Healthcare reform is front and center on the national agenda nowadays. I’ve seen (and participated) in numerous debates on the subject; sometimes they were civil, sometimes not so much. Still, one thing is for certain: the subject matter is hugely complex. The other thing that is for certain is that places like Facebook are horrible for having these discussions. Stupid comment text limits.
In any event, some preliminary terminology needs to be sorted out before anyone can discuss the subject. You can’t be using the same word, but then debate when you don’t share the same definition. First and foremost, using the term “universal healthcare” is a misnomer. It does not describe our current situation or proposals at all. The term is misused as a bludgeon quite often. I mean, how can you NOT want everyone to have healthcare?
The truth of the matter is that, in the United States, we DO have near universal healthcare (quality arguments aside) in many ways, most notably in terms of emergency situations. If a homeless man is hit by a car, for example, an emergency room isn’t going to turn him away because he has no money in his wallet. There is a whole separate argument of whether he will be able to cover the bill when he is done, but there are many laws that require emergency rooms to take everyone that comes in with, well, an emergency. And, although it is a separate argument, many hospitals, through charitable donations or otherwise, have funds to cover such cases so that certain people don’t have to pay (or simply that there is an understanding that certain people can’t pay). The point is that Americans are not dying in the streets because they lack access to healthcare.
So, current proposals are more about universal health insurance, not universal healthcare. Along those lines, another argument for reform is that there are a great number of “uninsured” in the United States. According to the Census Bureau (http://www.census.gov/prod/2007pubs/p60-233.pdf), in 2006 there were 47 million people in the United States (16% of the population) who were without health insurance for at least part of that year. That number gets tossed around a lot. However, the number needs to be broken down by a few qualifiers.
First and foremost, about 37% of the uninsured live in households with an income over $50,000 based upon the same Census Bureau report. Second of all, the 47 million uninsured is based upon only being uninsured at any time for that year. That would include a person who had employer health insurance, was unemployed for a month and lost his coverage, but then got a new job with new health insurance (so, even though that person had health insurance for 11 months, he would be counted as uninsured). These numbers were analyzed by the Congressional Budget Office in 2003 (http://www.cbo.gov/doc.cfm?index=4210&type=0&sequence=0), and they estimated that the number of people uninsured for an entire reporting year are somewhere between 50% and 75% of the actual numbers given. Thirdly, the number includes illegal immigrants and young workers who are transitioning from high school/college to the working world. When those numbers are combined, it should give pause to the reliability of the 47 million uninsured number and whether it is sufficient reason to drastically change our entire national system.
There is also a philosophical portion of the debate as to whether or not healthcare is a right of humanity. Some people think that human beings have a God given right to healthcare. However, I truly do not believe that is the case at all. I can’t think of a single other right that REQUIRES the services of another human being. My rights to free speech and free expression of religion, for example, do not require action on anyone else’s part. They are both inherent qualities of the individual. With healthcare, however, you would have to argue that a doctor, surgeon, nurse, or other healthcare worker has the obligation to serve your needs. Any turning away of a patient, refusing treatment, other inaction, or misstep is a violation of the other person’s right to health. And that isn’t even factoring in that sometimes the need for healthcare arises from an individual’s self-destructive habits or actions.
For arguments sake we will leave the philosophical portion out of it and assume that there are a decent number of uninsured Americans. That aside, the real issue at hand is, therefore, not access to healthcare, but rather the cost of healthcare. And within that realm there are two “costs” that need to be analyzed: cost of service and cost of insurance. At the very basic level, cost of service is the key and influences the cost of insurance coverage. As medical costs go up, premiums have to go up to be able to cover service costs in the event that something happens. So, that is the real problem and the issue that our government is trying to tackle. And, the current plan of the government is taking the route that they can control medical costs by controlling medical insurance. In essence, it is a backdoor way of directly controlling costs by controlling the industry that is used to pay for the costs. Call it whatever you want, whether brilliance or socialism, but that seems to be the basic simplified concept.
So, to do this analysis justice, it would be helpful to analyze, as best we can, reasons for the increasing costs of healthcare. To that affect, I found a great article from 2006 that lays out ten reasons for high healthcare costs. It is really a great starting point to analyze whether the government’s plan to provide universal health insurance by determining whether it will reduce the costs in these areas or if there are other market based solutions. The full article can be found here (http://finance.yahoo.com/expert/article/economist/2760), but I’ll reprint the various sections so you don’t have to read back and forth.
1.) Nobody shops for value.
When was the last time you heard someone say something like this: “You’re having chest pains, Al? Sorry to hear that. You should see Dr. Smith. He’s not as fancy as those cardiologists at the Cleveland Clinic, but you can’t beat his prices! In fact, I think he’s having a Presidents’ Day special on angioplasty right now.” There’s no medical equivalent of Wal-Mart. Everyone wants Neiman Marcus.
This is a definite issue at the basic cost level of medical services. Everyone wants the BEST care available, and that costs money. Other than allowing greater market competition for basic procedures or check-ups, the only way medical costs come down is when a procedure moves from being experimental to becoming routine. And the only way that happens is if we foster an environment that encourages new procedures and further research on experimental procedures. Heck, open-heart surgery was experimental not that long ago.
Does universal government coverage foster that environment? Hardly. First of all, it has been widely pointed out that an end goal of the current healthcare proposals is to limit new private insurance policies in the future (see the Investor’s Business Daily editorial http://www.ibdeditorials.com/IBDArticles.aspx?id=333066661999894). Even if the public option simply becomes a greater market share of the insurance industry, the government doesn’t need to make a profit or meet operating costs like other companies do (they can just get more money from the public some other way) and therefore other companies can’t compete.
One only needs to look at other socialized medicine systems to see what happens when the government decides what healthcare (whether directly on individual decisions or generally by a health board) is available. Expensive, experimental procedures are not offered under such government plans because the bureaucrats in charge, in a sort of cold cost/benefit analysis, will decide it is not worth the government money to pay for such a procedure. So, as President Obama said in a town hall meeting, sometimes you’re “better off just taking the painkillers.” This most certainly doesn’t foster greater innovation in experimental, more expensive treatment.
What needs to be done is to create an environment where people still have the choice of going the experimental route if they choose to pay for it. When the government won’t allow such procedures, the people willing to go the experimental route will find it increasingly hard to find experimental treatment in the first place. And that leads to number 2:
2. Medical innovations are usually more expensive, not less.
Economic progress tends to come in two forms: Learning to do old things better and cheaper, or learning to do new things. Medical progress tends to involve the latter. A bone-marrow transplant may provide new hope for many cancer patients, but it’s not necessarily cheaper than the old alternative.
In the case of pharmaceuticals, we’ve explicitly designed the system so that new drugs will be expensive. We grant patent protection — a legal monopoly — to pharmaceutical companies for breakthrough medication. The more impressive the drug, the more the company can charge, regardless of the actual cost of producing the pill. Yes, those prices are high, and the profits can be huge — which is exactly what creates the incentive to discover such drugs in the first place.
I already touched on the first half above, but the same analysis applies to pharmaceuticals. The reason most medical innovations come out of the United States is because we offer such protections of the innovations. I know pharmaceutical companies are painted as evil, but they risk capital to produce innovation because there is a promise of a huge return if that pans out. The profits then can pay for new research and development.
Again, will government insurance help lower those costs? Perhaps in the short term, but to long term detriment. Any form of price control, whether by legislation or indirectly by not covering certain medications and forcing them off the market, may reduce costs of current drugs in the short term, but it will greatly slow down future innovations in the field by creating disincentives to investing in a high risk field. When a new drug comes out, it may be expensive and harder to cover at first. When generics are eventually able to hit the market, however, we all benefit.
3. Health care is a “luxury good”.
Wait. Before you start sending me angry e-mails, please let me clarify. I’m not saying that health care is a luxury. I’m saying that health care is a “luxury good,” which is a technical term in economics. It refers to any good that wealthy people demand in disproportionately greater amounts than less wealthy people.
The opposite is an “inferior good”, which is something that people actually consume less of as they get richer. Ramen noodles, for example, are likely to be an inferior good. I’m certain that my graduate students eat far more of them than Donald Trump does, his capacity to afford huge quantities notwithstanding.
Richer societies, and richer people within a society, have higher expectations for health care than less wealthy people. We increasingly demand medical fixes — and have the technological capacity to provide them — for problems that our grandparents would have just tolerated. Think hip replacement, stomach stapling, Lasik eye surgery, and so on. Our spending a rising share of our GDP on health care as we grow richer as a nation is not inherently a bad thing.
Again, this reason for cost increases is what also helps foster innovation. As long as we have expendable income, we will be willing to expend more on healthcare because we can. As stated above, putting a roadblock between experimental treatments and paying customers by allowing the government to make cost/benefit analyses with your health will kill innovation even if it seems to stabilize costs. It is always cheaper to give someone ibuprofen than to perform some kind of medical procedure. If someone is willing to pay for a medical procedure because they can afford when the problem would have been tolerated in the past, why stop them?
4. We don’t pay for what we consume.
Health care is unique in that neither the service provider nor the patient gets the bill. For most people, the tab gets sent somewhere else. So nobody directly involved in the transaction has any incentive to control costs.
Imagine if you could buy a television that way. You would walk into a retailer and discuss your needs with the salesperson (working on commission), knowing that the bill for your eventual purchase would get sent to Aetna. Would anyone walk out of the store with less than a 60-inch flat screen with surround sound?
The insurance company will try to contain costs, albeit without the benefit of being in the office with the doctor and patient. So that may mean somewhat arbitrary limits on care or time-consuming hurdles for more expensive procedures — which is why everyone hates their HMO and doctors complain, rightfully I’m sure, about the staggering paperwork and bureaucracy associated with nearly all insurance plans.
Even then, it’s easy to game the system. Imagine the expert salesperson at the shop writing a letter to your insurance company explaining that you need a giant, high-definition screen because of your poor eyesight.
These are good points all around. Although I think it needs to be put in a different light.
What would happen if insurance wasn’t involved at all and you, as the consumer, directly got the bill? Some medical bills can be staggering. However, in 2008 the annual premium for an employer health plan covering a family of four averaged nearly $12,700. The annual premium for single coverage averaged over $4,700 (http://www.nchc.org/facts/cost.shtml). It would take individual analysis, but I guarantee there are plenty of people that don’t use that amount in true medical costs every year. If you don’t have any catastrophes and only go to the doctor’s office a couple of times, you would most likely only spend a couple of hundred dollars out of that $4,700 you spent on health insurance for the year. When you are confronted with the bills directly, maybe you would be less persuaded to walk out with that 60-inch flat screen TV and you would actually control health care spending directly. Paying for a new alternator for your car may hurt, but paying for it directly probably costs less than paying monthly for insurance for years in case your alternator goes bad.
Now, that may not work for everyone, but that should be an option for anyone that wants to go that route. Do you want to make your own decisions and pay directly out of pocket? Fine. If you want to be safe and get an insurance policy in case something happens? That’s fine too. However, the current healthcare proposal LIMITS your options rather than broadens them. Heck, because of current government regulation people don’t even have the option to buy lower premium plans that only cover catastrophic health problems. Also, the current bill will fine anyone who does not have health insurance. Also, as stated earlier, it certainly seems like it will have the effect of forcing people into the public option.
And how would a universal public option contain costs? Just like insurance companies attempt to control costs: by limiting service. However, a market based solution that allows you to shop insurance companies would let you choose which company you want based upon the services they allow and pay for. Those companies that cover more would have higher premiums, but it is your choice to make and you can control the costs. If we all have public insurance, you have no say as to what you want to see covered and what you don’t and the only way they can control costs is by not covering certain procedures. Those decisions will be made for you by bureaucrats and an unelected board of policy makers.
We need the greatest amount of options available. Creating a system where there is only one option is the antithesis of that.
5. Baumol’s disease.
This is not something you should fear testing positive for at your next check up. Rather, it’s an important insight made by economist William Baumol: As societies become richer, labor-intensive endeavors, such as health care, become increasingly expensive relative to goods and services that can be produced using less labor.
Why? Because there are none of the cost savings that usually come from rising productivity. Compare farming to brain surgery, for example. A typical farmer today may grow 20 times as much corn as a farmer could 100 years ago. Thus, it’s possible for a farmer to be 20 times as wealthy without any increase in the price of corn. A brain surgeon, on the other hand, cannot see 20 times as many patients. (I don’t know if there were brain surgeons 100 years ago, but you get the point). Baumol’s famous example was that a string quartet will always require four musicians.
So, for brain surgeons’ income to rise at the same pace as the rest of society (a necessity if smart people are to be induced to enter the field), then the price of brain surgery must go up relative to less labor-intensive goods and services (like corn). In short, as long as the doctor-patient relationship remains relatively unchanged, health-care costs will rise faster than prices in general. (Baumol’s observation was described as a “disease” because it afflicts certain sectors of the economy, such as health care and higher education.)
Again, this is a cost where there is little you can do. On the flipside, even though costs go up because there is a limit on the amount of services provided, costs can go down if there are more service providers. If government limits procedures (some of which are experimental and more lucrative) and therefore has direct/indirect influence on pay to healthcare providers, it will not effect this kind of cost increase by creating further disincentive for going through the trouble of medical school through limiting the option of increasing costs. Again, the only option to control cost is for the government to limit service.
6. The old.
I’ve written before about the “baby boomers”, the huge demographic “pig in a python” born just after World War II (see “Tackling the Social Security Mess” http://finance.yahoo.com/columnist/article/economist/2415). This huge cohort of Americans is getting older, and older people have greater health-care needs. So even if nothing else on this list were true, an aging population would drive up the nation’s health-care spending.
Perfectly valid point. Healthcare spending is increasing, but that can be skewed based upon the percentage of the population that is aging. The older you get, the more medical care you generally need.
There isn’t a lot you can do about these increases in medical spending. You need to give the aging population greater choices in regard to their medical spending. Once again, the emphasis has to be put on this: the government, to control costs, would have to limit services. That will assuredly affect the elderly more than anyone else.
7. The uninsured.
Quick quiz: Your child has a high fever and a scary cough. Do you (1) call your pediatrician or (2) take your child to the nearest emergency room? If you’ve got a pediatrician, you do (1). If you don’t, you do (2) — which is a very expensive use of a trauma center’s highly trained staff. Or maybe you never do anything at all, in which case five years later society is paying to deal with diabetes or asthma or some other chronic condition that could have been managed far more cheaply with better primary care.
I discussed the “uninsured” issue initially. Although it is a different analysis than cost control.
And how will government healthcare affect those key areas? If primary care physicians are limited in what they can provide by government mandate, you will either have to do nothing at all (definitively or by waiting) or go to the nearest emergency room, even with insurance. And if emergency rooms can’t turn you away by law, and government is footing the bill, you aren’t going to see drop in costs. You also won’t see drops in cost if you develop future chronic conditions, either. The only cost control is, again, limiting service now and in the future (are you seeing a pattern here?). Otherwise, government insurance isn’t going to be lowering costs any time soon.
8. The fat and lazy.
Most of us, in other words. We smoke too much, eat too much, and exercise too little. Why? I have no idea. A woman from Canada once asked me if fining Americans for unhealthy lifestyles might help. My off-the-cuff answer still rings true: “If someone is behaving in a way that’s going to prematurely end their life, do you think a $200 fine is going to make much difference?”
Once again, another cost that is hard to contain without lifestyle change. Can the government force you to change your lifestyle?
Still, the point rings true that universal health insurance would spread the cost of these “fat and lazy” people to everyone else. Not the intention, I’m sure, because we’d like to think we are just helping the uninsured and attempting to control costs. However, you are going to pay for those people that need the most care.
9. Because death is sometimes the low-cost option.
What happens to people who are miraculously treated for heart disease or cancer? They die of something else. Or of the same thing later. Any medical success merely begets some later medical expense, particularly if we continue to spend so much on end-of-life care.
Again, with government run health insurance, who is making these decisions? Do you want to be the one that decides what medical treatment your ailing, sick mother gets, or do you want the government making the decision based upon the cost? As I alluded to earlier, Obama responded to this very question that sometimes you are better off with the pain killers. It may control costs by not treating them through end-of-life care, but at what price (pun intended)? The theme of reduced cost through care remains.
10. Malpractice.
I almost didn’t add this to the list, as it’s more of a legal problem than an economic one. But then I began to anticipate all the angry e-mails from folks who are convinced (wrongly) that malpractice suits are the only reason that our health-care costs are skyrocketing. So I stuck it in.
And, in a sense, my behavior proves that it belongs on the list: By attempting to preempt angry e-mails, I’m acting like doctors who practice “defensive medicine.” Doctors seeking to avoid lawsuits have an incentive to overtreat all kinds of maladies — a rational, albeit expensive response to a highly litigious climate.
Jokes aside, this is an issue that no politicians want to address. Too many donations from trial lawyers, I presume. Still, passing malpractice reform that limits malpractice awards could go a long way in reducing costs. Defensive medicine is expensive, and although it isn’t the sole reason for high costs by any stretch of the imagination, it certainly doesn’t help. Current legislation doesn’t even touch this area, most likely for political reasons, but these costs can be addressed.
SO IN CONCLUSION, through a long winded analysis, there are some key types of costs. There are direct costs that can be influenced by behavior or by choice, and there are indirect costs due to economic factors beyond our control. Government health insurance does not solve ANY of the problems. Direct costs are limited by choices being made for you or limiting service. Indirect costs are actually negatively affected by government sticking their noses into areas that where they weren’t present before.
Is our initial problem of high medical costs going to be solved then? They will try to control costs through the methods I have stated above, obviously. But when has the government EVER purchased things at market value? All I can see is decreased services and overpayment for services that are rendered. With healthcare costs nearing 20% of US GDP, giving control of that spending to the government is not going to make that number lower.
Is it socialism? Is the government trying to gain more control of our lives? Are they legitimately trying to help? Call it what you want. I think you can simply call it a terrible idea.