Correctly Political: Wealth Care, a Historical Note

Insurance 4

~by jfxgillis

Okay. So here’s the thing about the health care industry in the USA, especially the insurance sector. It stinks. Everyone knows it. Everyone feels it. We pay more for what we get, and we get less for what we pay for, than virtually any other developed country by any systemic measure. Even people with gold-plated policies they have by virtue of highly remunerative employment know those policies are overpriced even as they benefit from them.

The old World Health Organization rankings rated us 37th in the world. Granted, there’s honest dispute about that, but still, massaging the figures in our favor doesn’t get you that far up the rankings. We still stink. And the Commonwealth Fund’s ranking of 19 developed countries puts us dead last. And I do mean dead.

I believe in USA Number One!! and all, but I could live with it if we were say, fourth or ninth, or maybe even just outside the top ten, but  being number one only in per capita health care expenditures while last in health care outcomes isn’t just atrocious. It’s irrational. It’s a mystery. The odd thing is, the resolution to the puzzle doesn’t seem to be amenable to ideological explanation. On the one hand, we spend more on taxes on provision of health care through the public sector than many of the nominally more socialist countries ahead of us on the Commonwealth Fund chart. On the other hand, our health care is more dominated by the private sector than any other country on the list. Both Left and Right can agree that there’s something weird about being last in outcomes and first in expenditures.

I was watching Bill Moyers interview conservative David Frum last week when he said something I agreed with. That was something of a shock to my system, and I assumed I had simply misheard him, so I hit rewind on my Tivo and played it again. Whoa there. I was right—he had actually, probably for the first time, said something I agreed with. Here it is:

Why is the American health system so crazy? Why do Americans spend so much more than anybody else for outcomes that aren’t a lot better? Well, we talk about the health market. We don’t have a health market. We have 50 state markets.

And although there are many, many insurers, in many states there are only one or two who are active. So what we need to do, first of all, is create a national market. I would like to see the responsibility for regulating health care removed from the states entirely and put in the hands of the federal government.

He went on to justify his argument in terms absolutely consistent with the business- and Capital-oriented conservatism he’s always espoused, based on the boringly ordinary model of economies of scale:

[T]hink about it. If we had 50 different mileage standards in this country, if we had 50 different sets of rules to describe what could and couldn’t go into toothpaste, we would just collapse the national market. The reason almost every product is cheaper and better and more convenient in the United States than it is in other places is because of the size of the national market. No surprise that when the national market is cut up for one product, that is the product that is the most troublesome.

But why is that? If the conservative Frum could offer an argument in favor of Federal regulation that the liberal Moyer could embrace, and if the forces  they each favor, economic efficiency and social justice, will have been operating for a century or so, how did we end up with a fragmented system of insurance riddled by conflict, injustice and inefficiency? Turns out, there’s a good reason for that.

Whenever there’s some aspect of American government that’s blindingly stupid, disturbing amoral or simply downright crazy, you can bet there’s some stupidass Supreme Court dung piled in a dark corner somewhere stinking up the joint. In this instance, it goes back to 1869, to a case called Paul v. Virginia, in which the ability of states to interfere in the underwriting of insurance across state lines was challenged, as when a company in one state insures a property in another. Here’s what the Court held:

The defect of the argument lies in the character of their business. Issuing a policy of insurance is not a transaction of commerce. The policies are simple contracts of indemnity against loss by fire, entered into between the corporations and the assured, for a consideration paid by the latter. These contracts are not articles of commerce in any proper meaning of the word. They are not subjects of trade and barter offered in the market as something having an existence and value independent of the parties to them. They are not commodities to be shipped or forwarded from one State to another, and then put up for sale. They are like other personal contracts between parties which are completed by their signature and the transfer of the consideration. Such contracts are not interstate transactions, though the parties may be domiciled in different States. The policies do not take effect — are not executed contracts — until delivered by the agent in Virginia. They are, then, local transactions, and are governed by the local law. They do not constitute a part of the commerce between the States any more than a contract for the purchase and sale of goods in Virginia by a citizen of New York whilst in Virginia would constitute a portion of such commerce.

Is that not the stupidest thing the Supreme Court has ever said? Well, okay, Bush v. Gore was stupider, but other than that, is that not the stupidest thing the Supreme Court ever said? Well, okay, Dred Scott was stupider than both, but … well, okay, is that not one of the many stupidest things the Supreme Court has ever said?

But the Court’s holding was so unequivocal that it was unassailable for decades afterward. The irony, if I may indulge a counterfactual, is that the case was heard so early in the Industrial Age that corporations had not yet fully consolidated their influence and dominance of the political and judicial branches; had the case been heard even ten years later, the insurance companies would most certainly have won. But they lost, and so had to construct their industry around it, quite to the detriment of, well, interstate commerce.

By the end of the 19th century, as “Your Correspondent” reminds the New York Times in the letter reproduced above, the patchwork of regulation was already so unworkable that the large insurance companies, with the full support of the 26th President and his Cabinet, were desperate for Congressional intervention, even against the express ruling of the Supreme Court. President Theodore Roosevelt in his 1904 State of the Union Message, declared:

The business of insurance vitally affects the great mass of the people of the United States and is national and not local in its application. It involves a multitude of transactions among the people of the different States and between American companies and foreign governments. I urge that the Congress carefully consider whether the power of the Bureau of Corporations can not constitutionally be extended to cover interstate transactions in insurance.

But nothing was ever done and the Supreme Court’s precedent held until 1944 when the Court finally overturned Paul in United States v. South-Eastern Underwriters. That case has two interesting aspects. First, the ultimate assertion of Federal authority arose because of a conviction of the company under the Sherman Anti-Trust Act for engaging in monopolistic practices, rather nasty ones at that, including blacklisting, boycotts, and intimidation, according to the Supreme Court’s statements of fact:

The member companies of SEUA controlled 90 percent of the fire insurance and “allied lines” sold by stock fire insurance companies in the six states [Alabama, Florida, Georgia, North Carolina, South Carolina, and Virginia] where the conspiracies were consummated. Both conspiracies consisted of a continuing agreement and concert of action effectuated through SEUA. The conspirators not only fixed premium rates and agents’ commissions, but employed boycotts together with other types of coercion and intimidation to force nonmember insurance companies into the conspiracies, and to compel persons who needed insurance to buy only from SEUA members on SEUA terms. Companies not members of SEUA were cut off from the opportunity to reinsure their risks, and their services and facilities were disparaged; independent sales agencies who defiantly represented non-SEUA companies were punished by a withdrawal of the right to represent the members of SEUA, and persons needing insurance who purchased from non-SEUA companies were threatened with boycotts and withdrawal of all patronage. The two conspiracies were effectively policed by inspection and rating bureaus in five of the six states, together with local boards of insurance agents in certain cities of all six states.

One interesting thing about that which is quite relevant to the current debate over the health insurance reform is that the company defendant here was exploiting a high degree of market concentration to impose monopoly prices. And the current health care insurance market, according to a report released earlier this year Health Care for America NOW, is highly concentrated. No one health insurance company dominates the national market, but don’t let that fool you–remember, as Frum pointed out, we don’t have a national market. Of the 50 state markets,94% are now “highly concentrated.”

What South-Eastern was doing back in 1944 was nothing less than a protection racket perpetrated across state lines–and perfectly legal until then because “insurance is not a transaction of commerce.” Well, the obvious stupidity and accumulated inefficiencies of that doctrine just got to be too much for an ordinary human, even a Supreme Court Justice, to bear (though we’ll see in a minute what that says about Congress) and the Court simply tossed Paul:

Our basic responsibility in interpreting the Commerce Clause is to make certain that the power to govern intercourse among the states remains where the Constitution placed it. That power, as held by this Court from the beginning, is vested in the Congress, available to be exercised for the national welfare as Congress shall deem necessary. No commercial enterprise of any kind which conducts its activities across state lines has been held to be wholly beyond the regulatory power of Congress under the Commerce Clause. We cannot make an exception of the business of insurance.

Whew. Okay. Stupidity overthrown, progress now possible, right? Wrong. By then the insurance companies had figured out the advantages of state-level regulation (hint: do what South-Eastern did but just don’t push it so far) and the state insurance bureaucracies meanwhile had become so entrenched and entranced (by easy tax revenues if they were honest, kickbacks and more if they were dishonest) that together they raised a holy ruckus and Congress the next year passed the McCarran-Ferguson Act, which effectively returned the status quo that had prevailed for the seventy years prior. And why not? The companies make money on the pass line, the state commissions make money on the come line, and the rest of us fools keep the crap table solvent by trying to make our point. Now that’s what I call Wealth Care Insurance.

Basically, states which were regulating could keep regulating as long as they kept regulating, except for boycott, coercion and intimidation. So we’re back to Stupid. And you want to know what’s really stupid? Congress still has the authority, reserved in the McCarran Act, to impose Federal regulation on the insurance market whenever and however they want. All they have to do is write the law specifically to apply to the “business of insurance.” All they have to do is, well, Act.

Health care stupidity of course entails more than simply fractured markets, such as the accident of employer-based provision, and some of our problems aren’t because of stupidity at all but rather advances in knowledge and technology that turn out to be expensive.

But that’s the stupid history of how the stupid Supreme Court and a stupid Congress wound up saddling us with such a stupid system for regulating the insurance market.

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32 thoughts on “Correctly Political: Wealth Care, a Historical Note

    • I just came over here after asking E.D. specifically about the question of where the interstate restriction is from. I think what might have happened here is that the lead got buried. I remember looking at the title and first few paragraphs of the post and not being able to tell what it was about other than some general ruminations on health care. Then I saw the length and moved on. Wish I hadn’t, because even at that time I was very interested in the question the post goes on to answer. But I think that may have been part of the problem.
      –‘Say what you’re going to say, say it, then say again what you said!’ Just some unsolicited advice in composition someone once gave me.

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  1. Agreed. Top notch post, with lots of very good information. Besides, it’s always good to see areas where libs and cons can at least ostensibly agree. 50 states with 50 different regulation bodies just doesn’t make sense.

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    • I’m with you, E.D. — I’m a strong proponent of a public option, but this seems absolutely convincing to me — especially since it explains why logjams to passing reform are currently centered around Senators with very small constituencies — their health insurance industry is least competitive (how many insurers can there be in Connecticut?) and has the most to lose from a national system.

      I invite you or anyone else to stop by my blog, which is all public option, all the time — just click on my name.

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  2. E.D.:

    Besides, it’s always good to see areas where libs and cons can at least ostensibly agree.

    Funny. TPM has an item up right now on Michelle Bachman and Jim DeMint calling for “states rights” in resisting reform. Like, 1840s style “nullification.”

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    • I’ll take consumers rights over states rights in this round. Then again, I’ve never been much of a states rights fanatic. Bachmann is not nearly as frightening as the fact that people take her seriously. Someday she’ll make a great Fox talk show host.

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    • Funny thing about that – conservatives were hardly up in arms about McCain’s health care proposal last year infringing on states’ rights, even though one of its central features was the elimination of restrictions on the sale of insurance across state lines. Liberals predicted this would create a “race to the bottom,” and have mostly been suggesting that state regulations should be untouched by any reform short of single-payer, but just about every conservative proposal I’ve seen (including DeMint’s own proposal!) has emphasized eliminating restrictions on the sale of interstate insurance.

      So, liberals have mostly been pushing the hard-core federalist stance (although I suspect they’d be in favor of complete federal preemption of state insurance laws if it were on the table), while conservatives have been pushing a more or less anti-federalist stance (although I’m sure they’d be opposed to federal preemption of state insurance laws if it were on the table).

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      • I think a “race to the bottom” is a significant risk in eliminating state regs. I think the lib response would be that fed regs would take over and apply everywhere.

        Oh, republicans not abiding by their dearly held principles surprises you? R’s are for state’s rights when it is convenient( see marijuana dereg, etc).

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        • I’m obviously less concerned about a race to the bottom – as far as state regulations go, I don’t think the bottom is really all that unregulated. Indeed, one thing that this post shows is that existing state regulations are really set up to protect one or two big insurers within the state, which suggests that they have relatively little to do with actually setting standards of insurancethat have much to do with quality of insurance. But I also don’t think that federal regulations would be terribly strong, in any event – the power of the insurance industry collectively is quite substantial on the federal level, whereas its power on the state level is largely confined to one or two insurers. Thus, on the federal level, anything that raised bars to entry (ie, any regulation whatsoever) would run into opposition from the industry collectively, whereas on the state level, raising bars to entry (under the guise of creating higher standards) is exactly what the primary insurer wants.

          All of which is to say, I really don’t see much practical difference between the “race to the bottom” and federalization, except that the industry as it currently exists wouldn’t be terribly happy with either since they would both force insurers to compete with each other directly. That said, I’d probably marginally prefer federalization over the “race to the bottom” because the “race to the bottom” would likely result in some form of preferential treatment for whichever insurer already has the strongest ties to that “bottom.”

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  3. man that was a fantastic post.

    I have this very strange love/hate thing with David Frum. I think his domestic policy is really stellar and his foreign policy take is for the f’in birds. Weird.

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  4. It still seems to me the elephant in the room is the fact that there’s essentially no relationship on the margin between amount spent on health care and health outcomes. People assume there *ought* to be one, but there isn’t. Spending more on “health care” doesn’t buy more health, it just buys more reassurance that somebody “cares” about your health, which is a luxury good we can afford more of in the US. Sure, we could reduce the costs per procedure, but the real problem is that more procedures don’t produce more health. To the degree that health care is really about signalling, trying to reduce costs is beside the point. It’s like trying to reduce the extravagance of prom parties by controlling the cost of limos – the kids and their parents will just spend more on something else to compensate.

    Robin Hanson says we should just cut medicine in half by any means available; I think he’s got a point.

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    • Glen:

      That’s because thinking of health care at the “margin” is a phenomenally stupid concept. At what marginal cost do you stop spending dollars to save your child from dying of cancer?

      Oh. I’ll spend $750,000 for a cure but at $755,000 …. eh … go ahead and die, kid, Mommy doesn’t love you THAT much.

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      • Too much medicine kills, just as certain as too little. Medical errors kill about 100,000 people per year in the US. One implication of this fact is that when insurors refuse coverage for an “experimental” treatment, there’s a good chance they’re doing you a favor. One of my favorite tidbits from Robin’s article – which you really ought to read – was this:
        Regions that paid more to have patients stay in intensive care rooms for one more day during their last six months of life were estimated, at a 2% significance level, to make patients live roughly forty fewer days, even after controlling for: individual age, gender, and race; zipcode urbanity, education, poverty, income, disability, and marital and employment status; and hospital-area illness rates.

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        • Hi, Glen.

          Longevity is not health. Also, the fact that the article changes its definition of health (occasionally using a ‘general health index’, sometimes using longevity) according to the study it’s citing, but always makes sure to trumpet the level of significance, is a classic example of the multiple comparisons error (here). In layman’s terms, that’s cherrypicking — if you have fifty separate definitions of health (and we do), any one trial will likely show a negative impact at a 2% significance level.

          Long story short, you cut your healthcare in half, and let me know how it goes.

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          • The Rand experiment used a “general health index” because to use longevity as the metric in a controlled experiment you have to run the experiment long enough for a significant number of your subjects to die and follow them until they do. Which takes a long time. It’s not cherrypicking to use the best data you’ve got so far, which each of those studies Hanson mentions individually do. I advocate that we run a bigger, longer Rand Experiment to find out if the earlier findings still hold; I suspect that they do. I do, in fact, follow Hanson’s advice, which basically is: don’t get any health care you wouldn’t be willing to pay for yourself out-of-pocket and treat your doctor like you would treat your auto mechanic – skeptically when it comes to accepting expensive treatment suggestions. (He also advises you avoid the latest new treatments or drugs in favor of older, more established ones wherever possible.)

            In the Rand study, the people who paid for their care from dollar one used less care, missed fewer days from work, and were slightly *healthier* on a variety of metrics than those whose care was more subsidized. They didn’t just look at the sum but also looked at all the individual categories to determine this; the judgment criteria were specified in advance of the experiment and the judgment was double-blinded.

            It would actually be tricky for me to cut my healthcare in half since I already see a doctor less than once a year. :-)

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            • Your last line kind of crystallizes the whole point. It would be tricky, wouldn’t it? That one last doctor’s visit, the one you consider absolutely necessary, is a doozy.

              And I’m not criticizing the use of a general health index — I’m criticizing use of a general health index sometimes, and longevity (as in the part you quote above) sometimes, and patient satisfaction sometimes, the reason that your Cato article leads off with: “Note that a muddled appearance of differing studies showing differing effects is to be expected. After all, even if medicine has little effect, random statistical error and biases toward presenting and publishing expected results will ensure that many published studies suggest positive medical benefits.”

              Which is basically for him to say, well, it’s going to look like I’m wrong because the studies are going to look bad because I’m so right. Pay no attention to the man behind the curtain.

              And all told, I’m very much in favor of people limiting their own health care use — I’m not at the doctor’s so much myself — but I’m very much not in favor of the rich saying that the poor, who can’t afford doctors and don’t have the opportunity to get care, are probably better off without it.

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              • Which is basically for him to say, well, it’s going to look like I’m wrong because the studies are going to look bad because I’m so right.

                Nonsense. He’s just giving one possible reason (of several) why the big aggregate studies – which all do support his view and do make it look like he’s right – can be reconciled with smaller individual studies that might initially seem to suggest otherwise.

                I’m very much not in favor of the rich saying that the poor, who can’t afford doctors and don’t have the opportunity to get care, are probably better off without it.

                But what if it’s true? The relevant quote from the Hanson essay regarding the Rand study: “At a 7% significance level they found that poor people in the top 80% of initial health ended up with a 3% lower general health index under free medicine than under full-priced medicine.”

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                • Ok, we can get into the line by line, fine.

                  “The first study known to me was by Auster, Leveson, & Sarachek, Journal of Human Resources, in 1969 . It found that variations across the 50 U.S. states of 1960 age-sex-adjusted death rates were significantly predicted by variations in income, education, fractions of white collar and female workers, and the existence of a local medical school, but not by variations in medical spending, urbanization, and alcohol and cigarette consumption.”

                  How is the existence of a local medical school not an indication of medical spending? Can medical schools be built without spending? How may I acquire one of these free medical schools? Also, to point out, death rates is a /third/ (there are more) method by which Hanson is measuring health outcomes (it is distinct from longevity, as well as general health).

                  And I can’t answer your question about ‘what if it’s true’, because the quote you give has the highest error rate I’ve ever seen in a straight-faced piece of medical research, and is also totally incoherent, since poor people who can pay for full-priced care are not poor, or are being given care, which makes it functionally free care — basically, the survey seems to prove that full-price care is better than free care, which I’m sure is the case. Additionally, it is completely irrational to limit the study to those in the top 80% of initial health — it basically ensures that the positive effects of health care will disappear.

                  It’s an interesting, counterintuitive argument, and I’ve got a lot of sympathy for thinking outside the box, but it’s wrong. Factually wrong in its original form, and morally wrong as a justification for denying health care to those in need.

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  5. I question the WHO ranking us 37th. Admittedly we have problems, but they rank us lower for a number of reasons: Health Savings Accounts rank against us as they have more out of pocket costs, outside of the U.S. other countries consistently don’t bring baby’s who have known birth defects to full term (are aborted) but do not count these in their mortality tables, plus pre-mature baby’s are not kept alive like in the U.S.. And, if anyone bothers to look at health care spending in countries with even quasi-socialistic health care spending is controlled by rationing. There is no other way to control it. And, I have no problem with rationing as it’s done already. I just think the reform crowd needs to call it what it is and not mask it in rhetoric.

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    • Henry:

      I specifically allowed that point and, you’ll note, didn’t even link to the primary source which, you’ll also note, I tend to do when I think it’s important.

      I think the Commonwealth Fund rankings are much more significant, both because it’s more apples-to-apples and because I think their metrics are superior to the WHO’s–in part for reasons like the ones you listed.

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