Fun (Facts & Fiction) With Numbers: Health Care Edition

The graph below, courtesy of the Kaiser Family Foundation, is featured in a VOX post purporting to explain why your health bills are gettng larger (all in one chart!).

kff deductiblesThe article focuses on the fact that deductibles have risen so dramatically as a major explanation for why it seems like we’re spending so much more on health care, even as health care expenses have been growing more slowly. There is some truth in the claim, and especially to the argument that people are more careful spending on health care when they have to pay for more of it up front, but there are some serious problems with this chart that can lead one to some pretty wrong conclusions.

First, what the graph doesn’t reflect is that the increase in premiums and the increase in deductibles are not, as the picture would appear, necessarily moving together for the people paying them. These are averages, and averages hide lots of information. Moreover, the graph makes it look like the two are increasing are independent of one another; i.e., that people are paying both 24% more in premiums and 67% more in deductibles since 2010. But that’s not the case. Since the ACA, many employers have moved to high-deductible plans that have lower premiums than the low-deductible plans that were popular pre-2010 (see below). What the graph hides is that people with low-deductible plans have seen higher than 24% increases in premiums while people with high-deductible plans have seen much lower increases in premiums–if not actual reductions in their premiums. What has changed is not necessarily how much people are paying for healthcare, but how they are paying it: in premiums or in deductibles. The graph above fails to show that.

Second, looking more closely at the news release on the Kaiser website, the 67% increase in deductibles is an increase in total deductibles paid–not the increase in the average deductible per employee. It reflects not only any increase in deductibles, but the increase in the number of people who have (higher) deductibles. That’s a pretty sneaky way to inflate the numbers on the graph to make it look like the average person is actually paying that much more. Consider the following two graphs, also from the Kaiser Family Foundation 2015 survey. kff-mkt-share-type kff-premiums The table on the left shows that premiums for high deductible plans (HDHP/SOs) are significantly lower than premiums for other types of policies. The table on the right shows that the market share of HDHP/SO plans has increased tremendously since gaining ground in 2006. In fact, to relate this to the first graph above, participation in HDHP/SO plans almost doubled from 2010 to 2015, meaning that 50 points of the 67% increase in deductibles could be attributable solely to more people choosing high deductible plans, specifically because the premiums are so much lower. And what the Kaiser report doesn’t say is how much employers contribute to the HSA plans that often accompany HDHP/SO plans. For some individuals, switching to the HDHP/SO plan may actually reduce their total out-of-pocket expense for health care. So while the original graph makes it look like everyone is paying more, that is likely not true for many people–and certainly not at the rate the original graph might suggest.

Finally, because the first graph is in percentages, it hides even more information that changes the story. Suppose deductibles had been $500 and increased to $1,000 or even $2,000. That’s would be a 100-300% increase! 300%! But that’s only $1,500. Not that $1,500 is chump change, but compared to the average annual premium of $6,251 (see the left-hand table above), that’s just 24%–ironically, about the total increase in premiums over the past five years. Even if that $500 deductible grew at the 67% shown in the first graph (which we know from #2 that it didn’t), the increase in actual out-of-pocket health care costs would have been $335–not quite the cost of two lattes a week.

Mark Twain is famously quoted as saying (and actually quoting Disraeli), “There are three kinds of lies: lies, damned lies and statistics..”  I’m not saying VOX (or Kaiser) are lying. But be careful when you see things like VOX’s report about some “fantastic new chart.” It’s far too easy to be misled if you don’t think carefully about the numbers being thrown about.

Bonus: If you’re interested in what the research says about the effects of high deductible plans, RAND has a nice summary site with links to additional resources.

Health Insurance Mandate Increases the Federal Deficit….?

A new report by the Congressional Budget Office (CBO) suggests that eliminating the mandate for purchasing health insurance would actually reduce the federal budget deficit by $305 billion. How? Because the estimated additional 14 million people in 2025 who would choose not to be insured would save the government roughly $311 billion on subsidies and health care expenses, while sacrificing $6 billion in revenues from the expected penalties (or taxes, depending on how you follow Chief Justice Roberts’ logic).

Two important observations:

  1. 14 million uninsured people?! Yes…but that would be the expected total to 41 million in 2025 (meaning even with Obamacare as it currently is, the CBO expects 27 million uninsured people anyhow).
  2. Another consequence of eliminating the mandate: insurance premiums for those who DO purchase insurance are estimated to go up another 20% on top of existing expected rate increases. This reflects the free-riding problem that led to the mandate being implemented to begin with: people who have low expected health care expenses (i.e., healthier people) are the very ones most likely NOT to buy insurance. Without the healthier people in the risk pool, the expected cost of caring for those who DO buy insurance goes up, which increases the cost to the insurer–and that cost is going to be passed along to the people who buy the insurance. So without the mandate, the health care costs are covered by the people who value the insurance enough to participate (i.e., the ones who expect to benefit from having it available). The mandate forces healthier people (who expect not to need medical care) to subsidize the cost of care for everyone else by paying more into the risk pool than they expect to get back from it.

You can see the CBO’s preliminary estimates here.

An Economist’s Approach To Buying A Car

Good personal finance skills are not exclusive to economists, but this little piece by Theodore Cangero provides great instruction for thinking through the economics and executing the plan for buying a car.

One part he glosses over is the decision to buy new rather than used. Precisely because cars depreciate rapidly with high mileage (especially the first bunch of miles), the opportunity cost of buying a new car is pretty high relative to buying a (relatively) low-mileage used car. The question is in large part one of risk aversion due to uncertainty about the reliability of a used vs new car, and the availability of information about the car in question (e.g., CarFax reports, maintenance records, model reviews, etc.). If one is going to put lots of miles on a car anyhow (like the author), letting someone else take the depreciation hit for the first bunch of miles may be a better deal…depending on one’s risk attitude over repair costs.

Another factor that he doesn’t touch on is how long one plans to keep the car. If you are one that likes to trade in/up every so many years (as he seems to imply), then the value retention he talks about is more important. If you are one that drives a car until its useful life is nearly over (or if you plan on putting a couple hundred thousand miles on it before selling it, or even handing it down to your future teenage driver), value retention may be less important–though certainly a factor to consider at the margin. That said, value-retention and expected reliability tend to go hand-in-hand. So focusing on expected reliability for long-term use will likely result in choosing a vehicle that tends to hold its value better anyhow.

Despite the quibbles, the article lays out a pretty good approach that might help you make the best car-buying decision you can.

Healthcare in the 21st Century: The Role of Competition

This looks like a very interesting program, if you happen to be in the Seattle area on Sept 18.

Healthcare in the 21st Century: The Role of Competition
Friday, September 18

Seattle University School of Law


Healthcare is the single largest sector of the economy, it is undergoing extensive and controversial reform, and the central goals of reform – universal coverage and cost control – have not yet been achieved. Since the Affordable Care Act relies heavily on private markets to provide health services and health insurance, competition will play a crucial role in reform. Yet, competition policy issues are especially challenging in healthcare, where markets are distorted by the fee-for-service payment system, insurance coverage, and market power. Competition can help correct these distortions, enhancing access and affordability, but it can also threaten the supply of doctors, new drugs, and higher levels of care. The challenge is to develop policies that achieve the right balance of these goals. The symposium will address many of the key current competition issues in healthcare, including Accountable Care Organizations, acquisitions of physician groups by hospitals, reverse-payment settlements, federal negotiation of drug prices, mergers of insurance companies, off-label uses of prescription drugs, the regulatory environment for the healthcare workforce, and market provision of assisted reproduction technologies.

See the conference page for the agenda and registration information.

HT: D. Daniel Sokol

Thursday’s Interesting Reads

A couple of interesting articles came across my screen today.

The first, by Alex Tabarrock over at Marginal Revolution, corrects a popular misconception about the relative bargaining power of workers. He points out the problems (both conceptually and factually) in framing employment issues as “firm versus worker,” which focuses on the threat of worker unemployment. He also shares a nice chart from the St. Louis Federal Reserve illustrating how this perception of employers having control over employment relationships is quite incorrect. One of my favorite lines/points:Buyers don’t compete against sellers, buyers compete against other buyers (and sellers compete against other sellers). See how that’s important in this context.

The second, by Andrew Flowers at FiveThirtyEight Economics, reports on a recent study by Montazerhodjat and Lo (MIT) that argues how the Food and Drug Administration (FDA) should change its one-size-fits-all approach for approving drugs to take into account the opportunity cost of making the wrong decision. This idea isn’t at all new to economists. Currently, the FDA uses the same standard for all drugs, regardless the severity of the consequences of making the wrong decision (in the trade-off between Type 1 and Type 2 errors). Montazerhodjat and Lo’s study (available here) is pretty technical, but Flowers’ piece does a great job of summarizing the economics and the results in a much more lay reader-friendly way.

Happy reading!

Markets, Incentives and a Krugman (et al.) Fail

Pity the poor teenager taking an AP Economics course whose father is an economist. Especially when the local school district has adopted a text that is based on Paul Krugman’s Economics (3rd ed., coauthored with Robin Wells). Even more especially when the father-economist has a fundamental disagreement with much of what Mr. Krugman has become since surrendering his academic credentials for political punditry. Yeah, that’s my lucky kid.

So of course, I had to thumb through the text. I suppose I shouldn’t have been too surprised to find on only the third page of Module 1 a gross error in explaining the trouble with command economies. After explaining the failed history of command economies, the text asserts (p. 3):

At the root cause of the problem with command economies is a lack of incentives, which are rewards or punishments that motivate particular choices.

Where to start? How about with the simple fact that incentives always exist, no matter the type of economy. And there were plenty of incentives in the former Soviet Union (the textbook example of a command economy–literally in this case). I remember the late Nobel Prize-winning economist James Buchanan sharing the story of his visit to Moscow shortly after the fall of the Soviet empire during which he was surprised to learn of a market for burned out light bulbs — because people could use them to steal working light bulbs from their workplaces when they couldn’t get light bulbs in the stores. People responding to incentives. It’s The Basics 101. The problem with command economies is not a lack of incentives–but a lack of incentives that are based on the wants of consumers themselves and a lack of incentives for innovation or efficiency. In short–the absence of the incentives created by a free market economy.

More importantly, the focus on incentives misses the point in a way that has significant implications for what the text goes on to say about economic policy. At the root of the problem with command economies was the lack of information available to decision-makers about the wants and desires of an entire population of individual consumers with different tastes and preferences and about the conditions of scarcity and desires in dispersed local markets across the society’s economy. As F.A. Hayek (another Nobel Prize winner) explained, the fundamental role of markets is to discover and reveal information based on the complex interactions of individuals across product types and geographic space.These interactions result in prices that reflect the relative scarcity and value of goods across society. Those prices create incentives, and those incentives are fundamentally important in guiding individuals to use their resources in ways that innovate, create value, and serve consumers. But the incentives are secondary–derived from the information discovery role of the market that cannot be replicated in a command economy.

Why is this such an important distinction? Because of the way the text goes on to describe the objective of policy making. After (fairly accurately) explaining how prices create incentives, the authors state (p. 3):

In fact, economists tend to be skeptical of any attempt to change people’s behavior that doesn’t change their incentives. For example, a plan that calls on manufacturers to reduce pollution voluntarily probably won’t be effective; a plan that gives them a financial incentive to do so is more likely to succeed.

The implication? All we need to do is create incentives (implicitly, in the form of taxes, fines or subsidies) to create financial incentives for manufacturers (or people) to do what we want them to do. But this line of argument ignores the more fundamental question of determining whether the plan makes social or economic sense in the first place. What is the economic basis for whether we uses fines or subsidies and how large they should be? At what point, if any, would doing nothing be economically more efficient than doing something? By taking away the fundamental information function of the market and jumping immediately to incentives, we skip the whole messy discussion of the information requirements by legislators, bureaucrats and policy makers in coming up with “the plan” to begin with. All we need to do is trust the omniscience and beneficence of policy makers to know what the “right price” is–and to set arbitrarily the incentives to get the outcomes we want. But that’s exactly why command economies fail.

The root problem of a command economy is not that there are no incentives, but that there are socially inefficient incentives. The incentives are socially inefficient because it is impossible for a central authority to know the value individual citizens place not only on existing goods and services, but on the latent value of potential goods and services that can only be discovered by innovation and experimentation–and a central planner cannot think beyond her own imagination in the realm of possibilities. And it’s not only true of Soviet-style planned economies, but of any central decision-making authority–including the US federal government–even in the context of a heavily market-dominated economy.

Note: AP Economics students (and teachers), remember….the correct answer on the test may not be the right answer in reality. Answer the questions from the textbook based on the information in the textbook. But in your real life as a consumer of information and participant in the market place of ideas and politics, be sure to get to the fundamentals rather than the superficial.

We’re From The FCC and We’re Here To Help

“We’re from the government, and we’re here to help.” Yeah, you know that punchline, right?

I saw a report from NPR that FCC Chairman Tom Wheeler had decided to do just that in the dispute between Dish Network and Sinclair Broadcasting. As reported in the Wall Street Journal yesterday, Dish blacked out some 150 local stations owned or operated by Sinclair as a result of their ongoing distribution contract renegotiation dispute. The blackout affects some 5 million consumers in 79 markets.

Enter Chairman Wheeler to the rescue. Per the NPR article,Wheeler stated “We will not stand idly by while millions of consumers in 79 markets across the country are being denied access to local programming.”

Just one problem: Consumers are not being denied access to local stations–particularly to local news, weather and information on their local NBC, ABC, CBS and Fox affiliates. These affiliates are required–by the FCC–to provide free digital broadcasts, meaning consumers are perfectly able to access these stations for relatively modest investments in a digital antenna for their television. Moreover, in most markets Dish is not the sole distributor of paid-access television, meaning consumers also have the option of switching to a different television service provider. Indeed, as reported by both NPR and the WSJ, Dish is already hemorrhaging subscribers in large part due to service interruptions that have come to characterize Dish’s negotiating tactics with local station owners. And no doubt Dish has taken that into account in their negotiation strategy with Sinclair.

Where the FCC should act is in clarifying its rules regarding negotiation rights and station ownership. Two weeks before the blackout, Dish filed a complaint with the FCC regarding Sinclair’s negotiating tactics–which revolve in part around whether Sinclair was the property rights to negotiate on behalf of several stations it operates, but does not own. The FCC issued a rule forbidding such negotiations, but Sinclair alleges their operating agreements were grandfathered in. If the FCC were more clear in its rules and interpretations, perhaps the contracting dispute would have resolved itself already without the need for Chairman Wheeler to mount his white horse and ride to the rescue.