I’ve been wanting to write something about the healthcare debate for some time now. I hear it discussed a lot. One of the problems that seems to underlie much of what I hear bantered about is that many people’s ideas rest upon faulty economic reasoning and wishful thinking about the way the world ought to be.
One of the biggest mistakes made is that people think that we can have it all. After all, we are America. We can have our pie and eat it too, thank you very much. We view trade offs as the hobgoblins of little minds. We can increase healthcare coverage without it costing us anything more than we already pay – and maybe even lower overall costs. Yes We Can!
Thankfully, not everyone has fallen prey to this nonsense. David Brooks, in an op-ed piece, focuses the question: “Reform would make us a more decent society, but also a less vibrant one.” Brooks underscores the fact that “[t]his debate is about values.” Indeed, the very way he frames the question attests to this. About the trade-off we face, there is no question. But if it were just a question of giving up a little economic vibrance in order to gain a little more decency, wouldn’t we be barbarians not to choose decency? How many people consciously desire to be backwards, crass, and selfish?
So, there is a trade off, and right now, it seems like a pretty easy and obvious one. But is it? What is the trade off? Are we really giving up a ‘decent’ society if we fail to reform healthcare by centralizing healthcare? Many economists, including Thomas Sowell, see things differently. In fact, if you were to label the current attempt to centralize healthcare as the only ‘decent’ option, you would have fallen prey to a kind of bait-and-switch swindle.
Falling for this swindle is easy. Prices of medical care are rising. The weak and helpless in our society need care. Everyone knows that something must be done, and since the free market isn’t doing the job, we cry out for government to take over. But did you catch the mistake? Everyone assumes that the free market hasn’t done its job in keeping costs down (isn’t that what competition is supposed to do?). Clearly something is wrong with the market. And you’d be right. Because the major problems of rising costs is in fact due to the market’s response to the incentive structure imposed on the market by government regulation. And the major culprit here is third-party payments – a system promoted by regulation.
Rising costs are promoted in one major way by two different entities. First, Medicare/Medicaid. These programs provide medical care free of charge to the elderly and the poor. Second, employer-based insurance. This structure of insurance is promoted by regulation because it can be purchased by pre-tax dollars, whereas non-employer based insurance must be purchased with after-tax dollars. You do the math. In both cases, we have little to no up front costs to the patient.
The rules of supply and demand tell us what happens next. When something costs less, people consume more of it – demand increases. The problem is that when demand for something increases, the price of that thing also increases. Sounds paradoxical, right? But get behind the curtain. When some third-party foots all or most of the cost when you see the doctor, you will tend to see the doctor more. But you never see the corresponding rise in prices that go along with your increased demand of the services provided by the doctor – at least not until your premium goes up. And if your medical care is paid for through tax revenues, then you’ll never notice it. (As an aside, one unfortunate practice of Medicare and Medicaid is the use of price controls for services. The refusal of the government to pay market prices for medical services, which in turn legitimizes underpayment on the part of insurance companies, is driving many doctors to refuse to accept Medicare patients, and the widespread price cap for medical services is a major factor behind the dwindling numbers of new doctors entering the market.) People economize on things they pay for. The major problem here is the over-use of healthcare services. (There are other sources that contribute to this problem, but for simplicity’s sake, I’m stopping here.)
So that’s the problem. And in the problem lies the true source of the solution. When people are made responsible for the use and allocation of their own dollars, they tend to go to greater lengths to understand their options among choices, and they tend to get the most out of every dollar they spend. The same logic of consumer choice applies to healthcare. People economize on their medical expenses when they themselves are responsible. They either do not see the doctor over minor issues, or they seek out good substitutes to a doctor’s visit. Consequently, by lowering demand, overall prices for doctors’ services fall.
How do we get to this happy place of reduced medical costs? Here are a few thoughts you’ve probably heard before. First, incentive structures need to change. Everyone should be able to purchase their own insurance with pre-tax money. Creating preferences for employed citizens is a form of discrimination against the unemployed, and against those employed by small firms, and it reduces their ability to purchase insurance. Second, the actual costs of medical care must apply to everyone. Nothing is free to produce, and nothing should be free to consume. Beneficiaries of Medicare / Medicaid should have to operate under some kind of allocation plan, like a health savings account. This way, they would have an incentive to economize.
Don’t get suckered by the swindle. The government has very little incentive to economize and efficiently distribute society’s limited resources. Everything is scarce, even medical care in advanced economies. The production of goods and services does not cease to be scarce just because the government provides them, and without a price system to tell us what to produce and how much to produce, the current healthcare reform is sure to lead to even greater inequality of care. That seems to me the greatest indecency.
-ps- Check out this brief clip of an interview with Sowell and these myths of single-payer (government regulated) systems.
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