Richard Thaler Undersells the Public Option

Richard Thaler is one of the great economists of our time. But that doesn’t stop him from getting a “C” on his latest health policy missive.

Richard Thaler is one of the best and most innovative economists of our time: if one person gets credit for inventing behavioral economics, it’s Thaler. His recent book with Cass Sunstein, Nudge, while not without egregious faults, is still must-reading. So when he says something about the controversy over the public option in the New York Times, I take notice.

In terms of the quality of the piece, there is some good stuff, but mostly bad.

First, the good stuff. Thaler, citing Victor Fuchs, makes an important point that has been lost in the debate: the public option does not figure to reduce administrative costs in the same way that Medicare has because the public option will not cover everyone (as Medicare does). Thus, in some sense it will have to market itself like other insurers, which increases administrative costs. Fair enough.

Now the bad stuff — and there is a lot more of it.

1) Thaler seems to accept that the public option should be competing with private insurers on the grounds of, well “competition.” But why? He talks a lot about reducing costs, but just accepts the notion that this competition will reduce costs. Why doesn’t he make the elementary point that if Medicare can reduce costs through having what he pejoratively calls a “captive market,” why isn’t that a good thing and not a bad one? (And no: it is no good to point out as Fuchs does that Medicare has financial problems. Medicare’s costs are rising more slowly than the rest of the health system even though it serves the most expensive patients: the rest of the system is not failing the insurers because those insurers are cutting people off.)

This is particularly true because, as Thaler himself points out later in the piece, the public option could use its buying power to reduce costs: but then he unaccountably says that this is a bad idea because it will reduce competition. This really winds up being: 1) competition in health care is good; 2) if the public option can reduce costs by using its purchasing power, this must be bad because 3) see #1. That is about as good of a circular argument as I have seen.

2) Thaler adopts the old saw that governments can’t run businesses. There are several reasons to doubt this (take Singapore Airlines if you doubt me, or better yet invest with Lehman Brothers if you have such faith in the private sector), but in any event, his “thought experiment” proving the point is really quite inapposite. He argues that Fedex or UPS are better than the Post Office, so why think that the public option will be better?

Well, maybe because health care insurance isn’t like sending a letter. A lot of what insurers do is buried in tons of fine print, or more egregiously, they simply decide not to pay if after promising to do so and then retroactively cancel the coverage, or delay for so long that the patient gives up, goes bankrupt, or dies. Now, I think that Thaler would respond, “exactly! That’s why the key provisions are about the regulation of the private insurers, not the establishment of a public option.” But as I pointed out the other day, the actual mechanics of ensuring these regulations is very complex and difficult. Thus, a public option serves as a potentially effective police officer. It will hard to discover, prove, and penalize private insurers: it will be easier to have the public option give consumers a better deal.

By the way: Express Mail from USPS is still cheaper than FedEx overnight.

3) More gobbledygook on tort reform. Just stop this. Reprising one of the worst chapters of Nudge, Thaler mentions that med mal reform “could actually save some money.” Yes — if you reduced the costs of the med mal system by an impossible one-third, you might actually save one-third of one percent of national health costs. (This courtesy Tom Baker, whose indispensable book on the subject should be required reading). I have no brief for the med mal system, and think that the whole thing should be scrapped — it compensates abysmally, it barely deters, and it is fabulously expensive. We should replace it with the sort of social insurance system that they enacted in New Zealand. But let’s not kid ourselves here: tort reform isn’t even a blip on the cost radar screen. It functions solely as a GOP talking point when they are challenged to come up with their own plan.

Thaler is right that the public option is not the be-all and end-all of health insurance reform. But it could be an important part, if senators in the pocket of the insurance industry did not disingenuously insist that it was off the table. It could serve as a useful weapon against those insurers gaming the system: that’s why they are working so hard against it. That’s why we should keep fighting for it. And it’s why Thaler should think a little more carefully before dismissing it on the altar of saying something cute and counterintuitive to get into the New York Times.

Author: Mark Kleiman

Professor of Public Policy at the NYU Marron Institute for Urban Management and editor of the Journal of Drug Policy Analysis. Teaches about the methods of policy analysis about drug abuse control and crime control policy, working out the implications of two principles: that swift and certain sanctions don't have to be severe to be effective, and that well-designed threats usually don't have to be carried out. Books: Drugs and Drug Policy: What Everyone Needs to Know (with Jonathan Caulkins and Angela Hawken) When Brute Force Fails: How to Have Less Crime and Less Punishment (Princeton, 2009; named one of the "books of the year" by The Economist Against Excess: Drug Policy for Results (Basic, 1993) Marijuana: Costs of Abuse, Costs of Control (Greenwood, 1989) UCLA Homepage Curriculum Vitae Contact: