Does Targeting Aid Help Poorer Regions?
Turkey’s experience suggests ‘place-based policies’ can have unintended effects.
Does Targeting Aid Help Poorer Regions?Josh Stunkel
Every month, The Big Question video series brings together Chicago Booth faculty for an in-depth discussion. This is an edited excerpt from January’s episode, in which John H. Cochrane, AQR Capital Management Distinguished Service Professor of Finance; Matthew Gentzkow, Richard O. Ryan Professor of Economics and Neubauer Family Faculty Fellow; and Matthew J. Notowidigdo, Neubauer Family Assistant Professor of Economics, examine health-care provision and reform. The discussion was hosted by Hal Weitzman, Booth’s executive director for intellectual capital.
(light piano music)
Hal Weitzman: It survived dozens of repeal attempts, and serious computer errors, but the Affordable Care Act’s toughest test will come in 2014, when the system actually begins operating and mandates kick in.
Some of the unintended consequences will also start to become clear this year, among them, how the law widely known as Obamacare will affect the labor market. There have been some wild claims about what employers and workers will do in response to the legislation.
But what do the data suggest will actually happen? The ACA supporters say that while the new system is far from perfect, it is better than it was, and argue that it is now settled law. But is there a meaningful alternative that would fulfill the same aims?
Welcome to The Big Question, the monthly video series from Capital Ideas at Chicago Booth. I’m Hal Weitzman, and with me to discuss the issue is an expert panel.
Matthew Gentzkow is the Richard O. Ryan Professor of Economics and the Neubauer Faculty Fellow at Chicago Booth. He’s an expert on empirical industrial organization, political economy, and the media.
John Cochrane is the AQR Capital Management Distinguished Service Professor of Finance at Chicago Booth. He’s a research associate of the National Bureau of Economic Research, a senior fellow of the Hoover Institution, an adjunct scholar of the Cato Institute, and a past president and fellow of the American Finance Association. He blogs as the Grumpy Economist.
And Matthew Notowidigdo is the Neubauer Family Assistant Professor of Economics at Chicago Booth. A former associate at Lehman Brothers, he’s a faculty research fellow at the National Bureau of Economic research, and an expert in labor economics, public finance, and health economics.
Panel, welcome to The Big Question.
Matthew Notowidigdo, let me start with you, ’cause you’re, you’ve actually done research on what the effects of health policy are on the labor market. So tell us about what you found.
Matthew Notowidigdo: Sure, so we studied an unusual reform of the Medicaid program in the state of Tennessee in 2005. What they did is they disenrolled about 170,000 adults from their Medicaid program. So these individuals previously had Medicaid, and now they had no access to health-insurance coverage, and we looked at what happened to them in the labor market. And to our surprise, we found that a lot of them went back to work and found health-insurance coverage through employers, through private employer-sponsored health-insurance plans.
And so our interpretation of that is that there’s a lot, potentially a lot of Americans who are working primarily for health-insurance coverage, and that for some of them, the only way they can get access to that is through employment.
Hal Weitzman: OK, and Medicaid is obviously the, the health program, government sponsored health program—
Matthew Notowidigdo: Yes, that’s right.
Hal Weitzman: For low income Americans.
Matthew Notowidigdo: That’s right.
Hal Weitzman: And so what, tell us how you, what do we learn about that for the Affordable Care Act?
Matthew Notowidigdo: Well, you could think about the Affordable Care Act. I mean, it’s a very complicated bill. It’s mind-numbingly complicated, but one way to think about it is that it breaks the link between employment and health-insurance coverage, and you could think of the Affordable Care Act as being this reform in Tennessee in reverse. What Tennessee did is they disenrolled a lot of individuals.
What one of things the Affordable Care Act is going to do is it’s going to expand Medicaid, the public health-insurance program, to many millions of Americans. And if those Americans were primarily working just for health-insurance coverage, we may expect them to leave the labor market.
Hal Weitzman: And when you say we may expect them to leave the labor market how soon could we see this effect?
Matthew Notowidigdo: Well, that’s a good question. In Tennessee, we saw things happening fairly quickly you know over the course of several months. So you know where I would think where I would expect things to happen fairly quickly would be individuals considering early retirement, that could potentially happen very quickly.
Hal Weitzman: OK, well, John Cochrane, let me bring you in because you’re a high-profile opponent of Obamacare, the Affordable Care Act, but you have said that we need to break this link between employment and health provision.
So doesn’t this research suggest that Obamacare at least does that?
John Cochrane: Not really. So the core of Obamacare is to strengthen the link. It’s the employer mandate. The vast majority of people who have jobs are supposed to get it through their employers, not by a policy that follows them around, which is the alternative I’d like to see.
What it has done is is if you had a job, lose your health insurance and now have a preexisting condition, you can go off on the exchanges, where you’ll discover fairly high deductible policies. And if you move to another state, then you can move to another exchange or Medicare and so forth. So its design is to soften that preexisting conditions problem that was an unintended consequence of employer provided care. But the majority of people are still, it’s basic core is to strengthen the employer provided thing.
Now, what Matt’s researched, it was a good thing. I mean, is this a good thing or a bad thing? Job lock was supposed to be a bad thing. People stuck in a job for their health insurance. Now they could move to get new jobs, and move to new states. Maybe that’s good.
What Matt’s pointing out is that a lot of people may just not work at all. Is it bad for people to work for the health insurance? We have a lot of disincentives for people to work at the lower end of the income scale, and we have a shrinking employment-population ratio. Lots of people just not working. So encouraging lots of people to leave the labor force altogether may not be such a great thing.
Hal Weitzman: Matthew Gentzkow, let me bring you in. Let’s go back to basics. What are we actually trying to do? I mean, I think we can probably all agree that the system that existed was not perfect. Obamacare was a response to that. Where were we trying to go? What are, what are the aims of any health-care reform?
Matthew Gentzkow: Well that’s a, that’s a pretty broad question, but I think one of the things that Matthew’s research shows very clearly is under the current system, people face very different prices for health insurance if they’re working or not working, or for that matter, if they’re working part time or full time, or working for a large employer, or a small employer. And I think almost all economists would agree that that link to employment and health-insurance coverage is probably not a good thing.
There was a poll that we run here through something called the Initiative on Global Markets of economists at top institutions, and I think 90 percent or so agreed that that employer subsidy, employer-provided health insurance, has serious consequences. So I think we’re all on the same page that that is a problem that needs to be fixed. I think Matt’s research highlights how big a problem that can be and, and, I, you know, on that dimension, the thing that we need to achieve is to close that gap between the price you have to pay if you’re working, and the price you have to pay if you’re not working. And I think, you know, somewhat contrary to what John said, I think that is one of the impacts of Obamacare is to reduce that price difference.
Now people who are not working can go buy health insurance on exchanges at a price that should be much lower than what it previously was in those private insurance markets.
Hal Weitzman: And they are free, they are free to, I mean, that they can leave their employer without fear that they won’t have health insurance. Isn’t that the point?
John Cochrane: But let’s come to one big moment of agreement here. The previous system was completely dysfunctional and it needs to be fixed in some way. I think you all, can we agree on that? I think we all agree on that.
And second, just to clarify, you don’t get your car insurance through your employer. You don’t get your life insurance necessarily through your employer. You don’t get your house insurance through your employer. They give you money, and you buy these things, and from any economically sensible point of view, that is the better way for the system to work.
Matt’s right, we’re patching it up so that there people who were kind of kicked out of the employer-based system didn’t face horrible problems. Whether we need to take over all our insurance to fix that is another question.
But there’s a better system, which is it’s something you buy. And I think we’re all . . . that what you’re referring to is economists sort of view this that that’s the better system.
Hal Weitzman: But when we’re talking . . . I just wanna, one more question on the labor market, ’cause you said lots of people leaving their jobs in response to the new health regime isn’t necessarily a good thing.
But Matthew Notowidigdo, doesn’t that mean that people, you know, if people were tied to their employer because they got health insurance, if they could leave suddenly and do something they’ve always dreamed of, they’ll be more fulfilled. Maybe they’ll start their own company or whatever. Couldn’t that be a good thing?
Matthew Notowidigdo: Oh, absolutely. I mean, it’s certainly our interpretation of the results. I mean typically if people voluntarily decide to leave their jobs, we wouldn’t necessarily consider that to be a bad outcome. They might be going to take care of someone else. They could be taking care of children.
Hal Weitzman: Well, the reason I ask is because it sounds terrible. You know, Obamacare willl make people leave their jobs. But actually, there might be a lot of positives of that.
Matthew Notowidigdo: I think that’s right. I think that’s right. I mean you know we want people who are able to be working who face the correct incentives to work to be working, and I think that’s probably where we reach some agreement.
But I think we would feel fine if most people are choosing to leave employment and doing something else that they find very valuable.
John Cochrane: But if people are choosing to leave employment and live on social security, disability, various government programs, and so forth, I think, you know, there’s strong disincentives to work and, you know, one more disincentive to work will have the effect that more and more people are not pursuing their dream. They’re pursuing this uncomfortable life of poverty and living off government programs, which is not desirable.
Hal Weitzman: OK, well John, you advertise your solution ,which is a more private solution. But first I wanna talk about the whole idea of the state getting involved in health care. Is that a good or bad thing?
Matthew Gentzkow, is there a role for the state in providing health care?
Matthew Gentzkow: I think, I think . . . in my view, unquestionably. I think health care, to me, is a fundamentally different market from, you know, airlines or books or other kind of privately provided goods because we as a society and every other developed country in the world have made basically a moral decision that health care is not something that we will let people go without. So in this country, we already mandate that if you are sick, if you are having a baby, if you turn up at a hospital, the hospital is required to treat you.
So we have already made a decision that we will provide health care to all of our citizens, and I think there’s wide agreement that letting people who have serious health conditions not get treatment is not an option.
That means fundamentally the state is involved in this market because they’re mandating that the firms in that market provide care to people if they turn up at the door. And I think that’s where the fundamental difference arises relative to lots of other markets. If we’re gonna do that, we’re essentially providing insurance to all people in this country implicitly, and I think there’s a strong argument for moving that . . . that has all kinds of inefficiencies associated, and there’s a strong argument for moving toward an explicit system of providing insurance to all Americans.
Hal Weitzman: And I suppose the other option is rather than having a completely free market would be to have a completely government controlled market. In many European countries, there’s socialized medicine. Costs are often lower. Life expectancy is often longer than it is in the US.
John Cochrane, I know you support the free-market model, but would the other, the completely socialized model, would that also fulfill some of the aims? The basic aims that we’re trying to—
John Cochrane: You gotta let me respond a little bit to Matt first. The completely free market in health care is a red herring. I mean, we have an enormous amount of government regulation before Obamacare and even more afterward.
And the poor people dying in the street is a red herring. We’re gonna take care of the bottom 10 percent. Poor people, unfortunate people, you know, yes, we’re gonna take care of that.
Now this is about, however, the rest of the 90 percent. Does that mean that the government has to have a big important role in structuring the health insurance that you and me buy? Now, to help poor people falling on the street with heart attacks we don’t . . . that . . . we don’t have to do that. And that’s I think . . . you know, is the state involvement at the bottom 10 percent? Or is it the, you know, 99 percent that it has to be taken over?
And that’s, I think . . . there’s a fundamental disagreement here that health care is not fundamentally a different good. Poor and unfortunate people have trouble paying for it, and mentally incompetent people need help, but for the average middle-class person who buys a house, a cell phone, a car, and the rest of it, health care is an economic transaction. It’s a personal service, and I don’t see why we need huge state involvement in those people’s health care. Not in the hypothetical poor person.
Hal Weitzman: OK, Matthew Gentzkow?
Matthew Gentzkow: Yeah, just, can somebody who is a middle-class. healthy, 25-year-old make the decision: I’m going to choose not to buy health insurance and take the risk that if I subsequently get cancer, if I subsequently develop some very high cost, chronic condition, I just won’t get treatment for that.
That is a decision that people might make, and in a perfectly free market, people would be free to make. And the truth is, even middle-class people, even people with relatively high incomes, I think we still would not . . . we’ve revealed that we’re not willing to let those people deliver their babies at home if they, if they have a baby and can’t afford coverage, or if they get some serious chronic condition. We’re going to provide them treatment.
So I don’t think it’s a red herring, and I don’t think it’s only about the bottom 10 percent. I think it’s a moral decision that we have made as a society, and given that we’ve made that decision, we should try to implement it in the most efficient way possible.
John Cochrane: So I will absolutely agree with you. But what is the amount of regulation we need to solve that problem? Do we need all of the 10,000 pages of ACA regulations to solve that problem? No. We need a much freer market of supply, free entry into it, driving down costs. We need catastrophic insurance, and once we have a completely free market on the supply end and, you know, catastrophic coverage insurance, I’m fine with a mandate that 25-year-olds have—
Hal Weitzman: Just to be clear, John Cochrane, you are saying that the bottom 10 percent as you described them, the safety net is provided by the state in your view?
John Cochrane: We will take . . . we will have a safety net. That’s fine. We don’t have to get into how it gets provided.
Hal Weitzman: Well, btu here’s the church. There’s the state.
John Cochrane: The . . . yes, there’s the church state—
Hal Weitzman: Well, but there’s a difference between if it’s the church or the state. I mean, that’s—
John Cochrane: There’s the church. There’s the state. There’s vouchers. Let’s not get into which cloud of libertarian nirvana we’re going to live on, because we can have a fun discussion about that. It’s just irrelevant. We can go off on that if you want, but how you take care of the bottom 10 percent, we’re gonna take care of the bottom 10 percent. We don’t need to commingle our health insurance with that problem.
Now did you wanna ask a question about socialism?
(all laughing)
Hal Weitzman: Well, I was asking about socialized medicine, which may, whether it’s socialism or not is another question. But yeah, you know, you could imagine it—you can imagine—there are systems that have socialized medicine where the outcomes are actually very good. Costs are lower. Life expectancy is longer.
John Cochrane: Costs are, well, some outcomes. If you, unless you get cancer, and then the outcomes aren’t so good. Yes, there are three systems. There is the free market system, which nobody has. There’s the crony capitalist, highly regulated system, which is what we had before and now have even more. And there’s the government provision system, which is really a two-tier system. It’s, the masses get government provision. Everybody with connections or something goes off into the private hospitals. People like us don’t go to the socialized medicine system in Europe.
And sure, that is, you know that’s another system. Let’s talk about that. You know, we could go that way. Why not, and we could do that in a lot of markets. Let’s get rid of this noisy competition and have one government-run airline. We used to do that. Everyone used to do that. Phone, cell-phone contracts, I mean, who, who can understand a cell-phone contract? Let’s go back to the 1960s government-regulated monopoly and, you know. provide cell-phone contracts.
Transportation, ugh, it’s complicated. Well, you know, let’s go back and have a sole provider.
FedEx, UPS, what’s with all this stuff? Let’s go back to the government-provided post office.
And we can do that. That is a system. We can do that in lots of markets. It’s a measure of how dysfunctional our current system is that there’s even competition with systems like that for the measure of its outcomes. You know, you can tell by my examples what I think of the quality of that system compared to what we could have if we let the same kind of deregulation that in all of those other markets happen happen in health care.
Hal Weitzman: OK, but what about this point about, you know, we assume that everyone should have health care in the sense that we don’t assume everyone should have airline tickets or, or a cell-phone contract.
John Cochrane: Well, housing, you know. We experimented with government-provided housing. That was a mess. Everyone needs housing. Everyone needs food. What do we allow all these grocery stores for? We need government-provided groceries.
Hal Weitzman: But there are food deserts where the people cannot buy food locally, so the food at the Whole Foods etc. is in the nice areas, and there are food deserts in poorer areas where they’re effectively, you know, the access to food is limited.
John Cochrane: And do you think things would be better with a federally provided single-payer food thing? Let’s take over all these, these grocery stores that aren’t serving poor areas. Do you actually think that that would wind up being a better system? It’s not about the wonderful imaginary system. It’s about how those things work in practice.
Hal Weitzman: OK, Matthew Gentzkow?
Matthew Gentzkow: Yeah, I just, I think something I love about John is he, you know, an idealist who’s willing to dream big dreams and think about things that are very distant from the system we currently have, and I think that’s extremely valuable, ’cause it’s very important to have in this debate a vision of, you know, where we might go if we were to kind of start from scratch and build something anew.
But I think the truth is in terms of practical policy, we have to begin with where we are now, and we have to be wary of radical, dramatic changes where we throw everything out.
The history of such radical dramatic changes has not been very good in government policy in general in all kinds of areas. And so, I think you look across the world and there . . . a crucial point is we spend far more on health care in this country than any other developed country. We have worse outcomes for many things, like life expectancy and infant mortality, and slightly better outcomes maybe on certain things like cancer, but overall worse outcomes than almost any other developed country, and I think we have to be . . . take that seriously and say, when we look at the systems that have actually been implemented, the private provision of health care has not succeeded in this country where we’ve allowed it to happen, and a lot of other countries are doing things far short of socialized medicine that are producing better outcomes at lower cost. And so I think we have to at least take seriously the experience of other countries as a model.
Hal Weitzman: John Cochrane, I will give you a chance to talk more about your idea and flesh it out, but Matthew Notowidigdo, let’s, before we go on to that, let’s turn just to this, before we move away from the theory, is health care just like selling airline tickets and mobile phones? What’s your view?
John Cochrane: Well, I think I’m closer to Matt in the sense that we have regulations that require people to be treated at hospitals. Actually, those regulations have not always been in place, so in the mid-1990s Congress passed a law that hospitals had to treat individuals who showed up, regardless of their insurance status, in fact, regardless of their citizenship status. So if you’re an undocumented immigrant, and you show up at a hospital without health insurance, and you have an emergency situation, the hospital is required to treat you. There’s not a lot of research on this, but it gets quite expensive. You know I think that the best estimates are we spend several tens of billions of dollars a year on health care for people who don’t have health insurance, and I think that means that the state has to be involved in regulating the hospitals to provide that health care.
I think that I did hear some agreement here, though, on one certain thing that I’d like to bring up, which is this issue of providing health insurance that’s catastrophic. And I think that’s something that’s really interesting. I think it’s something there’s sort of an emerging consensus among health economists that that’s potentially something we should experiment with. We have tens of millions of people in the United States without health insurance, and I think an interesting question is what kinds of health insurance do they wanna have? And I think it’s quite possible that the answer could look very different than the insurance that’s being offered on the health-insurance exchanges. I think that’s something that’s gonna be really interesting to experiment with going forward.
Hal Weitzman: Right, and John Cochrane, that’s very much part of your view, that insurance is there for the catastrophes, not for everyday, you know, checkups.
John Cochrane: Well, right, in a relatively free market, where you can walk in and buy stuff. I mean, you can’t walk into the hospital with money and buy stuff because it’s been a completely dysfunctional system. But yeah. In the relatively free market, which you need, is you pay for regulation. Your car insurance doesn’t pay for oil changes. Your home insurance doesn’t pay to clean the gutters after, you know, your primary home-insurance specialist says your gutters need cleaning, you wait six weeks, you fill out the forms, you fax in your history, and all that.
Right? For obvious reasons, that’s how we do stuff. It requires competitive suppliers, so that the cash market works on the margin. But then yeah, what the typical person needs is a catastrophic coverage that pays for if you get cancer, if you get something huge, and that gives you the right to always stay in health insurance, so that you’re buying the right to not be in a preexisting conditions problem.
That could be very cheap. I think a lot of people would buy that on their own if it were offered, and I’m not sure we even have to regulate it or mandate it. But, you know, if people weren’t buying it, I’d be happy to regulate it or mandate it.
Matthew Gentzkow: One of the biggest failings of the current system is that the thing that in some sense is an insurance product is the most valuable is when I am a healthy 25-year-old, I would like to sign up for something that says I am insured against the lifetime risk of having terrible health outcomes, terrible chronic conditions, things like this happening to me.
John Cochrane: Yes.
Matthew Gentzkow: And that is a policy that I currently, you currently cannot buy. And so I think we’re in complete agreement that that’s in some sense the fundamental gap in the current system. That’s why we get job lock. That’s why we get people not being willing to change employers. It’s why we get people not willing to become entrepreneurs. All of this is fundamentally about that gap.
Now how do we fill that gap? I think we have kind of two options. One is there might be a role for the state in filling that gap, regulating coverage in a way that ensures that people don’t face that gap.
Or it might be that it could be provided by the private market. I think the interesting thing to notice, the private market has never offered that product. There’s no reason in the current system why it shouldn’t. I would love to buy that product. You would love to buy that product. Like a lot of things, this is something which you would think there should be a lot of demand for, and there are no companies offering it.
John Cochrane: So that’s just factually not true. So, United Health tried to offer it, and it is regulated out of existence. You, right now, under the ACA, if you offer that product you go to jail. I mean, just done. You may not offer that product. But prior to the ACA—
Matthew Gentzkow: Prior to the ACA, it was not regulated out of existence. It didn’t exist.
John Cochrane: Yes it was. Well, so in—
Matthew Gentzkow: With some small exceptions, it didn’t exist in a widespread—
John Cochrane: No, no, it was regulated out of existence. I don’t know how deep you wanna go into the regulations that stop that kind of insurance from coming.
Hal Weitzman: Tell us, tell us briefly.
John Cochrane: Well, employer-provided groups is the first thing that poisoned the well of the system. So you’re 25 and you’re thinking, I’m gonna buy a lifetime product. Oh, but wait a second. By the time I’m 27, I’m gonna have a job, so then it’s gonna be wasted for me to buy my own personal life insurance, what the hell?
Next, it’s state regulation. So if I might move to California, since I can’t take my current insurance to California, buying lifetime insurance is useless.
So there’s just two of 15 different regulations that stop this sort of thing from emerging.
Life insurance has it. If you buy life insurance in the private market, it is guaranteed renewable. It goes with you from state to state. The insurance companies want to sell it. People want to buy it. That happens.
So well at least let’s allow it to happen before we decide we need to do something else.
Hal Weitzman: OK, and tell us about what’s your vision for the checkups, for the regular low-level health care, less-expensive treatment?
John Cochrane: Well, you pay for stuff. But let’s . . . the other problem, the deep problem of why this can’t happen is that the cash market is so dysfunctional. There is no market so regulated as health care. If you wanna be Southwest Airlines or Walmart and come in and say, I have an idea: I’m gonna provide people with cheap, very effective health care, and they pay cash. You just can’t do it.
So you and I can’t walk into the University of Chicago Hospitals and say, we, you know, we want cash, you know. The $500 mandate happens to you. So you need a functional system of health-care delivery that works before you can implement a lot of this stuff.
Hal Weitzman: OK, what about the idea that, isn’t there an assumption here that people know what’s best for them in terms of their health care, you know? You’ve written and said that, you know, if you offer someone a small procedure that will make them feel a bit better, or $1,000—the cost of the procedure—they will take the money in most cases. So how do we deal with that problem?
John Cochrane: Oh boy. So let me first of all, well, I’ll start with the reasonable answer. All systems are comparative. If you think we need government-provided health care ’cause people are just no good at taking care of themselves, do you really think that the government bureaucracy that runs Amtrak and the post office is better at taking care of you than you are yourself?
More deeply, think of what you’ve just said. That’s a . . . it kind of reminded me of a 1780s French aristocrat. Oh, the poor little peasants are no good at taking care of themselves. Us, the great, the magnificent aristocrats must do it for them. I mean, if they can’t take care of themselves, can they really vote? Think of what you’ve just said.
Now, if that’s your motivation, the Affordable Care Act does nothing to solve this problem. If you think we need government-provided health insurance because people are no good at taking care of themselves, the ACA is about money. Let’s give its founders their due.
It’s about getting people into the current, very complicated, dysfunctional system. It’s not about helping them take care of themselves.
The wellness visits. So we’re gonna have wellness visits despite big deductibles. To get a wellness visit, no one’s gonna knock on your door and say Hal, you need a wellness visit. You gotta go find an in-network doctor who’s gonna take you. You gotta sign up, wait six to eight weeks for the appointment, take the day off of work, go to the appointment, you got yout seven minutes with your doctor, ’cause click click click, time’s in, and then you better take the medicines when he tells you, diet and exercise, you better do.
That’s it. That’s what you’re getting. So the idea that this implements some sort of aristocratic noblesse oblige, take care of the peasants—
Matthew Gentzkow: Oh but to be, to be—
John Cochrane: It just doesn’t, that’s not what it’s about.
Matthew Gentzkow: To be fair, I mean, where we started was: What is the rationale for having health insurance that not only covers catastrophic events, but also wellness visits and also prenatal checkups, and also a bunch of other things that you might imagine could be just provided on a cash basis. And I think if you started from the view that people are likely to underinvest in those things, a system that has a price of zero on the margin, forgetting them is gonna lead to more consumption.
So I think it’s perfectly coherent, if that’s where you start from, to argue that in the kind of insurance we’re gonna provide to people, we want that to, among other things, give them low marginal prices for things that have those kinds of benefits.
John Cochrane: Fine, and we don’t need the ACA for that. On-budget voucher: here’s $100 to every American citizen. It’s a voucher. Go take it. Get a wellness visit. Done. I mean, you don’t need this whole structure—
Matthew Gentzkow: But so—
John Cochrane: . . . to subsidize. If you think people aren’t getting enough stuff, and you wanna subsidize it, fine. Send them a voucher. Easy, simple, clear.
Matthew Gentzkow: But I think we’re getting closer and closer. If you agree, so we need to subsidize these parts of health care. You agree we need to have a mandate that covers a broad part of the population—
John Cochrane: Mm, we’ll get there.
Matthew Gentzkow: You agree we want to have, as you said earlier, you agree we want to have health care portable and not tied to employment. You know, the goals are very close to the goals of Obamacare.
Now how do we implement those goals? That’s I think the really difficult question, and, and I agree with you that if we could just throw out the current system and start from scratch, there are a lot of things we would do very differently. But in terms of . . . if we all agree on those goals, and we’re constrained by the political process, we’re constrained by the political reality of what you can and can’t do—getting rid of the employer subsidy turned out in this case to be something that was just off the table. I think then we, you shouldn’t disagree that much that you know this is a step in the direction that we’re trying to go. It’s an imperfect step, but largely due to the constraints that we face as a reality of the political system.
John Cochrane: It’s a step in exactly the wrong direction. One can take steps toward a freer market. You don’t have to throw up the world and put your hope on the free market.
You know, you said no other country allowed competition in telephones ’cause tele, well, we can’t let the market work in telephones, gee, you know, then the crazy Americans tried it, and it worked. No other country allowed competition in TV broadcasting because we can’t let the media be run by the free market. Well, you know, that one turned out to work. No other country ever allowed airlines to compete. Well, you know, we tried that one. It worked. One can move sensibly in the right direction, and this, this moves in the wrong direction, because what it gets rid of is competition. It gets rid of innovation, competition, free entry, everything that’s brought us all the wonderful stuff we have now, it gets rid of, and it just turns it into this crony capitalist, highly regulated, highly controlled barriers to entry. Everyone’s got their deal marketplace.
Hal Weitzma: Just one other thing John Cochrane. To turn from being the aristocrat to the bureaucrat, I wanted to ask you, if we have a lot of new entrants coming in—and let’s not compare this to the current legislation, I’m just asking you about your idea—if we have a lot of new entrants coming in, providing different kinds of health services, wouldn’t that entail more regulation? Now we need to oversee a whole load of new startups that are providing all kinds of, you know, services in different areas. Don’t we need to regulate them? They’re providing health-care services.
John Cochrane: Do you not think that we have regulation of health care and health insurance now? We have—
Hal Weitzman: But in a private market, wouldn’t we see a lot more entrants that would drive the costs down? So there would be more bureaucracies spread around.
John Cochrane: So our current problem is that we have . . . there’s huge barriers to entry. Why does a hospital get away with not posting their prices the way Southwest Airlines is posting their prices? Because you can’t bring a new hospital in and compete. So of course, of course there’s gonna be quality regulation. That’s, you know, the air . . . Southwest Airlines came in and drove all sorts of massive reorganization in the airlines. The FAA still requires pilot’s licenses and, you know, nobody’s . . . we’re not talking about which cloud of libertarian nirvana we go on that we don’t have pilot’s licenses and mechanics who know what they’re doing. We can talk about that over beer some day.
Certainly, you know, minimal quality regulation, of course you have to have that. An effectiveness board that rules on whether a new hospital can come in and is explicitly charged with preserving the profits of the existing hospitals? Not so sure you need that.
Hal Weitzman: OK, Matthew Gentzkow?
Matthew Gentzkow: Yeah, I think, I think it’s, two quick points. First on hospitals and in general how competitive is the market for health-care delivery in this country, say, the market for hospitals, which you characterize as having huge barriers to entry, and crony capitalism and all of this stuff. One of our colleagues, Chad Severson, has a recent paper that looks at productivity dispersion of hospitals, how different is the productivity across different hospitals, which we think of as a pretty good measure in some sense of competitiveness, and also looks at the return, how much extra profit does a hospital get that innovates and cut costs that how much extra profits do they get. On both of those measures, they show that the hospital sector in this country looks very similar to the average, say, manufacturing industry in this country. And that’s consistent with the fact hospitals, unlike some other parts of the health-care system, are, there’s a large share of hospitals in this country that are private. It’s a largely private market.
The other thing I was gonna say is, just, you know, if you look at the US health-care system, as you’ve said, we are already on the extreme of experimenting more than almost any other country with private provision. There are big parts of the US health-care system, like all health insurance for people over 65, which are completely government run. Their health care for veterans is completely government run.
But we have private hospitals. We have privately employed doctors. We have almost completely private or nonprofit health-care delivery, and if you look at the one part of the system that is most completely private and free from government regulation, which is the individual insurance market, that’s in some sense, the most dysfunctional part of the entire system, with the worst performance on a lot of measures.
So I think the evidence doesn’t support the view that small steps in the direction, taking that given a lot of the current constraints and regulations and employer-provided stuff, doesn’t support the view that small steps in the direction of making things more private are gonna move in the direction of the goals that we want.
Hal Weitzman: John Cochrane, just a brief, a brief word now.
John Cochrane: Very brief. The individual insurance market is hardly competitive. It’s very strongly regulated by state regulators, and it’s completely screwed up by this huge elephant in the room of the employer provided.
I thought where you were going is that the free market in US health delivery is plastic surgery, LASIK, and vet care, where you show up with your money, and you get service. You don’t wait six weeks, and it all works pretty well. And I don’t see why we don’t expand that system.
Hal Weitzman: OK, Matthew Notowidigdo, do you think that this at least shows that the Affordable Care Act has provoked an important debate?
Matthew Notowidigdo: For sure.
Hal Weitzman: And this is gonna go on for a long time.
Matthew Notowidigdo: Yeah for sure, I mean I think it’s gonna be interesting to see in the next couple of years, you know, what happens when you have tens of millions of new people coming into the health-care system who haven’t used it before.
I think it’s gonna be interesting to see what happens to their health. It’ll be interesting to see what happens to their financial well-being, you know. Did they spend less out of pocket? Are they less likely to go bankrupt? Are they less likely to have their home foreclosed? You know, I think these are gonna be interesting things to look at going forward.
Hal Weitzman: And I have a feeling we’re gonna be coming back to this subject again, but on that note, our time is up.
My thanks to our panel, Matthew Gentzkow, John Cochrane, and Matthew Notowidigdo. For more research, analysis, and commentary, visit us online at chicagobooth.edu/capideas, and join us again next time for another The Big Question.
Goodbye.
(light piano music)
Gentzkow: In my view, unquestionably. Health care is a fundamentally different market from airlines, books, or other privately provided goods. We as a society have made a moral decision that we will not let people go without health care. In this country, we mandate that if you are sick or are having a baby, if you turn up at a hospital, the hospital is required to treat you. So we have already decided to provide health care to all citizens. Letting people who have serious health conditions not get treatment is not an option. That means fundamentally the state is involved in this market because they’re mandating that firms provide care to people if they turn up at the door. That’s where the fundamental difference arises relative to lots of other markets. We’re providing health insurance to all people in this country implicitly. There’s a strong argument for moving toward an explicit system of providing insurance for all Americans.
Cochrane: The completely free market in health care is a red herring. We had an enormous amount of government regulation before Obamacare and even more afterward. Poor people dying in the street is a red herring. We’re going to take care of the bottom 10%. This is about the other 90%. Does the government have to have a big role in structuring the health insurance that you and I buy? To help poor people falling on the street with heart attacks, we don’t have to do that. There is a fundamental disagreement here. Health care is not a different good. Poor people have trouble paying for it, but for the average, middle-class person who buys a house, a cell phone, or a car, health care is an economic transaction, it’s a personal service, and we don’t need huge state involvement.
Gentzkow: The consensus goes beyond a homeless person in the street having a heart attack or what you describe as the bottom 10%. Can a middle-class, healthy 25-year-old make the decision, “I’m going to choose not to buy health insurance and take the risk that if I subsequently get cancer, I just won’t get treatment for that?” That is a decision that people would be free to make in a free market. But if they get some serious, chronic condition, we’re going to provide treatment. So I don’t think it’s a red herring or only about the bottom 10%. It’s a moral decision that we have made as a society. Given that we’ve made it, we should try and implement it in the most efficient way possible.
Cochrane: I agree with you. But do we need 10,000 pages of regulations to solve that problem? No. We need a much freer market of supply, driving down costs. We need catastrophic insurance. Once we have a completely free market on the supply end and catastrophic coverage insurance, I’m fine with a mandate that 25-year-olds have to buy it.
Cochrane: There are three systems. There is the free-market system, which nobody has; the crony capitalist, highly regulated system, which is what we had before and now have even more; and the government provision system, which is really a two-tier system. The masses get government provision, everybody with connections goes off into the private hospitals. We could go that way in a lot of markets. Let’s have one government-run airline, or a government-regulated telephone monopoly. Everyone needs food. What do we allow all these grocery stores for? Do you think things would be better with a federally provided, single-payer food program that takes over groceries stores that aren’t serving poorer areas—do you actually think that would wind up being a better system? It’s not about the wonderful imaginary system; it’s about how those things work in practice.
Gentzkow: When you say the system you’re advocating is something that no country in the world has ever tried, that’s really important. In terms of practical policy, we have to begin with where we are. We spend far more on health care than any other developed country. We have slightly better outcomes on certain things like cancer, but worse outcomes for many things, like life expectancy and infant mortality. We have to take that seriously. When we look at the systems that have been implemented, the private provision of health care has not succeeded in this country, and a lot of other countries are doing things far short of socialized medicine that are producing better outcomes at lower costs.
Notowidigdo: I did hear some agreement on one thing, this issue of providing catastrophic health insurance. There’s an emerging consensus among health economists that that is something we should experiment with. We have tens of millions of people in the US without health insurance. What kinds of health insurance do they want to have? The answer could look very different than the insurance offered on the health-insurance exchanges.
Cochrane: Right. Your car insurance doesn’t pay for oil changes. Your home insurance doesn’t pay to clean the gutters. What the typical person needs is catastrophic coverage that pays for cancer treatment, and that gives you the right to always stay in health insurance so that you’re buying the right not to have a “preexisting conditions” problem. That could be very cheap. I think a lot of people would buy that on their own if it were offered. I’m not sure we even have to regulate it or mandate it. But if people weren’t buying it, I’d be happy to regulate it or mandate it.
Gentzkow: I agree totally. When I’m a healthy 25-year-old, I would like to sign up for something that says, “I am insured against the lifetime risk of having terrible health outcomes, terrible chronic conditions.” That is a policy that I currently cannot buy.
Cochrane: You pay for stuff. But the deep problem of why this can’t happen is the cash market is so dysfunctional. There is no market so regulated as health care. You can’t walk into a hospital and say, “I want to pay cash.” So you need a functional system of health-care delivery that works before you can implement a lot of this stuff.
Gentzkow: Where we started was: What is the rationale for having health insurance that not only covers catastrophic events, but also a bunch of other things that you might imagine could be provided on a cash basis? If you started from the view that people are likely to underinvest in those things, a system that has a price of zero on the margin for getting them is going to lead to more consumption. It’s perfectly coherent to argue that in the kind of insurance we’re going to provide to people, we want that to give them low, marginal prices for things that have those kinds of benefits.
Cochrane: We don’t need Obamacare for that. If you think people aren’t getting enough stuff and you want to subsidize it, send them a voucher.
Gentzkow: I think we’re getting closer and closer. You agree we need to subsidize these parts of health care. You agree we need to have a mandate that covers a broad part of the population. You agree we want to have health care portable and not tied to employment. The goals are very close to the goals of Obamacare. How do we implement those goals? That’s the difficult question. I agree that if we can start from scratch, there are a lot of things we would do differently. If we agree on those goals and we’re constrained by the political process, you shouldn’t disagree that this is a step in the right direction—an imperfect step, but largely due to the constraints we face.
Cochrane: It’s a step in exactly the wrong direction. It gets rid of competition, innovation, free entry, and it just turns it into this crony capitalist, highly regulated, highly controlled, barriers-to-entry system.
Notowidigdo: For sure. It’s going to be interesting to see in the next couple of years what happens when you have tens of millions of new people coming into the health-care system who haven’t used it before, what happens to their health and their financial well-being.
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