Understanding Health Care Economics
By Larry Johnson on October 14, 2009 at 10:15 AM in Current Affairs
(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.
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Congress can not give away what it does not possess. They cannot legislate that everyone gets certain services. If they do, then they must also take control over the resources in order to allocate it as they have legislated.
Taking over health care resources means forcing doctors to work for the government. How many people will want to practice medicine under this circumstance? Less than we have now. Then the government will need to force people to go into medicine–or ration. This has all been done before. Why do they not learn?
Not really, no. Every state in the union has laws requiring automobile owners to carry insurance for their cars. Yet no state government has assumed control of the auto insurers.
This truly is no different. The new law will mandate, most likely, that all Americans carry some form of health insurance. It will help those who can’t afford it to purchase it (hopefully providing enough help, rather than creating and unaffordable mandate). There will be cost controls of some sort (hopefully, including breaking the insurance cartel that has created anticompetitive regional monopolies, and better yet, including a voluntary public insurance option similar in design to Medicare). But it won’t have anything to do with deciding how care is administered. It will deal solely with how that care is paid for.
Apples and oranges: auto insurance does not require near the resources–you just have a few administrators and poof, you are covered. Health insurance (or, more accurately, health provision) requires the paper pushers plus many, many medical professionals and expensive equipment.
Fine then.
What in any of the proposed bills represents the government taking any degree of control over the means by which health care is provided (i.e. doctors and hospitals), rather than how it is paid for?
Or are you just making a slippery slope argument without a factual basis in any of the current legislation?
There is no written legislation yet!
I’m just working my way back. You want health care, you have to have a doctor. You want a doctor, there has to be a reason for that person to work in medicine, etc. It is wither compensation or force. (I don’t buy the humanitarian argument. You do not feed your family with the thankfulness of other people. And not many people will sell themselves short by working extremely demanding jobs for low pay their entire lives.)
Government officials are rarely honest about being accountable for what a whole program will entail. They just want to give people a feel good program and think about the details in implementation and funding later. They do it to get votes.
In a marketing class, you are taught the A #1 consideration in anything is feasibility. Before you design the package, record the ads, or manufacture the good, you CRUNCH THE NUMBERS–repeatedly, using all possible contingencies. If you don’t, you may end up loosing money for the company and loosing your job, too.
Government works the opposite way. They make the flash without worrying about the realities. When the out of control bill comes due, government officials rarely loose their jobs over it. (Yes, sometimes they do, but it is relatively rare. They cover up, distract and redirect attention.) Debt piles up, taxes increase, and/or money gets printed out of thin air. We are at the breaking point with these things. Adding health care will add to the problems.
“either” not “wither”–It is either compensation or force.
To the contrary, there are several bills available in full text form. The Baucus bill is out there, obviously (Affordable Heath Choices Act of 2009), the most likely House bill is available (HR 3200), and there are several more.
So, good news. You don’t have to “work your way back” after all! Instead of worrying about what the proposals might be, you can read what the proposal actually are. Have fun!
Related question: if there are provisions in any of the bills to seize control of how doctors treat patients, why in the world haven’t the Republicans pointed them out? Seems like a political killer, no?
The CBO has crunched the numbers on the Baucus bill. If you start at 2015–the year benefits start–the costs are sky high http://www.nypost.com/p/news/opinion/opedcolumnists/the_senate_reform_fraud_PVp3TSIkA1O5pB9mY4W2aJ
There do not have to be provisions in the bill for the government to seize control over how docs treat patients. That kind of stuff happens later, when additional legislation is created to provide what people believe they are entitled to.
If it is so easy and efficient for government to provide people with goods, why should we stop at health care? Let’s have government provide us with cars, tvs, housing, food….
Your post only demonstrates what everyone here has been saying. Your comment and those of other obamabots are full of vague and/or empty words and phrases such as hopefully, most likely, of some sort, some form, voluntary, etc. What you’re talking about here is a a complete unknown, including your prediction that it won’t deal with how healthcare is administered–that is a great big unknown fact. Indeed, I would rather have a known status quo than an unknown system, which was designed by the very groups that have made our system a mess currently: bureaucrats in government and big business lobbyists.
No thanks.
sigh.
Show me where, in any proposed bill, there is any sort of measure that would affect how healthcare is actually delivered by doctors. If you can’t find such a thing, then it’s not really an unknown, is it?
What you’re saying is, in essence, like asking me to disprove the existence of the Easter Bunny. Even though I can’t see him or any evidence of him, I can’t really prove that he’s not out there, can I? It’s nonsense, and it’s embarrassing that those kind of scare tactics are a part of our politics. And if you’ve honestly bought into that scare tactic — if you honestly think that a bill is going to be enacted that places some bureaucrat between you and your doctor, even though no such bill has come out of any committee — then it’s just embarrassing for you personally.
Every state in the union has laws requiring
Driving is a privledge not a right.
I do not have to Drive or own a car.
So by your silly comparision, every one should do the same with healthcare?
Cost controls? State Farm decided to leave the the state after California imposed “legislation” on them…
Assumed control? LOL
That has nothing to do with the analogy.
I’m simply responding to the idea that a government mandate to carry insurance (of whatever sort) means the government will ultimately control the thing that the insurance pays for.
Simplified: the government makes drivers buy car insurance (and BTW makes the auto insurers compete, so that they can’t gouge the public). Yet the government does not control auto repair shops. So if the government makes everybody buy health insurance (and breaks up the health insurance cartels), why does it follow that the government would control the hospitals?
It simply doesn’t.
Because this is health care we are talking about, not health insurance.
Great post. Thank you.
Other than a couple of “blue dog dems” who are still yelping, the democrats are virtually unfettered now.
All the bills will be merged, in a back room, and no one will know what is in the final product. But does it matter?
Thousands of Americans took a stand against many of the proposals, but they are ignored.
I’m trying to remember when I have been as angry…very few times come to mind!
If a college student were to graduate today and decides to become a doctor, not including the cost of prepping for the MCATs, shelling out the dough to send off applications to medical schools, the cost of schooling itself will be $250,000+.
In addition, many of the qualified students will not go to medical school if Obamacare goes into effect – particularly if it becomes a single payer system. They will go into other more lucrative fields in science where government does not exist.
That is a very dangerous probability for all of us because not everyone is qualified to be a good doctor. Med schools would have to lower their entry standards and the quality of medical care will be signficantly reduced over time.
I have someone in medical school right now and they are all very concerned about the damage that is being perpetrated in DC by elected officials who are completely ignorant of running businesses and of the real dynamics of the medical industry.
Disagree. There are some people who go into medicine for the right reasons–and not for the money. Frankly, I’d rather have a doctor who didn’t go into the field for the money as I know where their priorities lie. Capitalism is fine in its place but not with a captive audience and especially not with medicine.
And those who choose not to go to medical school because they won’t make a a boatload of money shouldn’t be in the field in the first place.
Once again here comes the la-la parade.
Since you don’t know jack about med students they do enter for the right reasons. But do you have a clue to what it costs to get through and how long it is until you make more than $40,000/year?
If surgeons were suddenly told that you are going make less money than say engineers then guess what happens to our best science students?
And you don’t want just some kumbaya idea of doctors – you want the best and brightest because it is about people’s lives.
According to your weird logic you would rather place a critically ill relative in the hands of a less skilled physician but who has a greater passion than most, than in the hands of a highly skilled physician who makes a boatload of money.
Good luck with that logic as 45% of doctors quit under Obamacare.
I think Ferd Berfle’s view of capitalism is the prevailing one in the White House and Capital Hill. If I am right, we are all screwed.
You may love capitalism, hate it, or be somewhere in-between. But, you can ignore the laws of economics only at your peril.
In the long run the only way to avoid Larry Johnson’s dismal forecast is to expand the number of doctors willing to go into the profession. You do that by paying them more, not less.
The reform legislation cuts payments to doctors by 24% reportedly.
This at a time when 28% of seniors have difficulty finding a physician.
My older female relatives,all widows, range in age from 74 to 94, and only two of them have a general practicioner.
What a straight-forward and simple explanation for those who have some brains! I am not sure if most of the dummokratik Reps in the congress would still understand this. Don’t we not only have to have some brains, but also be willing to use it to be able to understand things? Thanks Larry!
If this, or any Congress is SERIOUS about “bending the cost curve down” (which is the latest phrase from these bozos), there is one way, and only one way to do it. That is Health Savings Accounts. And that means even if we have to provide (via tax revenues to our fellow citizens) the seed money to originate these plans. Let me explain.
Wanna know why I don’t care how much you and your spouse spent on your anniversary dinner last night at a fancy four star restaurant? Not because I don’t think it’s a great thing, because I do think it’s a great thing. It’s because I was not asked to PAY for it. It’s the same reason that I don’t care how much your coat, your couch, and your landscaping costs. You pay for it, it’s your deal.
The reason health care costs continue to rise is BECAUSE of our system of insurance, not in spite of it. Picture how much your house insurance rates would be if you had to include:
Routine painting
New hot water heater
Replacement roof
Fixing the driveway
New furnace or AC
Carpet cleaning
Pest control services
and all the rest. Get it? When you ADD “routine maintenance” to the cost of insurance, it goes up! Insurance should be limited to catastrophic events; things you can’t save up for. We are supposed to save up for routine maintenance on our homes. We should also save up for routine maintenance on ourselves! That’s the problem before us.
Anytime you establish a distance between the person receiving the good and the person paying the bill for the good, you will have exactly this scenario as we have now. Third party is the enemy, here.
This is, btw, the reason that college costs have exploded over the years. The more involved third parties became (grants,scholarships, loans, etc) the more quickly the costs rose. I must be older (49) than everyone here, I’m afraid. Because there really was a time when “working your way” through school was a fact. There was a time in the US when you could work all summer (lifeguard, etc) and pay for the following year’s college tuition. Really!
If it were up to me, I’d do away with all medical insurance except for catastrophic (we’d have to deal with our pre-existing folks in a more charitable way, however) and make everyone be in charge of their medical services. And even if we have to donate the original “balance” to their account, with would be in the thousands.
Btw…just a note of trivia. How did health insurance come about? It came out during the end of WWII, to add compensation to employees that did not violate FDR’s onerous wage control rules. No kidding!
Gov’t tinkering has been at the root of most of our problems, despite their well-meaning intent. The CRA eliminating “redlining?” (The CRA played a role in the collapse of our housing market) Did you ever wonder where “redlining” came from?
The person who invented “redlining” was FDR. And you can look it up.
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