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August 14, 2010

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Posted: 13 Aug 2010 11:01 PM PDT

"Health Care, Uncertainty and Morality"

Posted: 13 Aug 2010 06:08 PM PDT

Kenneth Arrow believes that market failure is an inherent feature of health care markets, and that society constructs institutions, adopts norms, imposes regulations, and uses other means to try to minimize the consequences of these failures. But some of those may be breaking down, "and that has led to some of the problems we have today." Uwe Reinhardt explains:

Health Care, Uncertainty and Morality, by Uwe E. Reinhardt: In last week's post I discussed Kenneth Arrow's exploration of whether special characteristics set health care apart from other commodities — whether it had a "moral dimension." ...

Professor Arrow, a Nobel laureate, explored in the early 1960s what the characteristics would be of a perfectly competitive market for an ordinary commodity, how the medical care industry deviated from those characteristics, and what aspects of health care might explain these deviations.

He concluded that virtually all the special features of the medical care industry — the role of nonprofit institutions; the expectation that physicians ... would always put the interests of their patients above their own self-interest; professional licensing and many other forms of government regulation — could "be explained as social adaptations to the existence of uncertainty in the incidence of disease and in the efficacy of treatment."

This uncertainty has several aspects. First, physicians may not agree on the medical condition causing the symptoms the patient presents. Second, even if physicians agree in their diagnoses, they often do not agree on the efficacy of alternative responses...

Third, information on both the diagnosis of and the likely consequences of treatment are asymmetrically allocated between the sell-side (providers) and the buy-side (patients) of the health care market. The very reason that patients seek advice and treatment from physicians ... is that they expect physicians to have vastly superior knowledge... That makes the market for medical care deviate significantly from the benchmark of perfect competition, in which buyers and sellers would be equally well informed. ...

Wherever asymmetry of information is present, there exists the potential for the better-informed market participants to exploit the ignorance of the less well informed. ... Professor Arrow explained many of the nonmarket social institutions and regulations characteristic of medical care that he had identified as "attempts to overcome the lack of optimality resulting from asymmetry of information and the inability of competitive markets to allocate efficiently all of the risks inherent in health care."

Pointedly, he said, "It is the general social consensus, clearly, that the laissez-faire solution for medicine is intolerable."

Professor Arrow touches on the moral aspects of health care only in passing... In formal economics, the moral dimension of health care manifests itself in an externality modeled by economists as "interdependent utility functions." That fancy jargon covers cases in which person A is happy (altruism) or unhappy (social envy) from knowing that person B consumes a certain commodity. Economists do not prescribe such interdependencies; they take them as givens in prevailing cultural norms.

With respect to health care, Professor Arrow observed that people typically have "concern for the health of others"... These tastes, Professor Arrow concluded, help explain some unique characteristics of the medical care market, for example, the redistribution of purchasing power built into private and public health insurance and the peculiar form of price discrimination practiced in the industry at the time of his writing, which struck him as not aimed mainly at profit maximization but instead as an attempt to make health care affordable to the poor. ...

In a recent interview with Conor Clarke in The Atlantic, Professor Arrow was asked how much of his 1963 paper "is still an accurate representation of the problems the health market faces." He responded:

I think the basic analysis hasn't changed. There are wars over the details, but the basic analysis is accepted. Some specifics have changed. If you look closely at my argument there is a sociological structure. There is a kind of sociological thesis. The market won't work – it doesn't work well in the health context. But something else supplements the market, and the thing I put stress on in the paper are the elements that put a non-economic influence on the market: professional commitments to provide a service, to engage in services that aren't self-serving. Standards of caring decided by non-economic actors. And one problem we have now is an erosion of professional standards. In a way there is more emphasis on markets and self-aggrandizement in the context of health care, and that has led to some of the problems we have today.

Coming from one of the most revered economists of our age, these are sobering thoughts. ...

Arnold Zellner

Posted: 13 Aug 2010 02:10 PM PDT

Via Andrew Gelman:

Arnold Zellner, by Andrew Gelman: Steve Ziliak reports:

I [Ziliak] am sorry to share this sad news about Arnold Zellner (AEA Distinguished Fellow, 2002, ASA President, 1991, ISBA co-founding president, all around genius and sweet fellow), who died yesterday morning (August 11, 2010). He was a truly great statistician and to me and to many others a generous and wonderful friend, colleague, and hero. I will miss him. ...

Andrew Gelman adds:

Zellner was an old-school Bayesian, focusing on statistical models rather than philosophy. He also straddled the fields of statistics and econometrics, which makes me think of some similarities and differences between these sister disciplines.
To a statistician such as myself, econometrics seems to have two different, nearly opposing, personalities. On one side, econometrics is the study of physics-like laws--supply and demand, utility theory, simultaneous equation models, all sorts of attempts to capture economic behavior with mathematical laws. More recently, some of this focus has moved to agent-based modeling, but it's still the same basic idea to me: serious mathematical modeling. The data are there to understand the fundamental underlying economic processes.
But there's another side to economics, a side that I think has become much more prominent, and that's the anti-modeling approach, the distribution-free methods that try to assume as little as possible (replacing distributional assumptions by second-order stationarity, etc.) to be able to make forecasting or causal claims as robustly as possible.
To the extent that economics is a model-centered field, I think it's naturally Bayesian, and Zellner's methods fit in well. To the extent that economists are interested in robust, non-model-based population inference, I think Bayesian methods are also important--nonparametric methods get complicated quickly, and Bayesian inference is a good way to structure that complexity.
Unfortunately, Bayesian methods have a bad name in some quarters of econometrics because they are associated with subjectivity, which goes against both mainstream threads in econometrics. Whether you're doing physics-influenced modeling or statistics-influenced nonparametrics, you want your inferences to be objective as possible. So both kinds of econometricians can agree to disdain Bayes.
What Zellner showed in his work was how Bayesian methods could be objective, and statistically efficient, and solve problems in econometrics. This was, and is, important.
P.S. I only met Zellner a few times and did not know him personally. My only Zellner story comes from the famous conference at Ohio State University in 1991 on Bayesian Computation via Stochastic Simulation. At one point near the end of the meeting, Zellner stood up and said: Hearing all this important work makes me (Zellner) realize we need to start a crash research program on these methods. And you know what they say about crash research programs. It's like trying to create a baby by getting nine women pregnant and waiting one month. (pause) It might not work, but you'll have a hell of a time trying. (followed by complete stunned silence)
The other thing I remember about Zellner was his statistics seminar at the business school, which I attended a few times during my semester visiting the University of Chigago. No matter who the speaker was, Zeller was always interrupting, asking questions, giving his own views. Not in that aggressive econ-seminar style that we all know and hate; rather Zeller always gave the impression of being a participant in his seminar, one among many who just had the privilege of being able to speak whenever he had a thought--which was often. He was lucky to have the chance to express his statistical thoughts in many venues, and we as a field were lucky to be there to hear him.

I don't think there's as much resistance to Bayesian methods as Andrew implies, my experience is just the opposite -- quite a bit or resistance to classical methods -- but the degree that Bayesian methods are embraced is partly field and even topic dependent.

Andrew also links to the official announcement from the University of Chicago. I had this in the links scheduled for tomorrow, but it deserves more prominence:

Arnold Zellner, 1927-2010, a pioneer of modern econometrics, University of Chicago News: Arnold Zellner, a leading economist at the University of Chicago Booth School of Business who pioneered the field of Bayesian econometrics, died August 11....... He was 83...
Zellner was known for the breadth of his contributions to many different areas of econometrics. His pioneering work in systems of equations, Bayesian statistics and econometrics, or time series analysis would each have earned him worldwide recognition.
In addition to his prodigious theoretical work, Zellner fostered applications in fisheries conservation, production theory, forecasting, and many other fields. In both his theoretical and applied research, Zellner believed that complicated problems can be solved by the application of a few powerful, simplifying concepts, what he called "sophisticated simplicity." ...
Beyond his strong commitment to teaching and research, Zellner was also known for his work to solve social and economic problems such as famine, unemployment, and economic stagnation. ...

Insurance is Not Welfare

Posted: 13 Aug 2010 11:52 AM PDT

Those who want to dismantle social insurance programs use the word "welfare" frequently as a way to make people think that the programs take from the worthy and reward the unworthy. For this reason, when thinking about social insurance programs, it's important to keep the distinction between insurance and welfare in mind -- they are not the same (see, for example, Fire Insurance is not Welfare and Neither is Social Security, something I wrote during the last round of the Social Security wars, or this which makes the same point; also, I should probably note somewhere that even if a tax to fund these programs is paid by the employer, the incidence still falls partly -- mostly for unemployment compensation according to the work I'm aware of -- on wages):

Unemployed Man Reacts To Gingrich's Accusation That 'Welfare' Is Making Him Lazy: I Paid Into It For 35 Years, Think Progress: Time and time again, conservatives have claimed that extending unemployment benefits for the unemployed is breeding laziness and lack of productivity. Newt Gingrich was the latest to adopt this meme. Writing in an e-mail to supporters, Gingrich cited a Wall Street Journal story where unemployed 52-year-old mechanic Michael Hatchell explained that he couldn't afford to take jobs that wouldn't pay enough to take care of his family. Gingrich claimed "welfare" was keeping Hatchell from working.

Last night, Hatchell and his wife Sarah appeared on MSNBC's Countdown With Keith Olbermann to explain his family's circumstances in his own words. ... He ... took offense at Gingrich's use of the word "welfare" to slur his taking of unemployment insurance, pointing out that he worked for 35 years, paying into unemployment insurance, and that he was simply taking money out of a fund that he worked hard to pay into:

OLBERMANN: You're a 52 years old now former law enforcement officer, used to have your own business as a mechanic, you were unemployed for 59 weeks [...] and Mr. Gingrich suggests you got used to being unproductive. If that's not true why did you turn down so many job offers?

HATCHELL: Keith, it's really hard for someone like Mr. Gingrich to understand the fact that when you have a mortgage, you have a family to support, car payments, insurance everything else [...] if you're going out to look for a job, jobs that were going to pay half of what I was making, when they were offering me these jobs and [...] this is going to be a situation where we're going to start you out at the entry level wage, I've got 32 years of experience, in the automotive business, it's kinda hard for me to do that. Even at 40 hours at 7.75 an hour [...] With a mortgage and everything else, yes I was drawing unemployment 475 dollars a week, I paid into since I was a young man, 35 years I actually paid into it. It's unemployment insurance, not welfare that Mr. Gingrich has spoken about. Until such time I can get a gainful job that will let me keep my house, keep my family fed, not necessarily anything expensive, I wasn't going to take any other job.

OLBERMANN: He seemed to leave out the idea that it is insurance and you did pay into it. Pay now and don't get it later! If you had taken those lower paying jobs your family would be considerably worse now than it actually is.

HATCHELL: Yes sir, with the mortgage payments, if you don't pay your mortgage, you'll be out on the street [...] When I did find a situation where I did have it better off, I took it.

OLBERMANN: Sarah, let me ask you something. Can you weigh in on how you reacted when we brought Gingrich's remarks to your attention today?

SARAH HATCHELL: I was appalled, frankly that he would consider welfare into unemployment insurance.

...Unfortunately, Gingrich isn't the only one picking on Hatchell for doing what's best for his family. Last night, Fox host Glenn Beck lamented Hatchell's choice to take the unemployment insurance he has paid into for 35 years: "He chose to take the government handout. People are choosing to be dependent on the government — over picking themselves up and taking less and resetting and starting all over again."

Update It is important to remember that even though Gingrich complains about "welfare," when he was Speaker of the House he directed more federal money to his district than any other suburban district outside of Arlington, Virginia, and the Kennedy Space Center.

Social Insurance and the Washington Post

Posted: 13 Aug 2010 10:45 AM PDT

The Washington Post gives Paul Ryan space on its op-ed pages to present an idea to reform Medicare that is not new -- it is little more than the voucher proposal from Newt Ginrich in 1995 -- and that is full of inaccuracies. The proposal, if implemented, would dismantle Medicare as we know it, but it does not solve the main underlying issue driving future budget problems, the growth in medical costs. Instead, it cuts benefits substantially. As Paul Krugman states, "we already know, from experience with the Medicare Advantage program, that a voucher system would have higher, not lower, costs than our current system. The only way the Ryan plan could save money would be by making those vouchers too small to pay for adequate coverage."

Dean Baker lists 20 inaccuracies in the Ryan op-ed:

Fun With Paul Ryan and the Washington Post, by Dean Baker: The Washington Post really really hates Social Security. They hate Medicare almost as much. Therefore they are willing to give its critics space to say almost anything against the program (the real cause of September 11th) no matter how much they have to twist reality to make their case.
Today, Republican Representative Paul Ryan stepped up to the plate. The Post felt the need to give him an op-ed column after Paul Krugman cruelly subjected Mr. Ryan's "Roadmap for America's Future" to a serious analysis last week. This violated the long accepted practice in elite Washington circles of not holding proponents of Social Security and Medicare cuts/privatization accountable for the things they say. It is therefore understandable the Post would quickly give a coveted op-ed slot to Mr. Ryan to make amends for such a grievous breach of protocol.
The rest of us may not have the power to invent the facts that would be needed to push our policies, but that doesn't mean we can't have fun. Let's count the inaccuracies (they call them something else outside of DC) in Mr. Ryan's piece.
...11 and 12) ...Ryan tells us: "the Democrats' political machine has attacked my contribution to this debate, making the false claim that the only solution put forward to save Medicare would "end Medicare as we know it."
The main attacker of Ryan is Paul Krugman. Krugman is very far from being part of the "Democrats' political machine." In fact, he is almost certainly the prime embodiment of the "professional left" recently criticized by White House spokesperson Robert Gibbs.
Of course Ryan's plan would end Medicare as we know it. It replaces a Medicare system that pays directly for health care with a voucher system. The voucher is explicitly designed not to keep pace with health care costs. Ryan describes the rate of increase in the size of the voucher as "a blended rate of the CPI and the medical care component of the CPI." In other words, something less than the rate of increase in health care costs. It is also means-tested, so that individuals with incomes above $80,000 would see their voucher cut in half (we might see a lot of people earning $79,999 under the Ryan plan) and those with incomes over $200,000 would not get the voucher.
13 and 14) In the next paragraph Ryan boasts that his Medicare cuts (raids?) would maintain the program's solvency: "while reforming the program to ensure it will be there for younger generations. Future seniors would have access to the same coverage I enjoy as a congressman." ... "Far from the claims of "radicalism," this proposal is based on a key reform from the National Bipartisan Commission on the Future of Medicare, chaired by then-Sen. John Breaux (D-La.). That commission in 1999 recommended "modeling a system on the one Members of Congress use to obtain health care coverage for themselves and their families."
Ryan's Medicare voucher might be a voucher system in the same way that a Yugo and a BMW are both cars, but there is absolutely nothing about Ryan's proposal that ensures Medicare beneficiaries the same quality of care as members of Congress.
16) Ryan then describes his Medicare voucher: "The Medicare payment would grow every year..."
Actually, the payment is explicitly designed to fall behind the rate of medical care cost inflation. ...
19) Ryan continues: "Under an ever-expansive, all-consuming central government, costs will be contained with Washington's heavy hand imposing price controls, slashing benefits and arbitrarily rationing seniors' care."
Actually no one has raised the issue of rationing in any context. President Obama's plan will limit the procedures for which the government will pay, as is currently the case with Medicare. However, there is nothing that President Obama has put forward that would do anything to prevent people from getting whatever care they are willing to pay for. Apparently the word "rationing" scores well in focus groups, which is why Ryan and other Republicans use it frequently in their attacks. ...
Ryan concludes by telling readers that his proposal is "my sincere attempt to break the political paralysis on entitlement reform, to show that this challenge can be met -- mathematically and politically -- and to challenge those who disagree with my proposal to offer their own."
In the forgiving spirit of Friday the 13th, I will not count the reference to sincerity as an inaccuracy. The 20 inaccuracies and 4 references to raiding Medicare can speak for themselves. Of course to the seniors who would be unable to afford decent health care if Mr. Ryan's plan became law, his sincerity won't make any difference. ...

That's not flimflam?

The tactic of accusing the other side of raiding a program the he intends to essentially dismantle through a voucher program that cuts benefits (and, notably, does not address the underlying the cost growth problem) is a well worn tactic from Republicans -- put the other side on the defensive by accusing them of doing what you intend to do yourself -- and they'll continue using it so long as the press gives them a free pass, even lauds them, for their efforts. I wouldn't have thought that such a dishonest approach was possible, but recent charges of "death panels" and the like from the Party that has worked hard to end, reduce, or substantially alter social insurance caused me to change my view.

Update: Brad DeLong comments on the Ryan op-ed.

Update: The EPI defends itself against charges appearing in an op-ed in the Washington Post. The topic here is Social Security:

Washington Post gets it wrong on Social Security, Lawrence Mishel: A recent editorial in The Washington Post ["Whatever the deniers say, Social Security needs reform soon"], painted the Economic Policy Institute as a Social Security "denialist" with a negative view of President Obama's National Commission on Fiscal Responsibility and Reform.
EPI certainly does not deny that there are long-term imbalances in the federal budget: passage of the Bush tax cuts and the prosecution of two protracted wars created serious problems even before the Great Recession put 15 million people out of work and dramatically reduced federal revenues. The key spending issues in the long term are rising health care costs and a lack of revenue, not Social Security.
The Post's suggestion that EPI bears some ill will toward the Fiscal Commission is simply not true. While we do have differences with many of the views expressed by some individual members of the commission, which are highlighted in our recent report, "Social Security and the Federal Deficit," EPI has never denigrated the commission's efforts. ...
Nor do we deny that Social Security has a long-term imbalance. But it is emphatically not the cause of the federal government's long-term deficits, since it is prohibited from borrowing and must pay all benefits out of dedicated tax revenues and savings in its trust funds. The editorial itself concedes that "Social Security is not a cause of the current or future debt." We wonder, however, why this is then followed by the non sequitur, "but putting it on a sustainable footing is essential to getting the nation's fiscal house in order." In that same spirit we wonder why there's so much focus on "fixing" Social Security in the discussion around the President's deficit commission since, after all, Social Security is "not a cause of the current or future debt." ...
The "when and how" we address the deficit problem really matters... How soon we start addressing deficits is vitally connected to the state of the economy, and we believe that no deficit reduction should take place before unemployment is at or below 6.0% for six months. How we address the longer term budget challenge is vitally linked to what type of nation we want and what our priorities are: it is not simply a matter of choosing some spending to cut or some revenues to raise. Retirement and Social Security are a case in point. We need to start by acknowledging that retirement insecurity has risen for two reasons: (1) personal wealth has been severely diminished as stock and housing wealth plummeted; and (2) the employer-provided pension system has weakened as fewer employees are provided guaranteed benefits. The challenge then is to address Social Security's shortfall while meaningfully improving retirement security, an approach we wish The Washington Post would take.

Paul Krugman also comments on the calls to "reform" Social Security. Update: More from Krugman.

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