Simple Solutions and Simple Care just became more expensive in New Mexico; and complicated care just became less expensive. Of course, the growing cost of additional administrative burdens may more than offset the gross receipts tax advantage enjoyed by complicated care.
According to my calculations, a health care provider now accepting straightforward fee-for-service billing will effectively be taxed on her income at a rate that is 10 to 14 percentage points higher than for an equivalent “managed care” provider. I have created an Excel Spreadsheet that will give you more precise estimates of the difference. Let me know if you would like a copy.
To break even net of tax, a fee-for-service provider must charge roughly 25 percent more (for the same procedure) than a managed care provider.
See my previous post on how well health care turns out when we keep it simple and allow markets to function without government controls.
A friend of mine recently recounted a debate he had with a liberal on libertarianism. His counterpart claimed that in a libertarian world, the FDA would not exist and we would all die of a terrible disease. Sound familiar?
This is a common argument. It has many flaws. I think we can all agree that under laissez-faire, as under any system, some people will do bad things some of the time. Some producers will try to dilute their medicines, take short-cuts in production processes, etc. The question is whether the government is better at policing bad activity than the market. A priori, there is no reason to think that it is. There are several ways that markets police themselves:
1. Reputation. Once people discover that a product is bad, it does not take long for profits to nose-dive. Firms can either: (a) cut corners now, earn high profits in the short term and nothing in the long term, or (b) make their products as diligently as possible and earn a long stream of moderate profits for years to come. The second strategy is almost always more profitable.
2. Asset markets. Stock prices do not just take account of current business conditions, they actually account for a firm’s prospects of long-run performance. What’s more, these markets react instantaneously to news, so stock prices immediately reflect new information the instant it hits. People who claim that businesses have an incentive to cut corners in the short run don’t understand that these asset markets take advantage of the best information available about the future. If a share price does not reflect the actual long-run health of a firm, people can make money by buying or selling shares until the value is accurate.
3. Competition. Rival companies have an incredibly strong incentive to find flaws in their competitor’s products and vociferously publicize them.
4. Information markets. If an industry is not good at policing itself, this provides an opportunity for others to make a profit in the “information industry.” This includes consumer magazines like Consumer Reports or buyer’s services like those that millions use when they buy cars. There is no reason to believe that these wouldn’t pop up if the FDA were eliminated.
What are the FDA’s incentives to police accurately and thoroughly?
1. Reputation? The FDA already has a bad reputation. They certify drugs that are unsafe and keep other, life-saving drugs off the shelf. Their profits are unaffected by this. If you try to stop ‘shopping’ at the FDA, the IRS will bang on your door and arrest you.
2. Competition? There is only one game in town. The FDA has no rivals looking over its shoulder.
3. Asset markets? Fat chance. Unlike stock owners, regulators and politicos have no incentive to look past the next election. Political institutions ensure that almost no one thinks about the long term (witness the impending Social Security crisis).
4. Information markets? The public is notoriously misinformed about political realities. This is because it costs money, time and effort to make oneself informed and unlike in private interactions, it just doesn’t pay off to be informed about politics. The chance that any one vote is decisive is about 1 in 60,000,000 (that was the actual probability going into 2004) so this gives voters little incentive to do their homework and learn whether the regulators are doing their jobs well.
People often assume that economists denigrate regulations because we fear that it hurts business. Actually, the opposite is true. The problem with regulation is not that it hurts business, but that it hurts consumers (it tends to enrich politically powerful business leaders). Regulations like those promulgated by the FDA raise the price of goods. They also raise the cost of doing business so that fewer firms enter the business in the first place. This grants a de-facto monopoly position to those firms already in. This is why, historically, producer groups and not consumers are usually the chief constituencies pushing for regulations!
In some cases, regulatory bodies flat out set monopoly rates. This is what happened in the case of the very first federal regulatory body, the Interstate Commerce Commission. It was instituted to keep railroad rates low. Within a very short time, railway barons were using the Commission to raise rates not lower them. Before the Commission, barons had tried unsuccessfully for years to establish monopoly cartels, but the cartels would always break down. With the Commission setting prices by law, government effectively established a cartel that was unsustainable under laissez-faire.
All of this is to say that I seriously doubt we will all die of a horrible disease were the FDA to be abolished.
David Friedman asks the following question:
“Assuming that airline passengers will soon be allowed to use their cellphones mid-flight, is it ethical not to wrench a phone from a loud talker’s hand and twist the earpiece off the phone, thus rendering our offensive communicator phoneless?”
It will be interesting to observe what etiquette and/or rules emerge voluntarily. Maybe we will soon see “talking” and “nontalking” sections on airplanes. Of course, if a cong gets personally offended (as is likely) airlines may be coerced into enforcing the cong’s rules.
Leave it to Venezuela. This (subscription required) makes the wishful thinking of New Mexico’s social and economic development schemes look small. Any bets as to the success of Venezuela’s new utopian cooperatives?
Here is a sample of what Hugo Chávez is trying to do:
“To accomplish that goal, the Chávez government is plowing billions of dollars into new programs, called “missions,” which act as social welfare agencies. Mostly financed by the PDVSA and run by a hodgepodge of bureaucratic offices, the missions are largely devoted to health-care education and jobs training. They exist as a sort of parallel government and are controlled by Mr. Chávez. The missions provide hundreds of thousands of Venezuelans with monthly stipends to learn everything from reading and writing to setting up cooperative farms. Mr. Chávez plans to combine the dozen or so existing missions into a megaproject dubbed “Mision Cristo,” or Christ’s Mission, which he proclaims will end poverty in Venezuela by 2021.”
This is bad news for Venezuela, bad news for Latin America and bad news for New Mexico.
Congratulations to the Rio Grande Foundation’s Micha Gisser. His excellent letter to the editor regarding health policy was published yesterday in the Wall Street Journal. Here is a portion:
“The economic problem lies in the fact that traditional medical insurance covers two dissimilar events, catastrophic and minor illnesses. Consumers’ demand for catastrophic medical incidents is inelastic: a consumer will not use more of the heart-surgeon’s services just because his out-of-pocket spending is zero. Consumers’ demand for care for minor illnesses is elastic: it is inversely related to price. At the true high price a consumer would consult the medical encyclopedia and use over-the-counter drugs. At a low price (zero if her insurance pays the entire cost) a person would consume much more freely, mainly by making appointments with her doctor for every sniffle and headache. The problem with the prevailing health insurance is that the third-party payment of health-care bills insulates the consumers from the real costs of medical care services for non-catastrophic incidents.”
For the entire letter, click here (subscription required).
Nice job, Micha!
Look who dropped into our Toastmasters meeting Tuesday evening!
No shopping mall Santa, he proceded to distribute gifts purchased by each of our generous members. Reality based as it was, we all felt like kids again.
He left these parting words of wisdom: “It’s too bad New Mexico cannot be reality based. We still have too many grownups who believe in the tooth fairy.”
A few years ago I conducted a national study of private prison costs. The results were published in two papers, one written for the Foundation and the other for the Maryland Public Policy Institute. The editor of an important book on the subject and a professor of my acquaintance at George Mason recently received a letter from an expert on the subject–a prisoner. Read it here.
We at the Foundation are saddened to learn of the death of our good friend, supporter and champion of liberty.
Leland and his family moved to New Mexico from Midland,
TX around 1960. He had been a wildcatter in the Permian
Basin, an activity in which George H.W. Bush had also been
active, and they were (and remained) close friends. In
fact, Leland gave George W. Bush his first ride in a small
He was a first-rate businessman, and a valued director in a
number of New Mexico companies. He was also a wise
investor in real estate, owning outright or with others
in partnership perhaps 25,000 acres of undeveloped land
on the outskirts of Santa Fe. One such investment, Rancho
Viejo, is now home to Santa Fe Community College as the
result of an outright donation of its campus lands by Leland
and his partners. The Institute of American Indian Arts and
a large Catholic church have similarly located on land donated
by the Rancho Viejo Partnership.
Leland was also a founder of Santa Fe Preparatory School,
the premier independent school (grades 7-12) in Santa Fe,
and involved in a major way assisting establishment of
the Santa Fe campus of St. John’s College.
His widow is Evaline (nee Rife), and they have five grown
children. Three are married daughters with children who
live out-of-state. One is a son, Warren, who is married
with (I believe) two sons, is now chairman of the Santa Fe
Preparatory School board and is respected in the Santa Fe
business community. Another son lives in Taos.