Could someone please explain to me how treating the healthcare system, essentially, as a public utility will result in reducing costs or even controlling them? Use your own utility bills as an example.
My experience has been that when public utilities make their case for rate increases to the regulatory boards that control them in most states and localities, they usually get them. Is it different where you live?
Please do. I’d love to see it. I’d especially like Michael or any other resient of California to explain it.
I’d love to but I don’t have any idea what we pay for electricity. I do however know that it was the free market — in the form of Enron — that shaped our current (heh) fate.
Michael, I presume you’re kidding about the free market. California has one of the most highly regulated energy markets in the country and has done for decades.
Coincidentally, this is a subject that Steve V. can address authoritatively.
Don’t get me wrong. I don’t believe in laissez-faire capitalism. To be honest I don’t think it exists in nature. However, what I believe in is government action targeted to quote a former president, “like a laser” on market failures and the adverse effects of other government actions.
So, for example, the gatekeeper status that physicians have WRT pharmaceuticals is totally a creature of government action (the Pure Food and Drug Act of 1901). I don’t believe in abolishing the action—I think that regulation of pharmaceuticals is probably a good idea. I believe in Pigouvian taxes to deal with the adverse effects of the action. Similarly, I don’t believe in abolishing Medicare and Medicaid. I believe in taxes or other regulations to deal with the adverse effects that they introduce.
OK, I will take a run at it. Presently, there is little negotiating on prices or costs. (I will stick with docs if that is ok as it is the topic I know best.) Most states are dominated by a couple of large insurance companies. They mostly dictate fees to docs. Conversely, docs dictate fees to small insurance companies as they do not have the clout to dictate fees.
Fortunately for docs, there is little incentive for the insurance companies to cut payments. Any insurance company that runs a big profit will get pilloried in the press or run afoul of state regulators. Instead, they prefer to grow. Bigger companies with more assets mean that the execs of those companies merit larger salaries. Besides which, if they cut fees, docs can respond by going public about leaving the state. The public becomes frightened and/or there really are shortages.
In this kind of system, incentives are distorted or counterproductive or nonexistent when it comes to holding down costs. It would be difficult for a utility approach to not do better, but let me offer a model. Let us look at the big places like Mayo that hold down costs while offering quality care. One of the ways they do that is by paying specialists a bit less and by doing fewer procedures. One of the things they know, is that money is not the only motivator, as long as pay issues are decided in some relatively open and fair manner. A public utility approach, with docs being allowed to make their cases, could be much more fair and open than the current approach. Non-monetary rewards could be used to offset pay losses by specialties.
Also, a utility approach might have a better shot at handling over-utilizers. The utility could monitor for outliers and reduce fees for those performing too many procedures.
I think this is largely what they do in Japan.
Steve
Regarding the electricity crisis.
The problem was in how we deregulated.
1. Huge incentives for utilities to sell of generating capacity.
2. Lack of a transmission system that could cope with a deregulated market.
3. Lack of hedging by utilities.
4. A fixed retail price while allowing the whole price to fluctuate.
These 4 aspects of deregulation, all set by government, produced a highly disfunctional market in which Enron, and others, were able to make some pretty nice profits. I know you like to point the finger at Enron alone, but that just underscores your ignorance of the topic. Did you know that LADWP also pocketed some really, really nice profits. Yes, how shocking a government run municipal utility screwing over the rest of the state.
And note that at least one of those items is something you don’t see in a really “free market”…prohibiting the hedging by some of the largest buyers in the market…who are legally obligated, by the way, to buy all the electricity their costomers want. Slap on that said customer cannot change their price as their costs go up and you have a recipe for disaster. Fortunately for the utilities there is thing, I’ve talked about a bit before, called Established Rate Doctrine. Which means that a utility gets to recover all of its “reasonable” costs. Since dergulation also stipulated that any electricity bought on the spot market is, by definition reasaonable–even when it is selling for $1,500/MW, the utilities get their money back….from rate payers or tax payers, but they get their money.
Which leads to the problem for those who think that turning health care into a “utility” much like electricity or natural gas will help. So long as the health care entities that fall under such regulation go in with sound data and argue reasonableness, they will get their money. In the end, for such a move to do much good you have to hold to the belief that there is vast amounts of spending that is unreasonable. While there may be some instances of this, I’m highly skeptical that it would amount to very much in the grand scheme of things.
By the way, as for why 1 and 2 are problems, consider that prior to deregulation electrcity had a vertically integrated utility structure. That is the utilities bought the fuel, generated the electricity, transmitted it (high voltage), distributed it (low voltage), metered, billed, and maintained. As such, utilities built “just enough” with a bit added on for system reliability. So, in switching to a deregulated environment it lead to a transmission system that was subject to congestion and a generation situation that was sufficient, but not much more.
Congestion means that some generators could try to game the system by scheduling load on a path that they knew would become congested. Load that they knew they could drop, but at a nice pretty penny and the kicker…they don’t even have to generate anything. And if you do your bidding right, you might also get to set the market price. Consider the following:
You suspect that tomorrow’s electricity needs will be near capacity. And suppose there are 3 generators, yourself and 2 others. Now, total capacity is
Michal’s unit: 400 MW
Generator 2’s unit: 500 MW
Genarator 3’s unit: 300 MW.
You three can produce 1,200 MW each hour. You think that in peak hours that the usage will be well above 1,000 MW. What price do you bid in to the market? Your cost? Only if you are a complete blithering moron. If the other two guys are going to bid in 800 MW, you can bid in just enough to clear the market. So what price do you pick, and keep in mind the electricity that is bought has to be enough to clear the market (i.e. if demand is 1,000 they have to buy 1,000)? It was not uncommon to see prices go as high as $1,500/MW. That breaks down to about $1.5/KWH. For the typical Southern California household that is about a $750 bill if that price can be maintained 24/7. Obviously it wont be, but if it is maintained say 60 hours that month, then the averge bill could easily be around $110/month. Compared to the national average that is at least 2x what most other households would pay for comparable usage and probably more in many areas.
First time something like this happened, the guy bid into one of the ancillary services market for $9,999/MW. He thought the price field had only 4 digits. He didn’t realize it actually had something like 16. Thank God.
This is also why there were so many stage 2 and 3 emergencies called in 2000. Generators were trying to game the system by with holding load to ensure that the load they did bid in cleared the market at the higher prices.
Of course, the state government got involved and went out and bought grossly inflated contracts for electricity. It did this through the Department of Water Resources and now the utilities get to play collection agent for this agency. If you are an SDG&E customer you may not see a DWR component on your bill. If you are in SCE’s service territory you will see such a component. About 30% of the electricity you are billed for is at the rate set by DWR to recover Davis’ folly of buying elecricity at astronomical prices.
Now alot of this may look confusing to you and you probably have MEGO by now. But consider this….all this is just for electricity. A fairly simple commodity. All you do is plug in stuff to the outlet and it works. Electricity from solar, natural gas, geothermal is all pretty much the same in terms of running what you want to run. Health care on the other hand is going to be a freaking nightmare to fully regulate, and if the regulator gets captured by the firms being regulated….
I will add this too on area that does offer some hope is the conservation aspect. Right now there is a big push for conservation in terms of electricity. The utility, understandbly, isn’t thrilled in that more conservation means lower sales and for given rates, less revenue. Since utilities get to recover costs that would mean higher rates in the short to medium terms and possibly a shrinking business in the longer run. So the utilities have been arguing that if it implements a successful conservation program it should get some reward for some of that conservation–i.e. paid for conservation.
Maybe in some areas of health care that same idea could be applied. Of course, it would amount to saying “No!” to lots of people. That will likely be far, far more problmatic that just getting people to switch to more energy efficient devices which, in the long run save the consumer money too. Saying “No!” to the 85 year old man who needs heart surgery becuase he is old and we don’t want to expend the resources on him wont win you many friends.
Oh, and the transmission/congestion bit I described was used by Enron, and others, and went by the lovely name of Death Star.
That analogy, Steve V., sounds more like to agriculture than utilities. The Soil Bank program, for example.
“These 4 aspects of deregulation, all set by government”
Wouldnt it be more accurate to say set by government at the requests of people from the industry? Didnt Gramm’s wife have hand in setting the Enron rules?
Steve
I have to confess I mostly just wanted to make the “current” joke. I’ve only been back in CA for a little over a year. I was born here, lived in CA sporadically, but had been away for something like 30 years before this return. And as is my habit I pay very little attention to local issues. I move around too often to cathect much.
Well, that’s a problem for people who think more regulation is the solution to these kinds of problems. Regulations are subject to the influence of politics and it seems to me more regulation is going to result in more rent-seeking as the various interests try to influence policy.
On the topic though, I simply don’t see how health care can be considered a utility. Utilities are required provide a standard of service to every household which is not possible with heath care.
The Enron rules? I don’t know what that refers too.
As for the “industry” who do you mean? The Investor Owned Utilities like PG&E, SCE, and SDG&E? Initially no, they were opposed to deregulation. Then when it became inevitable they got on-board. It was before my time, but my thinking is that the management at each utility felt it was better to be part of the process…part of the team trying to drive the bus vs. being standig at the bus station and having everything out of your control. Did the IOUs make mistakes, sure. Agreeing to the fixed retail rate was probably the biggest, the second was not insisting on ways to hedge.
And lets be quite clear, the deregulation was absolutely bi-partisan. It passed the houses in the legislature with unanimous votes. To try and pin this on the Democrats or the Republicans indicates that the person trying to do so is and totally ignorant fool who really should STFD and STFU. It highlights why often screws things up, even when the intentions are good.
Wendy Gramm, Phil was head of the Senate Banking Committee, pushed through a bill which exempted Enron from government oversight in its energy trades.
Steve