The Dangers of Complexity in Policy Formation

On Zic’s piece on bodily integrity, Michael Drew and I had a disagreement about one of the things that really annoys me about the US healthcare model – the way it treats private companies as if they were public utilities – simply directing 3rd parties to enact government policy, rather than doing it themselves. This is what I had to say in regard to the Hobby Lobby case that was the focus of Zic’s piece:

This is why the whole premise of the US health care system (a premise that was only further entrenched by the ACA) is flawed – that employers have any business acting as healthcare providers. It is only because of this policy-induced intermediation of health care services that the Greens are even a party to this transaction. A single-payer system wouldn’t have this problem, nor would the individual-insurance-plus-welfare model I prefer.

Michael wanted me to justify my position:

Aren’t some very successful health care models based exactly on the utilization of private utility-like organizations that are regulated to within an inch of their lives? (Germany, if memory serves?) I personally want that kind of thing on the table, which is not of course an argument that I want to adopt it in any given case. As a general matter, I hardly see where I should reject that out of hand. If you want me to think I should, either as general principle or a specific case, you’d have to make the argument. (That’s not an invitation to do so: if you want to, go for it. But my point is just that the truth of either the specific admonition you made nor of its general form is self-evident. As it stands, it’s just simple, unsupported normative assertion. “Things should be this way! Because!”)

This is a fair point, I didn’t state my case. So, here is a quick run-down of the reasons why I strongly prefer more direct government intervention of policy by proxy:

1) Simplicity: Simplicity counts for a lot more than people give it credit for. People have limited cognitive resources, and making a policy too complicated can make it too hard to deal with. This is not to say people are stupid, it’s just that dealing with something you don’t do often can require a lot of attention and effort, and every little thing you make people keep track of makes their life that much harder. The same applies at the government end, the more complex a policy is the more likely there will be a failure – either a mistake at the policy level, or some kind of flaw in the operational policy that makes the policy fail to work as desired. The more thing your plan relies on going right, the more likely you are to have something go wrong, or in the immortal words of Montgomery “Scotty” Scott: “The more they overthink the plumbing, the easier it is to stop up the drain”.

2) Distortion: Distortion is the economists’ term for a market going wrong because of bad incentives. In practice what it means is that people end up doing things that are destructive, or at least unhelpful, because there are incentives that make it worth doing for them. The more you concentrate the costs of a policy onto a small group, the more perversely they are likely to behave. I strongly suspect a lot of what is going wrong with U.S. healthcare is that the risk-pooling requirements and coverage mandates imposed on heath insurers lead the insures to want to drive away their sicker clients. Distortion is something to be avoided wherever possible in policy making, and where avoiding it is impossible it would be minimised.

3) Disintermediation: Consumer choice works best when there are a few steps as possible between consumer and the producer of a product or service. Health insurance is already one step removed because you have insurers making decisions on behalf of customers, but that’s unavoidable because of the risks involved in health care costs. But having employers decide what insurers will make decisions for consumers is an extra, and unnecessary, step. At least if insurers are being paid directly by consumers, they have to worry about consumers shopping around for another insurer. But how many people would quit their jobs because the health insurer is irritating to deal with? Every extra step in the decision-making process is a little more grit in the gears of the market.

4) Pluralism: The Hobby Lobby case happened because some people feel the requirements of the ACA go against their moral principles. Depending on how the court rules, one of two things will happen: Either a hole will open up in the protections the ACA is trying to afford to people, or the opposition to the ACA will grow more heated. Neither of these is good for the ACA in the long run. Now you may ask, why should I care about the Greens and their values? First off, because so long as they have some ability to affect policy, their opinion matters in a Realpolitik sense. And second, because policy pluralism is designed to stop moral conflicts escalating into political, or worse military, conflicts. Pluralism means making some concessions to people whose values you despise, and making people pay taxes of things they object to is less of a burden on their conscience than actually making them do something they object to – it’s like the difference between paying for an army whose actions you oppose, and actually being drafted into that army.

5) Obligation: Typically, the argument in favour of providing social support is that society has an obligation to ensure the most vulnerable do not suffer (at least up to point). If that is the rationale for social assistance, then why push the burden of this obligation onto a subset of the population? To use conscription again as an example, conscripting soldiers places a disproportionate burden on a subset of the population (usually young men), while a taxation-funded professional army spreads the burden far more evenly. Admittedly, this point applies less to the issue of health insurance (since workers most likely bear the majority of insurance costs), but this point applies in other cases.

6) Accountability: This is probably the biggest issue for me. The difference between a modern democratic government and a tyranny, is that modern governments have rules. There are rules about government actions being disclosable, rules about government spending being accounted for and rules about how governments may act in regards to the public. The specifics of these rules, and how well they are enforced in practice very from country to country, but none of them apply to the private sector. If a policy is funded from taxation, then that costs is clear and known, but who knows how much the ACA will cost? Only the government’s part gets counted, and much of the action as been foisted onto the private sector. Without Transparency the government cannot be held to account by the public. How can they possibly decide if a policy was a good idea, if its costs are largely unknown?

Ultimately, these forms of pseudo-private provision often result in the worst of both worlds. They lack the price-responsiveness and innovativeness of markets, but often lack the comprehensiveness of public provision.

So what should governments do instead? My suggestion is to either go more public and/or more private – I say and because sometimes its about refocusing the government on the aspects of the problems that markets address poorly, and in other respects letting the market work. This is why I prefer a healthcare approach consisting of private, individual insurance backed by welfare because it lets the market do its thing, while focusing the government on the problem the market can’t solve – that some people can’t afford their expected lifetime healthcare costs.