Tuesday, November 24, 2009

Health Care - A Free Market Economic Take

More thoughts I have on health care.

Disclaimer: I believe in a free-market capitalism and could give a crap about partisan politics. I do believe there is a role of gov't to uphold contract rights, private property rights, and upholding the right of the individual to their own life and their own liberty. With regards to "public goods" (roads, bridges, water, sanitation, energy, schools, defense, etc), I do think there are debatable things that the gov't can/should do versus what it was enumerated to do (but that is a separate debate). If that makes me whatever perjorative you want to label me, so be it.

I highly recommend that anyone who wants to have a serious discussion about the dynamics of the Health Care industry learn about how government interventions distort the free market and make things worse... not better (highly recommend reading Mises, Hazlitt, or Rothbard). A free market much allow prices to adjust to the supply and demand of the market as well as allow for the allocation of scarce resources to be set by consumer preferences. Anything else is a centrally planned market that will not meet the needs of the consumers (in this case "patients").

Now, we all know that Health Care is a relatively inelastic bundling of products and services since not everyone can be a Surgeon or Nurse or Doctor and there are only so many MRI machines in the world, etc. Each provider is not going to provide the same type of homogenous product/service since humans are different and sometimes curing the sick is an inexact science. You can't say, "I'll take one breast cancer protocol cure for $5000 please."... and expect it to come out with the same result every time for every patient. But, this is the same for other types of products like food, clothing, housing, transportation, etc. There are going to be services that cost more than others and a different amount of resource allocation based on the differentiation of the product/service. This is WHY we need to have prices for a market to work.

The major problem that we have with health care (and health care insurance) is that we do NOT have freely floating prices that consumers are aware of that they can make rational and reasoned purchasing decisions on about spending their health care dollars since a 3rd party payer assumes a large majority of the cost and risk. When I go for a check-up to the doctor, I don't ask him how much it will cost. When I get an X-Ray or MRI done, I don't ask what it costs or if it is absolutely necessary.... because I'm not paying for it... someone else is (gov't or insurer). But, when I crash my car into the ditch and want to repair it, I shop around for the best value for my dollars and/or most reputable repair shop depending on my insurance deductible/liability (and whether my car is a jalopi or not). Conversely, when i go to get an oil change, I can see how much it will cost and I know my insurance will not pay it as a part of my "benefits". The oil change guy asks me for all of these other services available to me (like transmission flush, tire rotation, windshield wiper replacements, etc). I can either choose to pay for those or not. It's my car and it's my choice and it is my dollars that I am spending with the fruits of my labor.

Because of this fact that prices are not used or even known to the end consumer, prices rarely if ever will fall to meet the supply/demand of the market. This is because weare always looking for someone else to pay for all of our care and we could care less if the cost of doing the service exceeds what the reimbursement will be by our insurance or gov't run insurer (medicaid, medicare, schip).

Here is the crux of the "mixed market" of health care. It is not a free market. It is a market where gov't has its hands deeply intertwined in the market. We have price controls (between insurers/gov't and providers for reimbursements). We have rationing (insurers/gov't dictating benefits and coverage). The supply of the providers (doctors, nurses, etc) are limited by the AMA and medical/nursing colleges through high barriers to entry (acceptance and limited resources for instructors). Health care is anything BUT a free market. Gov't controls close to 50% of the health care market. I would argue that it controls much more than that with all of the other things I've suggested.

Yet, we all think that gov't is the solution. Based on all of the things I know, the current health care legislation WILL lead to a virtual single payer style system ... no ifs ands or buts about it... we will have a pseudo single payer system. The public option is Medicare-for-all. The coverage will be guaranteed issue with a community rating. That is not insurance. That is an entitlement. They are not the same. Medicare is not insurance, although we all think it is. It is essentially a single payer system for the elderly. Medicare has proven to have billions is fraud and waste and does not live off of it's premiums (FICA taxes) and draws money from the general fund. It is bankrupt and we all know why that is. And, while the public option is a nightmare, virtually everything else in the health care bill is a nightmare.

Insurance (any for of it) is just a form of pricing risk. If an insurance company cannot adequately price risk, the premiums will never be high enough to cover the benefits for whatever you are insuring (life insurance, auto insurance, home owners insurance, etc). Just because you have insurance does not mean you are guaranteed unlimited benefits or services.

As for the anti-trust exemptions, they only exist today so that insurance companies can compare actuarial tables with each other to price risk pools. So, the anti-trust exemptions are for information sharing and not for collusion purposes. Otherwise, we'd have one insurance company per state, right? State mandates are the real culprit. Essentially they are the key barriers to entry that do not allow for greater competition from new entrants. And, they are the reason for the cartel-like reality that we have few choices in the individual health insurance markets. This is the reason why you see a crowding out of other competition and you have either oligopolies or duopolies in certain states like NY, NJ, etc BECAUSE of limited competition. The federal gov't is going carve out these barriers to entry for insurers only on a much larger scale at a federal level. So, you are going to have far fewer insurers who will become even bigger cartels. Or, they will simply close their businesses and their stocks will be worthless by not being able to compete with any form of the public option since it will have an implicit tax payer backing from the gov't and undercut the private sector insurance (like Medicare). Right now, there are 1300 insurance companies in the nation, yet you can only buy plans from a hand full of them.

Whether the public option is in there or not, the mandates and requirements that all insurance be guaranteed issue with a community rating will destroy health insurance companies over time since obviously many folks in Congress are on record to wanting a single payer system. If you don't believe me, maybe you should google Jacob Hacker from the Tides Foundation or any of the Congress/Senate/President's comments on their positions of a single payer. If people want to have a single payer, while I may disagree, folks should be honest about it instead of doing it through methods of behavioral economics.

Saying the public option is "optional" is like saying that seniors have an "option" to get Medicare. It's a gov't monopoly that does not need to make a profit (and never has for that matter) to keep the risk pool solvent.

Health Insurance should be like any other type of insurance product that is allowed to price risk and set premiums based on that risk. There should be high risk insurance and low risk insurance for health care consumers just like it exists for other insurance markets like car insurance. We don't charge the teen age driver who crashed her dad's Beamer 3 times last month and has 10 speeding tickets the same as a driver with a clean driving record. There unlimited ways to create insurance products that can meet the needs of the consumers based on pricing, competition, and an election of "optional" benefits that the consumer can chose between. If someone wants a "Cadilac" health insurance plan, so be it! I just know that the premiums are going to cost more than someone who wants a high deductible and assumes all of the risk out of pocket to pay for whatever medical needs he/she wants.

The best method to solve the health care model is to transform it back into a free market system that existed before the Great Society, HMOs, Medicare, Medicaid, et al. Most people don't realize it but people used to deal directly with their doctors for health care. My dad still has the check that his father paid the doctor with to deliver him.

And, if we are going to mandate everyone get Catostrophic Health Insurance, it should be done at the state level (like it is done for car insurance under the 10th Amendment). Or, if the federal gov't demands all citizens buy a product or good such as health insurance, it MUST require a Constitutional Amendment passed by at least 38 of the states just like Prohibition required it and was later repealed (18th and 21st Amendments respectively).

Obviously, all of what i'm saying will be heresy and tons of folks will post numerous fallacies on how gov't is good and a free market is bad. If you're willing to listen to these ideas I've shared and actually think outside of the box and forget a lot of what our society has baked into your head, maybe there is hope for you. Free-Market Capitalism (while obviously not perfect) with political, economic, and individual liberty while honoring private property and the rule of law is the best and most moral system the human race has ever known.

No comments:

Post a Comment