 Welcome to Free Thoughts from Libertarianism.org and the Cato Institute. I'm Aaron Powell. And I'm Trevor Burris. Joining us yet again is Peter Van Dorn, he's Senior Fellow at the Cato Institute and Editor of Regulation Magazine. Welcome back to Free Thoughts. Thanks for having me. We should just call these like Trevor and Aaron go to school with Peter Van Dorn as our guest. What we're going to be learning today from Peter. Today, we're going to be learning about health insurance. Healthcare economics, I think generally speaking. What is insurance? At least how do economists tend to think about insurance? Let me give you a definition and some terms in it and then I'll unpack those terms. Insurance is a, well, all markets involve gains to trade. So remember that, we've talked about that, 170 podcasts have talked about that. So people don't tend to think of insurance in terms of the basics of that it's gains from trade. All right. So it's gains from trade from between whom? The answer is insurance contracts or contracts between risk averse people and risk neutral companies. So I needed to find risk aversion and risk neutrality and I'll throw in risk seeking as a third bonus definition. But before that, to do that, I need to introduce the term expected value statements, which is in economics statistics, expected value is the probability of an event times the value of the event if it occurs. So getting hit by a bus, so the, how much that would cost times the 0.013%, what are some sort of probability we can come up with that would produce a expected net value, current value of getting hit by a bus. So I want to compare two expected value statements. The first is you have a choice of a 10% chance of a $10,000 accident happening to you in a given year or you have with certainty the 100% probability of paying $1,000 every year. Okay. So to repeat, these are two equivalent expected value statements, which is the probability times the cost that the two, the products in these two statements are equal, which is 0.1 times $10,000 is $1,000 or $1,000 times 1.0 is $1,000. So you can pay $10,000 every 10th year when you have an accident or you can pay $1,000 every year. What I want to do now is ask each of you, Trevor and Aaron, to tell me are you indifferent between those two things? Do you prefer one to the other? I probably prefer paying $1,000, but there's no accident in that situation, right? I haven't revealed all that yet. Basically what I'm doing, well, go ahead, Aaron. I guess I would need to know how much money I already have. So do I have enough money sitting in my account to cover the $10,000 if that already happens? The smart student always adds complications. Hey, I'm smart too. I'm asking you to compare two states of affairs with a given budget. The budget constraint is constant. And so to go to reveal what I'm trying to get at with my little inquiry here is if you prefer to pay $1,000 every year rather than paying $10,000 every 10th year, then you are defined as risk averse. It's just a definition. You prefer one expected value statement over the other. If you prefer to pay $10,000 every 10th year, if you prefer that, you are defined as risk seeking. If you are indifferent between these two statements, then you are risk-neutral. So an insurance contract is a trade between a risk averse person and a risk-neutral company. The insurance company has data on population level damages, how often people run into things, how often people get sick. And given that data, they can calculate the average for the whole population, for any subset of the population. And they can then charge those averages called premiums to the whole population or any subset of it and then sign contracts with all those folks. Now there are some specific concerns that are difficulties that arise with insurance because of the incentive structures that it produces that concerns economists. What are some of those? There are two terms often called their market failures. They occur and I'll describe them. One is called moral hazard and the second is called adverse selection. Moral hazard is a shift in the pop in the... So make believe all these folks that I described sign up insurance contracts. And because they are insured, they then change the frequency with which damages occur because they are insured, i.e. they get more careless because they now are insured. That increase, that shift to the right if you're visually inclined, that shift to the right of the entire population level of damages is called moral hazard. Is that something that we tend to see in, I don't know if the data is that granular but do we see, we ask people what they're expected with this basic question and then we insure them and we see actually it's shift a little bit to them being a little bit more risky than before they were insured. Some of it comes from health insurance data actually and it comes from universities. Harvard University had a health insurance plan that had a low option, high deductible coverage and then for a not very higher price you got zero deductible and so they did an experiment and what they found is once people were insured against everything, the level of illness and damages in that population in the health insurance pool at Harvard went up dramatically. And when I taught at Princeton, Princeton had the same kind of setup and I had a shoulder injury from college hockey and I was uninsured as a gradual student and once I got my first job I immediately signed up for the high, the low deductible plan got my shoulder repaired and then left the low deductible plan for the other. So you're part of the problem. Is that the adverse selection problem? That's it. So now we're on the second part. So adverse selection is what Peter Van Doren did when he was in graduate school. I, people who sign up or don't sign up based on personal knowledge of their own condition relative to what the insurer has, that's adverse selection. And it's a Nobel Prize winning set of articles, Joe Stiglitz and Mike Spencer and Akerlof from Berkeley. The Lemons problem is a popularized version of adverse selection. So why would we buy insurance then if, so let's say that I already, I think that I'm going to spend this $10,000, there's a $10,000 accident possibility, the one in ten chance. So if I already have the $10,000 and I could just squirrel it away somewhere, is there any reason for me to buy insurance or is insurance always about I don't already have enough to cover the cost so this is like an easier way or a cheaper way to get into coverage? To go back to the basics. The choosing to become insured stems from your preferences about two kinds of states of the world which have equivalent expected value. If you are risk-neutral, if all people were risk-neutral, there'd be no insurance, there'd be no gains from trade. Risk-neutral people wouldn't make trades with risk-neutral companies. It's just a nonsensical statement. So if you are risk-seeking as a person or risk-neutral, then you both normatively should not buy insurance and then positively we predict you will not buy insurance because you are indifferent between paying large sums of money every now and then for bad things that happen versus paying every year a smaller amount which more or less adds up to the same thing over any long period of time. Now let's get into the ... We're not going to be talking about automobile insurance and stuff. I mean that's not specifically the topic although some of these concerns might be equal but as shared between the two but in the American healthcare market and specifically the insurance side of this market which has come up again because the Republicans are looking back at the Affordable Care Act and thinking about what they're going to do with it. So let's get the lay of the land first about the American health insurance market. How much do we spend on it? What does that spending look like? Just let me lay out some of the stylized facts from ... Oh, stylized facts. This is our bad name by the way. The three of us would be the stylized facts. You're on Pickle Aware. I'm not going to participate in that. I used that adjective again, didn't I? In 2015, take all the healthcare expenditures in the United States and divided it up by 325 million people. The per capita expenditures on healthcare in the United States in 2015, $99,000, $9,990. It's a lot per capita. It's a family of three, $30,000. In effect, I know I'm a reductionist but all healthcare fussing is about whether each of us pays more than $99.90 or less than $99.90, i.e., which set of people do we pool with for insurance purposes? Can I find a bunch of people who all spend less than that and then I claim I'm a part of that pool for purposes of ... Remember, the insurance is the average, the premium will be the average of the people I share expenses with through contract. If we could know ex-ante, which people spend a whole lot more than $99.90, consensually I'm not going to sign a contract with them at the same price. You mean so, basically you're saying that if someone is particularly accident-prone in your group and then they actually end up costing $100,000 in a year, that means that you have to pay more to cover them in this sort of basic ecosystem we're talking about? Correct. If we knew that ex-ante, if everyone knew ex-ante, whether you'd be above or below $99.90, you wouldn't sign contracts with them at that price. When I taught my class, I used to bug my students and put ... I wanted to push them into a corner and say, you love your grandparents and you care for them dearly, but I said, would you voluntarily sign a health insurance contract with them, which said, take your expenses, the student's health care expenses each year, and one of your grandparents' expenses each year. And share them. And share them by dividing by two. And they go, oh no. And I'm putting them in a moral dilemma, which is they care, but would they voluntarily sign such a contract? The answer they regretfully had to tell me was, no, I'd want ... No, I would not. I'd want to lower premium for me and a higher premium for my grandparent. And so that's the rub, and health care is we're playing of a long, complicated, sometimes bitter debate about who will share costs with whom under a totally free market style health insurance system, and is coercion or force necessary to deal with the sickest individuals. And today we'll talk about ... My claim is that guaranteed renewable individual health insurance did exist and can exist, and that coercion, i.e., what's called community rating in the central part of the Affordable Care Act, is one method of dealing with this dilemma. But it is not the only dilemma. It is the claim that individual guaranteed renewable health insurance cannot exist, and therefore we need to have community rating. That I want to argue in today's discussion is not true. So what type of groups are we talking about that you can select between? So you gave the example of your grandparent, so that would be, are you going to be stuck in a group with people who are much older than you and therefore likely to spend more versus someone who's younger? So that's an age one, but does this, do the groups vary also, say, geographically, like realistically when we're picking, because you said we might choose, but what kind of choice is there in those groups right now? Well age, age is certainly an indicator. I'll give you some numbers. The per capita expenditure is very predictably by age, and these are 2012 numbers. Less than 19 years of age, the average is 3550 a year. Between 19 and 44, it's 4458 a year. Between 45 and 64, it's 9500 more or less. Above from 65 to 84, it's almost $17,000 per capita. And above age 84, it's 32,400 a year. So healthcare expenditures rise predictably with age. They also increase with what are called high cost conditions, cancer, diabetes, et cetera, et cetera, et cetera, the usual horribles. And part of the key to guaranteed renewable individual health insurance contracts is that from the data, we know the incidence of those conditions by age, and we can precisely design premiums for everybody that's normal by age. And then we can through, because we know the probability of these high cost conditions and how long they persist, we can price out what high cost insurance would add on to the normal premium for people at every age. Because these guaranteed renewables, would this be something where I buy a plan when I'm I guess 26, my parents have kicked me off their plan, and I'm healthy, I buy it at some amount, and then I keep paying that some amount for the rest of my life? The schedule of premiums would rise with age, but it would not rise as fast as if you bought a series of term insurance contracts for each year for that same number of years. In other words, by you saying I'm going to keep paying this company over a long period of time, the company in turn can then predictably smooth the rate at which the premiums rise and the increase would be smoother than if you bought a series of single year, non-renewable single year health insurance contracts. Given this concentration of cost, we have this difficult issue, as you said, about most of it seems to be concentrated in most healthcare costs, it'd be concentrated in a certain segment of the population toward the end of life care. Therefore, on one level, the problem is it would make some sense for young people to just not go insured if they just don't have that risk. If they have their own risks, assessment is they're riskier people and they're okay with the possibility of getting some problem, but looking at the numbers here you have, you say that the top 1% of healthcare users account for, in 2014, 22.8% of healthcare costs and the top 5% of healthcare users account for 50.4% of everything that we spend on healthcare in this country, so just 5% of people accounts, and then you think you might get there. I mean, most people are like, if I get old, then I'll become one of those high healthcare users, but before then, why should I be insured? Let me just piggyback on that question so I can understand these numbers a bit more. When we say, so we say let 5% spend 50%, is that just because we are dealing with rare but expensive events, so you're either spending nothing basically, like you were healthy that year and you spent close to nothing, or you spend an extraordinary amount because you got very sick or you were injured, so it's not like there's 5% of these people are like this group of really sick people. It's kind of just a random, I don't know if I'm making a lot of sense, but a random selection of all of us. They become sick. Possibly. They become sick or they get hit by a truck or, so it's not, we can't point to a population and say, yes, those guys, the way that we can say people who are really old might be the problem. All right. If I hear you right, I think you're asking, can I know ex ante, which people will fall in the high cost category? We know ex post and I think you're asking ex ante. In general, we know that if you're over age 85, you're more likely to fall in that category, although ironically, if you make it to 85, actually healthcare costs go down slightly because the set of people, they're non-random that end up being that old are in fact extraordinarily healthy on average. The short answer to your question is, no, we cannot predict ex ante. So yes, the incidence of high cost things in any given year makes you in this very sick category. So again, 330 million people in the United States. So 1% is 3 million, right? 3 million people, the sickest 3 million people in the United States. We spent over $100,000 a year on their healthcare. Now, the papers that underlie this discussion, one by Mark Pauley, shows that the persistence of these high cost conditions, the median persistence is about four years. You either get better or you die. So that's what makes guaranteed renewable health insurance possible because the median sick person, it doesn't go on forever. So that's how the insurance company can come out not broke in this is because they can say, yes, we're locking ourselves into potentially getting far less in premiums than this person's going to cost us, but we know they're probably not going to cost us a ton for very long. So four years is the median in the data underlying the... If they paid us premiums for a very long time before that, we still think we'll come out ahead basically on some level. Correct. If we locked them in at a slightly rising premium at 18 or something, then looking at our actuarial tables, when they're 74 and they have a very expensive disease for four years, we will be able to afford that and make a profit. Now, to be precise, the data in the paper, in fact, most health care papers only study the 19 through 64-year-old population and they just, sadly, from Kato's purposes, there is the argument about individual guaranteed renewable health insurance assumes that Medicare exists and that Medicare takes over after age 64. So I don't want to overclaim that somehow we have... That by starting at age 18, we can take care of things at age 90. That has not been studied. And so I don't want to overclaim that, but conceptually, there's nothing that strikes me that's not impossible about that, but it would be more expensive at every age because you're having to, in effect, start paying for those things that inevitably, and to answer Aaron's, in the data that are in this paper, approximately a quarter of males and females who are initially low risk at age 18 will develop a high risk condition by age 55 and almost 40% are high risk by age 64. So if we go to age 75, it'd be a much higher number, it would be in one of the so-called high-cost conditions. So you, Aaron, asked why, if I'm young, again, would and should, and I want to keep those statements separate, why would it be rational? Let me use that term. Why would a rational person who's young, who knows that the incidence of high-cost conditions for his or her age group is very low, why would such a person buy the kind of policy that I'm describing? And again, I go back to the definition, it's because they're risk-averse. If, because when you're young, you don't make that great money, you don't have much savings. So if you have a car accident or a bus accident, or you get leukemia or whatever, you would be wiped out and you would be denied care because you would not have enough resources to pay for it. So you, in fact, what's odd about the uninsured young is the people who should be most interested from an economist's point of view in being insured are young people without much wealth or access to wealth because they have no buffer to pay for things that go wrong. And yet, oddly, kids don't seem to care as much about that as economics would predict and often are subsidized by their own parents to be forward-looking. Well, let's take a step back then because I know it's like you don't like to think about these questions about justice and deserve it. These are words that don't usually enter into what you're thinking, but healthcare really charges people up. It makes people very upset. They have a view of what everyone deserves, how people deserve healthcare as a matter of right. All these sort of things, which I know is not your field. But it's more of a broader set. When someone says these things and you hear someone say everyone deserves a certain level of healthcare, it should be paid by, it shouldn't vary based on your age or your sex or your race or these things. How do you hear that? I feel like you decode that in your head as a certain kind of claim about distribution. Well, we'll go... With the free market. I mean, all these things that you hear, I feel like you probably hear those claims in different ways. Well, let's talk about it in the Affordable Care Act way, which is to talk about community rating as a normative solution to the underlying data that we've been talking about. And that's just a part of the law that says that the price can't vary between people except for, I think, five characteristics, like age, smoking, geography, maybe a couple others. But even those are ceilings in that, that is the premiums can vary so much by age, whether or not that is the real difference by age, right? In effect, political limits have been put on the variation. The central insight of economics in my view is that it says, let prices do whatever they need to do and deal with distributional issues separately and transparently. So if you, because of your conditions, in effect require very high-cost care and you don't have the resources to fund that care, we have two choices, well, three choices. One is we can appeal to charity to pay for those things. Or two, we can explicitly subsidize the care for that person. And economists tend to favor, if we're going to transfer resources, do not transfer to institutions, transfer to people. And then let people decide what to do with things. And then if they don't choose to use the resources we give them for healthcare or education, the things we hope that they would invest in, if we give them transfers, if they do not do that, then from a libertarian standpoint, then our job is done. Which is if they've made, if their lives continue to not go well, despite the, either the charity or the, and again, libertarians would differentiate between a charitable contribution and a tax and transfer scheme. But economists' least favorite thing would be setting up a publicly subsidized thing that's separate for those who need care, i.e., in the old days, we used to subsidize city hospitals, right, there would be hospitals where middle-class people would go and then an interest, and then a so-called city hospital that was publicly funded and had a predominantly poor population. Well, that confines, that puts poor people who need care in a very terrible position because they don't have any choices. We confine, we, in effect, they're not only poor, but we also say, if you're going to get anything, you have to go here. We don't give them choice. Whereas food stamps, right, is a redistribution of economic resources, and we don't say in order to get the food, you have to go to this provider that's government-sanctioned. So the, so having a Medicaid program, right, having an explicitly publicly provided insurance program for poor people would strike most economists, I think, as kind of odd because it restricts their choices. We should separate the, are we going to transfer resources to people or not? And if we do, we shouldn't second-guess all their choices. We shouldn't engage in the stereotype, it seems to me, that poor people are whatever don't make proper choices. And so we all have all this hand-ringing over, you know, our food stamps overused or underused for junk food or whatever. And it's like, I personally am not interested in those discussions, and I don't like engaging in them because it, to me, it demeans the individual. We're giving them money. That's the end of discussion. And then let's stop second-guessing everything they do because I don't want people second-guessing everything I do. I'm going to push us into that discussion just a little bit. I'll put on, I have to put on my friends on the left hat, but this time I'll put on my friends on the right, the more conservative hat. That, so if the goal, you know, what we want to stave off and the reason why we would be worried about not having any sort of subsidy is that we want to prevent people from having their lives destroyed by bad things happening to them. We don't want to watch people die on the street. We don't want to watch people die of illnesses that could be cured and so on. There's a compassion angle to it. And it seems like, I mean, we can say like, yes, it's maybe paternalizing or not respecting them to say, you know, all these people practice poor judgment, but it does seem like poor judgment does play a role to some extent in some level of poverty, goes back to the marshmallow test and whatnot. But so do we, it seems like, yes, it's more respecting of them to say, we're going to give you this chunk of money and you can spend it however you want. But then if we're, I guess, naive about the degree of poor judgment that exists. And poor judgment seems like another thing that may decline maybe related to age too, like the very young people who were saying, you know, they're the ones who have to make this decision about whether they need insurance or not because they're the ones who are least likely to get sick and so it's this harder call than the older person who's like, yeah, I better have this thing, are also the ones who are most likely to practice poor judgment because judgment typically improves with age. So our kind of libertarian desire to let people have the resources and then leave them alone to make the choices seems like it could lead us back to the very situation we were trying to avoid in the first place with the subsidies, which is people leading, you know, having awful things happen to them and then suffering the consequences. True. So in the end, this is an empirical question which is what in Peter's world of transfers and no centrally provided programs, what percent of bad behavior would exist and we could find out, we could do experiments and two, then there's just type one and type two errors which is, so of the set of people we're helping, if we centrally provide things through explicit programs and say, if you want healthcare, you have to go to Boston City Hospital or Washington General and that's the only way you get help, otherwise you don't get any or think of education. The only way you get subsidizes if you attend public schools, if you want to do something different, you're on your own. So I'm making a voucher-like argument for healthcare that's equivalent to what people on the right often describe in education and then there's an empirical question of if the ratio of people that Aaron describes is a large portion of the population we're trying to help, then his concerns clearly strike me as important and my arguments would diminish in importance because my giving the 5% of people who need to be subsidized, the freedom to make better choices given that they would do it, whereas 95% of the people we're helping would make poor choices, let's say, if that's true, then my stance seems to be while very principled, might be described as a waste of taxpayers' money, whereas if the percentages were reverse, then the, and again we can think of food stamps, right, people on the right. They're just a study released recently on the barcode data has finally been released by the Department of Agriculture and we now know how many, what percent of food stamp monies are used for, you know, snacks and soda and things like that and it's higher by a bit than the normal retail non-food stamps subsidized purchasing population. Is that bad enough so that I want to go back to, you know, stored cheese in the cheese storage thing which then was sent to food banks, which then was handed out to poor people who had to show up at the right time in the right place to get cheese? Do I want to go back to that system? I have tasted government cheese and nobody wants to. When have you tasted government cheese? I knew someone whose grandfather received, and I don't quite know why or how government cheese and it was ... There's our first album name, by the way, Stylized Facts, first album is going to be called Government Cheese. So I think we could agree maybe that we need an empirical answer would inform our value choice about which kind of error is worse, they screw up error or we want to give them freedom kind of perspective. Well, let me ask a question about the guaranteed renewables that kind of impact on this but also might be something someone listening to would be concerned about, which is ... So the idea would be that I make the decision when I'm young and healthy to buy insurance. Well, just the poly paper actually said you can buy guaranteed renewable insurance at age 55. It would just be more expensive. Right, but the idea is that I buy it not knowing what the future holds and I'm sick, my premiums don't go through the roof, so I've done okay. And that's my incentive to keep with that policy going forward. So that seems to work for people who are in the position to make a decision about whether to buy insurance or not and what kind but how does it handle, say, sick kids? We have a neighbor whose son, 18 month old son, has cancer and they're spending a ton of money. There's a lot of healthcare costs involved which is presumably on their insurance but that 18 month old probably was never in a position to buy insurance for himself and if he had parents who chose not to buy it for themselves or for him when he was born, is he now stuck either not being able to buy it or getting it only ever being able to buy it at this extraordinary cost because he's now in this much higher bracket. The only fool proof logical way to deal with the questions you raise is to drive the discussion we're having all the way back to age zero. So in other words, you're correct that if so one cannot insure against something that is known, right, so the poor children or children who through no fault of their own end up with very costly childhood diseases that's already known, we know that and so what could insurance do for them and the answer is it could simply share the variance in the cost among that population of very sick people. I want to just clarify some people like so some leukemia people would be slightly higher cost than others and one can insure against that variance but one could not insure against the fact that they have leukemia. Making sure that we're using the right words here because some people might be listening to what you're saying and saying they can absolutely get insurance if you made it the law. I'm saying in the hypothetical. But also on some sort of definitional level, that's not insurance anymore. The law is just saying that a third party has to pay for this thing. It's not actually insuring it's an uncertain future risk. One can insure against only the unknown variance of some distribution. Well, it's known at the population level but you don't know where you're going to fall in it. If you know where you're going to be and then you're demanding someone else pay for it, it's not insurance. It's called subsidy. Which is kind of how some of this stuff worked. I think that with the Affordable Care Act for example part, it was about cross subsidizing between groups of people and not calling it a welfare payment. Correct. Again, we remember 10 minutes ago I said the economist's tendency is to let all prices be transparent and let all facts be known and then deal with the need to subsidize or not subsidize completely separately. In the real world there is a perception particularly among Democrats and that the public because America is even though not a Cato kind of into free markets they're into it more than because of culture and tradition, more than maybe we give them credit for here at Cato that the resistance to explicit redistribution is rather large in the United States so political forces that lead to redistribution have to be hidden, particularly in the views of Democrats who generate these programs think that the public support for them would be much, much less if the transparency that I prefer were and did in fact exist. So the only way to redistribute is to have something called community care, everyone gets a policy at the population average but then to avoid adverse selection we have to have an individual mandate, we have to use force to get everyone to sign up because people who are 23 know that their costs probably are not going to be 99.90 the per capita average that year and so to charge them that premium they won't buy it unless they're forced to and so that's, so in the real world there's lots of cross subsidies in American policy programs but it's all very hidden and if you go out and ask voters are they being subsidized most of them will probably say no because they don't realize that they're being subsidized. I want to talk about and maybe actually we've already covered it to some extent but one of the papers that you cite in the outline you gave us for today is by John Cochran who I think is Chicago he was he's now gone to Stanford to Hoover Hoover yeah his idea of health status insurance which you write is a product that mimics the guaranteed renewability portion of an insurance from a community rating kind of thing well Cochran basically read the Pauly paper and said oh I wrote a paper like that only in a completely different journal way before Pauly did actually to summarize because we glad we touched on it the Pauly paper says what is it what is the general because we kind of mentioned it a few times but we actually haven't what Pauly did and this is a paper that's 2003 so it's 14 years ago way before the Affordable Care Act it said it examined the medical expenditure panel data it examined healthcare expenditures in the United States at the individual level a big big sample of those it then said what would guaranteed renewability oh well prior to this paper Pauly actually investigated corporately provided employee your provided health insurance and realized that the premiums don't rise as much with age as one would think they would well the healthcare costs rise by age we know what that is and the premiums that companies charge their employees and in turn that companies charge insurance companies charge employers don't rise as much with age as actual health expenditures rise with age which is honest it's confusing so Pauly scratched his head and said hmm what's up with that and so he then went on to say well what would a guaranteed renewable world look like and he said it would at every age have a very low cost component for the majority of people that don't get any health care at all in a year then there are 12 high cost conditions and he figured out what those were and he said these occur with the following incidents at every age group let's add that to the very low cost like cancer like that kind of thing actual conditions condition and he added that actually fair amount to the low cost premium at every age group and then went out and said how do health insurers what prices do they charge for guaranteed renewable health insurance and he found that the calculations he made more or less mimicked what companies actually charged so first of all there's an important point which you said a little bit but we can make very clear guaranteed renewable health insurance did existed before Obamacare so you kind of at least one of the things many policy proposals claim that it was impossible to free market to have this kind of my view state something that like the current concern we now have for facts they stated something that good reputable research in my view refuted which is that this market that you say can't exist did exist it did exist now many people didn't buy it in part because most people have employer coverage so the set of people that need individual health insurance in the United States 10% of the adult population something in that range and then Cochrane's paper said ah what I'm going to provide is a portable present value contract that sits with you because all the horror shows that we that led to Obamacare right I'm I can't get insurance I have a pre-existing condition those largely were transitions from employer they've been employed or something and then they were laid off and then during a recession after 18 months they still don't have a job or then they're out of luck so Cochrane said let's just extend the polly notion of can we write a financial derivative for the transition from back and forth between an employer provided plan and an individual plan because in the United States people flop back and forth but once you have a condition and it's known quote the individual market doesn't want you because you haven't they now know it and so you're just going to share risk with other people who have cancer and it turns out that premium is $40,000 a year so Cochrane said can't you design a probabilistic financial derivative whose cash goes with you so that as you cycle between employer and individual coverage no one will discriminate against you because yes you'll face a high premium in the Cato world because that's what you need to pay on average but you'll come with this pile of cash because you've paid for the derivative that pays for this low probability but high cost health transition that you've gone through does the paper mention or do we have a sense of how much such a thing might cost like is this in order to have health status insurance am I going to have to be paying an extra $500 a month or is it $20 a month well remember go back to the data I gave you about the incidence of high cost conditions is very very low at young age and it increases linearly well non-linearly actually with age so by age what did I say before 64 was one of the we had 16,000 but that's what we currently pay oh right here a quarter a quarter of both males and females who were initially all low risk at age 18 would be high risk by age 55 so every year as you age the probability of being in a high cost condition increases and depending on the high cost condition as that probability approaches 0.5 times a $50,000 a year you could yes the premium would be could be high if you don't start out when you're young but in fact try to get guaranteed renewable insurance at age 55 because half of you by next year right the data I just gave you if you're 55 and you join 40% of those people who join at that age next year could be in a high cost condition so there's not that that gets expensive it seems that some people they have a problem with the fact that we're talking about the economics of people's lives right now which strikes me is I mean a sentiment that I understand we're seeing a fight club where he's doing the calculation about whether to issue a recall for the cars based on how frequent it is or show yeah it's a sentiment I understand and but I nothing is free and and how do you react to this sort of like to this why are we talking about nickels and dimes with people's lives kind of attitude because someone has to pay I mean we can make I mean by not wanting to talk about this we've healthcare has gone from you know 8% of GDP to 17% do you think that's part of this thing that we don't like to talk about the nickel and dimes with people's lives and then we politically do things if everyone says it's immoral to talk about a budget constraint then this is a problem there is a budget constraint so yeah that does seem to be a problem it's we can make believe there isn't a budget constraint and so when we do that we end up spending a lot of money on this thing I mean Robin Hansen at CMU says in his view a lot of healthcare expenditures are to assuage guilt over death and things related to it and it doesn't really stop it it doesn't do it just it's we're in a fluent country and we spend a lot of money to avoid these well I mean we go into interesting discussion is Medicare now allows one to spend a lot on one's death clarify what you mean by that Medicare covers everything until you die and we know the data show that I'd have to go back and look I can't say off the top of my head but a non-trivial percent of Medicare expenditures occur in the last six months of life you know that now we're not very good at predicting that six months that's so we can't go to a complete game in which I'm about to describe but what if families were given the following choice you can spend $200,000 on me in the next two years or I could stop healthcare treatment and the government would split the savings with you and your relatives many many people find this discussion absolutely abhorrent they would think I mean no we should not this is econ gun nuts we should not go down this path econ gun nuts gone nuts you just described an Agatha Christie novel okay a will exactly grandma wanted us people I know a family because they know they chose the diagnosis with pancreatic cancer the survival rate is very very low for that they chose to do no care none because they said oh they know the treatments involved would probably not do much and make life the quality of life not very good so this family conscientiously decided way before any symptoms were horrible to just forgo all treatment well that family saved the nation a ton of money now they did not do it to save money they did it because of their own healthcare decisions but if lots of families did that we'd save lots of money the question is should we is there any reasonable way in which some of those savings right now those savings aren't shared with the family in question that seems to me that the real moral the real moral quality of the healthcare debate needs to come in about the actual cost of these procedures because if you make things cheaper questions about distribution change so if you actually make if you made treating cancer $20 a $20 pill because of some sort of innovation then your discussion of how much we spend and how much distribution is changes suddenly one libertarian example that should be near and dear to our listeners hearts is dialysis is the one treatment kidney dialysis is the one treatment that's 100% funded by Medicare regardless of age regardless of age it's not just old anybody on dialysis in the United States that is free kidney transplants are not and a market for kidney a market to incentivize a donation of kidneys is illegal this to the libertarians this is crazy right so we will spend a gazillion dollars on dialysis so you're hooked up to a machine for three days a week for the rest of your life or we could give money to somebody to create more supply of kidneys for transplant purposes that's one side but also innovation for actually coming up with better ways of doing things that are cheaper I mean is this also seems to be a thing that we can't ignore in the discussion that maybe we can lower that $9000 by coming up with cheaper ways of doing things or is it always to be the case that people are spending I mean is that is there sort of a thing where does it always fill the amount of money allotted to it or could we actually bend that down and like and spend $8000 a person and save as many lives and make as many people happy or does it just the money fill what is allowed to it again it's an empirical I mean many on the right claim that because of government involvement in healthcare because of the extensive government involvement in healthcare that Moore's law governs the IT world I rapidly decreasing costs from because of technological innovation that that does not arise in healthcare because of government involvement and if there were more market forces the miracle of cost reduction that we see with computers and smartphones would also show up to a much greater extent in healthcare I think that's a fair way of putting the claim in the end it's testable but hard because we don't have government involvement in healthcare is so extensive everywhere in the world in the United States is an outlier for our lack of we're on the low end of government involvement that it's very hard to test and find a place or a set of circumstances in which we can see whether or not this claim is true but it seems like if I mean you mentioned that we're a lot of the healthcare expenses are like Trevor mentioned but it's kind of paying for guilt around death and guilt around death is not is something we can innovate our way out of and so it may simply be that like yes if we can cure cancer it just means that now that last little bit of whatever is going to kill the person or old age we're still willing to spend up to our level of guilt or if it's on you up to your level of fear of death there's a good way of putting what I was asking because let's say we do come up with a $20 pill for treating cancer and so a lot of people in their 60s you get cancer take that pill cancer is gone now they live to 95 keeping someone alive at 95 for you know one day more six months more in some situations is very expensive so now we just spend it at that point and so we always we used to heart disease has gone down right smoking rates are down among men so compare 1970 to now the expenditures on heart attacks heart disease etc etc that's that's gone down over time now we spend it on hip replacements right I mean we've in the price of those is going on so there I mean the the literature in healthcare economics tends to argue that because the subsidies exist the money flows into healthcare companies find technological breakthroughs that are very expensive that will do stuff for health even though it's marginal this op-devo you've seen a ad on television for op-devo say divo op-devo I think I'm got the pronunciation right notice all pharma all drugs have three syllables I think they just draw op-devo okay it's a can a lung cancer drug late stage and it it says it gives people longer life blow it did the trial right it was approved it's three months three months extra life three months and it's expensive okay so right now Medicare approves at well even insurers approve everything not because the marginal benefits are greater than the marginal cost but as long as the marginal benefit is greater than zero regardless of the cost okay it's almost like environmental policy it's like can we reduce air pollution at great expense yes we can do it same same thing with healthcare I mean we so here's the hard to say no here's a good I guess final question on that how much should we spend on healthcare and how would we know the answer to that question is that a big enough one for you yes believe it or not there is there's a literature that tries to say what a the price of a statistical life year ought to be and the answer is about a hundred thousand dollars now in the United States so that that's the economist answer I kept this goosey kind of exactly this comes from how much do people in high risk occupations except in wage rates to deal with the possible mortality risk and it's nine million dollars per statistical life saved and then when you work it out to a year it's about a hundred thousand dollars and so that's one way of I mean if you want to use market indicators based in people's choices about the value of their lives and the risk they put forward then we should never spend in a public sense and when taxpayers money is is at stake we should never spend more than a hundred thousand dollars per statistical life year saved and there is a literature that talks at length about what cures do and do not pass those tests et cetera et cetera thanks for listening this episode of free thoughts was produced by Test Terrible and Evan Banks to learn more visit us at www.libertarianism.org