the public, who have generally an interest to deceive and even to oppress the public, and who accordingly have, upon many occasions, both deceived and oppressed it.

          –Adam Smith, An Inquiry into the Nature and Cause of the Wealth of Nations, vol. 1, pt. xi, p.10

        • earlofhuntingdon says:

          I think Mr. Smith was well aware of capitalist excesses; there were many even in his day. The acceleration of forced “enclosure” of public lands for private profit come to mind. I think it’s the perpetrators of the excesses that merit disdain and opposition.

          • readerOfTeaLeaves says:

            The acceleration of forced “enclosure” of public lands for private profit come to mind.

            Yes, so he was focused on ‘scarcity’ in his economic thinking.

            But he did not live in an era of pollutants and those economic pollutants we call ‘derivatives’.

            As if the economic entity he described was an amoeba, whereas we need to deal with a rabid dog.

  6. Adam503 says:

    There’s no other options.
    -It’s time to start planning general strikes.
    -The corruption of governance in the United States now is beyond repair.
    -Time for the people of this country to step forward and “Get the corrupt corporations out of the American political process.”
    -There is no other next step. There’s going to have to be a work stoppage.The political process that could lead another way are too corrupt.

  7. MadDog says:

    I find it very interesting that White House Secretary Robert Gibbs and Senator Jello Jay Rockefeller have so ferociously responded to Howard Dean’s “Kill the Bill!” broadside.

    It would seem that Dean & Co. (Jane, Markos, etc.) have struck a nerve. A most sensitive nerve!

    Based on that Team Obama response, one could easily ascribe it to the fear of being found out.

    The Emperor has no clothes? Oh noes!!!

    Avert your eyes, and pretend we didn’t see it.

  8. WTFOver says:

    Is Joe Lieberman Protecting Israel?

    Sen. Joe Lieberman’s latest threat to scuttle health-care reform – vowing to join a Republican filibuster to block an over-55 buy-in to Medicare, a proposal that he has long championed – is raising questions about his motives. But no one is mentioning the unmentionable, the cause that has come to define Lieberman’s career: Israel.

    http://www.consortiumnews.com/2009/121509.html

    • earlofhuntingdon says:

      As you, EW and others have said, if this was “the moment” and this is the legislation that arose out of it, why on earth would insuresters, with this success in hand, achieve less success next time health reform comes round? A battered and bloody union that accepts an agreement that contains less than management’s original offer is not likely to be more successful the next round.

  9. CTMET says:

    I don’t like the term bailout for this situation. That would assume that the insurance companies are sinking. They aren’t.

    I prefer the term “money bath”

  10. Ishmael says:

    “Our society long ago decided that profit could, in situations in which there was a real market, motivate corporations to provide society with something of value. And so, in cases where there was a functional market, society would be willing to pay a profit in exchange for the efficiencies that system offered.”

    As Atrios as said many times, the only role insurance companies play in health care is skimming 15% of the 18% or so of US GDP that is spent on “health care”. While the argument, however tenuous, can be made that high drug costs and expensive hospitals make US health care “the best in the world”, there is no argument to be made that insurance companies have saved a single life, or act as a brake on rising health costs. There business model is to get rid of sick customers and make health care costs as large as possible. The higher the health costs, the greater their cut is of a continually-growing pie.

    What value do they add that is worth the money they extract from the system? Isn’t the issue that whatever administrative services or competitive advantage insurance companies could offer to consumers that actually added value, was back in the day when they had the only IT and customer service infrastructure that could do the job for health care? That isn’t the case anymore, no more so than news could only be delivered on a broad basis by companies that owned very expensive printing presses and forests to make newsprint.

    • MadDog says:

      And the “adminstrative overhead” that is the insurance companies is far more than the cost of the same for Medicare run by the government.

      A leech by any other name is still a leech!

  11. Ishmael says:

    As painful as it is to see busloads of American seniors coming to Canada to fill their prescriptions (particularly from hard-hit border states like Michigan and upstate NY), I have problems with importation of Canadian prescription drugs as a partial solution. Prescription drug prices in Canada are lower than in the US for two reasons: one, in contrast to the U.S., Canada regulates the price of patented prescription drugs through the Patented Medicines Prices Review Board (PMPRB) which compares the prices of the drug in other industrialized countries and essentially creates a ceiling price in Canada. Two, single payer provincial health plans use their market clout to negotiate prices with drug manufacturers. It should be noted the PMRB price controls are only on drugs that still have patent protection – the price of generic drugs, by contrast, can be higher in Canada than in the US for certain drugs.

    If large imports of Canadian prescription drugs to the US are allowed, the price in the US may fall on certain drugs, but the rational response of the drug companies will be to resist the price demands of the provinces, or threaten to limit or not to supply certain drugs at all in Canada. I am not suggesting that we should beggar our neighbours at all in the case of drugs – just that the refusal of Congress to regulate drug prices or use Medicare’s buying power in Part D should not be the reason to look to Canada as a safety valve when we have made better public policy choices, and the result may impact very badly on Canadian patients who need affordable prescription drugs too – drug coverage in Canada is generally subsidized only for seniors or private health plans.

  12. skdadl says:

    Gee, you guys, I wasn’t beating up on our Adam, nottattall. I admire him endlessly. But I do think you can see, even in that wise quotation Ishmael provides @ 26, that he lived in faith that there would still be out here, somewhere, citizens not only listening “with great precaution” but also capable of carefully examining “with the most suspicious attention” before adopting anything. In other words, he imagined a citizenry who could still be not only critically intelligent but practically effective.

    Anyone noticed one of those lately?

    • Ishmael says:

      Agreed. Unfortunately, inducing apathy in the citizenry is one of the most effective tactics of the opponents of progressive reform.

    • fatster says:

      Yep. Capitalism (particularly the insidious contemporary variant) has stilled the Invisible Hand which otherwise would have benefitted all. And, as Ishmael says @ 30, it has been quite effective in inducing apathy among the people. Nonetheless, to link to this yet one more time, it appears that only 32% of Americans think the O-Team “health care reform” is a good idea. Go people!

      (Given my upbringing, Ms. skdadl @ 24, I was thinking more in terms of tar and feathers. Did you ever get the chickens you were seeking a while back? You could donate some feathers.)

      • skdadl says:

        Alas, no. My new burgh has big-city envy, so we have all the same silly licensing laws that Toronto does. They won’t let me keep chickens, and they’re even demanding that I buy licences for teh kittehs. Entirely indoor kittehs, too.

  13. bobschacht says:

    At the beginning of this whole process, going back a year, ObamaRhama decided on a Clintonian approach to Health care reform: strike bargains with the biggest companies, to keep their cash pipelines flowing to Dems rather than Reps. They (ObamaRhama) thought they were being real cute in extracting a promise from Big Pharma and the Insurance Company Majors to sit on the sidelines rather than openly opposing the legislation.

    But they seriously underestimated the ability of the Bigs to use proxies. Behind closed doors, the Bigs let the Chamber of Commerce and the Four Horsemen of the Apocolypse (Ben Nelson, Mary Landrieu, Joe Lieberman, and Blanche Lincoln) know what their bidding was, and all blood was drained from the corpse of the Senate bill until it was lifeless and comatose.

    ObamaRhama thought they could contain The Left and Chairman Dean. They were wrong. Dean went along for as far as he could, but when Reid capitulated to Liarman again and again, Dean finally decided he’d had enough. His open defection is a game changer. The ObamaRhama strategy has been mortally wounded. Their decision to listen to Liarman more than Dean has crossed the line.

    I wonder what the 5 “Liberals” of the Gang of Ten are saying now? Jay Rock and Harken are still on board, I think, but Feingold his hedging. The progressive leadership is wilting. They’ve been had, and they know it.

    Bob in AZ

      • fatster says:

        Next time I blow it around here and am facing the prospect of having to don the sackcloth-and-ashes attire, I’ll remember your terrible transgression here and protest loudly. Misspelling something! My word.

  14. readerOfTeaLeaves says:

    if I were a small government conservative one political tactic I would employ would be to start characterizing all initiatives involving government spending as a “bailout.”

    … because I, Matt Yglesias, can’t distinguish between a PUBLIC GOOD like education, and a PRIVATE GOOD, like your shoes (which are made by a PRIVATE company).

    Jeebuz…!
    Sloopy, slipshod thinking and this guy gets paid to be a pundit?!!
    Arghhhhhhh!!

  15. bobschacht says:

    EOH @ 5,

    Perhaps another way of saying this is that efficient markets assume that supply and demand are both elastic. That is, both are free to react to market forces by either participating more, or participating less. But the health care market is very inelastic. For example, if everyone must buy insurance, that is inelasticity to the max. If the insurance companies have to provide insurance to anyone, regardless of health that is inelasticity again. Elasticity also requires competition, not monopolies.

    In other words, elasticity requires choice. The less choice there is, the less elastic the market.

    Bob in AZ

  16. readerOfTeaLeaves says:

    I have not read the bill, and even if I had there are probably sections that I would misinterpret. And it certainly appears that the healthCos and the GOP are taking advantage of people’s confusion in order to tank health care reform. (It’ll just come back bigger, badder, and meaner, but that’s a different topic…)

    But this:

    That’s one of the key problems with the mandate: it violates the entire premise behind our society’s support of profit, and given our market structure, does not provide enough choice in the system to make the market work.

    I would go beyond ‘it doesn’t provide enough choice’…

    IF you assume that markets are primarily created out of ‘information’ (including hype, lies, and fourth-hand-knowledge), then we don’t have a functioning market because we don’t enough information to make good decisions.

    The information is blocked at so many points in the system that it doesn’t function as a ‘market system’ at all.

    But I’d argue that if the US moved to a ‘utilities model’, it wouldn’t need to worry — a reasonably regulated utilities model would also provide more employment in the health care sector, so it would be a double-triple home run.

    (Why Matt Iglesias and Ezra still have trouble distinguishing a PUBLIC GOOD from a PRIVATE good really cheeses me…)

  17. Mauimom says:

    Gosh, Marcy, I love you and your work.

    I’m going right over to contribute to the Marcy Fund. It’s also on my “Christmas list.”

    Happy Holidays.

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