Friday, October 24, 2014

Lest we forget: The fall of East Germany, 1989

I was in Leipzig, Germany this last week.  Twenty five years ago, in September and October 1989, Leipzig was the center of demonstrations that were pivotal in tearing down the Berlin Wall and to the downfall of the East German state, the DDR -- Deutsche Demokratische Republik.

In the last two months, in Leipzig and throughout Germany, there have been many events commemorating those events of 25 years ago.  How momentous those events were!  I was in East Germany in 1984 when it was still communist.  It was just amazing to me to see firsthand the lack of freedoms, both political and economic.  I was shocked by actually seeing police with dogs looking under the train with mirrors -- as we were leaving the East.  In 1990 I visited the Berlin Wall -- what was left of it -- and saw the beginning of freedom for the East.

Leipzig today is a tremendous city, beautiful and well on its way to rebuilding its reputation as a marketplace for Germany and indeed for all of Europe.

And look how quickly we forget.  I read the news pretty thoroughly, and I don't remember seeing a single story in the US press in the last two months about those events 25 years ago.

Here is a nice film clip from Die Deutsche Welle about the demonstrations in Leipzig in October, 1989 and the brave men who filmed the events from a church and then smuggled the tapes out to the West. internet back then, so the East Germans had effectively shut down any news about large scale demonstrations.

Sunday, October 05, 2014

Why should "preventive care" in health care and cars be free?

The Affordable Care Act mandates that certain preventive care -- well visits, annual checkups, certain bloodtests and screenings -- be made free to anyone covered by insurance.

As an economist, I usually cringe at such policies, as a basic principle of economics is that insurance is meant to cover large and infrequent events.  My usual response to covering things like annual checkups is, "Do we have insurance for oil changes on our cars?"  Incurring the transaction costs of insurance in paying for routine care just seems senseless.

But then I started noticing that some auto manufacturers in fact provide for free maintenance care for new cars -- see here for BMW's plan for example.

Why would new cars come with free maintenance?  What might be the reasons for this, and might we learn something about free preventive health care in thinking this through for cars?

A few things come to my mind as to why BMW and other car manufacturers might offer free maintenance.  I put analogous explanations for free preventive care in italics alongside.

1.  Consumers don't bear the full cost of not maintaining vehicles.  There is some truth to this, certainly a lot of truth for leased vehicles.  Even for owned vehicles, the used car market classically suffers from adverse selection, making well-maintained vehicles sell for low prices that reflect the average quality of all cars.  The manufacturers have an interest in maintaining the value of used cars, so they optimally lower the price of maintenance. This explanation should have less weight to the extent that the maintenance being considered is easily documented.  In health care, the analogy would be that people will have insurance for large ticket illnesses, so the incentive to pay even a little for preventive care is lessened.  Also Medicare in later life means that we have less incentive to take care of ourselves now.

2.  Consumers face monopoly prices from dealerships for maintenance, so the manufacturers negotiate on behalf of new-car buyers.  I like this explanation, as I always feel that the car dealers exploit both their local monopoly power and any power they have from giving "authorized warranty" coverage.  The analogy to health care is self evident, with monopoly pricing (price exceeding marginal cost) by providers being common.  Insurers have incentive to bargain with providers to give preventive care at the lowest possible price when the insurers bear the cost.

3.  It is all a marketing ploy, with consumers overestimating the value of free maintenance care.  I think there might be some truth to this one too.  Car manufacturers know how little maintenance a new car really needs; consumers overestimate that and therefore over-respond to offers of free maintenance.  The analogy in health care is that we should have seen insurers offering free preventive care without being forced to (and I think we did).  

4.  A last one, not my favorite, which is that consumers are irrational and skip maintenance even when the value of the maintenance exceeds its cost.  As always, we have to look on both sides of the coin:  I agree that consumers make mistakes, but why do we think they will under-maintain rather than over-maintain?  I know lots of people who change their oil way too frequently.  In health care, my guess is that most analysts would say that consumers will irrationally take too little health care if they have to pay for routine care.

5.  This is a good one:  free maintenance is a way to get consumers into the dealerships so they can be sold additional services ("we changed your oil but what you really need are new shocks").  This depends on consumers not figuring out the game entirely, although again information asymmetries make it possible.  I especially like the analogy to health care here:  come in for your free check-up and let's see what else you need.  Blood tests, scans, ....?

Bottom line?  I think that in health care we give away too much preventive care.  Point 5 above is an especially good one.  Not addressed by any of the points above is another big concern of mine, which is that free care perpetuates a belief that all health care "should" be free to all.