Mr. Moderate

In an earlier essay (03 - Easy Credit & Home Prices), I wrote about how easy-to-obtain financing for home purchases led to a huge run-up in the prices for homes. This is based upon the proven theory that an increase in the money supply in the absence of an increase in the supply of goods and services will lead to price inflation (please read 02 - Inflation & Money Supply).

If you have read through the above-mentioned essays, it should come as no shock when I now assert that at least some substantial portion of the rise in health care costs is due to the large percentage of the population which is covered by health insurance and whose payments for health care are thus “decoupled” from the consumption of health care services. WIth such a financial “decoupling” in place, the providers of health care goods and services have no real incentive to keep prices down as demand becomes highly-inelastic. People pay their health care insurance premiums and expect to receive, in return, “whatever they need” (read “want”) in the way of health care goods and services. Since it is the insurance company who pays for these goods and services, and not the actual consumer of the goods and services, the free market is unable to work its magic of setting the proper price to balance the demand for health care goods and services with the supply of such goods and services.

Now, the solution proposed by the Republicans makes at least a bit of sense based upon the foregoing explanation of what is wrong. The Republican proposal is for “medical savings accounts” (MSAs), which can be used to “save” pre-tax dollars that are designed to be used only for medical expenses. Each individual would then be able to spend their own saved medical dollars and, in that way, would presumably be more interested in holding costs down and keeping a greater amount of money in their personal MSAs. This idea is supposed to restore the operation of the Law of Supply & Demand to health care costs.

However, there are several problems with the proposal advanced by the Republicans. Among these problems are:

• There are no controls on using money for “legitimate” cures instead of “quack” cures.
• How do you balance the question of who gets sick against who has the money for care?
• The proposal does not address structural problems in health care, like “doctor monopolies.”
• The forfeiture provisions operate as a huge disincentive to participate.

The first item above is based on the fact that people tend to choose the treatment option which has the best public image, which image is going to be largely based upon advertising claims rather than medical facts. The second item above is based on the fact that people tend to get sick somewhat randomly, and they might not have sufficient money in their MSA to cover the costs associated with saving their life. The third item above is based upon the fact that doctors and other medical providers are now licensed and thus immune to competition from any person who is not a member of the “doctor club,” eliminating a truly free market for health care goods and services. The fourth item above is based upon the disincentive to carry large sums of money in your MSA since you will lose whatever it is you do not use. This virtually eliminates any consideration of long-term savings for medical costs, and thus requires continued patronage of the health care insurance system to insure against catastrophic loss. Thus, the MSA plan really only eliminates insurance coverage for so-called “routine” health care expenses.

Republicans are also vocal in arguing against the costs of medical malpractice lawsuits. But I am aghast at the idea that our legal system would be further tilted towards protecting rich doctors and insurance companies and against protecting the people that the doctors have injured through their negligence. I will agree that we need tort reform, largely on the grounds that lawyers get far too large of a share of any eventual payout. But I would never agree that a person who is permanently disabled, and who will have huge medical costs for the rest of their life, should necessarily be forced to accept some minimal amount of money because that is the legally-defined limit for any payment for their type of injury. Yes, there are some crooks who take advantage of the system (some lawyers, some their clients, and a few both). But there are far more honestly-injured people who get little or nothing because the insurance companies can (and do) afford to hire the best lawyers to defend the doctors against the legitimate claims of their injured patients. Besides, at the end of the day, few people are injured by doctors, and the payments for malpractice insurance are not directly related to the costs of health care to the consumer. Yes, they are part of the cost basis of the doctor, but they do not directly relate to the charges incurred by each patient who enters the doctor’s door.

As I mentioned above, the demand for health care goods and services is relatively “inelastic.” Most people who are sick will pay whatever it takes to get better. Thus, when it comes to health care goods and services, the free market is not very efficient at setting proper prices. The huge barriers to entry for suppliers of health care goods and services also discourage any sort of free market competition. Thus, the market is also highly-insulated on the supply side. This is the real problem with the cost of health care goods and services: there is no really free market to efficiently set prices as neither the buyers (patients) nor sellers (doctors) are responding to each other based upon the stated costs of the goods and services to be provided.

This leads to a discussion of the final consideration about all this, which is the fact that the real customer of the doctor is not the patient who is seeking health care goods and services, but it is instead the insurance company who will eventually pay the doctor on some basis or another for the goods and services provided to the patient. The doctor is under the usual pressures (including greed) to make more money, and so the doctor finds more and more ways to bill the insurance company for different goods and services, all at as much profit as the doctor can wrangle under his or her provider contract with the insurance company. Accordingly, most health care practices which have large patient populations will tend to have their own “captive labs” to perform medical tests “while you wait.” The doctor then has every incentive to order lots of medical tests and to justify the costs of those tests to the insurance company by pointing to the high cost of medical malpractice insurance. It is, of course, unstated that the doctor is making a good percentage of the testing fee as the doctor’s own profit for just checking the box on the patient’s examination form.

This article is only a brief overview of some of the worst aspects of our health care system in the United States. As I’ve shown above, the plain fact is that the widespread availability of medical health care insurance (covering roughly six-sevenths of the population of the United States) operates to drive health care costs up dramatically through a number of obvious mechanisms (see the above discussions). The Republican proposal to restore buyer price competition in the health care system addresses only a small portion of the problem, and will not have anything like the intended effect if it is more-widely implemented than it is now. The Democrat proposal to make health care insurance all-but-mandatory for virtually everyone will also not have anything like its intended effect. Instead, the Democrat proposal will likely drive the overall cost of health care goods and services up by making even more insurance money available to compete for those same goods and services.

We need to stop nibbling at the margins of this problem and engage in a real debate over the true causes of our inability to efficiently provide affordable health care goods and services to all lawful members of our nation’s population. The current system is exacerbating the problem by leaps and bounds, and no current proposal will have any real effect on reducing or eliminating the affordability problem. The cost problem will not go away until the system is redesigned to reduce or eliminate the incentives that providers of health care goods and services have to run up the costs as much as possible.