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Costs and Benefits: A Disastrous Asymmetry

By Shlomo Maital


   An economist, it is said (and I am one), is one who knows the cost of everything – and the value of nothing. There is much truth to this saying.

   Costs are pretty easy to measure. You add up the numbers in financial statements or government budgets.

   But benefits? Fruits? Now that’s another story. Because many social benefits are long-term and indirect. There is a famous study by Nobel Laureate James Heckman of the pre-school program known as Head Start, where funding has been drastically cut.

     Heckman writes in SCIENCE, 2006: “at current levels of funding, we overinvest in most schooling programs, and underinvest in pre-school programs for disadvantaged children”.   The diagram above shows this. Pre-school investment has a social return above the opportunity cost of the money. Other programs for older children fall short. Why?

   Because the benefits we reap from pre-school (mainly the Head Start program) are long-term, accruing in adulthood, hard to measure, hard to track – and beyond the myopic vision of political leaders, especially Republicans.

   Here is another example of this dreadful cost-benefit asymmetry:[1]

The study shows that, under plausible scenarios, the societal cost savings generated from fewer evictions and foreclosures could equal half of the cost of subsidizing coverage for the near-poor.

Low-income people who gain health insurance are much more likely to make their rent and mortgage payments, according to a new Washington University study of families living near the poverty line. Lower delinquencies mean fewer foreclosures and evictions. Researchers found that near-poor households that enroll in subsidized Marketplace insurance are 41 percentage points less likely to become delinquent on home payments compared to similar uninsured households. As a likely consequence, the rate of home delinquency for households without access to employer insurance fell by 31 percent at the income eligibility threshold to receive Marketplace subsidies during the 2015-2016 period. The study, performed at the Center for Social Development at the Brown School of Social Work and the Olin Business School, is one of the first to show the effect of the Affordable Care Act on family finances and the first to show the financial impact of the Marketplace component of the program, in particular. “Our results indicate that lower home payment delinquency may be an important benefit from subsidized Marketplace insurance,” the authors write.

          “The spin-off benefits to the community may offset a substantial share of the cost of the subsidy program,” said lead researcher Emily Gallagher. “Not only do the banks and landlords benefit, but the entire community gains through lower rates of homelessness and abandoned property. There are fewer vacant homes dragging down housing values in the neighborhood.”

   Republicans in the Senate are about to kill Obamacare (the Affordable Health Care Act) and deprive 23 million people of health insurance. The main motive is cost saving. The result will be to again increase defaults on home mortgage payments, eviction, decaying neighborhoods and vast human suffering.   And all, because of cost-benefit asymmetry, and blindness to long-term indirect social benefits.

   By the way – many Senate Republicans have not yet seen the actual proposed legislative bill. Senate Majority Leader Mitch McConnell has kept it a state secret.   Thus does calumny thrive in the dark, like mold.


Goal-Driven Innovation: the Case of U.S. Health Care

By Shlomo Maital

Health Care

U.S. health care expenditures ($billion)

The U.S. spends 18 per cent of its GDP on healthcare. Much of the recent rise in healthcare spending has been driven by higher prices and costs.

   In any industry faced with rising costs,   innovation must play a role.   Harness creativity, ideas, new thinking, to get costs under control. Yet in healthcare the opposite has happened.   More and more innovation has created amazing medical technologies that costs astronomical sums – devices, drugs, etc.   Innovation became part of the problem, rather than the solution — it’s great to know that you can save lives, but how many people can afford to have their life saved, at those prices?

   Writing in today’s Global New York Times, David Brooks notes that healthcare inflation seems to be under control, and partly, as a result of cost-saving innovation:

   “ …Recently health care inflation has been at historic lows. As Jason Furman, the chairman of President Obama’s Council of Economic Advisers, put it in a speech to the Hamilton Project last month, “Health care prices have grown at an annual rate of 1.6 percent since the Affordable Care Act was enacted in March 2010, the slowest rate for such a period in five decades, and those prices have grown at an even slower 1.1 percent rate over the 12 months ending in August 2015.”

   There is naturally some controversy over why precisely health care prices have stabilized. But here is one theory:

Jonathan Rauch, in a report for the Brookings Institution, argues that the health care market is more open to normal business model innovation than ever before. The quality of health care data and analytics is improving exponentially. Pressures to reduce costs are ratcheting up. Profitable niches are growing for efficiency improving products.   In the past, most innovation involved improving quality of care at high cost. Rauch described many entrepreneurs who are providing innovations that maintain current quality of care but at lower cost. We seem to be making at least some incremental progress toward a structural reduction in health care inflation.

   Innovation indeed is regarded as a panacea, when the world faces severe problems, as with healthcare provision, and increasingly severe budget and resource constraints.

   But the innovation effort has to be focused, with a goal. If health care inflation is the problem, direct your innovation efforts toward controlling and reducing costs, rather than ever-more-expensive gadgets and drugs that make the problem worse.

     Like all human activity, innovation needs a clearly defined goal – a precise question to which it is directed. For America, the question should probably be: how can we use our creative thinking to keep healthcare prices stable?   So far, it seems to be working.

 How to Fix America’s Health Care Problems: Experiment!

By Shlomo Maital

                                            DouglasTommy Douglas: He Stood Alone

President Barack Obama: I apologize. In this space, I criticized you fiercely for incompetence, for the inability to even set up a simple website. Sorry. Turns out it wasn’t so simple. Reforming health care, within a completely broken existing system, is tough. You now have 7 million people signed up for ObamaCare. This is a big achievement.

But it’s only a start. America still spends 18 % (!!) of its GDP on health care, a vastly inflated sum, with little to show (life expectancy is below that of countries that spend less than half that).

   In today’s New York Times, Molly Worthen describes an experiment in Vermont (Live Free!), the state of independent-minded voters. It’s called Green Mountain Care. The idea came from a third party, the Vermont Progressive Party. It’s a single-payer system, which regulates doctor’s fees (translation: keeps doctors from inflating them) and covers all Vermonters’ medical bills. The system could spread to other states.

   This is how to resolve social problems. Let each of the 51 American states try its own system. Check which of them work and then replicate them across America.

   How do I know this works? It worked in Canada. I grew up in Regina Saskatchewan. In 1959 Premier Tommy Douglas proposed a medicare plan to give all residents of Saskatchewan free medical care. Douglas was a socialist, head of the CCF party. He was tiny, a boxer, a fighter, and my family knew him personally – his daughter Shirley went to high school in Regina with my sister Estelle. In July of 1962, the Saskatchewan doctors all went on strike, to protest. It was a bitter strike. Imagine – no doctors, no medical care. The strike lasted three weeks. Douglas fought hard and even began importing doctors from Britain.  Douglas stood alone, against fierce attacks from doctors, hospitals, federal politicians, Saskatchewan voters.  He persisted.

    Tommy Douglas won. The strike ended around July 21, 1962, with the doctors’ submission. And the idea spread from Saskatchewan across Canada, with the federal government mandating national health insurance – a program America needs but somehow cannot seem to attain.  It is thanks to little Tommy Douglas that Canada has a workable, effective health insurance system that America needs so badly but can’t seem to attain. 

    Many Americans are scornful of Canada – but they would do well to look North and benchmark.  Canada does have ideas that work, that America can use.  It’s worth a try.   If there were more social experiments in America, there might be more wellbeing for its citizens.


Explaining Obamacare to Grade Three Kids

By Shlomo Maital     

                       grade three

   How would you explain the US government shutdown and Republican psychosis about Obamacare (The Affordable Health Care Act), to a class of Grade Three kids?

   Here is my attempt.

   Kids, sometimes people get sick.  Going to the doctor costs a lot of money. So they buy insurance, just like your mom and dad buy insurance, in case there is a fire at your house.  Insurance means you are paid money when something you don’t expect happens.   A lot of American people, 30 million or more,  don’t have health insurance.  So President Obama and the United States Congress acted to make sure they do.  This was done by a law called the Affordable Health Care Act.   

   But here is the problem.  Medical care costs a whole lot more in America than other places – probably twice as much or more.   And in America health insurance is provided by the companies that your mom and dad work for  (while in other countries it is mostly provided by the government).  So when President Obama makes every business provide health insurance, it means that some small businesses that don’t have much money have to spend a lot to do what the law says, and they don’t like it.   Why doesn’t the government in America provide health insurance?  Well, it’s a long story. It goes back to the days of President John F. Kennedy, who almost did it, but in the end the doctors shot it down. 

    So the Republicans think that Obama’s health insurance law is too expensive and want to cancel it.  The Democrats think it is a good thing and want to keep it.  This is what has caused the shutdown of government, because you can’t pay people without having a government budget and the Republicans in the House of Representative will not vote for this.   The people in America who had health insurance already were mostly satisfied with it.  The people who didn’t have health insurance are mostly happy with the new law but we don’t know for sure, because the law has just begun to work.

    A lot of people outside America are looking at how national parks and cemeteries and Mt. Rushmore and the Statue of Liberty and part of the Pentagon are closed, and are just amazed.  It sure doesn’t make America look good.

   Everybody believes that democracy – where everyone chooses their elected officials by voting, and where everyone gets to have a vote – is a good thing. But when democracy shuts down the government in America, some people are wondering if it is really working the way it should. 


  Boring background:  America spends 18 per cent of its GDP on health care, twice that of most nations, but America’s health statistics are significantly worse than many other modern nations.   The real core problem is:  the Affordable Health Care act has NOT made health care affordable for America as a whole.   To do that, you would have to make drugs cheaper, pay doctors and hospitals less, and take health care out of the for-profit sector.   

Blog entries written by Prof. Shlomo Maital

Shlomo Maital