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I've got the DVR all set for today's Republican candidates debate. John Harwood of CNBC and the Wall Street Journal has his preview here. As this debate is about the economy, he is looking for three big issues: taxes, spending, and trade.

I don't blog much about trade. I'm a free trader. Economic exchange by mutual consent is one of the things that ties the world together in a positive way. In the absence of some identifiable non-pecuniary externality, Republicans have no business restricting free trade.

I've gone off on the Republicans for their budget policy a number of times. (Here's a good one.) If any of these candidates are going to sway me on budget policy, they are going to have to do two things. First, do not say that tax cuts pay for themselves. Second, say that you are going to balance the budget without reference to a Constitutional amendment. And I'll have to believe them. That's a tall order, given what we've seen so far.

But the most important issues of budget policy are going to come in the form of budget priorities. I hope they all get asked the question of SCHIP funding vs. war funding. That will tell us something about their leadership potential. For very good commentary, see this post at SnowDahlia.

I don't know which of the following statements is more surprising. From the AP:

A 35-year-old Canadian woman has given birth to rare identical quadruplets, officials at a Great Falls hospital said Thursday. Karen Jepp of Calgary, Alberta, delivered Autumn, Brooke, Calissa and Dahlia by Caesarian section Sunday afternoon at Benefis Healthcare, said Amy Astin, the hospital's director of community and government relations.

The four girls were breathing without ventilators and listed in good condition Thursday, she said.

Wonderful. And this part:

The Jepps drove 325 miles to Great Falls for the births because hospitals in Calgary were at capacity, Key said.

"The difficulty is that Calgary continues to grow at such a rapid rate. ... The population has increased a lot faster than the number of hospital beds," he said.

For those of you unclear on the geography, their trip looked something like this and would take about five hours at the posted speed limits. About halfway through the trip, they would pass through Lethbridge, which is home to Chinook Regional Hospital, which claims to offer a "high level neonatal intensive care unit." Not good enough? No beds there either? When they were in Lethbridge, they were about an hour away from Medicine Hat, home to this fine institution and its NICU, or two and a half hours plus a border crossing away from Great Falls. They chose the latter.

UPDATE (8/20): At the prompting of a commenter, I found that the doctor's statement about them driving the 325 miles is incorrect, and so too is my travelogue in the last paragraph of the original post (now italicized). Here is a report from the BBC that explains:

A medical team and space for the babies had been organised for the Jepp family at the Foothills Medical Centre in Calgary but several other babies were born unexpectedly early, filling the neonatal intensive care unit.

Health officials said they checked every other neonatal intensive care unit in Canada but none had space.

The Jepps, a nurse and a respiratory technician were flown 500km (310 miles) to the Montana hospital, the closest in the US, where the quadruplets were born on Sunday.

My apologies for the hasty and incorrect post, though this notion that "every other neonatal intensive care unit in Canada" had no space is more of an indictment of the system than my original remarks.

If I had to come up with the basis of a plan to achieve universal health insurance coverage, here is what it would be:

1) All people under age 65 would be presumed to be enrolled in Medicaid unless they show on their tax return that they have coverage elsewhere. Premiums for Medicaid coverage would start out at zero for those with the lowest incomes and increase with income to some multiple of the poverty level, after which the premium is high enough so that there is no taxpayer subsidy. The premium is collected on the annual tax form. That's universal health insurance as a base.

2) On a state-by-state basis, all people under age 65 would have the opportunity to enroll in the plan that is offered to state employees. It is not clear whether this would increase or decrease per-participant costs in the plan. Higher per-participant costs would have to be made up by the taxpayers. The purpose of this buy-in option is to give middle class workers access to a more generous plan than Medicaid if they pay (most or all of) the additional costs.

3) Those nearing age 65 (say 55 - 64) would be able to buy into Medicare (Parts A, B, and D together). This is reminiscent of the Clinton Administration's plan. However, the premiums would be set so that there is no taxpayer subsidy (not even for Parts B & D).

4) As a matter of law, private insurance contracts would not be permitted to discriminate based on pre-existing conditions.

5) Employers who sponsor a health insurance plan would have to offer the plan to all workers.

6) Premiums paid to all of these options would have the same tax treatment (preferably modified as I have previously discussed).

I think that the virtues of this plan are that it achieves the objective of universal coverage with minimal external funding and without eliminating choice and thus the possiblity that competition could lead to better outcomes for consumers. I expect the private group and individual markets to shrink but not to disappear. It's also a bit simpler than other plans that have been proposed.

It was a fantastic weekend in Grand Rapids for the annual Great Strides walk for Cystic Fibrosis. Here's a picture of Ally's Allies. Allison is sitting on her grandmother's lap near the middle, next to her parents, all with purple shirts on. The picture was taken at the conclusion of the walk, in Calder Plaza. My son and I are on the upper right. My wife and daughter are on the upper left.

I would like to say a heartfelt "thank you" to everyone who contributed through this appeal. I'll keep the link to Allison's page and Cystic Fibrosis in the sidebar, for those of you who are interested in how she's doing and in how the treatment of this disease is improving.

In what is now an annual event in the Samwick household, the four of us make a trip to Grand Rapids, Michigan, to participate in the Great Strides walk for Cystic Fibrosis. CF is a devastating genetic disease that affects tens of thousands of children and young adults in the United States. Research and care supported by the Cystic Fibrosis Foundation are making a huge difference in extending the quality of life for those with CF. Those of you who conduct or follow the health outcomes literature, or who are curious about how to improve medical treatment in this country, will find this article in The New Yorker from 2004 to be of interest as well.

We walk for the Woodhouse family, dear friends whose daughter Allison has battled this disease every day since birth (and even before). We've learned a lot about courage from her story. If you would like to support us in our efforts to raise money to help children and families like them, then please make a pledge here.

Robert Pear writes in today's New York Times that "Citizens Who Lack Papers Lose Medicaid." His opening paragraph:

A new federal rule intended to keep illegal immigrants from receiving Medicaid has instead shut out tens of thousands of United States citizens who have had difficulty complying with requirements to show birth certificates and other documents proving their citizenship, state officials say.

I'm going to comment first on the policy and then on the reporting. I think it is crazy that the rule was implemented without a provision that presumed that all children were citizens until a fairly long window elapsed during which their parents or guardians could formally establish their status. Pre-natal care should always be included, for the same reasons. There's no reason why the rule has to have the sort of impact during its phase-in period that Pear's subsequent report documents. Say what you like about illegal immigration, Medicaid, or poverty--none of them are the fault of these kids.

Now go back to how Pear wrote that sentence. I don't think his reporting justifies the use of the word "instead" in that sentence. To do so requires him to show that the policy is not making illegal immigrants ineligible for Medicaid. He has not done that. Here are three excerpts from the article that come closest:

“The largest adverse effect of this policy has been on people who are American citizens,” said Kevin W. Concannon, director of the Department of Human Services in Iowa, where the number of Medicaid recipients dropped by 5,700 in the second half of 2006, to 92,880, after rising for five years. “We have not turned up many undocumented immigrants receiving Medicaid in Waterloo, Dubuque or anywhere else in Iowa,” Mr. Concannon said.

[...]

“We’ve seen an increase in the number of people who don’t qualify for Medicaid because they cannot produce proof of citizenship,” said Albert A. Zimmerman, a spokesman for the Florida Department of Children and Families. “Nearly all of these people are American citizens.”

[...]

Wisconsin keeps detailed records listing reasons for the denial or termination of benefits. “From August 2006 to February of this year, we terminated benefits for an average of 868 people a month for failure to document citizenship or identity,” said James D. Jones, the eligibility director of the Medicaid program in Wisconsin. “More than 600 of those actions were for failure to prove identity.” In the same period, Mr. Jones said, the state denied an average of 1,758 applications a month for failure to document citizenship or identity. In 1,100 of those cases, applicants did not provide acceptable proof of identity.

The last one simply shows the policy is having an effect. It does not identify whether the effect is the intended or (presumably) unintended effect. In the first two, claims are made that the effect is largest among the largest population of Medicaid recipients. The effect may even be disproportionately large among the citizen group. But there is no evidence that it is confined to that group. There is no information in the article about California or Texas or even the paper's home state of New York, where we would expect the largest populations of illegal immigrants to be applying.

The fact that a rule is having unintended consequences does not by itself mean that it is not also having its intended consequences.

Tyler Cowen of Marginal Revolution weighs in with a very thoughtful post challenging the notion that it is adverse selection, driven by informational asymmetries, that plagues the health insurance market:

To be sure, this is a real point but it is not adverse selection. Adverse selection requires asymmetric information, namely that I know more about my brain tumor than does my potential insurance company. The more likely problem is that the tumor is common knowledge, or would be if I applied for insurance, and the company won't sell a policy for any price cheaper than the costs of treatment. There is no asymmetry of information, rather insurance simply is no longer possible. In the limiting case, imagine that a predictor-demon could forecast your lifetime medical expenditures with certainty, and then blog them by your social security number. Such a person, no matter how healthy, couldn't buy insurance either.

Scream all you want, but that is not inefficient per se (don't complain in the comments about the limits of the efficiency concept, and the cruelness of economists, I'm already on that one, scroll down to #7 under "microeconomics", alternatively you might make a complicated Rawlsian argument.) Covering these people, by the use of government policy, is a transfer, not an efficiency improvement, with an added caveat for imperfect capital markets.

Defenders of the adverse selection argument in reality believe the following: if someone is going to face death, or a very bad medical outcome, and can't buy their way out of it, government should put up the money, at least within limits.

Maybe yes, maybe no, but now we are comparing competing investments and which will bring the greatest utilitarian good and the greatest moral good. I'm far from convinced health care access wins that race or even comes in second.

Why does this matter? Because if it's adverse selection, that leads very quickly to a policy argument for a mandate on coverage and, in this market, a single payer system. Not so fast, say the bloggers at MR, and I think they are right.

Via the Economic Research Initiative on the Uninsured (ERIU), here is an interview with Professor Jon Gruber of MIT, who played a key role in the recent Massachusetts health insurance reform. Here's his assessment of the recent proposal by the Administration (with my emphasis added):

Bush's proposal is a step forward and two steps backward. He's rightly drawn attention to the largest hidden expenditure on health care, the $200 billion a year that we spend on subsidizing the provision of employer-provided health insurance. Basically, people who get paid wages get taxed on those wages, but individuals who are paid in the form of health insurance don't get taxed on that compensation. And if they were, we would raise about $200 billion more a year in tax revenue. This is a very inefficient use of money for several reasons. First, it's very regressive; the richer you are, the bigger tax break you get. Secondly, it's what we call a marginal subsidy; every dollar an employer spends on health care is cheaper than that spent on wages, leading to excessively generous, even gold-plated, health insurance. The third problem is that it props up the system of insurance being tied to employers, extending a number of inefficiencies and distortions in how the labor market works.

However, what the president has done is say 'let's blow up the existing system by taking away the entire employer exclusion and rededicating it to an individual tax break where every person, as long as they were insured, would get an individual tax break of $7,500 or $15,000 per family.' The reason that is two steps backward is that it doesn't address the two things you need to address to get rid of this employer exclusion: 1) he doesn't acknowledge that this system is devoting most of the money to the rich. Under his proposal, the system becomes even a little more regressive than the existing one; and, 2) even more importantly, if you're going to blow up the employer-based system you need someplace else where people can go. Bush doesn't do that, and that's the fundamental flaw. Overall, he has raised an important issue, but he chose to do it in a dangerous context.

I remain convinced that the first reform is to remove the tax exclusion for health insurance premiums. Phase it in over time if you like, but sunset it in any case. Use the money saved--$200 billion a year according to Gruber--to start fixing the gaps in coverage.

Some of the discussion from the last two posts has carried over to Mark Thoma's blog. Krugman responded to Mark as follows:

Aha - I was wondering if anyone would raise that. I was taking it as true to a pretty good approximation that the long-run supply curve for medical services is horizontal. Unless you think that there's permanently limited supply of medical education, or something, why should we think otherwise?

And I would guess that very few people would read Bush's statement to mean that it's bad if other people have extensive insurance, because it drives up doctors' paychecks.

So in a comment, I noted:

Based on Krugman's response (must be nice to have him on speed dial), we're now in the much more comfortable environment in which this is a few economists talking about the magnitude of various key parameters.

One could point out that if he was "wondering whether anyone would raise this point," then he seems to realize that he was going a bit overboard in claiming that "no economic analysis I'm aware of says that when Peter chooses a good health plan, he raises Paul’s premiums."

On the substantive point, one could assert that almost any market has a long-run supply curve that is flat. Exceptions would be made for markets like diamonds--there is a finite quantity available to be mined. At this juncture, it becomes quite relevant how long we think it will be before we are in the long run.

As evidence against this happening any time soon, I don't think the AMA is going to give up its near-monopoly on certifying medical practitioners. Licensed practitioners will be in short supply for a long time even if wholesale medical prices rise. In order to get more services when prices change over this long run, we have to build a lot of buildings--medical schools and hospitals--and fill them with really expensive equipment. I'm guessing that long run will take a while to get here.

A commenter on Mark's blog noted that we could allow more immigration of medical personnel, a policy to which I don't object. Chiming in, Brad DeLong posts his views:

It's not clear to me that Paul Krugman is wrong. It is also not clear to me that Paul Krugman is right. One of the things patients are buying with more expensive health-care plans is the freedom to choose their own doctors, and that gives the doctors they choose some monopoly power in their bargaining over reimbursement rates with the insurance companies.

I don't have a handle on how big this effect might be, however.

I think that makes four of us. I also think that Krugman's larger point about the key market failure being adverse selection rather than moral hazard is right, and I would like to stop having policy makers focus on the tax code to try to improve the health care market. As for constructive solutions, I hope to have more in future posts.

For what it's worth, I think Paul Krugman makes some good points about the problems inherent in using the tax code to encourage or discourage the purchase of health insurance in his column today (original here, reposted here). I obviously don't sign on to his characterizations of "Bush and his advisers," and he stops short of his usual call for a single-payer system, so there's no reason to get into that today.

Were it up to me, I'd completely eliminate the exclusion of health insurance premiums from taxable income. That levels the playing field between premiums and other expenses (as the Bush plan tries to do), but it does so without forcing the tax code to be the arbiter of whether something was a legitimate health expenditure or not. It also raises tens of billions of dollars in additional tax revenue that can then be directed to all the other things the government needs to pay for.

However, I found this statement (highlighted in bold) in Krugman's column to be odd:

While proposing this high-end tax break, Mr. Bush is also proposing a tax increase — not on the wealthy, but on workers who, he thinks, have too much health insurance. The tax code, he said, “unwisely encourages workers to choose overly expensive, gold-plated plans. The result is that insurance premiums rise, and many Americans cannot afford the coverage they need.”

Again, wow. No economic analysis I’m aware of says that when Peter chooses a good health plan, he raises Paul’s premiums. And look at the condescension. Will all those who think they have “gold plated” health coverage please raise their hands?

Is he kidding me? That is almost the definition of a pecuniary externality. Wikipedia describes it as follows:

A pecuniary externality is an externality which operates through prices rather than through real resource effects. For example, an influx of city-dwellers buying second homes in a rural area can drive up house prices, making it difficult for young people in the area to get onto the property ladder.

This is in contrast with real externalities which have a direct resource effect on a third party. For example, pollution from a factory directly harms the environment.

Both pecuniary and real externalities can be either positive or negative.

So in the President's defense, there's a very simple argument to be made here. When one person feels inclined, for whatever reason, to purchase more health care services, that puts upward pressure on the price of health care services (if the supply curve is not flat) and thus the cost to everyone else in the market. Normally, we don't pay any attention to this, because that is precisely the mechanism by which a competitive market achieves economic efficiency.

The President is referring to the pecuniary externality generated by a tax distortion in the treatment of health insurance, which interferes with a market achieiving economic efficiency and thus should concern us. It goes as follows. Premiums are fully excludable from income tax, but out-of-pocket expenses are not tax advantaged. That favors health insurance arrangements in which there are low deductibles and high premiums. Such arrangements can lead to higher utilization of health services, since the insured faces no financial cost at the margin once the low deductible has been met. (This is just a standard moral hazard argument.) Krugman may not believe that the relevant behavioral effects are large here, but he's on shaky ground with his "Wow ... no economic analysis ..." comment.

For more on pecuniary externalities, I came across this source.