Michael Pollan says health care reform will pit insurance companies against agribusiness (in a good way)

To budding agricultural economists looking for interesting questions to dig into, read Michael Pollan. This piece in the New York Times touches on some interesting economics:
No one disputes that the $2.3 trillion we devote to the health care industry is often spent unwisely, but the fact that the United States spends twice as much per person as most European countries on health care can be substantially explained, as a study released last month says, by our being fatter....

...One recent study estimated that 30 percent of the increase in health care spending over the past 20 years could be attributed to the soaring rate of obesity, a condition that now accounts for nearly a tenth of all spending on health care...

...As things stand, the health care industry finds it more profitable to treat chronic diseases than to prevent them. There’s more money in amputating the limbs of diabetics than in counseling them on diet and exercise...

...As for the insurers, you would think preventing chronic diseases would be good business, but, at least under the current rules, it’s much better business simply to keep patients at risk for chronic disease out of your pool of customers...

But these rules may well be about to change — and, when it comes to reforming the American diet and food system, that step alone could be a game changer. Even under the weaker versions of health care reform now on offer, health insurers would be required to take everyone at the same rates, provide a standard level of coverage and keep people on their rolls regardless of their health. Terms like “pre-existing conditions” and “underwriting” would vanish from the health insurance rulebook — and, when they do, the relationship between the health insurance industry and the food industry will undergo a sea change.

The moment these new rules take effect, health insurance companies will promptly discover they have a powerful interest in reducing rates of obesity and chronic diseases linked to diet....Insurers will quickly figure out that every case of Type 2 diabetes they can prevent adds $400,000 to their bottom line. Suddenly, every can of soda or Happy Meal or chicken nugget on a school lunch menu will look like a threat to future profits.

AGRIBUSINESS dominates the agriculture committees of Congress, and has swatted away most efforts at reform. But what happens when the health insurance industry realizes that our system of farm subsidies makes junk food cheap, and fresh produce dear, and thus contributes to obesity and Type 2 diabetes? It will promptly get involved in the fight over the farm bill — which is to say, the industry will begin buying seats on those agriculture committees and demanding that the next bill be written with the interests of the public health more firmly in mind...
Pollan has a really interesting point here. While I think Pollan may be overstating the influence of agribusiness and agricultural policy on the cheap prices of unhealthy foods (something I've mentioned before [1, 2, 3]), this really could be a game changer.

Here's how I see it:

Most of the health care bills primarily target the problem of adverse selection: keeping insurance companies from cherry picking the lowest health risks, leaving those with real problems uninsured.

Fixing the adverse selection problem might exacerbate the moral hazard problem: If everyone is insured for the same price no matter what, it provides less incentive for people to take care of themselves and prevent health problems from happening in the first place. This is (I think) what makes serious Republicans go a little crazy.

Now, here the issue is more complex than most moral hazard problems because we need to put aside the idea that everyone is perfectly rational. I rather imagine that, holding all else the same, insuring everyone isn't going to make people much fatter than they already are. People really don't enjoy being fat or sick. It's that people can't help themselves.

But with mandatory pooling insurance companies may have a stronger incentive to aid prevention. And this may really work given people probably want to lose weight and be healthier anyhow. Here I can imagine insurance companies teaming with behavioral economists and psychologists to devise ways to help people eat healthier, exercise, and lose weight.

An interesting feature of this perspective is that it provides a reasonable argument against a single payer system or a large public-sector option. Private insurance companies will surely have a stronger incentive to help people be healthier than the government will. To some extent USDA is captured by agribusiness interests and would have a much more difficult time than insurance companies in implementing creative mechanisms to help people live healthier lives. It's hard to imagine how much of this will actually take place, but it is a compelling argument.

One reason for skepticism: so far insurance companies seem to have been rather unsuccessful at policing doctors from administering unnecessary care (see this excellent article). If they can't control moral hazard by doctors how will they control it for individuals? The hope, I think, is that the problem with individuals is more behavioral. People want to lose weight and be healthy; doctors don't want less money.

Comments

  1. I have to disagree with your premise that conservation set asides are dictate what is grown.

    The ethanol mandates from congress changed farming in the mid-west overnight leading to farmers abandoning crop rotations for the easy money of delivery of off grade corn to ethanol plants instead of the open market. We saw the effects of that policy turn Ag production on it's head.

    Subsides based on "Yield per Acre" creates a false economy when farmers over produce for yield and the basic economic "return per acre" is abandoned for higher use of fertilizers and pesticides.

    The excess use of chemicals is harmful to the environment and to farm workers.

    The current Ag system is as bankrupt as the financial sector. It is run for the benefit of a few to large to fail Ag corporations at the expense of small farmers.

    Small dairy farms are failing at an alarming rate, yet USDA will not use it's depression era powers to raise the farm gate price of milk to a sustainable level, yet USDA has already sent over 100 million dollars to bail out large pork producers.

    Why should these public corporation receive public tax dollars when family farmers are going out of business?

    I would hope that you would look beyond the raw data to understand the current Ag system is in dire need of a complete overhaul.

    Organic George

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  2. Organic George,

    I agree with you at least in part: I do think the ethanol mandates and subsidies had a huge influence on commodity prices and rotations. This has been a focus of some of my research. As noted on this blog, my work with Wolfram Schlenker suggests that the average world price of a calorie derived from corn, soybeans, wheat or rice is about a third higher due to U.S. ethanol policy. I've also acknowledged that farmers are influenced by the relative prices of different crops, and this explains the modest shift away from soybeans toward corn.

    But if we look at the total amount of land dedicated to crop production, I think it's hard to reject the idea that agricultural policy--and conservation set asides in particular--drive most of the variation. If we look at the big picture in the USA, I think agricultural policy does more to restrict production than encourage it.

    I'm ready to be convinced otherwise. But I need some clear facts to get me there. I just don't see them.

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  3. Hi,
    I totally agree with you. It was wonderful of Michael Pollan to point out these relationships, but Michael Pollan should speak out about how the FDA increases health care costs by denying advertising of simple low cost treatments, and how state medical societies prosecute doctors for using those same "unapproved" yet effective treatments.

    Florida Health Insurance

    Have a nice day.

    ReplyDelete
  4. Your argument that ag subsidies don't boost production is very interesting. I don't understand how the conservation acreage is determined (or by whom) - is it centrally decided, or do farmers have the option in any given year of either growing crops or receiving a fixed (or varying?) payment for setting aside land?

    Also, I think I saw you mention somewhere that most subsidies are not volume-related - is that true? If so would be interested to learn more.

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  5. R:

    Good questions. Conservation acreage is determined by legislation. I also know from first-hand experience that program administrators in USDA anticipate, even now, about how they might change the size and nature of conservation programs in the event commodity prices rise. Congress ultimately sets the acreage goals, but things change quickly when commodity prices change and bureaucrats know to expect this.

    And yes, most payments received by farmers are not tied to the amount the produce. Most are tied to the amount and mix of crops they produced many years ago. The payments are attached in some sense to the history of the land, and so they transfer from one farmer to the next. These payments are called "direct payments" and "counter-cyclical payments."

    It could be that some farmers plant particular crops today in anticipation of payments in the future. But since programs and prices change so much over time, only farmers very confident in their foresight might try to game the system in this way.

    Subsidies that are connected to production volume come from the "loan rate program," which effectively servers as a price floor--the government pays farmers the difference between the price they receive and the "loan rate" should it turn out lower than the marketed price. The ostensible purpose of the program is to give farmers flexibility about when they sell their crop. But if they can't sell it for more than the loan rate, the loan rate serves as a price floor. Loan rates have been well below market prices for quite awhile.

    One last point: The demand for commodities is really steep. Prices go up a lot if production falls just a little short. So, the purpose of farm programs is to keep farm incomes high then the best way to do this is to limit production somewhat. This helps to keep prices high. Paying farmer to produce too much really defeats the purpose because that steep demand curve means that extra supply will drive down prices a lot. So restricting production is the easiest way to keep farm income high.

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  6. Hmm. So who has the final say on conservation acreage for a given season? I have to imagine it's the USDA since it must be impossible to get Congress to turn on a dime in response to commodity prices...

    Also, how are the top-down acreage targets cascaded down to thousands of producers? Is there any choice at the individual producer level, and how are they compensated for not growing?

    And finally... if removing rich-world subsidies wouldn't materially shift world production or prices, why are developing countries so hung up on them in free trade negotiations like Doha? Do they simply misunderstand the mechanics and implications of the subsidies, or is there something else going on?

    Thanks for sharing your knowledge!!

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  7. In some cases the USDA (the Secretary of Agriculture) has discretion for the amount of acres so long as it is beneath a target set by congress. That discretion can vary somewhat from bill to bill.

    Today all the land is in the Conservation Reserve and the amounts in that program do appear a bit more "sticky" than more discretionary set-asides in the past (probably more environmentally beneficial, too). But when prices spiked last summer, there was serious pressure to reduce the size of the program, and they did. If prices staid high, I'm quite sure CRP would have further declined. Right now about there are about 34 million acres in the program and that is begin ratcheted down to 32 million. Before the run-up in prices the cap was 39 million acres. If prices staid high acreage would have fallen much more (I'd guess another 10-15 million acres).

    Enrollment in CRP is up to the farmer. Most acres are enrolled in a competitive process wherein the farmers offer parcels with certain environmentally friendly covers, request a rental rate, and then all offers are scored and ranked. Some of the land is more targeted (like buffers for streams and lakes). For the targeted lands farmers are offered generous sums that they are unlikely to refuse.

    I don't completely understand the trade negotiations. Clearly developing countries don't like us giving cash to our farmers. They like our conservation program (that's a "green box" program) because they keep prices high. The politics here must be very complicated. I've speculated here that agriculture may be something of a red herring to muck of the negotiations or other purposes. But I just don't know.

    To make things stranger, I think developing countries as a whole would benefit more from lower commodity prices than from higher prices. The U.S. exports food to developing countries and this helps to feed more people in the world. But the hungry masses aren't the ones sitting at the trade negotiation table...

    Anyway, on fairness grounds alone, I can see why people really don't like the big cash payments to farmers.

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  8. I had a quick look and both the FAO and IFPRI project world price rises in full trade liberalization scenarios. I'm guessing they are knowledgeable enough to know what they're talking about (what do you think?). So two hypotheses:

    1) Are EU ag subsidies more volume-linked or otherwise production-increasing than ours?

    2) Maybe there is also an effect from removing the domestic price controls (usually caps) in many developing countries?

    Food prices are a double-edged sword. On one hand, it irritates me when people like Pollan root for higher food prices without acknowledging (or even realizing?) how they would increase undernourishment in poor countries, since most hunger is due to lack of purchasing power, not physical access. On the other hand, low ag commodity prices make it harder for agriculture to be an engine of economic development in rural areas of poor countries (where it is often 80-90% of the rural economy). So low prices are definitely good for poor urban food buyers, but their net effect on the rural poor is tricky to judge.

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  9. “President Obama’s speech last week really moved me. Despite what my colleagues think of me. If what he says is what will EXACTLY happen, how can I not hope and work towards that cause”? Mike Oliphant runs a small Utah health insurance website www.benefitsmanager.net/SelectHealth.html and www.dentalinsuranceutah.net whom deals with hundreds of people on a day to day struggle to be approved for health insurance. “I get hopeful that I can finally tell people they can qualify for coverage REGARDLESS of their pre-existing medical condition”. Mike’s concern is that Obama’s people won’t deliver what he urges on areas within his speech. “I really have been moved by this guy and wish we could just talk so he could understand the frustration of a health insurance agent. I have been involved on a political level within the state of Utah and their struggle for health care reform. I have seen and regrettably been part of politics at work. I have learned lessons through baptism of fire with politics. For instance, I struggled against House Speaker Clark and H.B. 188 because that was what I was urged to do from our industry (that was all I knew). But after awhile and countless meetings with state and private carriers in Utah, I began asking myself if I was doing the right thing. I realized over time that House Speaker Clark really means what he says and is hard nose about getting reform done in Utah. I got that there wasn’t any behind the scene conspiracy scheme or personal objective of Mr. Clark. His bill makes allot of positive changes in the “health insurance reform” world of Utah. He claims that reform just doesn’t stop there, it must continue through “health care reform”. You see, there is a major difference between the two reforms. Clark “gets it” but I really worry that Obama’s administration doesn’t because if you have noticed the subtle language change of dropping “health care reform” and going to “health insurance reform”. See more about what Utah has accomplished here which utilizes private carrier involvement with true reform. If you can believe it, they reached it with an objective of $500,000. Perhaps the feds should take a look at Utah and House Speakers Clark’s bill 188. www.prweb.com/releases/utah_health_insurance/health_care_reform/prweb2614544.htm. Now I find myself on the “other side” of the fence furthering Utah’s cause. Let’s hope we don’t all have a mental breakdown nationally and just take a honest look at the proposals.

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  10. I read the Omnivore’s Dilemma and started to look at how pervasive corn is in our ‘natural’ bath and body products. My company makes castile soap and I have created a video called ” Are You Washing With Corn”- view http://mountainskysoap.com/corn.php

    Being Canadian, I hope you realize that eventhough we have socialized medicine, we still eat a lot of corn in our diet. The government spends a lot on prevention but people still are overweight. It is really a lifestyle choice of too much inactivity in front of screens

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  11. I am very grateful for the advice! but I don't completely understand the trade negotiations. Clearly developing countries don't like us giving cash to our farmers. thanks for the article.

    -----------------
    Health Insurance

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  12. Mark:

    I'm sure there are *some* in developing countries that don't like our subsidies. Or at least like very much painting the U.S. as the big bad guy. But I think it is very important to keep in mind that what we hear reported about developing countries may not always represent the interests of the poor urban people living in those countries.

    My claim is that on balance poor countries probably have more to gain from our subsidies than to lose. But surely there are winners and losers.

    ReplyDelete

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