In my principles classes, one of the first things we do is talk about economic models. The real world is complicated, so we have to make some simplifications and assumptions to get a handle on things. One assumption we always is make is that people are rationally self-interested and respond accordingly. I have to assume that if I offer you the opportunity to buy the candy bar in my left hand for $.50 or the exact same candy bar in my right hand for $.75, you’ll choose to buy the one in my left hand. In the real world, we might see people paying $.75 for a candy bar at one store when other stores sell it for $.50, but that doesn’t mean people aren’t rational. It is because either a) they don’t know what all the prices are, b) there are costs (time and money) in driving to the store that has the candy bar for $.50, or c) it’s not their money so they don’t really care. Saying that people are rationally self-interested does not mean that people never make mistakes. It just means that they do the best with the available knowledge at the time and try to get the most happiness they can for their income.

I tell my students that the assumption of rational self-interest in economics is fundamental, as fundamental as the assumption of gravity is to physics. If we don’t assume that people behave according to some logical set of rules, then we can’t predict anything about what people would do in response to some change in the market or government policy. If I don’t assume that you buy the $.50 candy bar, then all the rules fly out the window and we can’t predict anything: offering people $4,500 to buy a new car could result in fewer cars being purchased. If gravity switched on and off at random, physicists would not be able to predict the way any object would move through the air. So if we have this assumption, we must apply it at all times or reasoned analysis is impossible.

If an engineer were designing a new rollercoaster and emphasized the role of gravity in causing the coaster to gain speed when going down an enormous hill, yet assumed away the existence of gravity so the coaster did not slow down when it comes up the next hill, people would debunk his new rollercoaster as a joke. Applying gravity selectively would be ridiculous, and the engineer would be fired (unless he were in a union). When someone looks at the situation and points out that the roller coaster does not magically just come up the other side at the same speed as when it hit the bottom, that’s called being intelligent and careful in one’s analysis. But in politics, we have a different word for the practice of calling out people when they selectively apply principles: fear-mongering.

I have issues with the way President Obama is talking about health care reform. He is selectively saying that incentives matter when it benefits his arguments, and pretending they don’t matter when they work against him.

However, I first want to thank President Obama for finally being able to accurately explain his Medicare reform proposals. In the past, he has said a few questionable things that made me wonder what he was really trying to do. He’s said that doctors have no incentive to counsel you in ways to prevent diabetes – they’ll just cut off your leg and get $30,000 for it. Not only is that not anywhere close to true (Medicare reimbursement is somewhere on the order of $700 for that), but it’s incredibly insulting to doctors. He’s said that instead of treating a sore throat with medication, they just pull kids’ tonsils because it makes them more money. Again, Obama’s message seems to be: doctors are greedy, evil people trying to collect as much Medicare money as possible. When you’re trying to reform our health care system, you probably want doctors on your side. I don’t see how impugning their ethics helps accomplish this.

In yesterday’s town hall in Montana, President Obama explained himself much better and dialed back the back-handed insults. He said that in the present Medicare system, doctors get reimbursed by Medicare based on the number of times they see a patient. So if a doctor happens to mess up, not fix a problem right away, or not use the most effective treatment, and the patient has to come back several more times, the doctor gets paid every time the patient comes back. That clearly incentivizes long treatments that are less effective. His proposed change is to pay based on the condition, so that if a doctor can fix someone’s problem in one session, they’ll save on costs and make more money. This is the way my pet insurance program works for Jake: they pay a certain amount per condition and the veterinarian does her best to keep costs down and keep treatments effective. This is a good thing, no?

Well, maybe. Here, President Obama correctly identifies that a change in incentives can change behavior. But that’s not the only incentive at play here. There may also be another effect: some doctors will stop accepting Medicare. If they are going to be punished more harshly for not getting it right the first time, some doctors will simply see this as more of a hassle than it is worth. If my veterinarian thinks that the reimbursement for treatment is insufficient, she can just choose not to honor my policy and I have to choose a different vet. (Jake barks at all of them so it doesn’t really matter to me.) Obama keeps saying, “If you like your doctor, you can keep your doctor,” but that’s not true if doctors decide Medicare’s rule-tightening is not profitable any more. But if you point that out, you’re fear-mongering. And maybe a little racist.

Now please don’t get me wrong. I think this rule change is actually a good thing. But anyone who says there is no potential downside to this is either ignorant or lying. (And if it’s such a great thing and going to save money for a system that even Obama admits is on a fiscally unsustainable path, why not adopt that reform and deal with the public option and all the other stuff later when you can work out the details?)

Obama also finally admitted yesterday that he can’t cover an additional 45 million people and not have costs increase. He says that 1/3 of the cost is paid for by the Medicare reform, 1/3 is paid for by decreasing reimbursements to insurance companies, and 1/3 will be paid by the wealthy. His preference is to lower the benefit from rich people claiming charitable deductions. He says that will get him $30 billion every year. (In a previous post, I took issue with his numbers. Back then, the administration was only trying to claim they could get $18 billion each year from changing the tax rate on charitable deductions, and I think I debunked that pretty well.) The House bill would instead impose an additional surcharge on people with high incomes.

**Update 8/16: I just read the transcript of what he said at the town hall in Montana. In it, he just refers to “itemized deductions.” In the past, he has been specific about just charitable contributions. It looks like he might be relaxing this language to include all deductions taken by rich people. If that were the case, it would include a lot more revenue sources (home mortgage deductions, work expenses, etc.) and I’m sure he could come up with this money. I think this highlights the problems that arise when he speaks in such generalities and doesn’t put forth a specific bill.**

Another area where Obama wants to selectively apply the power of incentives involves prices of prescription drugs. He proposed that we shorten the patent life on prescription drugs. He says that they’ll go generic sooner and this will help lower drug costs. And while that may be true, it will also lead to less innovation and development of new drugs. To pretend it won’t or to ignore that fact is disingenuous. But my pointing it out? Well, that’s fear-mongering.

You can’t say that incentives matter and will make a huge cost savings when it works for you, and then pretend that companies won’t respond to those same incentives when they go in the opposite direction.

At this point, an Obama health care reform supporter might say: Dave, not only are a you a fear-mongerer (which would prove my point, btw), but you’re a shill for the health insurance companies and you want poor people to die. Yes, I’m admittedly an evil conservative and I want poor people and children and pets to die. Oh, and don’t forget old people. (I am also a firm believer in sarcasm.) Here’s what I am for, so you know I’m not just slamming everything Obama does:

1. I am for changing regulations that affect whether insurance companies can drop you.
2. I am for allowing people to purchase health insurance from companies in other states. Each state has its own set of rules and regulations that just prevent competition. We should eliminate those.
3. I am for making health insurance more portable: if you have insurance now and get sick, you’re covered — but if you lose your job, you may have a hard time getting new insurance because now you have a pre-existing condition. This is clearly not fair.
4. I am in favor of Obama’s proposed Medicare changes. (I am just not willing to pretend that nobody will have to change doctors.)
5. I am in favor of the government providing tax breaks and subsidies to the 15 million or so people who cannot afford health care. (You hear that 45 million people are without health insurance, but when you eliminate people that either a) are here illegally, b) qualify for goverment programs but simply haven’t signed up, and c) can afford health care but choose not to pay for it because they think they are too young to worry about it and would rather spend it on other things, that number drops to about 15 million.) I do not think we need to change our entire system for 5% of the population. Just help them pay for it.

One of the reforms President Obama wants is for individual people to be able to buy health care as part of a “community pool.” That way, you won’t be treated individually — you’ll pay the same health care premiums as your neighbors would. That sounds like a great thing because, if you have a pre-existing condition, you don’t get punished for it. But remember, this is the same president who praises Safeway for implementing some incentives for their employees to join health clubs; and Safeway’s health care costs have been flat for the last five years while everybody else’s is rising. So on the one hand, Obama is acknowledging that if we incentivize people to behave in a healthier way, this will have a positive impact on health care costs. And on the other hand, he says we should all pay the same costs regardless of our behavior when we’re in a community pool. Sorry, but that’s only going to decrease the incentive people have to take care of themselves, which will raise costs. Either you treat everyone the same and costs rise, or you incentivize people to do healthy things and unhealthy people pay more. You can’t have it both ways.

Which brings me to Ashton Kutcher. He was on Real Time with Bill Maher yesterday. I’m a little disappointed in myself for even considering what he has to say, because I have always thought that he was so full of himself that I should just ignore him. But his performance on that show proved that he is an intelligent, thoughtful man who is not only passionate about the issues, but educated about them. I want to hate him but I’m having a harder time doing so after this appearance. A devout Obama supporter, he said this:

“Why can’t we set up a system by which the guy who’s doing something to live a healthy lifestyle gets a tax break within the system, or companies that are promoting a healthy lifestyle get tax breaks. Why are we going: okay, base it just on how much people make? If you give gym memberships to the people that work for you, you should get a tax break for that. How about instead of promoting this health care plan that seems a lot more like a sick care plan, why don’t we promote wellness within the system? I don’t want to pay… I mean, frankly, I don’t want to pay for the guy who’s getting a triple bypass because he’s eating fast food all day and deep-fried Snickers bars. Like, i just, I don’t want to pay for him. I want him to pay for him, whether he’s wealthy or he’s not.”

He’s saying that rich people shouldn’t pay more for health care than poor people, and that our behavior should affect the prices we pay? Better watch out, Ashton: Nancy Pelosi will throw you out of the party for independent thought like that.

Fellow panelist Ross Douthit, a conservative, responded: “I agree with you, Ashton. But that’s the kind of thing, I think, that also can scare people though. If you come out and say, look, if you have led an unhealthy lifestyle we’re not going to cover your care when you hit 75 and so on, that’s where you get the sort of fears about death panels and so on.”

Congratulations, Ashton: you’re a conservative! He agrees with me that people should bear the costs of their own behavior. But that won’t happen if we go to this community pool option, unless the government is rationing health care somehow. Don’t worry: we are assured by President Obama that nobody is going to ration your health care. Actually, that’s not quite what he says. First he says that insurance companies are already rationing health care (which is true), so why is it so bad if government does it? Then he says government won’t ration anything. And costs won’t go up. I’m confused again.

Another Democrat, Geraldo Rivera, was on Fox and Friends on Thursday morning and was recalling the passing of his father-in-law. If I remember correctly (and I’m not sure I do, so if I’m wrong please forgive me), the man was only in his 50’s when he died. When presented with the option to try to fight his illness and spend a lot of money or die gracefully, he said that he had lived a good life and it was his time to go. Geraldo praised him for doing so because it saved money. According to Geraldo, in the name of the greater good, you should simply slip away and not fight.

End-of-life care is an extremely important and controversial issue. One quarter of all health care costs occur in the last year of someone’s life. Granted, some of those last years are for people in their 30’s and 40’s who develop an illness, we try to fight it, and we don’t succeed. I don’t think anybody’s saying that we shouldn’t do what we can for those people. But when you’re already 70 and get cancer, should we pay for your treatment when you only have a few years left anyway? If you’ve lived a healthy live and expect to live into your 80s, should we pay for it then? (This gets back to Douthit’s point.) Of course it makes sense to fight harder and be willing to spend more money on someone who has 30 years left to live than it does for someone who has only 3. That’s precisely why it’s so scary for some people who oppose this bill: because rationing care in this fashion makes so much sense that it’s damn near inevitable.

A doctor friend of mine once told me that there are three things people want in their health care: they want it to be fast, they want it to be good, and they want it to be cheap. Throw in another goal while you’re at it: they want everyone to have it. He told me that we can only have two of those three. You can have health care that is fast and good but not cheap (the U.S. model). You can have health care that is fast and cheap but not good (Cuba). Or you can have health care that is good and cheap but not fast (Canada). Trying to decrease costs and increase access is either going to decrease the speed with which you can get treatment or the quality of that treatment, plain and simple.

What this whole debate is highlighting for me is the sacrifices that have to be made any time we do ANYTHING. You can’t say that we’re not going to ration care and also say that we’re going to keep costs down. You can’t say that you’re not going to be penalized for pre-existing conditions or punished for the individual choices you make, and also provide incentives for people to take better care of themselves. You have to choose one or the other and be prepared to admit that there is a cost to your decision. The closest thing we’ve come to any admission that there is going to be any downside to health care reform is Obama finally admitting today that he can’t pay for it all without raising taxes. But on everything else, there is no downside.

Gravity ceases to exist when it would slow down the Obama Health Care train.