Contributor Post Created with Sketch. Warren’s Health Plan, SNL, and Partial Equilibrium Reasoning

 

That Saturday Night Live cold-open about Elizabeth Warren pitching her “Medicare for All” plan to skeptical Iowa voters may seem like an in-kind donation to the Warren campaign. Kate McKinnon’s impression of the Massachusetts senator is both spot-on and compelling.

But there was one way in which the sketch was unfair to Warren. At one point, “Warren” is asked why she claims her plan will cost $20.5 trillion over a decade even though many economists put the cost at 50 percent higher or more. “Warren” then dismisses all these estimates as “pretend,” then adding, “You ready to get red-pilled? Money doesn’t exist!”

But the real Warren has a more thoughtful answer than that. Her plan would supposedly spend far less than commonly assumed through lower administrative costs than private insurance, reimbursing physicians and other non-hospital providers at current Medicare rates, and “reining in out-of-control prescription drug costs” through a variety of government-driven means.

All of which brings us to what economists might call “partial equilibrium reasoning.” In the case of a health plan like Warren’s, it’s the dodgy notion that even if America starts to pay a lot less for healthcare, all else will stay equal and everything will be better. Sounds great!

But might it be the case that the folks getting paid less might respond to this new status quo in ways that would affect American healthcare in ways the rest of us might not perceive as “better?” Incentives matter. And if the incentives change, actions will often follow.

For example: The Warren plan would first try to reduce drug prices by giving Washington “real bargaining power” to negotiate lower prices for patients. But if that tool proved insufficient, Warren would consider overriding patents so generics could be immediately manufactured, and perhaps even supported by public funds. Bernie Sanders’s plan would do much the same. In a podcast Q&A earlier this year, my AEI colleague Ben Ippolito explained “partial equilibrium reasoning” in terms of drug prices and tradeoffs:

Whether you hate drug prices or not, in the world of drug manufacturing, the early stage development is done by biotech firms and is funded by venture capital money. Then, if they are successful they are bought up by “big pharma” and then they develop the products and bring them to market. But with venture capital, that funding isn’t guaranteed to just stay within pharmaceuticals. If you drastically lower the returns on making a drug, venture capital is going to go make some app or some new, I don’t know, skateboard sharing app. There are other things you can do with money and they will chase profits, and you cannot simply assume that away. You need to stand up and say, “Okay, where are we spending too much money relative to what we’re getting,” identify those places, and make active and transparent decisions about when those trade-offs are worth making. Don’t just pretend that they’re not there. … And those are the kinds of trade-offs that we need to be making. But if we’re going to do this, we can’t just pretend they’re not there and say, “It’ll be fine if we just set low prices.”

And, of course, the substantial decline in prices would come with a substantial increase in uncertainty. Similar to how investors must now contend with the possibility of future presidents being more willing to actively wield expansive powers when it comes to trade protectionism, pharmaceutical sector investors would also have to factor how future administration would use this patent lever. As Ippolito adds, “It would be nice if everyone just really wanted to invent new drugs and all that. That would be great, but it’s just not the reality. And when you hear these plans discussed, when you hear the words, ‘what are the potential costs,’ generally the only thing you ever hear is, ‘Well, how would you fund it?’ That’s not the only trade-off that you need to think about and frankly, it might not be the most important one in the long term.”

Published in Economics, Healthcare
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There are 8 comments.

  1. James Gawron Thatcher

    JamesP,

    Yep, like every lefty, they can’t see the reality of their failures. Obamacare a less radical solution than what Warren is talking about resulted in much higher healthcare costs for the average person and took their choice away when it came to their personal physician.

    Instead of going with the market and increasing competitiveness or giving incentives to companies who can produce lower-cost solutions, Warren wants a much more massive invasion of the free market. Not only is it unlikely to actually bring costs down but it may destroy much of what is best in American Health Care while doing nothing to reduce the price.

    The Democrats can’t see the downside of their grandiose fantasies and thus are very likely to wreck anything they really go after. Also, remember this is just one Democratic mega-program whose unintended consequences could massively damage this country.

    When even SNL is laughing at a Democrat you know they are completely nuts.

    Regards,

    Jim

    • #1
    • November 4, 2019, at 5:04 PM PST
    • 1 like
  2. MACHO GRANDE' (aka - Chri… Coolidge

    Medicare as its run right now is a failed and failing system. It has trillions in unfunded liabilities and underpays for treatments, that cost has been shifted to private insurers for decades. Where will that cost shift now to? Martians?

    And ‘administrative savings’ are the laughiest laugh of laughington. I worked in a finance and budget office for a hospital with a billion dollar annual budget. One of the biggest administrative sinks was in payments, dealing with Medicare/Medicaid claims, and the additional costs incurred to try to get approvals within the assclownish regulatory requirements created by those agencies.

    The people in charge of our lives and our health are idiots, and we’re paying them to do this to us.

    • #2
    • November 4, 2019, at 5:19 PM PST
    • 2 likes
  3. Fake John/Jane Galt Coolidge

    The left understands. They just don’t care. They think they can ride this to power and graft for their buddies.

    • #3
    • November 4, 2019, at 5:21 PM PST
    • 1 like
  4. DonG Coolidge

    Leftists always use static thinking and react to their emotions. It makes it hard to reason with them.

    The pharma industry, insurance industry, and the medical professions are prolific lobbyists at all levels of government. The Dems. would never get anything through that hurts them. Or rather the largest players. The small guys and competition would be crushed by regulation. It is foolish to think Warren could simply sign away an industry that makes 100s of billions of dollars a year.

    • #4
    • November 4, 2019, at 6:19 PM PST
    • Like
  5. DonG Coolidge

    It should also be mentioned that a wealth tax is not constitutional. It is also probably not legal to tax employers an amount that matches their current healthcare spending. A simple payroll tax would be OK, but not a tax based on previous expenses.

    • #5
    • November 4, 2019, at 8:31 PM PST
    • Like
  6. I Walton Member

    She’d destroy the existing system and maybe a market would grow up on the ashes. The current system is a disaster from the USDA, on down. Instead we better let the market sort it out to begin with without taking the risk of turning it all over to centralized Bureaucrats. How we do that is beyond me but that’s the point isn’t it? The medical infrastructure in addition to being the largest set of private, public, technical, research, scientific, financial system that exists anywhere is the most complex. Since we can’t understand it we’ll turn it over to folks who don’t have to pretend to understand any piece of it, let alone all of it. These people are insane. 

    • #6
    • November 5, 2019, at 4:42 AM PST
    • Like
  7. JuliaBlaschke Coolidge

    But it works to get votes. The average Joe is wandering around out there thinking, “why can’t we have free health care when all these other countries have it?” Also, “Sounds good. I get free stuff and somebody else pays for it”. It doesn’t have to be true, it just has to work.

    • #7
    • November 5, 2019, at 7:14 AM PST
    • 1 like
  8. Mark Camp Member

    James Pethokoukis: ‘Well, how would you fund it?’ That’s not the only trade-off that you need to think about and frankly, it might not be the most important one in the long term.”

    Music to my ears. Or to my eyes, a little blossom of economic truth poking its head out from a crack in the rubbish-strewn asphalt pavement of political-economic ignorance.

    But just “might not be” the most important? That’s ok, James. You play Good Cop, and I’ll just tell it like it is. You’ll win more people over to the side of freedom by being nice.

    [Tags: Incomprehensible Humor/political.]

    • #8
    • November 5, 2019, at 7:29 AM PST
    • 1 like