The Bad Economics of Health Care Reform
MAY 22, 2009
Economic illiteracy will be hazardous to your health.
Barack Obama says, “[T]he most significant driver — by far — of our long-term debt and our long-term deficits is ever-escalating health care costs. If we don’t reform how health care is delivered in this country, then we are not going to be able to get a handle on that.”
Very clever, indeed. Enlist the budget-deficit hawks in the effort to further bureaucratize decision-making in medical care. Obama has already recruited the competitiveness lobby, claiming that more centralized control of medical care will lighten (!) the burden on American business, enabling it to better compete against companies in countries with socialized medicine.
Another strategy is to blame “private”-sector medicine for the out-of-control Medicare program, which has a $35 trillion unfunded liability and is helping to break the federal budget. In the 1960s the national government took over funding of medical care for the elderly. Critics warned that, as a welfare program, Medicare would explode beyond all official budget estimates. When it did so, the advocates of Medicare (and fully nationalized medicine) blamed the (semi-)private providers of services, and now Obama threatens more control than they already endure.
Once again, we see an important principle at work: No matter how much the government controls an industry, when something goes awry, economic freedom will get the blame.
If the price of a particular set of services rises faster than other prices year after year —and there is no free market in those services—there are two things you can do: 1) give bureaucrats greater power to control costs—this is called “reform—or 2) look for the ways that existing policies create price inflation, then repeal those interventions.
For medical care the juggernaut is heading toward option 1, with the insurance companies and providers climbing aboard fast in order to cut their deals early.
This is too bad, because the solution lies with option 2.
Prices in the medical industry today, no matter what the advocates of government control believe, are not arbitrary numbers plucked out of the air, or the result of sheer profiteering and greed. Rather they are the product of a government-manipulated, semi-competitive, supply-and-demand process. Prices emerge from this tangled system that is result of decades of government intrusion. If the planners ignore the real determinants of rising prices and attempt to get them “under control,” it will make things worse by creating shortages and other problems. If, for example, price controls are imposed, supply will shrink relative to demand, and when the shortages become acute, the bureaucracy will step in to ration medical services.
Or the policymakers might go directly to rationing as a way to control costs. The easiest way for the government to lower society’s overall medical bill would be for it to engage in triage, dictating who gets what kind of service. In some ways, this already happens in Medicare, which refuses to cover certain services out of budgetary concerns. It could also license medical technology to avoid “wasteful duplication,” another form of rationing. Such an approach might lower total money expenses, but so what? The point shouldn’t be to cut the total bill regardless of the consequences. Waiting months for surgery or doing without because the government won’t pay for it is a cost, although it doesn’t show up in the budget. This in part is how other countries seem to spend less on medical care than we do. In fact, our semi-statist system uses resources more efficiently than fully nationalized systems in other wealthy countries—with equal if not superior results. U.S. per capita spending growth is below the OECD average, writes John Goodman of the National Center for Policy Analysis.
Savings through Modernization
The Obama administration promises savings will come through modernization not interference with consumer choice. Imagine government modernizing a sector of the economy! The grounds for skepticism are abundant. We can be confident that when the benefits don’t materialize, the politicians will resort to more draconian methods—while blaming greed and profiteering for the policy failure.
You know an industry is heavily regulated when politicians exhort providers to lower costs and they pledge to do so. No competitive industry would require exhortations or pledges. Competition would drive innovative providers to minimize costs while maximizing quality and making even exotic services more and more accessible.
It is not the free market that has failed. It is government.
Therefore, the second approach to cost-cutting is in order: Eliminate all the ways that government causes medical price inflation. These range from supply-side interventions—including occupational licensing, certificates of need, the FDA, and patents—to demand-side interventions—including tax favoritism toward employer-based insurance, Medicare, and Medicaid. Third-party payment that makes medical services appear free or nearly so encourages overconsumption and raises costs indirectly for everyone, with particular hardship to those not participating in the programs.
To set things right, consumer prices and true costs must be aligned through the market process. People would then become cost-conscious buyers of services and would most likely reserve insurance for truly insurable catastrophic events. Of course, some who need medical attention wouldn’t be able to afford it. That would be less frequent in a real free market, but when it occurred, the answer would be voluntary charity rather than clumsy bureaucratic intervention.
For decades government policy has conveyed the message that no one should have to pay for medical care. Bastiat’s aphorism has never been more true:
The state is that great fiction by which everyone tries to live at the expense of everyone else.
But of course medical services and products are not really free, and we can’t all live at everyone else’s expense. Someone has to pay. There are only two choices: free exchange (including mutual aid and charity) or bureaucratic diktat— and all its negative externalities.
The government should get out of the way. How much we spend on medical care is none of its business. The medical industry is not destroying the government and the country. On the contrary, the government is destroying the medical industry and the country.