Asymmetrical Information

Here's a link to the transcript that you can reach (at least for today) without being a Wall Street Journal subscriber.

I think Dubya's heart is in the right place on this, but it's made even easier by the political makeup of the Michigan congressional delegation and Governor. As a Ford Truck owner I know Detroit can make superb vehicles if they choose to. They are just not able to change directions fast enough to keep pace. This is due to both the UAW Unions and the shadow, but just as real middle management unions.

I think sometimes it is important to remember how much resistance there is in the public to competition and the consequences. Bush has proposed small but significant competition for social security, education and now health insurance and encountere fierce resistance. This will all take time

Well all I can say is ask the retired pilots at United airlines if they trust management to do the right thing. Also Jane where in the city you crashing? I'm in Rego Park FYI.

GM and Ford make some decent vehicles. Not as many as they should, and they rely too much on badge engineering, but nevertheless vehicle quality is not the sole reason for their woes. They're also struggling with massive pension and health-care expenditures, thanks to their habit of conceding to UAW demands back when times were better. In addition, both GM and Ford have a not-entirely-deserved reputation as making doofy old fashioned vehicles for doofy old buyers. GM and Ford vehicles lack the trendiness and cachet surrounding vehicles by Toyota, Honda and others, even though average buyer ages may not be all that different. In the end, this image problem may prove to be the biggest obstacle of all.

sometimes you like Bush?

Charges: Simply put, the stupidest man ever to lead this country. Bush’s lobotomized Will Rogers routine is a satirist’s dream, a European intellectual’s caricature of the dipshit cowboy American, all balls and no brains. Often responds to questions by attempting to define the word he finds the most challenging in them. Thinks press reports of his various crimes are responsible for his waning popularity, rather than the deeds themselves. Interprets the constitution like a Unitarian interprets the bible; for maximum convenience and with no regard to the actual text. Foreign policy vision is less serious and more simplistic than an issue of Captain America.

Exhibit A: "I want to thank the President and the CEO of Constellation Energy, Mayo Shattuck. That’s a pretty cool first name, isn’t it? Mayo. Pass the Mayo."

Sentence: Trapped for eternity under shoddily manufactured Diebold voting machine, unable to reach nearby refrigerator full of hot dogs and bourbon.

"the stupidest man...a European intellectual’s..."

Do you laugh or cringe?

But as far as the topic. As a Manhattan resident I'm much more concerned about the near complete disapearance of farming jobs from New York City. These are good New York City jobs that are no more. We need to intervene now!

Dave, I've had Ford trucks, and liked them, but the reality is that with Toyota's new San Antonio truck plant about ready to ramp up to full production, with new models which will compete head-on with Ford and GM in the full size truck arena, the last bastion of profitability for American manufacturers will be breached. Truck consumers are not that different from auto consumers in this regard; when given a choice between two vehicles, the one with a 33% higher defect rate (which still remains, after all these years of Ford and GM allegedly closing the quality gap, the spread in manufacturing results), is going to be the second choice a large percentage of the time. The American firms will do what they always have at this point, offering such aggressive pricing incentives that money is lost on every vehicle sold, as is the case with sedans. How long can an automotive firm which does not make any vehicles which are sold at a profit survive?

In fact, given that for a lot of truck owners, a truck is the ultimate utilitarian vehicle, as is the case with me, a significant difference in manufacturing quality gives even more impetus to change brands than is the case with sedans. I don't know how this all ends, but somebody is gonna get it right in the chops.

Earl-- You stole that from here, a list filled out by people who call other people idiots yet don't know the difference between a Filipina and a Japanese person (all them Asians look the same right, huh?) and can't figure out at all why a Filipino-American might harbor bad feelings about Japanese behavior in World War II. What fools.

"I think Dubya's heart is in the right place on this, but it's made even easier by the political makeup of the Michigan congressional delegation and Governor."

Too superficial. UAW plants are the largest employers in Ohio. Have major presence in Kentucky and Tennessee.

Simply blowing off Ford/GM because one state is not as blue as it was doesn't make electoral sense, especially sine Ohio would probably go blue.

You may call it a "bail out" if you want or some call it a "level playing field". For all the pie-in-the-sky, self righteous libertarian platitudes offered on the is blog you are overlooking the simple fact the Ford and GMs main problem is HEALTHCARE ... HEALTHCARE ... HEALTHCARE!
I have seen estimates that $3500 per car is related to healthcare. All of the competition has the benefit of "communist healthcare" in their home market OR in the case of the transplants (honda or toyota usa) a VERY young workforce.
In the real world this seems be a case where the auto industry may be sacrificed at the libertarian altar. Enjoy the ritual.

He would have never said that before last November.

"Ford and GMs main problem is HEALTHCARE ... HEALTHCARE ... HEALTHCARE!"

How can you pick one cost out of all of them as "the problem"? Maybe steel is the problem? If steel was free, then they would be in the money, right? What if, in the Utopian age of "free" healthcare, the auto makers ended up spending more (say taxes) than they do now?

And strangely enough, how do the Japaneese car manufacturers succeed meanwhile?

Josh K,
If you bothered to read my post it said Toyota and Honda in the US have a very young workforce, so their operations will face problems as their workforce ages!
PLATITUDE #1 "you have to build products people will buy"
Domestic autos sell almost 60% of the autos in this county!

"Toyota and Honda in the US have a very young workforce"
They have lots of retirees in Japan also. I just don't beleive that they retired at 55. And again, whatever "free" health care they get from the government is paid for by taxes, which is a cost they bear either way.

"Domestic autos sell almost 60% of the autos in this county!"
That number has been breached already on the downside. And, (I forgot where I saw the #), once you take out sales to rental fleets, you have a really bad #.

As for your "free" healthcare charge...somehow other commie nations live longer than Americans while spending 5-10% less of GDP! Spend 10% live longer or spend 15-20% and die fat young and broke! Keep repeating "health insurance companies are always my friend" "the auto industry deserves to go broke"

It only feels like you living longer in the commie nations.

Retired workers healthcare in Japan is covered by the government....You may have a point on the retirement age! My point is that this whole topic is much more complex than the onesided diatribes on the thread!

somehow other commie nations live longer than Americans while spending 5-10% less of GDP!

Life expectancy is an easily manipulated statistic. The US life expectancy is 77.71 years, just ahead of Denmark (77.62), Ireland (77.56), and Portugal (77.53), and just behind Finland (78.35) and the UK (78.38). See list. A small difference such as that is easily explained by endogenous factors with nothing to do with health care spending, including higher rates of teen pregnancy and very high rates of immigration to the US from countries with shorter life expectancies. (Not that I oppose immigration at all.)

The spending difference is almost entirely explained by greater use of the latest technology in the US (other countries wait a few years to use the latest thing, once it has become cheaper) and much greater spending at the end of one's life.

"Spend 10% live longer or spend 15-20% and die fat young and broke!"

perhaps the key statement here is "fat" - since being fat (as a nation) would almost certainly tend to increase healthcare costs. Being fat also impacts life expectancy...

That ease of manipulation must explain why I have seen the US as low as 37th on a list of OECD nation life spans. The US is always number one in absolute and relative amount of resource spent to achieve that outcome...usually by a wide margin. Somthing has to done ...other than repeat "We have the best heathcare system in the world" over and over. Best or not, their is obvious room for improvement and it has to happen for the sake of the rest of the US economy.

If health care is the big problem, we could save GM and Ford at a stroke by repealing the law that forces them to pay for their employees' health care.

On second thought, no, we couldn't. There isn't any such law.

"other countries wait a few years to use the latest thing"

Well, you hear lots of stories about people coming here for healthcare b/c it's not available elsewhere. My Mom was recently at Columbia Pres neuro, and there were so many non-US citizens there. I've read than many of the more expensive treatments are triaged heavily in socialist systems.

But IMHO, if we ever get the HSA / High-Deductible to work, healthcare would be a lot cheaper and better for all.

I'm with David January 26, 2006 12:11 PM. George Bush's protectionist steel tariffs impeded the overall economic recovery.

Paul,
Great obsevation...no law madates employers provide healthcare. Ford and GM both entered into contracts that mandate that they provide healthcare. Nothing is more sacred to to a free market economy than people honoring contracts they enter into.
I thought given the libertarian bent of the thread, someone was sure to point out that the whole concept of linking healthcare to employment goes back to the price control during the second world war. Wage increases were prohibited, so employers offer "benefits" instead.
Our entire industrial policy hinges on a historical fluke...not a free market fluke either.

Given the libertarian bent of the thread, someone was also sure to point out that the concept of linking health care to employment would have gone the way of Rosie the Riveter postwar if not for the privileged tax treatment given to employer health plans. GM and Ford didn't have a cost imposed on them; they jumped at a subsidy.

The problem of health care for the Big Three is not so much the issue itself as is their failure to plan for it.

Who could have guessed that as work forces get older they need more medical care? Is there an economist in the realm wreckless enough as to suppose that health care costs will increase in the future?

My immediate family has over 100 years of UAW/GM experience. As a kid in high school (1980), I realized that the business model the unions and managment were pursuing was not sustainable.

Why didn't they?

It was always easier to kick the can down the road than to open the can and deal with the contents, especially once the government showed a willingness to be the capital provider of last resort, as it did with Chrysler. So that's what happened. The long term issues here likely cannot be dealt with without bankruptcy, and possibly not even then.

Bush is against bailouts....unless it is his company being bailed out...what would he have made with the Rangers if he couldnt use his connections to grease the wheels and get a new stadium built. Oh yeah i forgot the saudi government bailed out of Harken energy. Free Market work for "others" Quite rich theatre.

Paul,
Given the huge healthcare burden of GM and Ford compared to their competition ...they are not "subsidized" enough!

I really don't have much sympathy for corporations that have problems because of high health care costs. They started paying their workers in health insurance rather than dollars because it was cheaper for them to do so. Now that it has become more expensive, they're complaining. Likewise, I have little sympathy for workers who gave up wages in favor of health insurance, and are now seeing the health insurance benefit slowly reduced.

I am glad to see this system coming to an end, because it will place the responsibility for healthcare back on individuals and families where it belongs. Once this happens, the insurance industry will respond with the types of insurance plans that people need. And by removing third party payers, the cost of healthcare will decline.

Our corporations will be stronger for getting out of an insurance business that they aren't any good at. Families will be stronger by accepting responsibility. And the government will be stronger for staying the hell out of a problem they cannot solve anyway.

"Sometimes I really really like this man"
What is not to like? in George Bush Jr world, it is heads he wins, tails he get bailed out. He is a real risk taker he was the profile of my book Atlas Shrugged...maybe you have read it!

What is not to like? in George Bush Jr world, it is heads he wins, tails he get bailed out

Yes, Ayn, do please keep whining about that.

Would you be happier if he bailed out GM and Ford? Or is it a given that you'd complain regardless of what he did?

Its a given. From what I can see, the Democrats are establishing themselves firmly as the party of the whining left.

One could argus that the auto companies are a major cause of American's high medical costs and slightly shorter average life span. We've got more cars per capita than practically anywhere. We drive instead of walking three blocks, when we haven't structured our lives and built our towns so walking is simply not possible. So we get fat!

Can anyone compare the health care received by UAW members versus that you might get in Japan from the national health service?

I'm going to guess that the costs to the patient are far lower for the UAW member, but I'd love to be proven wrong...

The health care costs for the auto makers (I am not sure what they are or who comes up with the estimates) may be significantly higher than they expected due actions by the Federal government.

After Medicare came out, companies that had previously offered health insurance to their retirees, usually made their coverages secondary to Medicare. As part of OBRA 90, to shore up Medicare's finances, the Fed Govt decided that Medicare would be secondary to any other coverage that people had. As a result, companies like the auto makers suddenly saw their health care costs for retirees skyrocket. (I could go on and on here about the government interfering with contracts between private parties, especially contracts already made, plus the unintended side effects of legislation.)

If this is what has happened to the GM/Ford, and it could be independently verified, than maybe the government should do something to help them.

Please this is not a "bail out". Get Ford and GM levels of healthcare costs in line with other nations and then you can prattle on about "competition" or "making relevant products"

Well all I can say is ask the retired pilots at United airlines if they trust management to do the right thing.

Similar problem, similar outcome. Unionized pilot labor negotiated workplace conditions and retirement packages fit for the Prince of Persia, management kowtowed to them in an age when the profits were high because the product/service was not yet commoditized, then -- after persisting in this tomfoolery long after it was clearly no longer sustainable, while failing to adapt the business to the new realities -- proceeded to wake up with a bad hangover.

Which is about where the Big Two will be in another 3-5 years.

GM and Ford are having issues for a lot of reasons, not least of which is that most of their stuff sucks...and this coming from a fan of Fords.

That's not to say that they don't have a few good products...but much of their line looks like it was designed by committee.

Also, someone else previously mentioned a quality gap. If the warranties offered by the manufacturers are an indicator of the reliability of their product, then US auto makers have a long way to go.

Overall it seems to me that they've got problems at all levels, upper management, engineering, marketing, and production. However, I firmly stick the blame to upper management for not taking the initiative to realize this a LONG time ago.

A widely quoted statistic is that Ford spends more on health care for every car sold than it does on steel.

And I'd like to see evidence that the 'tax' cost of foreign cars, that makes up the health care cost in nations where there is universal health care, is equivalent. Somehow, I suspect extra taxes Honday pays, for example, are a fraction when compared directly to what Ford spends on health care. I'd like to see some actual numbers to back this idea that the health care costs are the same.

Ford is heavily invested in health education for its workers. It is desparately trying to keep them as healthy as possible, in order to reduce future costs. It looks like the effort failed, what with the new layoffs.

"Ford spends more on health care for every car sold than it does on steel"
Then it sounds like the management negotiated a pretty bad deal. Or the monopoly power of the unions crushed the company.

"I suspect extra taxes Honday pays, for example, are a fraction when compared directly to what Ford spends on health care"
If it comes out of the company's tax or the employees tax it is similar for current employees. The fact that they have a huge pension debt (counting health care and direct payments) is unique to these unionized companies.

Nate's right and JoshK can't do relatively simple math. Health care costs are born largely by the auto companies for their employees although there are some tax advantages offered. In a national system those costs don't vanish but are much more spread out over a larger number of companies and people. It's a good general rule in this country. Upper management screws up and the employees pay the greatest price.

Randy would be hilarious if he didn't really believe it. The insurance companies won't start offering better deals for individuals who are forced into shopping for products that they can't understand. Most of them will change businesses. Those who don't will make their contracts even more obtuse than they already are and play other games with their customers. And the cost of health care will never decline. There is no health care corporation that will ever want it to do so.

Jim S,

And the cost of health care will never decline. There is no health care corporation that will ever want it to do so.

In a competitive market that would not be the case. By adopting high-deductible catastrophic insurance policies and HSAs and/or out-of-pocket spending on daily medical needs, the market power of HMOs and other third parties would be diminished. Also, using a debit card or credit card would eliminate most of paperwork needed for a simple doctor's visit.

There's more on this at Scatterbox in a post titled, "Speaking of relevance, Mr. President..." The nation's CEO has a far worse track record than the auto companies he scolded for not controlling costs and being irrelevant to the public.

Centrist wrote: "Please this is not a "bail out". Get Ford and GM levels of healthcare costs in line with other nations and then you can prattle on about "competition" or "making relevant products"

The statistics I've seen is that Toyota and other Japanese manufacturers have much lower health care costs for their cars manufactured in the US than the US producers. The playing field is level within the US, and some companies are winning. This may be due to Japanese designs requiring much less labor to actually manufacture the cars. In this case (both being manufactuered within the US) you cannot say it is due to national policies.

Jim S,

No phone company in the world wants phone bills to go down, but they have once competition began. You must still be losing sleep over that one.
I work for a semiconductor company, and most of what we do is working like crazy to make our products cheaper. Not because we want to, we hate the fact that our prices drop an average of 10% a quarter, but because if we don't, the company will go out of business.
So it's not in our interest to lower prices, but we have no choice. This should not be confusing if you are 13 or older.

...the government showed a willingness to be the capital provider of last resort, as it did with Chrysler.

Chrysler, which was profitable but having short-term cashflow issues, never received a cent of bailout from the government. Congress cosigned the loan the banks were afraid to issue, and Chrysler paid off the loan without fallback. Chrysler had acquired the remains of AMC in a leveraged buyout, but one of the important assets was a deal with Renault which was to be the solution to the small econocar issue. Renault bailed, saying under French law the old contracts were void. The Jeep line and the Belvedere plant did not appear to cover the amount of the buyout (in the long run they did) and all of a sudden Chrysler had credit problems.

Renegotiating their bank debt won't turn Ford and GM around now.

Can anyone compare the health care received by UAW members versus that you might get in Japan from the national health service?

I'm going to guess that the costs to the patient are far lower for the UAW member, but I'd love to be proven wrong...

Don't know about the UAW, but when I lived in Japan, I paid 20% of all medical costs out of pocket. As far as I know, that's what everyone there pays.

It's extremely inaccurate to talk about GM's health care costs for past workers in terms of cost per car sold. The costs of legacy health care is fixed and has nothing at all to do with the current number of cars sold. Legacy health care costs have absolutely no effect on the marginal cost of cars. Although we would expect legacy health care costs to reduce profits at GM by a fixed amount, they otherwise should have no effect on the competitiveness of the company. The problems of reduced market share, low quality, high prices, and a high marginal cost structure cannot be in any way related to legacy health care costs.

The difference between fixed costs and variable costs is extremely important. The commenters complaining about the lack of a level playing field have failed to grasp that concept.

FXKLM: Fixed costs do affect overall profitability, which is what is bedevilling GM. And if a company is struggling with quality problems -- as GM is -- then a high fixed cost structure can and does affect that company's ability to cut prices over the long-term, a cut which is warranted by the inferior quality of its products. You're correct in the particulars but the factoid you're complaining about does point accurately to the general problem GM faces.

"JoshK can't do relatively simple math. Health care costs are born largely by the auto companies... In a national system those costs don't vanish but are much more spread out over a larger number of companies and people."

Huh? How could costs go away? Who is going to pay for this? Eventually, someone will be taxed to pay for "free" healthcare.

larrydj,
I have already addressed that point in an earlier post. You have not thought of the demographics of the Japanese operations in the US. They are new plants with young workforces and as a result low healthcare cost.
You are the second person who has made that point...young workers are cheap to provded HC for.
In 20 years the transplants will face the same problem...or just fired the old sick workers.

Well, tritcale, when Congress guarantees a loan, it becomes the de facto capital provider of last resort. You are correct, though, that today's problems are much more entrenched.

i owned a ford tempo, then a ford taurus. both were terrible and the dealerships perpetually screwed me on costs to fix problems that never really got fixed.

i'm now a happy owner of a hyundai, with 10 year warranty.

it's so simple - make cars that don't break. then ten years after they prove the cars work, i might try buying one.... oh they don't have ten years - oh well, i'll bet it was nice to have high paying jobs with cushy benefits for uneducated workers while it lasted. it sucked for the fools like me that bought their crappy cars though.

centrist,

"You have not thought of the demographics of the Japanese operations in the US. They are new plants with young workforces "

I think you are confusing two issues. One is the current workforce, the other is the retirees.

Paying anything for the current retirees is a burdonesome cost. I'm not saying that can shirk it, but it sounds like a very bad deal to them. But, I guess management from back then cashed in their checks already.

If there's any point I take away here is that shareholders governance needs to be improved.

I am not confusing the two issues....Both the burden of an older current workforce AND the burden of many retired workers compared to active workers are disadbvantages for the big dom. autos compared to the transplanted foreign auto.

BTW I just took delivery of a a car from Ford motor company today!!!! I love my new Volvo wagon
:O)

Thank goodness for Sweedens communist healthcare system.!! haha!

Joshk,
The new plant issue is also important...I agree.

jult52:

a high fixed cost structure can and does affect that company's ability to cut prices over the long-term

I don't follow this. A company is always going to set its prices to maximize profits. I don't see how it could matter whether you're subtracting $1 billion or $20 billion a year in fixed costs. If cutting prices increases profits, that should be true regardless of the fixed cost structure. I can certainly see how legacy benfits hurt GM's profits, but I can't see how it could hurt GM's quality, market share, or pricing power. If I'm wrong, I would appreciate an explanation because I don't see it.

FXKLM: GM is producing an inferior product which should accordingly be priced lower than competitor products. GM has been losing market share over the last decade, which indicates that its products are too expensive. Because GM has high fixed costs, it cannot cut costs further, to a rate where it stops losing market share, without enduring profitability problems and eventual bankruptcy.

"A company is always going to set its prices to maximize profits."

What if its product can't be priced profitably taking into account the company's fixed costs?

Am I the only one getting really tired of comparative longevity statistics being thrown around without any mention of ethnicity, immigration or lifestyle? And as if increased longevity were the only enhancement health care could legitimately provide (as opposed to quality of life)?

Another thing that really gets me is the underlying assumption that if the gvt made healthcare "free", buisiness would be more competitive. Why not then have the government make steel and oil "free" also? Or even wages themselves? There would never been any unemployment if the goverment paid everyone's wages.

GM could sell cars for $10 each at a profit.

"Somthing has to [be] done ...other than repeat "We have the best heathcare system in the world" over and over. "

Maybe we should repeat "Something has to be done!" over and over instead.

"Another thing that really gets me is the underlying assumption that if the gvt made healthcare "free", buisiness would be more competitive. Why not then have the government make steel and oil "free" also? Or even wages themselves? There would never been any unemployment if the goverment paid everyone's wages."

Taking medical care out of the employment relationship is not the same thing as making it "free". Medical care should be returned to its proper place, between the patient and doctor. Why should employers be responsible for medical care but not housing? The decision of how to best structure medical care is independent from removing the employer from the relationship.

Removing the employer can then allow insurance to work better, since there will not be a subsidy creating artificial incentive to push every dollar through "insurance".

jult: This is going to be my last post on this issue because I don't want to go too far off topic. Based on your first post, I thought you saw something that I had missed. Having read your most recent post, I'm pretty sure I'm right. Even assuming that it's probably true that as a result of fixed costs related former employees GM can't price its cars in a way that will be profitable, the fixed costs still don't do anything at all to affect the price at which GM should be selling cars or the number of cars that GM should be producing. If GM sets prices too high, it's just going to lose more money that it would otherwise.

But if I understand you correctly, I think we're both in agreement that the decline in market share of domestic automakers cannot have been caused by the costs of retired workers.

mj,

Agreed. In fact, I think this is happening now. And we should let it happen. I believe the market will respond with insurance plans capable of meeting most people's needs. The state can then pick up where these plans leave off. A bit of patience may be best in the short run. Give the market a chance.

Jane, I've tried a couple of times to submit a trackback for this post, but it doesn't seem to be taking. Are you seeing the request?

I enjoy the blog immensely, and it's a regular part of the day. It's been my daily dose of NYC since we left the city two years ago. Thanks again.

Mack

As long as there is the adversarial relationship between the UAW and manufacturers, the 2 remaining US car manufacturers will continue losing market share until they close shop.
It's not only the health care cost, but also the union mandated work rules that hamper productivity and competitiveness. In the end it comes down to # of hrs. worked per car assembled, and a common interest to produce the best car possible.
I watched some deliberations on C'Span I believe, about the pending bankruptcy of Delphi. UAW workers were talking about bringing the whole of GM into bankruptcy, rather than admitting the need to compromise and save their jobs.
Unions have not changed their mid-1900's attitude, when their demands were simply rolled over to the price, 'til foreign competitors made that policy impossible.
Unions are dinosaurs that have outlived their usefulnes a long time ago.
They are currently doing to public education what they have done to the manufacturing industry: producing an ever shoddier product at ever increasing cost.

LSD doesn't create as many hallucinations as libertarianism, apparently.

JoshK, no where did I say that costs go away. What I said was that if costs are distributed over a greater number of people the expense to any given small group within that population is lessened. What is so hard to understand about that?

Meaningful competition in the market place that can drive down prices requires a functional rational actor model. Health care decisions will never fall into that category. It requires meaningful information about the product being purchased and a product that doesn't change once you've bought it. Every system of health insurance can unilaterally change the terms it offers the purchasers at any time they wish and cloak what they've done in fine print and jargon that millions of people can't understand. That's the point of it. And the shafted customer doesn't find out until it's too late.

The concept that choosing health care will ever be like shopping for a computer or car is so hyper-simplistic and completely ignores so many psychological factors that enter into health care that don't enter into any other "product" purchase that it boggles the mind.

FXKLM,
the fixed costs still don't do anything at all to affect the price at which GM should be selling cars
If GM sets prices too high, it's just going to lose more money that it would otherwise.

You don't see how contradictory you are? Losing money doesn't 'affect the price'? Of course fixed costs affect prices. I'm glad you're not on the board of any company I own stock in, if you think that the difference between $1 billion in fixed costs and $20 billion shouldn't affect at what price to sell our products.

Jeff: I'm not contradicting myself. Optimal pricing is the same regardless of your fixed costs. I said that if you're losing money at your optimal pricing as a result of your fixed costs, raising prices is just going to make you lose more money. You haven't made any coherent argument to the contrary. This is really basic economics. You produce until marginal revenue equals marginal cost and sell at the market price. Since fixed costs have no effect on marginal revenue or marginal cost they have no effect on how much you should produce or what price you should charge.

Let me put it this way. Imagine you have zero fixed costs. You figure how much you should produce and what price you should charge so as maximize your profits and you make $20 billion. Now imagine that you have $25 billion in fixed costs. That means that however much you were making with no fixed costs, the best you can do now is make $25 billion less. In this case, you can't possibly do any better than you can by producing the same amount and charging the same prices as you would if you had no fixed costs. You'd lose $5 billion, but if you did anything differently you'd lose more.

JimS,

"no where did I say that costs go away. What I said was that if costs are distributed over a greater number of people the expense to any given small group within that population is lessened. What is so hard to understand about that?"

Again, *EVERYONE* is using healthcare. Unless you are going to find people who will agree not to see doctors, etc, and then get them to pay up. You're fighting basic arithmetic. This is something we all use. We can pay for it via taxes or lower wages, but you can't make it free - or cheaper - by shifting it around.

FXKLM says:
Imagine you have zero fixed costs. You figure how much you should produce and what price you should charge so as maximize your profits and you make $20 billion. Now imagine that you have $25 billion in fixed costs. That means that however much you were making with no fixed costs, the best you can do now is make $25 billion less. In this case, you can't possibly do any better than you can by producing the same amount and charging the same prices as you would if you had no fixed costs. You'd lose $5 billion, but if you did anything differently you'd lose more.
But does any CEO ever actually know what the optimal pricing really is? If you were losing money, and you didn't know for a fact that you were already at the optimum pricing level, changing the price would seem to be a prudent course of action. You might make it worse, but you might make it better, too.

Similarly, if you don't actually know the optimal pricing, the fixed costs are going to determine a floor on what you're willing to try. So, lowering the fixed costs gives you more maneuvering room, and that may allow you to get closer to opimal pricing. Raising the fixed costs takes away maneuvering room, and may make it impossible to get to the optimal point.

JimS says:
Again, *EVERYONE* is using healthcare. Unless you are going to find people who will agree not to see doctors, etc, and then get them to pay up. You're fighting basic arithmetic. This is something we all use. We can pay for it via taxes or lower wages, but you can't make it free - or cheaper - by shifting it around.
But you can make it less likely that a person with a grave medical problem will be financially destroyed by it. As far as I'm concerned, that's the whole point of the system, and this goal does in fact require that people without grave medical problems pay more into the system than they get out in medical care. Do you see any other way out that doesn't leave actual sick people with their own financial resources and nothing else?

But you can make it less likely that a person with a grave medical problem will be financially destroyed by it. As far as I'm concerned, that's the whole point of the system, and this goal does in fact require that people without grave medical problems pay more into the system than they get out in medical care. Do you see any other way out that doesn't leave actual sick people with their own financial resources and nothing else?

Given a reasonable expectation of risk and serious consequences for not insuring against it, then yes, many people who will never withdraw the amount they contribute over the life of the policy, will still contribute. The entire industry of insurance was founded, and still operates, on this model.

My parents are highly fire conscientious -- they don't leave even the coffee maker or toaster plugged in when not actively in use, they have a fire extinguisher each in the garage and the basement stairwell (the latter can also be quickly accessed in the event of a kitchen incident), greasy shop rags are discarded in a sealed metal transhcan, extension cords rats' nests are a cardinal sin, paint and other flammables are stored in a locker well away from the furnace and water heater...etc.

Nonetheless, they have a comprehensive homeowner's insurance policy which includes fire protection, in part because home loss would be a devastating financial wound, and in part because affordable policies are available in a competitive market. The failure of some people to understand how readily this kind of scenario could apply to the health insurance industry, given the necessary structural reforms, is simply mind boggling.

anony-mouse: I think the misunderstanding starts with the fact that what has been called "medical insurance" has been a mixture of real insurance (a plan to pool the risk of large, unusual, and unexpected expenses) with something quite different - paying someone else to pay your bills for routine expenses.

Real insurance never pays back as much on the average as you would get if you took those insurance payments and invested them. Some of the money has to go to pay insurance company workers, expenses, and profits. However, on the average, your house doesn't burn down and (I hope) you don't wreck your car or need a major operation. Insurance spreads the risk of such catastrophes, so instead of a possible huge loss, you get a constant small financial drain.

When expenses are predictable - like treatment for chronic conditions, as well as annual checkups, etc. - having an insurance company pay the bills just means that someone is going to have to cough up all the money for the routine expenses plus some more to keep the insurance company going. You don't hire an insurance company to pay your light bill or put gasoline in your car. Why should you hire an insurance company to pay medical bills that are just as predictable? Of course, one reason is that it doesn't look like all the money that goes to pay the insurance is yours. Part is yours, part is from the company, but the company share just takes a more indirect path to come out of your paycheck. Part might be from tax savings, but you can bet the government is getting that money somewhere else. Part might be from your fellow employees, if you happen to have a more expensive chronic condition than them, or if you merely frequently bring your kids into the emergency room for things that only needed disinfectant and a Bandaid, and go to the doctor and scream for antibiotics when you've got a minor virus infection that will run its course no matter what the doctor does.

Which brings us to one problem with insurance, called "moral hazard". By promising to pay all or most of certain expenses, it reduces the motivation to avoid those expenses. For medical insurance, this means that either everyone else in the same pool with you (e.g., your fellow employees) are paying extra because you and your doctor are making treatment decisions without regard to cost, and possibly because you are demanding unnecessary treatment, or else somewhere an insurance company clerk is practicing medicine by telephone to try to hold the costs down.

With HSA's, we are getting back to real insurance, plus a savings account to cover the routine expenses. My employer just switched to an HSA. As best as I can tell from the paperwork, it provides the same coverage as before if we run up bills of more than $1,000 for one person or $2,000 for a family. E.g., my wife's gall bladder removal a decade ago cost us $5,000, and a similar operation now would still cost us $5,000 - except that by paying this through the HSA tax-sheltered savings account, I get the effect of a tax deduction without having to itemize deductions, and I get employer matching on the first $600. Smaller bills have to come either from our HSA account, or straight out of our pocket. I hope that will lead some people to learn to tell when a trip to the doctor is actually necessary.

The one problem is, the way that HSA savings account is set up, I'm still paying someone else to pay my bills with my own money...

markm: no real arguments there. Thing is, we have people like the ubiquitous Jim S arguing that "health insurance is somehow different and special, therefore normal market mechanisms are inadequate!" -- which translates roughly to "therefore, any and all socialized policy prescriptions are obvious and justified." Others are not saying it in quite those words, but are fingering threads of the same sentiment.

I think a saner argument is that most people would be well served by a competitive market for health insurance, as insurance (in contrast to the present system, hence the need for structural reforms first). The disclosure procedure need not be onerous, just carefully regulated. Then, and only then, may we safely debate and implement suitable social policy for those who truly cannot be served by such a system, as opposed to "everybody".

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