Nobody is saying the right thing, namely, that in America, the right solution to the high cost of health care is to privatize it completely. The right solution is to eliminate Medicare, Medicaid, prescription drugs and tax write-offs for employers who provide health insurance for their employees. Just let 300 million individual American citizens bargain price for themselves. Representing everyone at once, 10 members of a National Board of Health will not do better.
Health Care and Economics
Economics, because it is a way of reasoning, has something to say about everything. One thing economics says is that every time there is a problem, whether among individuals or society as a whole, there is a price problem: somewhere a price is too high or too low. During rush hour, when the freeway is congested, the price for using the freeway is too low. It costs the same at two o’clock in the morning, when no one is on the road, as it does during rush hour, when everyone is on the road. If society wants to solve the problem of freeway congestion, then motorists should pay more to use the freeway during rush hour. During periods of full production, when air surrounding a factory is polluted, the price for operating that factory is too low. It costs the same when the factory is located out in the countryside and disturbs no one as it does when the factory is located in the middle of an urban environment and disturbs everyone. If society wants to solve the problem of pollution, the factory should pay to compensate the owners of surrounding land for their property right to clean air. Owners of factories may in fact have to relocate, or pay owners of surrounding land to leave, or pay costs of cleaning up the pollution. And during an illness, when anyone can enter a hospital without concern for what it’s going to cost, the price of health care is too low. With Medicare, for example, wealthy and poor both pay the same and receive similar service. If society wants to solve the problem of out-of-control health care costs, it must, then, charge the right price. If health insurance was left to the market, the price of premiums would drop and individuals would simply purchase the level of insurance they could afford. Until we start thinking this way, we will never solve any of these problems. We will not solve any of these problems until we start understanding that if something of value can be obtained without regard to cost, price is too low. If a Medicare patient, no matter what their personal income or wealth, can walk into a hospital and say, “Take care of me; I don’t care what it costs (because I’m not paying for it),” price is too low. If citizens of a nation are all given the right to state-of-the-art health care (see universal health care) without having to consider cost, demand will necessarily exceed supply, and price will rise without limit. One iron law of economics is that price is a function of supply and demand. No economist, from Adam Smith to Karl Marx, disputes this. What they dispute is the role government should play in controlling supply and demand, in controlling an economy; Adam Smith advocated minimal control, Karl Marx total control. This iron law has other names. It is also called the law of demand, or the law of marginal utility. It says that when we have enough of something we’re not going to pay a high price to have much more of it. Conversely, it says that when we do not have enough of something we will pay a high price. It says that when supply is restricted, price will rise.
It is why the price of health care is high: demand for health care far exceeds its supply. But is this true? How do we reconcile the high cost of health care with the fact that there has been for the last 20 years an enormous oversupply of doctors and hospitals both competing for patients? How is it possible that hospital costs are exorbitant, $800 a day for a private bed ($5,600 a week), yet half the nation’s hospital beds are empty?
The answer is that the demand for health care is not true demand. It is artificial demand, subsidized demand, demand that would not exist on its own. This is the cause of the high price of health care in America, the cause of distortion in the market for health care. It is the same distortion that produces inflation. False demand sends false signals to suppliers of goods and services. False or artificial demand, via the false signal of higher prices, notifies the market that demand for a good or service is rising. Suppliers of that good or service then calculate that when they increase production, that is, demand more resources—raw materials, labor and capital, they will be faced with higher prices. Believing the higher prices indicate a true rise in demand, they, too, raise their prices. That is inflation. In the U.S., health care problems stem precisely from the fact that demand is artificial, i.e., that demand comes from demanders without the means to pay. True demanders, those who have first produced a good or service and are then wishing to exchange it for a good or service produced by someone else are, therefore, the only ones who, according to supply-side economists, are true demanders. In a modern economy where exchange does not involve barter, money, pieces of paper representing an already produced product, is the medium of exchange. Anyone who advocates the use of money to solve social problems should understand this, namely, that real work was performed to make those pieces of paper valuable. And if it was not you, the person holding the money who performed that work, then you are not a true demander; your demand only creates inflation. Your demand for health care is the reason that health care costs three times what it should. Yet the money which supplies Social Security, Medicare and Medicaid, in the early years of those programs, was earned—it was paid from taxes. During those early years it did represent true demand; today it represents government debt. With baby boomer retirement projected for 2011, i.e., with more recipients than there will be payers, with people living longer (two or three times than originally planned for at the creation of Social Security in 1935), with people expecting the most life-lengthening medical care possible (two or three times more expensive than was originally planned for at the creation of Medicare and Medicaid in 1965), the only way there can possibly be money to support all of this is with an enormous tax hike. Outside a market solution, the only alternative is higher taxes. Yet if the public is to accept the market solution to health care (rather than taxation) then it must also accept an underlying fact: to markets, health care is just another commodity. It’s a commodity like peanuts and chewing gum. To markets, the price of a commodity is simply notice to the world at a particular moment in time of the relationship between its supply and demand. Today, in the U.S., the notice is that the demand for health care far exceeds its supply, that the nation’s desire for health care has overtaken its ability to pay. Artificial demand has so distorted the market that for 15% of the population the price of health care is completely beyond their means, and for everyone else it is way overpriced . Health care is overpriced for the simple reason that there is no check on demand. Third parties, neither the supplier nor the demander but rather government and insurance companies, are paying for everything. They operate as if they had unlimited resources, as if there actually is no market for health care. Third parties, impersonal entities removed from the decision-making process between first and second parties, i.e., patients and doctors, do not care enough to keep costs down. As price rises, they just pay them. Unfortunately, but for a different reason, because they’re not paying for it, consumers don’t care either. But if health care were delivered through the market then we, as consumers, would care. We as consumers, as we do for other goods and services, would shop around, compare prices and then purchase the best value. We would pressure suppliers to lower prices because it is we, with our own money, who are paying. What this really means is that if health insurance was real insurance, insurance for catastrophic illness, instead of (as it is now) uncompetitively priced prepaid medical care, premiums would drop 66%. Remove the reasons for unchecked demand and price will fall. With hospitals half empty, with an excess of 130,000 to 140,000 doctors (true in 1995 according to a Pew Commission report, not true in 2010, but because medical schools are again planning to increase enrollment, will be true in the future) economic theory dictates that if a true market for health care existed, this excess supply would force prices to fall. It’s true for business and it’s true for the business of health care. A bank cannot earn a profit let alone pay its employees unless, at interest, it loans out money; neither can a hospital earn a profit or pay its employees unless, for a fee, it loans out hospital beds. Doctors and hospitals need revenue and they will, whenever there is a drop in demand, lower their prices. Should suppliers of health care ever find themselves in a competitive environment, prices would fall. Because government controls that environment, the solution, therefore, is to remove government. Removing government also means forbidding government to mandate what insurance companies should provide. That, too, is for the market to do. In rich nations, if citizens want mental health care, outpatient care and state-of-the-art diagnostics, the market will reflect this demand with higher premiums. In poorer nations where demand for these things is less, insurance premiums will be lower.Reality, however, is that in the U.S. as everywhere else in the world citizens are so used to government intervention in markets (in Europe, since the 1880s, in the U.S., since the 1930s) that, in the U.S. today, 80 years later, it is impossible to reverse it. With the market for health care, for example, government is so immersed it even controls the tax benefits which drive that market. In truth, government created that system, a system which allows employers to write off health insurance premiums they pay on behalf of their employees. The situation should be reversed. Just as they buy their own auto insurance, fire insurance, and life insurance, individuals should buy their own health insurance. Premiums should reflect how much coverage individuals want in relation to how high a deductible they are willing to accept. If we really want universal health insurance, let individuals have that tax deduction. If we really want universal health insurance, there must be no connection between a person’s health insurance and his or her job. (No one should lose insurance because they change jobs.) Again, if we really want universal health insurance, leave it to the market. Prices will drop and everyone will be able to afford it. Those who cannot will be taken care of by charity—doctors and hospitals working pro bono, private endowments, even charitable law that requires health insurance companies, by spreading the risk among themselves (with government as insurer of last resort), accept all applications. So, why does President Barak Obama (as did President Clinton earlier) insist on a health plan that mandates American employers to pay their employees’ health insurance? Because that’s the system already in place. As a pragmatist, President Obama accepts this political reality, yet, what’s so good about it? Why should employers be forced to pay an additional $4,000 to $5,000 a year for each employee, even part-time, when we all know that the current price is three times what it should be? President Obama’s answer is that he would raise taxes on the rich (which is impossible) as well as ration Medicare and Medicaid. (President Clinton’s answer was that he would have imposed price control and rationing of all health care.) Great! Let’s break every economic law in the books (let’s forget everything we know about how free markets work); let’s replace individual planning with central planning (let’s replace individual freedom to choose with government freedom to choose); let’s introduce socialism.
- Off the record, of course, members of Congress are aware of the idea. However, like privatizing Social Security, mentioning it in public is their absolute political death.
- Ronald Coase, in The Firm the Market and the Law, University of Chicago Press, 1988, a collection of essays written between 1937 and 1960 for which Coase won the Nobel Prize, proves that the cost to society to eliminate a negative externality is the same no matter what the solution. For any negative externality, there is always choice in solutions, but not in price.
- Price would drop with universal health care, but only initially. Over time, it would rise again. This is so because universal health care is a political solution to an economic problem. Populist politicians will always clamor for higher levels of coverage, or for coverage for some excluded group; their careers depend upon it. This alone guarantees that price will continually rise.
- An owner of a parcel of land wishing to build a house would not tell the contractor, “Charge me time and materials; I don’t care what it cost; I just want it done right.”
- In the former Soviet Union, prices rose until they exceeded the nation’s income. In the former Soviet Union, in Cuba, North Korea and China today, citizens earning $1,000 a year in income all have the right, if necessary, to $100,000 a year in medical care. That is the beauty of communism. An ugly aspect, however, is that in order to pay for this, doctors resort to surgery. If your leg is infected, to avoid the unaffordable expense of long-term treatment, it is amputated. This is called rationing without actually turning anyone away. If a fetus shows any sign of abnormality, to avoid the unaffordable expense of having to save it, it is aborted. This is called low infant mortality rate. Michael Moore in his film Sicko forgot to mention that Cuba, with the lowest infant mortality rate in the world, has the highest abortion rate in the world.
- Not true everywhere, but in sought-after metropolitan areas, the San Francisco Bay Area, for example, it is true. In the Bay Area it was certainly true in the 1980s, less true in the 1990s, but true again today. In San Francisco  there was a debate over the closure of St. Luke’s Hospital: patient volume was low—out of 229 beds only 50 were ever occupied (because San Francisco General Hospital is only a few blocks away), but in San Francisco, where politics always trumps economics, articles like, “Health Provider aims to consolidate services in Mission District,” San Francisco Examiner, 7/11/10, are guaranteed to generate populist reaction. It did! The hospital will be rebuilt.
- When price rises because demand for resources rise as a result of a true increase in demand for a product, that is not inflation.
- The other part of supply-side economics is the notion that it is only suppliers, producers of goods and services, who run an economy. It is only suppliers because it is only they who are at risk. Demanders can waive all the money they want (their own or government’s), but if suppliers, as producers, are not ready to start production, or if lenders, as extenders of credit, are not ready to make loans, nothing will happen. Government spending cannot jump-start an economy.
Delaying or reducing entitlements is another solution. But an even more radical solution is to link entitlement payments directly to current, rather than past, contribution. If, for example, one million people are contributing to Medicare, Medicaid and Social Security, where previously there were two million, then those currently receiving benefits should have their benefits cut in half. (This is currently being tried in Sweden.) That was how Social Security was originally designed: a pay-as-you-go system in which those working pay for those who are retired. Congress, in 1935, as part of the Social Security Act, specifically forbade the creation of an account to hold that money. Congress did not want politicians ever to be able to get their hands on it.
(An advantage of adopting the Swedish solution is that, because it is unfair, it may prompt citizens into obtaining their own retirement accounts.)
- In 1965, before Medicare and Medicaid, health insurance cost the same as auto insurance, fire insurance, and life insurance, about $200 a month in today’s dollars ($400 for a family of four).
In 1972, a 1,400-square-foot row home in Daly City, California, was valued at $30,000 and insured for $22,000: the rate was $107 per year. In 2010 the very same home was valued at $600,000 and insured for $400,000, its replacement cost. The insured value increased 18 times and the cost of insurance nine times: the rate today is $900 a year. If the home had not been in the Bay Area, where zoning laws restrict new construction such that home prices are double what they would be otherwise, its insurance cost would have risen 4½ times, not 9 times. In 1972, a 1970 Oldsmobile was insured for $50,000 liability per accident/ $100,000 per year: the rate was $400 per year. In 2010, the average auto is insured for $250,000 liability per accident/ $500,000 per year: the rate is $1400 per year. Insured value rose five times and insured cost rose three-and-a-half times. In 1979, Prudential Chip Individual Health Plan offered health insurance with a $100 deductible, a $1 million lifetime cap, and 80% reimbursement of the bill. At the time, unlike today’s HMOs and PPOs with their $10-$40 co-pay, which gives the patient the impression that he or she isn’t paying anything, there was no over use of health care. The rate was $50 a month for a single person, $300 a month for a family of four. In 1974, Health Service System City and County of San Francisco, with City Health Plan, the rate was $0.50 a month for a single employee, $44.53 for a family of three or more. With Blue Cross, it was $26.19 for a single employee and $77.21 for a family of three or more. (See exhibit below.) Depending on the deductible, the rate today, $1,400 to $2,200 a month for a family of four, is 30 to 50 times the rate in 1979. As described, since 1972, property insurance jumped four-and-a-half times and auto insurance three-and-a-half times, a fraction of the jump in health insurance. (Society may demand more expensive treatment today, although preventive care is also more advanced, but most of today’s high cost of health care is from over use: a result of low deductibles, health insurance as pre-paid health care rather than insurance, and over spending during the last six months of life.)
Property, auto and health insurance information were provided by private insurance agents. Information on historic rates is very difficult to come by—insurance companies won’t release it; they call it “proprietary information.” The agents asked that their names not be divulged; they had no right to offer it.
- This would cover those with pre-existing conditions. In that category, however, are only a fraction of the uninsured. Most of the 45 million uninsured are between jobs, or are young. They are all simply temporarily uninsured; year after year, it is not the same 45 million.
David Parker Essays Copyright © 2009