Category Archives: competition

In Defense of College Admission for Pay

20 Wednesday Mar 2019

Posted by in competition, Education, Markets, School Choice, Uncategorized

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The college admissions scandal revealed by the FBI last week exposed the willingness of some very wealthy people to lie and cheat to enhance the status of their children. It also resulted in charges against several employees of testing services and prestigious universities, who sold-out their institutions for pure financial gain. These actions may have harmed more deserving applicants to the defrauded academic institutions. Perhaps as sad, the children whose parents cheated are bound to suffer life-long consequences.

Strong prosecution of these crimes will deter other parents entertaining similarly crooked avenues in pursuit of ambitions for their kids. The schools and testing organizations should be motivated to tighten their internal governance processes. My hope, however, is that legislative bodies will refrain from passing new laws in an effort to regulate college admissions. Many schools accept a small percentage of students, legacy or otherwise, who do not meet their academic standards but whose wealthy families make substantial, above-board donations that benefit other students. Putting an abrupt end to these transactions might not be helpful to anyone.

With certain conditions, I do not object to wealthy parents wishing to pay an above-board premium to get their kids into the college of their choice, nor do I object to schools that are free to name their price. First, the school should always receive consideration in an amount adequate to benefit other students or deserving applicants. Second, the acceptance of a privileged but academically inferior student should represent an increment to the school’s freshman class, never taking a coveted slot otherwise filled by a better student. Third, an institution should never guarantee successful completion of a degree program in exchange for such an offer. Fourth, I’d like to see schools make public the number of students falling short of academic qualification whom they accept in exchange for such offers, as well as the aggregate remuneration they receive in all those cases. Fifth and finally, I see no reason why these practices should be limited to private schools. However, a public school’s remuneration must be more than sufficient to make unnecessary any taxpayer subsidies attributable to a new matriculant.

I don’t believe any of these conditions should be a matter of law. Private and public educational institutions are market participants, even if they do engage in non-price rationing. Market incentives should guide institutions to protect the integrity of their brands by awarding degrees only for real academic achievement. This bears on my third and fourth conditions above: no school can guarantee to parents that a degree will be awarded to their child without compromising its integrity. Also, a school’s academic reputation should reflect the extent to which it accepts applicants lacking the school’s minimum standards.

One of the thorniest problems with my conditions has to do with the poor academic standards that actually exist in certain degree programs. These make it possible for bad students to earn diplomas. Grade inflation is all too pervasive, and grade-point averages are notoriously high in some fields, such as education. It may be exceptionally difficult to monitor and prevent instructors from allowing poor students to skate through classes with decent grades. And too obviously and sadly, it’s often the diploma itself that matters to people as a status symbol, rather than real educational achievement. If employers are content to rely on mere signals of that kind, so much the worse.

There’s nothing to be done if that’s all that is demanded of a college education. I think that, more than anything else, is what inflames the passions of Bryan Caplan, who calls the entire system of higher education wasteful. More demanding disciplines have some immunity to this form of decay. Competitive markets might punish schools and employers having weak standards. But wherever the importance of real merit is discounted due to classist loyalties, legal impediments, professions lacking in academic rigor, or any other form of compromise, the diploma signal is paramount, and that is lamentable.

The admissions scandal has prompted howls of indignation directed not only at the cheaters ensnared by the FBI’s “Varsity Blues” operation, but more broadly at the perceived injustices of college admissions in general. The process is said to be unfair because it tolerates admissions for scions of wealthy families and even those who can pay for multiple rounds of standardized tests, multiple application fees, interview “coaches” and the like. These advantages are not unlike those endemic to any market in which ability-to-pay impinges on demand. Yet generally markets do an excellent job of facilitating the development of affordable substitutes. College education is no different, and longstanding mechanisms are in place offering means of payment for academically-qualified applicants who lack adequate resources. The conditions I listed above would enhance that support.

Nevertheless, critics say that the disadvantaged do not get adequate preparation in primary and secondary education to be competitive in college admissions. They are largely correct, but the solutions have more to do with fixing public K-12 education than the college admissions process. Primary and secondary education are almost devoid of competition and real parental choice in disadvantaged communities. There are many other social problems that aggravate the poor performance of public education in preparing students who might otherwise be candidates for higher learning. Realistically, however, the college admissions process cannot be blamed for those problems.

Injecting Competition Into Health Care

12 Friday Oct 2018

Posted by in competition, Health Care, Uncategorized

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Competitive pressures in U.S. health care delivery are weak to nonexistent, and their absence is among the most important drivers of our country’s high medical costs. Effective competition requires multiple providers and/or substitutes, transparent prices, and budget-conscious buyers, but all three are missing or badly compromised in most markets for health care services. This was exacerbated by Obamacare, but even now there are developments in “retail” health care that show promise for the future of competition in health care markets. The situation is not irreversible, but some basic policy issues must be addressed.

John Cochrane maintains that the question of “who will pay” for health care, while important, has distracted us from the matter of fostering more competition among providers:

“The discussion over health policy rages over who will pay — private insurance, companies, “single payer,” Obamacare, VA, Medicare, Medicaid, and so on — as if once that’s decided everything is all right — as if once we figure out who is paying the check, the provision of health care is as straightforward a service as the provision of restaurant food, tax advice, contracting services, airline travel, car repair, or any other reasonably functional market for complex services.”

We face a severe tradeoff in health care: how to provide for the needs of more patients (e.g., the uninsured, or a growing elderly population) without driving up the cost of care? As a policy matter, provider resources should not be viewed as fixed; their quantity and the efficiency with which those resources are utilized are responsive to forces that can be harnessed. Fixing the supply side of the health care market by improving the competitive environment is the one sure way to deliver more care at lower cost.

Fishy Hospital Contracts

Cochrane discusses some anti-competitive arrangements in health care delivery, quoting liberally from an article by Anna Wilde Mathews in The Wall Street Journal, “Behind Your Rising Health-Care Bills: Secret Hospital Deals That Squelch Competition“:

“Dominant hospital systems use an array of secret contract terms to protect their turf and block efforts to curb health-care costs. As part of these deals, hospitals can demand insurers include them in every plan and discourage use of less-expensive rivals. Other terms allow hospitals to mask prices from consumers, limit audits of claims, add extra fees and block efforts to exclude health-care providers based on quality or cost.”

Mathews’ article is gated, but Cochrane quotes enough of its content to convey the dysfunction described there. Also of interest is Cochrane’s speculation that the hospital contract arrangements are driven largely by cross subsidies mandated by government:

“The government mandates that hospitals cover indigent care, and medicare and medicaid below cost. The government doesn’t want to raise taxes to pay for it. So the government allows hospitals to overcharge insurance (i.e. you and me, eventually). But overcharges can’t withstand competition, so the government allows, encourages, and even requires strong limits on competition.”

The Role of Cross Subsidies

In this connection, Cochrane notes the perverse ways in which Medicare and Medicaid compensate providers, allowing large provider organizations to charge more than small  ones for the same services. Again, that helps the hospitals cover the costs of mandated care, regulatory costs, and the high administrative and physical costs of running large facilities. It also creates an obvious incentive to consolidate, reaping higher charges on an expanded flow of services and squelching potential competition. And of course the cross subsidies create incentives for large providers to lock-in business from insurers under restrictive contract agreements. Such acts restrain trade, pure and simple.

Cross subsidies, or building subsidies into the prices that buyers must pay, are thus an impediment to competition in health care, beyond the poor incentives they create for subsidized and non-subsidized buyers. So the “who pays” question rears it’s head after all. When subsidies are necessary to provide for those truly unable to pay for care, it is far better to compensate those individuals directly without distorting prices. That represents a huge policy change, but it would also help restore competition.

Competitive Sprouts

John C. Goodman provides a number of examples of how well competition in health care delivery can work. Most of them are about “retail medicine”, as it’s been called. This includes providers like MinuteClinic (CVS), LASIK and cosmetic surgery, concierge doctors, and “retail” surgical services. Goodman also mentions MediBid, a platform on which doctors bid to provide services for patients, and Ameriflex, which matches employers with concierge doctors. These services, which either bypass third-party payers or connect employer-payers with competitive providers, are having a real impact on the ability of patients to obtain care at a lower cost. Goodman says:

“I am often asked if the free market can work in health care. My quick reply is: That is the only thing that works. At least, it is the only thing that works well.”

Conclusion

Some of the most pernicious Obamacare cross subsidies have been dismantled via elimination of the individual mandate and allowing individuals to purchase short-term insurance. Nonetheless, U.S. health care delivery is still riddled with cross subsidies and excessive regulation of providers, including all the distortions caused by third-party payments and the tax code. Many buyers lack an incentive for price sensitivity. They face restrictions on their choice of providers, they don’t know the prices being charged, and they often don’t care because at the margin, someone else is paying. Fostering competition in health care delivery does not necessarily require an end to third-party payments, but the cross subsidies must go, employers should actively seek competitive solutions to controlling health care costs, price transparency must improve, and consumers must face incentives that encourage economies.

Don’t Cry for the Former Taxi Monopoly

23 Friday Mar 2018

Posted by in competition, monopoly, Technology, Uncategorized

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It would be odd to argue that innovation is not unequivocally positive, that its costs will exceed its benefits. Certainly there are downsides: human capital invested in the methods and technologies supplanted by an innovation is devalued, jobs may be lost, retraining becomes necessary, and even consumers must get used to new ways of doing things, which is not costless. But most of these costs are temporary. And when an innovation eliminates an incumbent’s monopoly, the former monopolist’s profit ends up back in the pockets of consumers.

People do seem to focus excessively on the downside of innovation without carefully tallying the benefits. For example, this article focuses on the loss of New York City taxi pickups since ride sharing services like Uber and Lyft began to have an impact in 2014. Mark Perry reproduces a chart from that article, which is featured above. The number of monthly taxi rides in NYC has fallen by about one-third since then, from an average of 13+ million to about 9 million in 2017. In fact, Perry reports that the market for taxi medallions has tanked since then as well, with plunging medallion prices and many medallions sold out of bankruptcy and foreclosure. But don’t be too quick to shed tears for a monopoly lost.

The same chart shows the massive upside to ride sharing, as discussed here by Warren Meyer. The size of the total market has nearly doubled, from about 13 million per month to roughly 24 million (adding the two lines together). And it was a quick transition! That’s what happens when real competition is introduced to a market: prices fall and quantity increases, with an attendant increase in the welfare of consumers. That increase always exceeds the loss suffered by the former monopolist or cartel (as the case may be), which was earning excessive profits at the expense of consumers before the innovation had a market impact. And many former taxi drivers have made the switch to ride sharing providers, and they seem to prefer it for the flexibility and autonomy it offers. Yes, the best innovations benefit workers as well as consumers.

Competition can bloom when government opens markets to competitors or when an innovation creates new alternatives for consumers. In the case of ride sharing, both were necessary. For many years, NYC restricted the supply of taxi medallions, which kept taxi fares artificially high. The formal approval of ride sharing services in the city was not uncontested. But once it was approved, consumers took advantage of superior dispatching and payment technologies enabled by their smart phones, as well as security features and rating systems, not to mention lower fares. Again, these developments have contributed massively to consumer well-being, which is ultimately the point of all economic activity. Traditional taxis have to try to keep up. The ride sharing industry has inflicted the kind of creative destruction for which consumers are quite grateful.

Benefit Mandates Bar Interstate Competition

30 Thursday Mar 2017

Posted by in competition, Health Care

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The lack of interstate competition in health insurance does not benefit consumers, but promoting that kind of competition requires steps that are not widely appreciated. Most of those steps must take place at the state level. In fact, it is not well known that it is already legal for states to jointly create interstate “compacts” under Obamacare, though none have done so.

The chief problem is that states regulate insurance carriers and the policies they offer in a variety of ways. Coverage mandates vary from state to state, as do rules governing the coverage of pre-existing conditions, renewability, dependents, costs, and risk rating. John Seiler, writing at the Foundation for Economic Education, offers a great perspective on the fractured character of state regulations. Incumbent insurers within a state have natural advantages due to their existing relationships with local providers. Between the difficulty of forming a new network and the costs of customizing policies and obtaining approval in multiple states, there are significant barriers to entry at state lines.

Federalism is a principle I often support, but state benefit mandates and other regulations are perverse examples because they restrict the otherwise voluntary and victimless choices available to a state’s consumers. Well, victimless except perhaps for in-state monopolists and their cronyist protectors in state government. Many powers are reserved to states under the Constitution, while the powers of the federal government are strictly limited. That’s well and good unless state governments infringe on the rights of individuals protected by the Constitution. In particular, the Commerce Clause prohibits state governments from obstructing the flow of interstate commerce.

Here is a bit of history surrounding the evolution of state versus federal control over insurance markets, as told by Pennsylvania Insurance Commissioner Teresa Miller (as quoted by reporter Steve Esack):

“Since the 1800s, the U.S. Supreme Court held individual states, not Congress, had the power to regulate insurance companies. The high court overturned that precedent, however, in a 1944 ruling, United States v. South-Eastern Underwriters, that said insurance sales constituted interstate trade and Congress could regulate insurance under the U.S. Constitution’s Commerce Clause.

But states cried foul. In response, Congress passed and President Harry S. Truman in 1945 signed the McCarran-Ferguson Act to grant a limited anti-trust provision so states could keep regulating insurance carriers. The law does not preclude cross-border sales. It means insurance companies must abide by different sets of rules and regulations and laws in 50 states.“

Congress obviously recognized that state regulation of health insurance would create monopoly power and restrain trade, even if states place bridles on insurers and impose ostensible consumer protections. The solution was to exempt health insurers from broad federal regulation and anti-trust prosecution by the Department of Justice.

Last week, the House of Representatives passed a bill that would repeal McCarran-Ferguson for health insurers. However, that would do little to encourage cross-border competition as long as the tangle of state mandates and other regulations remain in place. The regulatory landscape would have to change under this kind of federal legislation, but how that would happen is an open question. Could court challenges be brought against state regulators and coverage mandates as anti-competitive? Would anti-trust actions be brought against incumbent carriers?

Robert Laszewski has strong objections to any new law that would allow interstate sales of health insurance as long as state benefit mandates remain in place for “local legacy” carriers. In particular, he believes it would encourage “cherry picking” of the best risks by market entrants who would be free of the mandates. Many of the healthiest individuals would jump at the chance to purchase stripped down, catastrophic coverage. That would leave the legacy carriers under the burden of mandates and deteriorating risk pools. Would states do this to their incumbent insurers without prodding by the courts? Would they simply drop the mandates? I doubt it.

No matter the end-state, there is likely to be a contentious transition. Promoting interstate competition in the health insurance market is a laudable goal, but it is not as simple as some health-care reformers would have us believe. Real competition requires action by states to eliminate or liberalize regulations on benefit mandates, risk-rating and pre-existing conditions. Ultimately, the cost of coverage for high-risk individuals might have to be subsidized, whether means-tested or not, through a combination of support from the states, the federal government, and private charities. And of course, interstate competition really does requires repeal of the health insurance provisions of McCarran-Ferguson.

Governments at any level can act against the well-being of consumers, despite the acknowledged benefits of decentralized governance over central control. Benefit mandates, whether imposed at the federal or state levels, are inimical to consumer choice, competition, efficient pricing, and often to the very concept of insurance. Those aren’t the sort of purposes federalism was intended to serve.