Understanding Health Care Economics
By Larry Johnson on October 12, 2009 at 2:03 PM in Current Affairs
“Harbor’s” piece, Why Obama Will Increase Your Health Care Costs, is an excellent springboard for explaining some very simple concepts that seem to have escaped most pundits.
We are talking simple truths about supply and demand. Let’s say your town only has one apple orchard and there are no apples brought in from outside the area. What happens if more people want to eat apples? You have to come up with a system to allocate those apples. A pure capitalist system will simply put a price on the apples and those who can pay will get the apples. When the supply of the apples is limited the price will go up as the demand goes up.
If you are not going to use “price” as the means to allocate the supply what are the alternatives?
The orchard owner can impose his/her own limit on how many apples you can buy. Or the Government (local, state or federal) can intervene and impose limits on how many apples you can buy and how frequently you can do so.
I am not going to argue that one system is necessarily better than the other. There are advantages and problems with both. But let’s apply the general principles to the issue of health care.
Here are some basic facts we can all agree on:
1. There is a significant number of people who do not have ready access to physicians (there is disagreement on how large this number is–some say 40 million, some say 25 million). Let’s just agree that there are at least 20 million people who do not have health insurance and, if something catastrophic happens, they will not be able to pay and will either have to pay for it themselves (which only the very wealthy can afford) or declare bankruptcy.
2. Over the next three years there is a finite number of doctors, nurses and hospitals able to treat patients. Increasing the number of doctors, nurses and hospitals will require at least four or five years. It takes three years to train a nurse (four is better) and six years for a doctor.
Given these two basic facts let us consider what happens if the Congress passes legislation granting everyone access to health care? It is very simple–either the cost is going to go up or health care will be rationed.
We do not currently have a surplus of doctors, nurses, and hospitals. When the supply of the care givers is basically fixed over the next two or three years then your only way to allocate who gets service is to raise the price (and deny care to those who cannot afford it) or you allocate the care and, in the process, limit how much service people can get.
Who are the guaranteed winners regardless of what we do? The drug companies and the insurance companies at a minimum. I am not making any kind of moral judgment. This is just a cold, hard fact.
When we look at the issue of health care in America what are we really after?
First, we need to ensure that insurance companies are forced to compete with each other. Our current system essentially divides the country up into geographic regions and effectively gives insurance companies monopoly advantages.
Second, we need to ensure that anyone who wants health insurance can get it regardless of “pre-existing” conditions. This is an appropriate area in my view for government intervention. Let’s call it the health care equivalent of the FDIC. The Federal Government would insure the insurers against the risk posed by pre-existing conditions.
Third, if we are going to have health care for everyone then we need to educate and train the new doctors and nurses that will be required to provide the health services. Here again I think it is an appropriate use of Government power to fund medical education or provide tax incentives to encourage the production of more nurses and doctors.
Fourth, I want people to have skin in the game. What does that mean? Everyone must pay something to get the services. No handouts for anyone. At a minimum we are talking about encouraging and promoting human dignity. You take better care of the things you own. You tend to not be so careful of things you can use without having to worry about paying for them.
The lie about the current debate is that we can have health care for all without having to pay more money. That is just a ridiculous and dangerous fantasy.
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Larry said:
“The lie about the current debate is that we can have health care for all without having to pay more money. That is just a ridiculous and dangerous fantasy.”
Exactly. Yet, this is what’s being peddled. For instance, how can you cut $500 billion dollars from Medicaire and pretend coverage/benefits will not suffer, particularly at a time when 50 million babyboomers are inching towards retirement? It makes no sense.
Btw, I agree with your 4 principles. Where can we vote for you :0).
Larry:
You are using common sense, and that is unacceptable in Government.
If Insurance companies were allowed to compete across State lines, it would have the same affect that it had on the airlines years ago: The prices would drop because of the competition. One insurance company drops it’s price, another has to compete.
That alone would create the competition everyone talks about.
As for pre-existing conditions? I have one. I had melanoma four years ago, and no one will insure me unless I pay HUGE premiums, which would cost more than the actual treatment! I check my “spots” and pay for my visits to the dermatologist, and so far so good. No more cancer.
This is where the government could be of use, like you stated above. I CAN get coverage, but the cost is prohibitive.
Also, I have a friend who has a rare immune disease called C.R.E.S.T. Her medication costs THOUSANDS of dollars per month. It’s being paid for by Medicaid, but because she accepts Medicaid, she isn’t allowed to make a living over the poverty level.
Why can’t they create a government funded service for people with strange, rare expensive diseases and keep it separate from Medicare and Medicaid?
I’m just rambling. None of the proposals from the House/Senate make any sense, and will only increase the cost of insurance for everyone.
They need to listen to you, Larry. But then again, you’ve got that “common sense” working against you.
Larry:
While I agree with your statements, I think this is actually the second level of the debate.
First we have to decide whether we are going to continue forking over 20-30% profits to private insurance or whether we are going to wake up and institute a single payer system like the rest of the industrialized world.
Then we start to deal with the problems you present.
Unfortunately, the Demmicans seem adamant about making sure the private health insurers will remain obscenely profitable before anything else.
Spot on, Craig. But before we go down that path, we need to know how to set that sort of a system up. The bills in the Senate and House are crocks of manure, riddled with irrelevant riders and more bureaucracy than you can shake two sticks at. There must be a process-driven analysis of the entire system, minus the insurance companies and minus government first to see where there can be cost savings, where there is duplicative effort, where there are gaps, and where, if any, things are working properly. Only then should the issue of single-payer be brought into the mix. There can be no effective management of a system when you don’t know all the inputs, outputs, and requirements associated with each. We could even go so far as to do in-depth analyses of all the varying systems in use over the globe. It isn’t such a daunting task if you start with the basics. This is systems engineering 101. If we don’t this, no amount of tinkering will ever work.
The rural areas will still be lacking unless something in policy adds a pay incentive or some type of incentive for those in the medical field to want to practice in rural areas. The paradox of high quality medical care, education and prevention of health problems is the focus instead of the quality of care available. Also how do we have comprehensive rational reform when we have multiple demands by interest groups?
Also what is the paramount object? To have everyone insured/ access to care or to have good health? It seems as though they are trying to force one policy into the other, where it would seem better to do them as separate parts of the same central problem.
Insurance companies must be able to compete with each other for the “product” of health care to truly be available.
There needs to be a close look at how the educational programs for specifically nurses is in the stagnant phase with too long of waiting lists to even get into these programs. Perhaps go back to offering many, many more hospital training programs. Not only is it a better hands on experience, it is also a self feeding employment mechanism for the health care industry.
Preexisting conditions must be treated, on both ends from the provider and the consumer, in an honest fashion. Both are at fault for either not being forthcoming (for whatever reason) or for being so greedy as to not want to handle the more expensive problems areas of a human beings health.
This is particularly important if we are to avoid what AFDC did to welfare. There also has to be some type of understood treatment available in emergency situations for non-citizens. Not as E.R. treatment for cramps, as we see it today. Some way we actually are able to charge the persons country of origin without having to absorb incredible amounts of medical care for those who are not contributing to the new system. There must be safeguards of fair play, where compassion isn’t lost, but neither is responsibility of other nation’s. I do not know the answer to this, but recognize just treatment and absorbing the costs isn’t going to work and never has.
Katmoon,
You make excellent points about other countries bearing a share of the cost.
Having worked with foreign students for many years, there is one additional component I would like to see addressed.
Most colleges/universities require foreign student to purchase a common health care insurance. The problem with abuse/overuse comes from:
1. Most foreign students are from the wealthier tiers of their own societies. In their countries, that means the physicians still make “house” calls on demand.
2. The concept of specialization by physicians is absolutely baffling to these students. When they look at the yellow pages, they are truly overwhelmed, and have no idea what these specialties mean.
In both the above situations, these students then tend to use the local hospital “emergency” rooms when they become ill.
Even immigrants are just simply baffled. They generally have little education, and the first generation has minimal English skills. Most immigrants are aware that hospitals are required to have translators. So rather than go to their non-existent “primary physician” they go to the emergency room.
I honestly have no idea on the best way to address these problems. But the segregation of specialists in America, compounded by entry and referral points as a medical business model, is too complicated for persons from 2nd and 3rd world countries to even comprehend.
A good next step in understanding this. Just some additions and comments.
Most of those uninsured either have opted not to have it because they are very young, or they are between jobs. I think the number of hopelessly uninsured (not by choice and no job prospects) is probably 15 – 20 million. Still it’s significant.
If something catastrophic does happen people can go to a hospital and they will take care of you without charging you. That is a fact that Obama and his people seem to overlook in demonizing hospitals and physicians.
My son is in medical school and these kids are very concerned about what is going on in DC. To complicate this problem is the fact that Obamacare will result in lower compensation to physicians despite what they tell you which could deplete the potential pool of medical students – not increase it.
Also, not only does it take four years, but training to be a physician is not like training to be a lawyer. You need to be smart enough to learn and apply the trade and there are a finite number of college graduates who can get through medical school successfully. Unless, of course, we lower the standards for entry into medical school and there goes quality.
Yeh! What happened when they broke up Ma Bell and deregulated telecom? What happened when they deregulated the airline industry? Competition results in lower prices for consumers. Health insurance companies profit margins are too high and careful deregulation will lower that (and prices) without hurting quality.
Absolutely! That is exactly the role of government in this.
Agree. In fact the need in the market is or primary care physicians because they tend to be in the lower rung of compensation and there is a measure to pay the loans for medical students who go into that field.
Larry, you should be writing this legislation.
REMOVED BY LARRY JOHNSON
Judging from MSM reports (unreliable, I know), the WH thinks that the Health Insurance companies will just eat the cost of that $300b or so in new taxes. What world are they living in? Maybe that script was written by Lewis Carroll?
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Watch the H1 visa program go nuts and then drive down the “cost” of having these medical professionals being American trained Americans.
I think if you go into a profession that is for the well being of the our country, you should get a “tax” break or some other insentive to choose that profession.
If it goes the way it’s going based on supply and demand, one would think a doctors services would go up. But that is not what will happen. The payments to doctors will decrease.
I can agree that nothing is free.
Larry,
Thank you for recognizing and pointing out the role of the healthcare worker in this whole effort. As a nurse, I keep asking myself “Who is going to take care of all these extra entries into the system?”. We already have a shortage of nurses - critical in several areas of the country. I believe that primary care doctors and OB-GYNs are scarce in some regions as well. We can’t mass produce nurses; not if you want them to provide good care. We don’t have enough faculty, Masters and PhD level, to teach (please, not train) the new nurses. I wouldn’t be surprised to see that a surge of patients and extra demands placed on nurses prompt those seasoned nurses to retire. After all, the average age is now in the mid-late 40’s. The shortage of nurses will only get worse. Rather than focus hard on the solutions, our goverment will instead willingly go to foreign countries to import a warm body.
Keep in mind that its the nurse at the bedside who affects the outcomes of hospitalized patients.
Ironically insurance was first intended as a sort of socialist system. Everybody paid a little bit into it and then if you got injured, the money was in the pot to pay for your care.
What’s gone so terribly wrong is years of government interference, closing down state lines of insurance, driving up the nat’l debt so that insurance rates become a huge percentage of everybody’s income. They also allowed insurance companies to gamble with our money, investing in the market, borrowing against profits.
Honestly, I don’t think health insurance is our biggest problem. I think the real problem is that Americans can’t afford to live anymore, to provide themselves with the basic necessities of life. We’re dependent on credit cards, loans, mortgages, and the government to get us thru the day. The national debt is killing us, the price of everything is just getting too expensive. Our purchasing power has declined to dangerous levels. No unemployment extensions or subsidized insurance rates are going to fix that.
Very valid points Larry!
I would add that many doctors will leave the system. Why not? If their compensation is so miserly, they could be more successful, financially, detailing autos or running a lawn service.
Recent reports indicate that the imposed penalties for persons who do not enter the system are worthless.
The current legislation also starts the cuts to Medicare and higher taxes now, leaving the uninsured waiting until 2013.
Ironic that seniors that paid their way all their lives, and supported McCain, will now be sacrificing their coverage for those who don’t pay up!
Yeah!
Let “those people” croak when they get sick!
It’s the American way.
The thing is “those people” go to the ER when they got one foot in the grave, so how can it get any worse?
Larry,
Finally the issue of healthcare has been plainly and factually explained. Thanks for a great post.
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