Freeman

PERIPATETICS

Health Care Cons

Repeal the myriad interventions.

APRIL 01, 2008 by SHELDON RICHMAN

Economist Joan Robinson (1903–1983) wrote, “The purpose of studying economics is not to acquire a set of readymade answers to economic questions, but to learn how to avoid being deceived by economists.”

A better reason to study economics is to avoid being deceived by politicians; they are the far greater threat to life, liberty, and the pursuit of happiness. When you consider that the typical political campaign is little more than a series of confidence games, understanding basic economics is a matter of survival. Without such an understanding one is an easy mark.

Case in point: How would one see through the flimflam served up as health-care policy without a working knowledge of economic principles? When politicians promise “universal and affordable” medical care and insurance, how else are we to know that those promises can’t be kept? Indeed, attempting to keep them would gravely damage our medical care (even more), our prosperity, our liberty.

What we call medical care/insurance is a bundle of goods and services that have to be produced. They aren’t found superabundant in nature. Production of those things entails real opportunity costs in terms of resources (labor, intellectual capital, machinery, and more, which could be used in alternative ways. The people engaged in this production are (so far) free to do other things if they choose. They can’t be compelled to practice medicine, run hospitals, invent medicines, or offer insurance policies. This sobering thought should be kept in mind when analyzing politicians’ plans for medical “reform.” Any proposal that would drive medical service providers and resources into other lines of work could hardly be said to be in the general interest.

However, one group can be compelled to participate in a government plan: the American people in their dual capacities as taxpayers and consumers of medical services. This is the key to any political “solution.” That’s why Hillary Clinton insists against Barack Obama that any program must be mandatory. Given the premises both candidates share, Clinton has logic on her side. Without compulsion, any government program must fail even on its own terms. You might think that’s a good argument against government programs, but politicians and most other people don’t believe physical force perpetrated by government is objectionable. Go figure.

Candidates who promise universal and affordable medical care don’t really believe they can lower the true costs of the relevant goods and services. Instead, their plans contain methods, overt and covert, to shift some people’s expenses to others. The overall price tag won’t shrink—indeed, it can be expected to grow—but the money price to selected individuals would diminish. (Nonmonetary costs, such as waiting times, would increase.)

The problem for those who promise universal and affordable health care is that medically we are not all created equal. Because of genetics and lifestyle, some people are more likely to get sick than others, and some people are already sick. This upsets the politicians’ plans, and they must do something about it. Clinton declares, “I want to stop the health-insurance companies from discriminating against people because they’re sick.”

One doesn’t know whether to laugh or cry at a statement like that. Is it ignorance, stupidity, or demagoguery? Real insurance lets people hedge against financial ruin by pooling their risk of misfortune with others. For reasons that shouldn’t need explaining, people who present a low risk for whatever is being insured against would reasonably be charged less for coverage than people who present a high risk. For one thing, low-risk customers would be unwilling to pay premiums that overstated their perceived risk. I recall reading that the fire-insurance company founded by Benjamin Franklin set premiums according to how fire-resistant a building was. Was that a reasonable or outrageous thing to do?

The depth of the lack of understanding about insurance is on stark display whenever someone demands that the terms of coverage for a sick person be the same as those for a healthy person. Risk grows out of uncertainty. But if someone is already sick, there is no uncertainty about his need for medical care. “Insurance” in this case would not be real insurance but rather a subsidy provided by others or prepayment for future expenses.

 

The Real Story

To be actuarially sound, insurance must discriminate on the basis of risk. If the government bars insurers from such price-discrimination, they really wouldn’t be in the insurance business at all. It would be more accurate to call their activity a forced subsidy. We should at least call a thing what it is.

Where would the Clinton principle of nondiscrimination lead if the government seriously enforced it? If an “insurer” is allowed to charge only one price regardless of risk, it would have to set the price high in order to be able to cover the riskiest customers. But that would not honor the politicians’ promise of affordable coverage. Moreover, young, healthy people would opt out, preferring to spend their money otherwise or to save it in order to self-insure. So the government could not let this stand. To “fix” things, it would compel everyone to participate and force the taxpayers to subsidize low-income people.

Even with subsidies the politicians wouldn’t let insurers charge market prices for long because this would anger voters and break the budget. So inevitably, the Clinton principle must lead to price controls.

We know what price ceilings bring: shortages. Why would a company that cannot charge enough to cover its costs and earn a competitive profit continue in business? Thus the principle of nondiscrimination combined with price controls would inevitably dry up the supply of private “insurance.” At that point, the politicians would declare that the “free market” failed and that government must step in to be the sole health insurer. Then government could have full control over who gets what kind of medical attention. It would be in the triage business, a terrifying prospect for sure. It would also dictate prices to doctors, hospitals, and drug companies, speeding up the exodus from that profession and those industries. As supply withered and demand inflated (because of the illusion of low prices), government would impose more and more draconian controls.

There’s a lesson here. When the government seeks to enforce a counterfeit right—such as the “right” to medical care—no expansion of freedom results. Instead, government power expands—to everyone’s detriment.

One way for politicians really to keep their promise of lower medical costs would be to uncover all the ways the government artificially raises costs today. It does this in a variety of ways: restricting supply through licensing and patents, boosting demand by lowering the apparent price of services, promoting third-party payment for even expected routine services, raising drug-research expenses, imposing coverage mandates on insurers, forbidding interstate competition in insurance, and on and on.

But politicians don’t talk about those things. They presumably wouldn’t get credit merely for repealing destructive interventions and letting the competitive free market provide universal affordable medical care—as it has provided so many other things universally and affordably.

ASSOCIATED ISSUE

April 2008

ABOUT

SHELDON RICHMAN

Sheldon Richman is the former editor of The Freeman and TheFreemanOnline.org, and a contributor to The Concise Encyclopedia of Economics. He is the author of Separating School and State: How to Liberate America's Families.

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