Understanding Health Care Economics

(Editor: Bumped up from Monday afternoon — this is a very thoughtful piece on the common-sense economics missing from Congress’s mish-mash of health care plans and countless amendments. You can also check out the comments in the original printing.)

“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.