Posts tagged ‘pricing’

Good God, is There No Indignity Too Trivial For Government Officials to Regulate?

The Business Secretary of the UK is desperately worried that when travelling to other countries, Brits will encounter a different selection of Netflix programming from what they are used to at home.  This trivial issue seems to demand a whole new regulatory and copyright regime:

Vince Cable will risk a clash with the film and music industries on Tuesday by calling for the creation of a single EU market for digital services such as Netflix.

The Business Secretary will say in a speech in Brussels that such services should offer the same content in all EU member states, for services paid for in one country to be available in the same form in all countries and for pricing offers to be replicated across the continent.

At present Netflix and Spotify, which operates a subscription streaming service for music, offers different catalogues at different prices depending on where the customer is located.

Harmonising such services across the EU would require copyright holders to change the way they license their material, which is currently carefully segmented for different geographic markets to maximise sales

Whenever Euro-regulators suggest harmonization across countries, they always assume that harmonization will lead to everyone adopting whatever the lowest current rate and broadest service offering that  exists in any one country.  But why?  That pretty much never happens.  It is at least as likely that anyone getting harmonized will get worse service at a higher price.

Poverty and the Minimum Wage

Mark Perry had this chart on the demographics of income distribution.  From it, I want to draw a couple of conclusions about minimum wage and poverty

Click to Enlarge

Note the household income per earner for the lowest quintile.  It equates to something over $14 an hour, well above minimum wage almost everywhere in the US and nearly as high as the $15 national minimum wage proposed as an anti-poverty program.

The problem with most poor households is not wage rate, it is getting full time work.  The household income per earner is nearly as high as the average income of the second quintile.  The problem is that most poor households do not have full-time earners.   The key stat is that only 16% worked full-time and only 30% had any sort of job at all.

This is what always amazes me about the minimum wage discussions.  An increased minimum wage doesn't address the root problem of poverty at all, and in fact will tend to make it worse by pricing the 85% of the poor who need a job or need more hours out of the job market.  If they can't find a job at $8, it is the purest insanity to think they will have a better chance with their limited skills of finding a job at $15.**

 

**Postscript:  I suppose there is one set of facts that would lead to a minimum wage increasing employment in this lowest quintile:  If people who don't work in this quintile are not seeking work because they are happy to live on government benefits and other sources of charity.  This would imply that the reason they are not working full-time is not because no work is available but because they choose indolence.  If this were the case, then a rising minimum wage would provide enough incentive, I suppose, for some to get off the couch and go to work.  I am reluctant to buy into this explanation, but I am SURE that those on the Left who promote the idea of rising minimum wages increasing employment would not accept these assumptions.

Bubble Prices are not Wealth

Conservative sites are running with this story:

OBAMANOMICS IN ACTION: Typical US Household Worth One-Third Less Than Under Bush

Seriously?  The bursting of the housing bubble, which actually began under Bush, is Obama's fault?  Because that is what likely drove middle class household worth down (while the Fed-sponsored asset boom in financial instruments drove up wealth of the top 1%).  I suppose one could say that the Republicans sponsored a bubble that helped the middle class while Obama is sponsoring a bubble that helps the wealthy.

I won't say this stuff is meaningless to the economy, because clearly they affect people's perception of wealth and thus spending and optimism.  But sound long-term economic growth has got to come from stable and rational monetary policy that allows interest rates and financial assets to find their correct level.  Getting political mileage out of bubble pricing of assets only creates incentives for politicians such that they will never stop fiddling with interest rates and credit.

DC Elites Say: Get Your Car Out of My Way

via the Anti-planner:

Washington DC has proposed an anti-auto transportation plan that is ironically called “MoveDC” when its real goal is to reduce the mobility of DC residents. The plan calls for reducing auto commuting from 54 percent to no more than 25 percent of all workers in the district, while favoring transit, cycling, and walking.

This strikes me as just incredibly elitist.   There is no way the politicians and lobbyists who are writing this stuff are going to by cycling and walking or even riding a bus.  They are going to drive (or be driven).  This is about getting the hoi palloi off the roads and out of their damn way.

As Randal O'Toole points out, congestion pricing, if done correctly, could actually improve capacity, but he is skeptical it will be done correctly.

One Thing I Got Wrong About Obamacare

For several years I have feared that my high-deductible health insurance would be illegal.  I am a big believer in high deductible insurance.  First, it is real insurance, requiring that I pay day-to-day expenses but protecting me from catastrophic bill.  Second, it improves the health care system by providing incentives for consumers to actually price-shop services.

Well, I was wrong.  In fact, most people see to be getting higher deductibles than they want.

My only excuse is that the Obama Administration has acted for three years as if they hated high-deductible health coverage and were planning to make it go away.  Kathleen Sebelius has said on a number of occasions that it is not "real insurance" (she believes that insurance should actually be pre-paid medical care).  Seriously, here is an example of what she was saying:

At a White House briefing Tuesday, Health and Human Services Secretary Kathleen Sebelius said some of what passes for health insurance today is so skimpy it can't be compared to the comprehensive coverage available under the law. "Some of these folks have very high catastrophic plans that don't pay for anything unless you get hit by a bus," she said. "They're really mortgage protection, not health insurance."

She is saying this all while the policies being prepared for the exchange were exactly the kind of coverage she was speaking out against.  And she had to know -- I cannot believe a former state insurance commissioner was not looking at what policies were being prepared for the exchange.  After all, her organization made the last minute decision to hide policy pricing from the public (e.g. deleted the window shopping functionality) and this almost certainly was in response to seeing the policies being prepared for the exchange and realizing the pricing and features were not going to make people happy.

By the way, there is a certain schizophrenia here that is entirely political:  These new policies have a $10,000 deductible, but they pay 100% for condoms?    They may well be creating a combination of catastrophic insurance and pre-paid medical care that has the worst of both approaches.

Politicians lie.  But what is it about this administration that lies in ways that are inevitably going to be discovered, in just a few months?  Can they really be so focused on getting through each individual news cycle that this kind of behavior makes sense?

Health Care Lost Opportunities

One of the real frustrations I have with Obamacare is that I believe we were on the cusp of a revolution in health care costs and payment systems, which the PPACA will likely kill.  As more and more of us adopted high-deductible health insurance plans, there was an increasing transparency in pricing, and new delivery models were emerging to serve this consumer-based, non-third-party payer health niche.

I think this even more as I read about the CMS revising its future health care cost inflation numbers to take into account a flattening of medical price inflation that has been occurring over the last few years.  The Left has hilariously claimed credit for this cost reduction via some kind of time-travelling effect of not-yet-implemented PPACA measures.  But Charles Blahous reads the CMS report more carefully and finds that the PPACA has nothing to do with these inflation reductions, and in fact is if anything slowing the cost reduction progress.

The obvious point that leaps out from this graph is that the chief CMS actuary found that the ACA would increase national health expenditures through 2016. Not content to let the tables speak for themselves on this point, CMS was explicit in the text of its memorandum that the ACA increased the near-term cost projections:

“The estimated effects of the PPACA on overall national health expenditures (NHE) are shown in table 5. In aggregate, we estimate that for calendar years 2010 through 2019, NHE would increase by $311 billion or 0.9 percent, over the updated baseline projection that was released on June 29, 2009. Year by year, the relative increases are largest in 2016, when the coverage expansions would be fully phased in…The increase in total NHE is estimated to occur primarily as a net result of the substantial expansions in coverage under the PPACA…”

...CMS is now projecting slower health care expenditure growth than they were in 2009 and 2010. CMS’s current projection of 2016 health spending totaling 18.4% of GDP is 1 percentage point lower than its June 2009 estimate (19.4%) and 0.9 points lower than its February 2009 estimate (19.3%).

Why did CMS lower its estimates of future health spending? It wasn’t because of the ACA. We know this for a fact because CMS has released a memorandum detailing the reasons for changes in their ten-year outlook since April 2010. Here are the factors CMS cited, and the percentage of the improvement each was responsible for:

1) Medicare/Medicaid/other programs “unrelated to the ACA” (50.7% of improvement).

2) Other factors “unrelated to the ACA” (26.1%).

3) Updated data on historical spending growth (21.8%).

4) Updated macroeconomic assumptions (6.1%).

Now, that adds up to 104.7% of the total improvement. The reason these four factors add to more than 100% is that a fifth factor, the “impact of the ACA,” worked against the improvement. Per CMS, adjusting the April 2010 projections for the subsequent impact of the ACA shows it further increasing spending over ten years (equal to and opposite from 4.7% of the total change).

Waaaaaaaay Too Late, And I Bet Obama Knows It

Via the WSJ:

President Barack Obama said Thursday that insurers will be able to continue health-insurance coverage next year for current policy holders that otherwise would be canceled under the new health-care law....

"Insurers can offer consumers the option to renew their 2013 health plans in 2014 without change, allowing these individuals to keep their plans," a senior White House official said, previewing Mr. Obama's announcement. These consumers will be given the opportunity to re-enroll, the official said, essentially extending the so-called grandfather clause in the 2010 health overhaul that allowed people to keep their plans if they were in place before the law passed.

"This step today is in the interest of fixing some of the challenges that have arisen" since then, the official said.

Under the plan, insurers are required to notify consumers whether their renewed plans don't include coverage that was required under the new health law, which set minimum coverage standards. They must tell consumers that new insurance options and possibly tax subsidies may be available for policies bought through online federal marketplace.

1.  The President announced this today to try to head off Congressional legislation to do the same thing.  Have we just given up on the rule of law?  Can the President unilaterally modify any law he pleases?  Shouldn't a modification in existing legislation have to come from the Legislature?  Can we just make it official and change the Constitution to say that the President can alter any legislation he wants as long as his party originally passed it?

2.  How is this even going to be possible?   My understanding is that insurance companies spend months preparing the pricing and features of their products for the next year.  The have done no preparation to offer these plans in 2014, because, you know, they were (and still are, whatever the President says in a news conference) illegal.   Its like your wife telling you to take the next exit when you are in the left lane driving 75 miles an hour in heavy traffic and the exit is about 100 yards away.  With 31 business days between now and the new year, how are they supposed to do this?  Or are they even expected to be able to do so?  Is this the President's way to blame shift to insurance companies?

Update:

Why The Administration Could Not Delay the Exchanges, Even When They Clearly Did Not Work

I think it is now clear why the Administration could not delay the exchanges, even when Republicans essentially cast them a lifeline during the budget debate by trying to delay the mandate by a year:  I think the Administration knew that a massive wave of insurance policy cancellations were already in the mail, and that the recipients of these letters would be facing huge price increases for their policies.

It is telling that the one thing you are NOT hearing from Administration officials in response to the policy cancellations is surprise.  If they were surprised, they would be yelling stuff like, "what the hell are those insurance companies doing?"  They knew this was coming, and you get the sense they were grimly bracing for it to be made public, hoping that perhaps their friends in the media would not make a big deal about it.

The minimum requirements on health plans that is driving these cancellations cannot at this point be cancelled.  Or, put more precisely, they could be cancelled but the act would be meaningless, because insurance companies have no way to suddenly go back to the old policies and pricing.  It takes too much planning to work out their product line and they can't just switch back on a dime.

So the huge wave of cancellations and price increases in the individual market was unstoppable.  That being said, the Administration has to be able to offer an alternative, and the only one they have is the hope one might get his or her new policy subsidized by other taxpayers.  But that is only possible through the exchanges.  So that had to be allowed to go forward and made to work, somehow.

There is no fix to this mess.  This is an avalanche that was loosed three years ago and cannot be stopped.

Will Health Insurance on Obamacare Exchanges Cost More Than People Are Paying Today?

I am not going to add to the confusion on this.  For a lot of people who already have health insurance, the answer will be "maybe".  Older folks and folks with health problems may see less expensive policies, and younger people will likely pay more.

I do, however, want to add two observations that are often lost in this discussion:

  • For the millions of people who have chosen not to buy health insurance and now will be forced to do so by law, they will certainly be paying more.  Anything is more than the "zero" which has been these peoples' preference to date.
  • A more interesting question is:  what will happen to premiums in the second year.  Right now, insurance companies are pricing as if all these young people who have not been buying policies will be forced to do so by the law (a key, maybe the key, funding source for Obamacare is forcing young healthy people to buy overpriced policies to subsidize older people).  What if they refuse?  After all, the penalties in the first several years are not very severe, and Obamacare removes any risk from not being covered, because if one gets sick he can just run and sign up then, like getting home insurance once your house is on fire.  The prices on the exchanges in 2014 will be very interesting.

Local Celebrity

I just read about a project dedicated to local celebrities, people who are very famous in their own backyard but not known at all beyond a small region.

The one person in this category I could think of (beyond local TV and radio personalities) is Johnny Barnes in Bermuda.   I encountered him around the year 2000 when I went to Bermuda for a job interview -- I was running Internet companies at the time and a group in Bermuda had an idea to combine an Internet B2B model with offshore banking and tax havens.  Transfer pricing games seemed to be prominent in the model.

Anyway, there he was, at a busy traffic circle almost everyone on the island passed when going to work in the morning.  He just stood there saying hello and good morning to everyone.  I found out later he was a Bermuda icon -- if he missed a day the radio stations and government offices would be flooded with calls from people asking if he was OK.  Searching the Internet, I found that someone has made a film about him.

 

Health Care Prices Are Not Actually Real Prices

Good stuff from Peter Suderman at Reason

 In March, journalist Steven Brill published a lengthy piece in Time magazine on high medical bills, comparing hospital “chargemaster” rates—the listed prices—to the rates paid by Medicare. And over the weekend, Elisabeth Rosenthal compared U.S. prices for a variety of health services to the lower prices paid by other countries.

Both pieces offer essentially the same thesis: The U.S. spends too much on health care because the prices Americans pay for health care services are too high. And both implicitly nod toward more aggressive regulation of medical prices as a solution.

Part of the reason these pieces get so much attention is that most Americans don’t actually know much of anything at all about the prices they pay for health services. That’s because Americans don’t pay those prices themselves. Instead, they pay subsidized premiums for insurance provided through their employers, or they pay taxes and get Medicare or Medicaid. Even people who purchase unsubsidized insurance on the individual market don’t know much about the particular prices for specific health services. They may open their wallets for copays to health providers, or cover some expenses up to a certain annual amount, but in many if not most cases they are not paying a full, listed price out of pocket.

What that means is that, in an important sense, the “prices” for health care services in America are not really prices at all. A better way to label them might be reimbursements—planned by Medicare bureaucrats and powerful physician advisory groups, negotiated by insurers who keep a watchful eye on the prices that Medicare charges, and only very occasionally paid by individuals, few of whom are shopping based on price and service quality, and a handful of whom are ultra-wealthy foreigners charged fantastic rates because they can afford it.

This is the real problem with health care pricing in the U.S.: not the lack of sufficiently aggressive price controls, but the lack of meaningful price signals.

Much more at the link.  If they really want an interesting comparison, compare the prices of medical care not covered by insurance (actually pre-paid medical plans) in the US, and those that are -- e.g. for plastic surgery vs. other out-patient surgeries.

Health Care and Prices

Kevin Drum is lauding the transparency an Oregon health insurance exchange which was initiated some apparently welcome price competition into a market for now standardized products.  My response was this:

I applaud any effort by this Administration and others to improve the transparency of pricing in the medical field.  I would have more confidence, though, if all of you folks were not pushing for 100% pre-paid medical plans that will essentially eliminate price-shopping by individuals, and in so doing effectively eliminate the enormous utility of prices.  Prices will soon be meaningful for one thing -- insurance -- in the health care field and absolutely meaningless for everything else in the field.

By the way, at the same time you are improving competition on price, you are eliminating by fiat all competition on features (e.g. what is covered, what deductible I want, etc).  This "success" is like the government mandating one single cell phone design, and then crowing how much easier shopping is for consumers because there is now only one choice.  A simple world for consumers is not necessarily a better world.  I am sure Medieval peasants had a very simple shopping experience as well.

Cable Unbundling Will Reduce Niche Channel Choices

I wish I could remember where I read this to give proper credit, but it is funny that the folks who are absolutely bending over backwards to bundle health care want to unbundle cable TV.  Think about it -- the person who just wants MSNBC but has to buy the whole cable package to get it is getting hosed far less badly than the young person next year who needs no medical care but will have to buy a pre-paid medical plan designed for a 65-year-old.

But I believe that cable unbundling will achieve the opposite effect from what most people expect.  And the key to my analysis rests, as do all important economic issues, on the difference between average and at the margin.  This is a repost from 2007

[A la Carte cable pricing] will reduce the number of interesting niche choices on cable.

For some reason, it is terribly hard to convince people of this.  In fact, supporters of this regulation argue just the opposite.  They argue that this is a better plan for folks who only are passionate about, say, the kite-flying channel, because they only have to pay for the channel they want rather than all of basic cable to get this one station.   This is a fine theory, but it only works if the kite-flying channel still exists in the new regulatory regime.  Let me explain.

Clearly the kite-flying channel serves a niche market.  Not that many people are going to be interested enough in kite flying alone to pay $5 a month for it.  But despite this niche status, it may well make sense for the cable companies to add it to their basic package.  Remember that the basic package already attracts the heart of the market.  Between CNN and ESPN and the Discovery Channel and the History Channel, etc., the majority of the market already sees enough value in the package to sign on.

Let's say the cable company wants to add a channel to their basic package, and they have two choices.  They have a sports channel they could add (let's say there are already 5 other sports channels in the package) or they can add the Kite-flying channel.  Far more people are likely to watch the sports channel than the kite flying channel.  But in the current pricing regime, this is not necessarily what matters to the cable company.  Their concern is to get more people to sign up for the cable TV.  And it may be that everyone who could possibly be attracted to sports is already a subscriber, and a sixth sports channel would not attract any new subscribers.  It is entirely possible that a niche channel like the kite-flying channel will actually bring more incremental subscribers to the basic package than another sports channel, and thus be a more attractive addition to the basic package for the cable company.

But now let's look at the situation if a la carte pricing was required.  In this situation, individual channels don't support the package, but must stand on their own and earn revenue.  The cable company's decision-making on adding an extra channel is going to be very different in this world.  In this scenario, they are going to compare the new sports channel with the Kite-flying channel based on how many people will sign up and pay for that standalone channel.  And in this case, a sixth (and probably seventh and eighth and ninth) sports channel is going to look better to them than the Kite-flying channel.   Niche channels that were added to bring greater reach to their basic cable package are going to be dropped in favor of more of what appeals to the majority.

I think about this all the time when I scan the dial on Sirius radio, which sells its services as one package rather than a la carte.  There are several stations that I always wonder, "does anyone listen to that?"  But Sirius doesn't need another channel for the majority out at #300 -- they need channels that will bring new niche audiences to the package.  So an Egyptian reggae channel may be more valuable as the 301st offering than a 20th sports channel.  This is what we may very likely be giving up if we continue down this road of regulating away cable package pricing.  Yeah, in a la carte pricing people who want just the kite-flying channel will pay less for it, but will it still be available?

Note the key to this analysis is the limited channel capacity of cable or satellite.  This is not a pure free market, where there is always room for another niche offering to try their hand with consumers.   Cable channels are more like products competing for limited floor space at Costco - to make the cut in an a la carte world, a channel has to do a lot of business.

Prices in Healthcare

Had an interesting discussion with my favorite New England liberal this weekend about the Time Magazine article on Hospital pricing and charges.  We both found the articles to be excellent.  But drew completely different conclusions.  She saw this all as a failure of capitalism, a sign of the inherent corruption that occurs that demands more goverment intervention.  I saw it as a totally screwed up market, from the dominance of third party payers to government-enforced monopolies (e.g. certificates of need), that killed any incentive of consumers to shop. The entire pricing mechanism is broken, and simply replacing it with a set of fiat prices from the government is not going to make things better.

Megan McArdle has a good interview with Bart Wilson on this very topic.  Here is a small excerpt:

Megan: Okay, so let me ask the obvious question: if a whole lot of health care wonks think that government-rate setting would fix health care costs, why should I be skeptical?

Wilson: Who knows the conditions of who values what and the opportunity costs of supplying health care? What set of minds in the government has the knowledge needed to make tradeoffs, to know who is best to supply this service or that one?

The values and costs of healthcare have to be discovered.

Megan: The wonks who favor rate-setting argue that health care simply isn't like any other market. For one thing, there's an information problem: how do I know if I want a heart bypass or not?

Why not let an expert who has read all the studies on heart bypasses make that decision?

Wilson: Right now, the doctor recommends to the patient what the insurance company will pay for. What incentive does the patient have to find alternatives? (None.)

There is the assumption that an expert knows all the alternatives. Doctors are not interchangeable. They know different things.

The function of a market is let us learn who will serve us sufficiently well.

Megan: So let's step back even farther, to 30,000 feet or so, for a second. What does the price do in a market? Why should I want to put a price on my lung transplant?

Wilson: A price is like a symbol at any moment of what millions of people are willing and able to do. All of the technology and services of the doctors have to be weighed against whatever else they could be applied to.

The prices of alternatives to lung transplants are doing the same thing. The difficulty is assuming that a lung transplant is "inelastic". What a price system does is find what part of say, healthcare, is on the margin.

“Inelastic” means that I’m relatively indifferent to the price. The last glass of water in a desert is the quintessential inelastic good; people will pay all they have to get it. Things can be more or less inelastic, which is to say, that demand can be more or less responsive to changes in price. Health care is often thought to be very inelastic.

Megan: But this is precisely the argument that health care wonks make: when I need a lung transplant, I don't have the time, or the emotional ability, to comparison shop. So there's no price discovery mechanism.

Wilson: Does the government know or have the ability to comparison shop for me? Do they know my circumstances?

Also, for some healthcare services, you do have the ability to comparison shop. Those services will then discipline the healthcare market in general.

Reality Overruns My Fiction

In the current novel I am writing, set in the future, the dollar has collapsed and everyone uses something called "zons" instead, a currency backed not by gold or the full faith and credit of the US Government (lol) but on the stable pricing and the promise of redemption at Amazon.com.   Yesterday, reality overran this admittedly small element of my story.  I will need to write faster.

Cost vs. Value-Based Pricing

Cost-based pricing would say that digital media streamed to the home should always be less expensive than the same media delivered on physical disks in boxes delivered by UPS.

Value-based pricing says that someone with a Roku who wants to see a show right now, not two days from now, and doesn't have a DVD player and doesn't want to hassle with putting disks in and out to get through a whole season of a TV show might pay more for the digital delivery.

Sometimes cost-based pricing rules.  Sometimes value-based pricing dominates.  Sometimes pricing is weird due to temporary scarcity or gluts.  Sometimes pricing is inexplicable.  Which is this (click to enlarge):

Entire Season on physical DVD's with free Amazon Prime delivery:  $13.99

Entire Season streamed digitally:  $22.99

Since I like to buy the disks and then rip them to my video server at home running XBMC, I was happy to get the disks inexpensively.

Counting Coup

The fiscal settlement passed last night did absolutely nothing to improve the deficit or the financial sanity of government.  Its only purpose, as far as I can tell, was to let Democrats count coup on rich people as a reward for winning the last election.  It's like telling your kids that on their birthday, you will take them to do absolutely anything they like, and Democrats chose to display their disdain for rich people as their one act of celebration.    A few other observations:

  • I had expected that they would gen up a bunch of fake savings and accounting tricks to pretend there were spending cuts in proportion to tax increases, but apparently they did not feel the need to bother.  Essentially only trivial spending cuts were included.
  • At what point can we officially declare that the reduction in doctor reimbursement rates that supposedly paid for much of Obamacare is a great lie and will never happen?  Congress once again extended the "doc fix" another year, eliminating the single largest source of savings that was to fund Obamacare.  Congress has been playing this same game  -- using elimination of the doc fix to supposedly fund programs and then quietly renewing the doc fix later -- for over a decade
  • The restoration of the FICA tax is probably a good thing.  Though I think the reality is something else, people still think of these as premiums that pay for future benefits, so in the spirit of good pricing, the premiums should reflect the true costs.  And FICA premiums have always been set about at the right level (it is only the fact that past Congresses spent all the money supposedly banked for future generations that Social Security has a financial problem).  In fact, we should raise Medicare premiums as well.
  • Apparently, though I have not seen the list, this last minute deal was chock full of corporate cronyism, with a raft of special interst tax preferences thrown into the mix.

And so ends, I suppose, the 12-year saga of the Bush tax cuts, with tax cuts for the rich revoked and the rest made permanent.   The establishment media decided early on that it was going to run with the story line that these cuts were "for the rich."  The irony, that will never get any play, is that now, at the end, it is all too clear that this was far from the case.  Reversing the tax cuts to the rich only reversed a small percentage of the original tax cuts.  In fact, if the Bush tax cuts had been mainly for the rich, then the Democrats would not have even bothered addressing the fiscal cliff.

Why Re-importation Won't Lower Prices

Just the other day I was making the point that reimporting pharmaceuticals from other countries where they are sold cheaper is not any sort of long-term solution to bringing down US drug costs.  Sure, it's frustrating that the US pays almost all of the fixed cost of drug development while other countries get these drugs closer to marginal cost.  But there is no solution to this that has everyone paying marginal cost -- unless, that is, we are willing to give up on all future drug development by sending the signal that these costs can no longer be recovered in market pricing.   All drug reimportation will do is raise the overseas cost of pharmaceuticals and hurt millions of poorer people.

I always find it ironic that drug reimportation is a favorite solution of many liberals, who are absolutely offended at paying higher costs in the US than what is paid in other countries.  Well, welcome to being rich.  You may think you are safely not-rich when you are advocating various soak-the-rich tax policies, but on an international scale, even many of America's bottom quartile would be considered well-off in poorer nations.  Compared to the US, even countries like France are substantially less wealthy.

Anyway, this was all brought to mind by this useful analysis of re-importation by Megan McArdle, though in this case it is in the context of textbook prices.

Striking a Blow Against the State

Fortunately I am not vain, so that I can still post this terrible picture of myself.  I am proudly holding the government-mandated flow restrictor I just removed from my most recent shower head purchase.  I don't buy any shower head until I make sure it has a removable restrictor.

 

The Federal laws restricting shower head flows have got to be among the dumbest on the books.  Some thoughts:

  • Water is not equally scarce everywhere.  So why is everyone required to conserve?  Why is the ideal flow rate the same in Seattle as in Phoenix?
  • Government policy for over a century has been to promote subsidized water prices that don't reflect its true scarcity (particularly to farmers).  Then, having guaranteed overuse via its pricing actions, the government then implements silly laws like this to try to offset the harm from its meddling in prices.
  • We have a lawn in Phoenix that needs constant watering and a pool that evaporates so fast in the summer one can almost see the water level dropping.  But the state's priority is to knock of a few gallons of water use from my shower.
  • With the low flow shower heads, it takes me three times longer to get the soap and shampoo off of me than with a full-flow head.  So we cut the water rate by half, but extend shower times by three.  And this helps, how?  And don't even get me started on low-flow toilets
  • The last three hotel rooms I have stayed in have had double shower heads, to make up the lost flow from wimpy government-approved single heads.  This process of cutting back on how much a single head can flow and then adding extra heads is incredibly dumb and wasteful.
  • I suspect this is all secret revenge from some English expat that wanted US showers to be as bad as those in Britain.

What is a Green Job?

Turns out the guy who gasses up a school bus has a green job.

When Bureau of Labor Statistics Acting Commissioner John Galvin balked on what qualifies as a green job under the agency definition, Issa responded, “Just answer the question.”

“Does someone who sweeps the floor at a company that makes solar panels -- is that a green job?” Issa asked.

“Yes,” replied Galvin, who also acknowledged that a bike-repair shop clerk, a hybrid-bus driver, any school bus driver and “the guy who puts gas in a school bus” are all defined as green jobs.

He also acknowledged that an oil lobbyist, if his work is related to environmental issues, would also have a green job.

It gets better.  Apparently, when I worked at the Exxon refinery in Baytown, TX, I had a green job:

The Bureau of Labor Statistics states a green job is either: a business that produces goods or provide services that benefit the environment or conserve natural resources, or a job in which a worker's duties involve making their establishment's production processes more environmentally friendly or use fewer natural resources

I have never encountered an industrial engineering job anywhere that was not concerned with having their processes use fewer natural resources.

I would argue the greenest of jobs are held by oil and other commodity speculators and traders.  They ensure that prices at all times accurately match our current understanding of the scarcity of each resource.  Without these accurate pricing signals, all efforts to properly invest to use more or fewer of these materials would be impossible.  Just look at the "success" of investments like Solyndra that were made irregardless of these market pricing signals.

Shopping for Health Care

I am exhausted with folks who have never tried to shop for health care telling me that it can't be done, despite the fact that I do it all the time and achieve substantial savings.  This is a meme developped and maintained solely to support government power by declaring that there is a market failure in the pricing mechanics in the health care industry that can only  be solved through regulation and price controls.  I wrote in response

I agree that the pricing in health care is often arbitrary and capricious.  Of course some suppliers are going to try to soak third party payers.  But I don't think simply changing the payer (from private to public) or having a government bureaucracy set prices for  millions of line items is the solution.  My diagnosis is that health care lacks the one thing we have for most every other product or service:  shopping.

Now, you try to head off this argument with a few folks who claim shopping is impossible in health care.  But that is absurd.  There is a large and growing community of us who have real health insurance, rather than pre-paid medical plans, which means we have high deductibles.  We pay all of our regular expenses out of pocket, and maintain health insurance for large, unpredictable, potentially bankrupting expenses.

I must admit that shopping for health care seemed odd and a bit intimidating at first, having lived for years in the world of gold-plated, pay-for-everything corporate health care accounts.  But it really is not that hard.  I have consistently knocked down the cost of everything from x-rays for my kids' fractures to colonoscopies by a half to two-thirds.  I am now used to doctors and providers having that second price book under the counter they go to if they know you don't have a third-party payer they can soak.  We always research and ask for generics.  We think twice before accepting the need for an expensive test, like a MRI, and price shop it if we have to have one.  I push back on my dentist who tries to x-ray my teeth every few months.  I have many friends that saved a ton of money on oncology treatments by just doing a little shopping.

I am exhausted with academics and writers who have never tried to shop for health care telling me it is impossible.  Many of us do it, and there are more and more resources out there for us.  Sure, there are certain things I am not going to have the time or ability to price shop -- if I am lying on my back having a heart attack, my wife (hopefully) is not going to check rates at the hospitals.  But it is a fraud to extrapolate from this minority of health care situations to all health care expenditures.

The other argument is used is that at the beginning of a health care interaction we may not know exactly what care is needed.  So what?  The same is true of auto repair, but I don't blithely allow the repairs to proceed at any cost just because I didn't know up front what the diagnosis would be.  I get an estimate when each new problem is found, and I have on several occasions interrupted a car repair, told them their price was too high on certain repairs, and went elsewhere for the repair or deferred it entirely.

Let's suppose there is some sort of market failure for 10-20% of health care charges where price shopping is impossible.  Then let's discuss government regulatory approaches for those situations.  But for the other 80-90%, we should be structuring a health care system where consumers provide the price regulation, as they do in nearly every other industry, by shopping.

As a note, some people are exhausted by the idea of shopping.  My first response is, so what?  Get over it.  We are not going to take over a whole industry just to free you from a bit of hassle.  The second response is that research shows that only a small percentage of buyers need to be price shoppers to enforce price discipline.  I generally trust that Amazon has low prices and don't always check them, because I know there are much, much more rabid people who do care and do check.

Over time, I have found physicians who are both sympathetic and cooperative with this approach and actively help us minimize the cost of our care.  Its just amazing -- somehow we accept this image as a doctor being above all this cost stuff, in fact with considerations of price and cost being corrupting to their mission of keeping us healthy.  Imagine a car mechanic that took that attitude -- "I'm the expert here and you will pay whatever it costs to do what I say you need to do."  Would you fire the mechanic and find a better and cheaper one, or would you suggest that what we really need is a massive new government bureaucracy to set prices for every imaginable repair a car might need.

Sometimes I suspect much of the support for government health care is from people who see shopping and taking responsibility for their own care as too much of a hassle.

State of the Union: Apparently, Hugh Hefner is Responsible for Abstinence

My column for this week is up at Forbes, and inevitably, deals with the State of the Union address last night.

But the portion that really floored me was Obama’s taking credit for the increase in US oil and gas production over the last several years.  It is certainly true that, against all predictions of peak oil, new technologies have helped drive a surge in US hydrocarbon production.  Combined with a recession-driven drop in demand, America’s oil imports as a percentage of its total use has dropped to 45.6%, the lowest level in over 15 years.

This surge in energy production is a fabulous reminder of how markets work.  For years I have written that the peak oil folks were missing something fundamental by performing an overly static analysis.  They looked at current “proven” reserves of oil and gas and projected forward how many years it would take for these to run out.  But oil and gas reserve numbers only make sense in the context of a particular set of technologies and pricing levels.  As hydrocarbons run short, rising prices tend to spur both innovation and new, more expensive exploration activity.  Oil and gas companies are once again proving Julian Simon’s addage that the only true scarcity is human brain power, and they should be given a lot of credit for the recent production boom.

The one person who deserves no credit for this boom is Barack Obama....

Read it all.

Thinking About Medicare and Social Security

Neither Medicare nor Social Security should be government programs.  The government essentially takes on two roles in these two insurance programs:  1) To subsidize the premiums of low income Americans; and 2) To use its power of coercion to force everyone to participate.  I have no stomach for the latter role and the former could be much more cheaply achieved with some sort of voucher or credit program.

But these programs are not going away.  While both need reform, it may turn out to be politically impossible to even reform them.

But if we take off the table for a moment their existence and their basic structure, there is still an enormous problem we might fix:  pricing.  There is absolutely nothing more deadly to an economy than a false or corrupted pricing signal.  But that is clearly what we have with these two programs.  The Medicare "premium" (tax) taken out of every paycheck is clearly way too small to cover true actuarial costs of this program.  And while Social Security rates may have been set right if the premiums were really being kept in escrow for the future, the fact is that the so-called trust fund has been raided into oblivion by past government spending programs  -- Social Security taxes need to be reset to reflect that fact.

The result, of course, will be a substantial increase in both payroll taxes.  I am not a big fan of tax increases, and find taxes on labor to be among the worst.  But as long as we hold on to the collective notion that these are insurance programs and the taxes we pay are premiums, its time to stop fooling Americans into thinking that the premiums they are paying are truly sufficient to fund their benefits.  Maybe after we reprice the "premiums" to their true actuarial value, we can then have a real debate about the structure and existence of these programs.

The Union Problem

I have always defended private unions on the ground that workers have a freedom of association just as much as anyone else.  I think the government has tilted the playing field in the union's favor too much, but I will leave that aside for today.  I will also leave aside the problem of public unions, where there is no one really representing the taxpayer on the other side of the table in negotiations (many politicians in union states owe their jobs to union support).

Leave all of that aside.  The economic problem with unions tends to be that they are such a conservative (little c) force in an economy that needs dynamism to grow and expand wealth.  Here is a great example:

The University of California last week tentatively agreed to a deal with UC-AFT that included a new provision barring the system and its campuses from creating online courses or programs that would result in “a change to a term or condition of employment” of any lecturer without first dealing with the union.

Bob Samuels, the president of the union, says this effectively gives the union veto power over any online initiative that might endangers the jobs or work lives of its members. “We feel that we could stop almost any online program through this contract,” Samuels told Inside Higher Ed.

I have said for a long time that negotiations for pay and benefits (in private unions) tend to be the least problematic union activity (different story in public unions, where the relationship to management is not adversarial).  Longer term, union imposed work rules and restrictions tend to be much more costly.  The reason I think is that corporate executives can easily value the difference between various pay and benefits packages, but have a hard time valuing flexibility and dynamism.  If union rules cut off potential future as-yet-unknown growth and cost reduction efforts, the cost of these rules can be huge but equally they can be almost impossible to value (more like options pricing than straight cost-benefit).

Cable Unbundling

Megan McArdle responds to yet another call for government-enforced unbundling (or a la carte pricing) for cable TV.  I think she does a pretty good job in response, but I wanted to go in depth on a couple of issues.

First, it is interesting to me that the exact same people, typically on the Left, who want to unbundle cable TV are the same ones who angle for net neutrality, which in effect is government rules to enforce bundling of Internet services.  Which leads me to think this has less to do with consumer protection and more to do with the raw exercise of power to overturn free market solutions to problems.

Second, I think that unbundling would be a terrible solution for customers, particularly for those whose interests are focused and esoteric (e.g, they like the GLBT channel or whatever).  These folks think unblundling will get them cheaper rates for the one channel they want.  What it more likely will get them is fewer of those niche, esoteric channels.  I will simply repeat an earlier article I wrote four years ago on this topic:

I see that the drive to force cable companies to offer their basic cable package a la carte rather than as a bundle is gaining steam again.  This is the dumbest regulatory step imaginable, and will reduce the number of interesting niche choices on cable.

For some reason, it is terribly hard to convince people of this.  In fact, supporters of this regulation argue just the opposite.  They argue that this is a better plan for folks who only are passionate about, say, the kite-flying channel, because they only have to pay for the channel they want rather than all of basic cable to get this one station.   This is a fine theory, but it only works if the kite-flying channel still exists in the new regulatory regime.  Let me explain.

Clearly the kite-flying channel serves a niche market.  Not that many people are going to be interested enough in kite flying alone to pay $5 a month for it.  But despite this niche status, it may well make sense for the cable companies to add it to their basic package.  Remember that the basic package already attracts the heart of the market.  Between CNN and ESPN and the Discovery Channel and the History Channel, etc., the majority of the market already sees enough value in the package to sign on.

Let’s say the cable company wants to add a channel to their basic package, and they have two choices.  They have a sports channel they could add (let’s say there are already 5 other sports channels in the package) or they can add the Kite-flying channel.  Far more people are likely to watch the sports channel than the kite flying channel.  But in the current pricing regime, this is not necessarily what matters to the cable company.  Their concern is to get more people to sign up for the cable TV.  And it may be that everyone who could possibly be attracted to sports is already a subscriber, and a sixth sports channel would not attract any new subscribers.  It is entirely possible that a niche channel like the kite-flying channel will actually bring more incremental subscribers to the basic package than another sports channel, and thus be a more attractive addition to the basic package for the cable company.

But now let’s look at the situation if a la carte pricing was required.  In this situation, individual channels don’t support the package, but must stand on their own and earn revenue.  The cable company’s decision-making on adding an extra channel is going to be very different in this world.  In this scenario, they are going to compare the new sports channel with the Kite-flying channel based on how many people will sign up and pay for that standalone channel.  And in this case, a sixth (and probably seventh and eighth and ninth) sports channel is going to look better to them than the Kite-flying channel.   Niche channels that were added to bring greater reach to their basic cable package are going to be dropped in favor of more of what appeals to the majority.

I think about this all the time when I scan the dial on Sirius radio, which sells its services as one package rather than a la carte.  There are several stations that I always wonder, "does anyone listen to that?"  But Sirius doesn’t need another channel for the majority out at #300 — they need channels that will bring new niche audiences to the package.  So an Egyptian reggae channel may be more valuable as the 301st offering than a 20th sports channel.  This is what we may very likely be giving up if we continue down this road of regulating away cable package pricing.  Yeah, in a la carte pricing people who want just the kite-flying channel will pay less for it, but will it still be available?