The Myth Of Cheap Health Care
It is a sad day when the people of this country believe they can all received something very costly for cheap. Day one in any Economics course will teach you about scarcity. We live in a finite world where every good, service and resource is limited. Gold has held value for thousands of years because of scarcity otherwise we may just as easily have turned sand into currency. I am not going to bore you with the gritty details of supply and demand, and price and profit and all the things you should really look into at another time and place. We all understand that if something is expensive to make then it will be expensive to buy. If things are very rare they are almost always more valuable than the common. I use the caveat almost always because though every snowflake is unique there isn't a market for them. So what is health care composed of?Doctors are the delivery instrument for health care and they aren't cheap. Doctors go through years of expensive school racking up debt only because once they get the job the salary can pay it off. If we want to bring down costs for doctors through education there are two ways. We can cut the cost of their education and require less training and certification. I am going to go out on a limb and say that this idea would be incredibly unpopular. I don't think anyone wants to dumb down the education process for those who are in charge of our lives. We could use taxes to subsidize the cost of their education which might provide some market pressure to lower the salary of doctors but most of that cost would just be shifting from the doctors to the government and shifting cost isn't lowering cost. Furthermore it would lower the incentives for highly specialized doctors making specialty procedures harder to come by which would create waiting lists and a lesser quality of care. In short, the downward pressure on salaries could easily result in more general practitioners directing you to fewer and fewer specialists. Ultimately that is a lose lose for everyone.
Once you are a doctor you have to spend money to maintain expensive insurance to insure you can keep practicing medicine in today's litigious society. TORT reform has been a highly publicized issue for republicans. The problem is finding a balance that is tenable for doctors and patients. We don't want doctors constantly covering their butts with defensive medicine but we also don't want patients to have no recourse when doctors are careless. I don't pretend that I know where this line is so I will leave that to those smarter than myself but it is clear that if we can find some compromise we could potentially save money by eliminating excessive defensive medicine and put downward pressure on doctor's salaries by reducing their cost for expensive insurance.
The next big factor in health care costs is the hospitals and all they entail. I am going to ignore the obvious costs of property and the costs for hospital insurance which I believe can be filed under the TORT reform segment. Let's talk about equipment. The machines in hospitals are really really expensive. Not only are they expensive but with advances in medicine there is a huge pressure to stay up to date. People don't want to go to hospitals that don't have to best and most advanced technology so in response to that demand hospitals try to stay at the front of the technology curve. Buying expensive technology and having to replace it every few years is a huge factor in the cost of health care. Costs could be a lot lower if there was a hospital using technology from the 90's but people won't go to that hospital even though the price would be lower. How do you lower the cost of the equipment? You can go to the manufacturer and ask them to cut their profit and sell for less. The manufacturer went into the business to make a profit so that won't work. You can have the government pass legislation to lower the price. If it were constitutional the result would be that the company would leave the market and if the equipment isn't made that isn't good for anyone. You could approach the patent owner but they won't give up profit because that is why the made the machine. You can legislate that they lower the price. If that is constitutional then people stop innovating and that doesn't help anyone. So we find that lowering the price of equipment isn't really possible. I will also add that the price of drugs follows the exact same logic as the price of medical equipment.
Now we have a situation in America where we all want the best technology, best drugs, and best physicians but at a low price. How do we do that. Well we know that the cost of care really can't come down much barring TORT reform but the issue recently has been about the cost of insurance. The cost of insurance is directly tied to the costs of health care but there are still ways to lower the cost of insurance.
How does an insurance company reduce cost? There are two ways. The first way is through competition. Competition drives prices down because each company has an incentive to provide services at a lower cost than its competition. How do you do that? You break down the state regulations so that companies can compete across state lines. Right now companies can move into a territory and offer a best deal according to its area. It costs a lot of money for other companies to adopt market and develop plans to compete with a company in another area so they don't. Breaking down these state regulations would be easy with the interstate commerce clause and create tremendous competition. Competition lowers prices. The second way an insurance company reduces cost is by spreading the risk. Just like you diversify a stock market portfolio companies spreading the risk through multiple persons lowers their cost of insurance. I am operating on the general assumption that most people don't have catastrophic health care costs. So to lower insurance costs we could break down state regulations and thus expand the risk pool for the companies that offer the best priced insurance. Now let's get to this new law!
Does this new law break down state barriers? I think it does, partially, but no one really knows how exactly it will pan out. It will break down insurance barriers in the insurance exchange but only certain people will have access to that. Creating limited access to competition, one of the best downward forces on cost, is stupid. It does phase in big business at a later date which I believe ultimately breaks down state barriers but I do clarify that we just don't know how this will pan out.
Does this new law diversify the risk pool? At first glance it does appear to diversify the risk pool because of the individual mandate. When you look further you find more loop holes than a hula hoop factory. I will consider for the sake of argument that the individual mandate is constitutional. I will also point out that in 2014 people cannot be denied coverage because of preexisting conditions. I will also point out that there is a fine, or a tax penalty for not having coverage to enforce the individual mandate. In 2014 much of the incentive to paying for health care will dissolve. The incentive being that if you wait until you have cancer right now, you will pay for a very expensive insurance plan. That change in incentive will drive more people to wait until they are sick to pay for health care insurance. The reason is obvious. Why pay for something you can just buy when you need? The deterrent is the fine or tax penalty. How it will be implemented is still unclear but at least for the first few years the penalty has no teeth. It starts out at $95 or one percent of income (I am doing this from memory so don't beat me to death on this). It eventually increases to $2,500 or a small percentage, I believe 2% or 3% of income. I have also seen that there is a cap to the fine that limits it to a reasonable price of health care. We are all still trying to figure out exactly what this bill says so any of this could very well be inaccurate. The point is that if you aren't sick you can wait until you are sick to get insurance or possibly game the system and only buy insurance during tax time to get proof of insurance and or when you are sick. What happens when the only people in the insurance pool are the sick people? The insurance industry implodes. What happens after that is all speculation but I would expect government would intervene and create some kind of single payer system. Government would like you to see them as angels sweeping in out of nowhere to save us from a market failure and hope we don't realize they created it. It is actually a very similar parody to this recession but that is for another time.
What Americans need to understand is that we can't get an incredibly expensive high quality service for pennies on the dollar. There are sacrifices. Right now the government is pretending that they are saving you money that isn't being saved. They are telling you they are saving lives that are being lost by policies that reduce innovation. Innovation has been the biggest saver of lives over the past century. Pretending there isn't a cost on life doesn't make it true. That cost is just being shifted to our children or grandchildren monetarily, and through innovation. I hope we can get through all of this and make better lives for everyone but I will leave you with this.
If life is priceless then why are we complaining about the cost.
- Tyson Bam -
