Morality and economics

Economist Steven Pearlstein has published an article in the Washington Post entitled “Is capitalism moral?”  It’s balanced and nuanced, giving the views of both conservative apologists for capitalism and its liberal critics.  I’ll give you a sampling after the jump and then raise some additional issues of my own. [Read more...]

From risk-taking to risk-averse

Economics columnist Robert J. Samuelson says that the reason economic recovery is so slow in coming and the unemployment rate so high is a shift in the national psychology:

We have gone from being an expansive, risk-taking society to a skittish, risk-averse one. [Read more...]

Medicare, the free market, and a drug that doesn’t work

This story will make you discouraged about BOTH the government AND the free market when it comes to healthcare.  Peter Whoriskey reports:

The U.S. health-care system is vastly overspending for a single anemia drug because Medicare overestimates its use by hundreds of millions of dollars a year, according to an analysis of federal data. The overpayment to hospitals and clinics arises because Medicare reimburses them based on estimates rather than the actual use of the drug.

The government for years has tried to rein in spending on the prescription drug, Epogen, which had ranked some years as the most expensive drug to taxpayers through the Medicare system.

Medicare’s current estimates are based on Epogen usage in 2007 for dialysis treatments. But since then, use of the drug has fallen 25 percent or more, partly because of Food and Drug Administration warnings about its perils and partly because Congress removed the financial incentives for clinics and hospitals to prescribe the drug. Because Medicare continues to reimburse health-care providers as if the dosing levels haven’t changed, the significant savings in doses has not translated into savings for the U.S. Treasury.

The amount of the overspending is more than $400 million annually, according to calculations done separately by The Washington Post and experts.

“I think we probably left money on the table,” said Rep. Pete Stark (D-Calif.), a critic of the way the drug had been used who helped shepherd through legislation that removed the financial incentives for bigger doses beginning in 2011.

The overpayment for Epogen reflects both the promise and difficulty of large-scale government reform of health-care spending.

For years, Epogen was one of a trio of anemia drugs — all manufactured by Amgen, a California biotech firm — that cost Medicare as much as $3 billion annually. Overall U.S. sales of the drugs exceeded $8 billion.

Nearly two decades after the drugs were first approved in 1989, their purported benefits were found to be overstated, and the FDA issued a series of stern warnings about their potentially deadly side effects, such as cancer and heart attacks.

At least some of their popularity stemmed from the fact that hospitals and clinics made lots of money using them: The spread between what they paid for a dose and what Medicare paid them to administer one reached as high as 30 percent, according to the Medicare Payment Advisory Commission.

The incentives drove up usage. By 2007, about 80 percent of dialysis patients were getting the drugs at levels beyond what the FDA now targets as safe.

Congress pushed Medicare to revise its payment system to remove the incentives for larger doses. Under the new system for dialysis patients, Medicare pays a set fee for a bundle of dialysis services and drugs.

via Medicare overspending on anemia drug – The Washington Post.

So Medicare reimbursed based on ESTIMATES rather than actual usage?  And hospitals and doctors prescribed the drugs so much in part because “they could make so much money using them”?

Of course, the reason the drugs were so lucrative is because Medicare paid so much for them, so it’s the unholy alliance between the government and the private sector–which is at the heart of Obamacare– that is to blame.  Still, this dashes further the assumption that our medical treatment is always based on objective considerations of patient care.

Are business practices that work in other profit-making enterprises fitting for health care?  For example, why are all of these prescription drugs being advertised on television?  Are patients now “consumers” who are expected to demand certain medicines from their physicians, in which case, what happens to objective determinations in the practice of medicine?  Or are the physicians the target of these marketing campaigns, in which case, again, what happens to objective determinations in the practice of medicine?

Health care and “broken markets”

Here is a different argument for the mandatory insurance requirement in Obamacare from Donna Dubinsky:

The private insurance market does not function as a normal market. If you are not employed and you want to purchase insurance in the private market, you cannot unilaterally decide to do so. An insurer has to accept you as a customer. And quite often, they don’t. Insurers prefer group plans, with lots of people enrolled to spread the risk. Can you blame them? The individual consumer is a lot of work, is a higher risk and produces relatively little revenue.

The Government Accountability Office studied this problem last year and found a range of denial rates that vary by state and by insurer. On average, 19 percent of applications nationwide are denied. One-quarter of insurers denied more than 40 percent of the applications they considered. These denials are not limited to deadly illnesses but include many minor reasons. Expect to be denied if you have asthma, if you take just about any prescription medication, if you are more than 15 percent overweight. Expect to be denied if a doctor has recommended any procedure for you, no matter how insignificant. Basically, expect to be denied.

I’m astonished that this information was not laid out in oral argument and that no questions were asked about it. I believe that lawyers on both sides of this argument, and the justices hearing the case, have always been employed and always been covered by employer-provided health insurance. Perhaps it simply does not occur to them that if they were to try to purchase insurance, they might not be able to.

The justices repeatedly asked: If the government can require you to purchase insurance, what else could it require you to do? What are the limiting conditions to this breadth of control?

The government muffed its response. To me, the answer is obvious. There are two simple limiting conditions, both of which must be present: (1) it must be a service or product that everybody must have at some point in their lives and (2) the market for that service or product does not function, meaning that sellers turn away buyers. In other words, you need something, but you may not be able to buy it.

Let’s test the examples presented to the high court: Can the government force you to eat broccoli? This proposition fails on both counts. Nobody must eat broccoli during their lives, and the market for broccoli is normal. If you want broccoli, go buy it. Nothing stops you.

Can the government force you to join a health club? Again, double failure. You don’t need to join a health club. Maybe you should, but you don’t have to. And, if you want to join one, plenty of clubs would be happy to admit you. Indeed, can you imagine a health club turning people down because they are too fat, the way insurers turn people down because they are too sick?

How about burial services? While this example passes the first condition — it is a service that everybody will need — it fails the second. There is a clearly functioning market for burial services. If you want to purchase a burial or a cremation, no seller of those services will turn you away.

The health insurance market meets both criteria. Everybody will need health services at some point. And as long as the United States doesn’t provide national health care, the only reasonable method for most people to pay for those services is through insurance. But here, the market simply does not work. Sellers of health insurance turn away purchasers, and in great numbers.

Although the Affordable Care Act is huge and enormously complex, the point of the legislation is straightforward. It aims to fix the market for health insurance by prohibiting sellers of the service from declining buyers. Why did Congress not pass a simple law just requiring insurance companies to accept all applications? Because such a law would not repair the market and would probably make it worse. With only sick people seeking insurance — because healthy people would wait until they got sick, knowing that insurance was guaranteed — coverage would become overwhelmingly expensive and impossible for most Americans to afford.

The only answer is to expand the pool and spread the risk, which lets insurers have a rational business model. Short of government-provided health services or a government-sponsored national insurance plan, the Affordable Care Act is the next best shot at fixing this broken market.

via The case for Obamacare – The Washington Post.

Could you answer this argument for Obamacare?

Who are the 1%?

Who are those 1% of the wealthiest Americans who allegedly are oppressing the rest of us? From Robert Samuelson:

In a study, economists Jon Bakija, Bradley Heim and Adam Cole break down the top 1 percent as follows: executives in nonfinancial companies, 30 percent; doctors, 14 percent; professionals in finance (banks, hedge funds, pension funds), 13 percent; lawyers, 8 percent; computer experts and engineers, 4 percent; sales workers, 4 percent; sports, entertainment and media stars, 2 percent. The rest include farmers, management consultants, real estate developers and scientists.

Also, it turns out that the membership in that group keeps changing.  From John Q. Wilson:

The “rich” in America are not a monolithic, unchanging class. A study by Thomas A. Garrett, economist at the Federal Reserve Bank of St. Louis, found that less than half of people in the top 1 percent in 1996 were still there in 2005. Such mobility is hardly surprising: A business school student, for instance, may have little money and high debts, but nine years later he or she could be earning a big Wall Street salary and bonus.

Mobility is not limited to the top-earning households. A study by economists at the Federal Reserve Bank of Minneapolis found that nearly half of the families in the lowest fifth of income earners in 2001 had moved up within six years. Over the same period, more than a third of those in the highest fifth of income-earners had moved down. Certainly, there are people such as Warren Buffett and Bill Gates who are ensconced in the top tier, but far more common are people who are rich for short periods.

via Angry about inequality? Don’t blame the rich. – The Washington Post.

This isn’t to feel sorry for them.  Can we tax these people to end the deficit and fund all kinds of  wonderful things as the president and other Democrats are advocating with the so-called “Buffett tax”?  More from Samuelson (who favors the tax):

In September, the Congressional Budget Office estimated the 10-year deficit at $8.5 trillion. The nonpartisan Tax Foundation estimates that a Buffett Tax might now raise $40 billion annually. Citizens for Tax Justice, a liberal group, estimates $50 billion. With economic growth, the 10-year total might optimistically be $600 billion to $700 billion. It would be a tiny help; that’s all.

The commodities bubble

Economics columnist Steven Pearlstein describes how high finance is distorting the commodities market and warns that speculation and “financialization” is blowing up a big bubble:

Silly you.

You actually thought companies existed to make products and profits.

You thought houses were meant to provide a place for people to live and office buildings a place for people to work.

You thought food was meant to be eaten, oil and gas to be turned into energy, and metals to be turned into cars, bridges and downspouts.

You weren’t sophisticated enough to realize that these really are just different “asset classes” meant to give investors around the world something to speculate in and to diversify their portfolios.

Even worse, you actually believed all that stuff about prices being set based on market fundamentals. Little did you know that it’s no longer the supply and demand for companies, houses, office buildings, natural gas or wheat that sets prices. More likely it’s the supply and demand for the futures, swaps and other derivative instruments linked to those things.

Maybe they thought we wouldn’t notice that the financialization of the economy brought with it higher prices and a more volatile economy, along with higher profits for the financial services industry.

The latest example is the market for commodities: corn, wheat, cotton, silver, copper, oil, natural gas. In the past decade, hundreds of billions of dollars have flooded into the market, largely through swaps contracts and commodities index funds, ETFs and mutual funds.

These markets have long since outgrown their original function of providing producers and consumers of these commodities with a way to hedge their risks by guaranteeing supply and locking in prices. All futures markets require a certain number of “speculators” to take the other side of the contracts from commercial users and producers. Typically, these speculators would represent 30 percent of the participants in a healthy futures market.

But today, because of a sudden desire to earn higher returns and diversify investment portfolios, there are more people wanting to invest in corn and copper and oil than there is corn and copper and natural gas produced and consumed. But no problem. The financial wizards on Wall Street have magically conjured up synthetic corn and copper and West Texas oil so that speculators can provide hedging opportunities for other speculators. Instead of 30 percent of the market, these “passive investors” typically account for 70 percent or more. . . .

What’s clear from this tale is how little the financial services industry has really changed since the crisis of 2008. The financialization of the economy continues undeterred, creating a bubble in commodities just as it did with houses and office buildings.

via Steven Pearlstein: You bet it’s another bubble – The Washington Post.

Does this kind of speculation serve an economic purpose?  Is it just an example of free market economics?  Or does it actually distort and thwart the free market?


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