Tuesday, March 23, 2010

Health Care Wedge Effect 2010

On March 23, 2010, President Obama signed the Senate Bill into law that was passed by the House of Representatives. While the Senate may or may not approve the reconciliation amendments of the bill, the health care bill is law. Obviously, many pundits, reporters, academics, and partisan folks will argue back and forth how great or detrimental the bill is to the American people. This blog post will analyze the economics of the health care bill which are not partisan, rather focused on sound economic fundamentals and human action of free people. The premise of my analysis is based on the following economic factors.

  1. Central economic planning and distribution of health care goods and services will lead to disruptions in allocating goods based on the laws of scarcity (finite medical resources) and the unlimited needs of consumers.
  2. The law will further create a "wedge" between the consumer and supplier of medical goods and services since the third party payer system will be expanded which will further distort prices and allocation of resources.
  3. The unintended consequences at the "margins" of this law are will damage the health care system as well as the financial health of the nation.
  4. Guaranteeing health care insurance does not equate access to unrestricted health care goods or services.

Central Economic Planning of Medical Care
While this law has been debated for more than a year, many people fail to understand that the government already controls 29% of health care (SCHIP, Medicaid, Medicare, Veterans Affairs). Many flummoxed individuals seem to think there is a "free market" in health care. In reality, a single payer government system (government programs mentioned above) is competing with a flawed private third party payer system with managed care style as the primary insurance product.  An expansion of both systems added together yields massive distortions, intervention, price controls, rationing, and misallocation of medical resources. A free market in health care would require free exchange of goods between voluntary providers and consumers, private property rights, and prices to help allocate scarcity with needs. Centrally planned, state run markets always fail based on economic calculation problem postulated by Mises and Hayek.  As health care insurance providers are transformed from private entities into wards of the state as health care utilities, government expansion into the private sector will be complete when the system is 100% operational in 2014.

Economic Wedge
The economic wedge in health care (third party payer) is one of the main distortions in the health care market.  When the consumer and producer are separated further and further away from directly exchanging with each other, the greater the wedge effect distorts economic reality. The wedge is increased dramatically with the huge expansion of subsidies. Subsidies will increase demand for services while not adequately covering the increased costs brought on by the new demand. Up until 1943, consumers paid directly out of pocket with cash or check for most if not all standard medical care products and services. The bill signed into law will significantly enlarge the wedge rather than reduce it.

Unintended Consequences At The Margin
The bill will induce huge constraints, regulations, and mandates on medical providers such as specialists and the primary care providers. Many doctors and providers have already declared that they will either quit or retire from practicing medicine when the law enacted starts. With the expansion of Medicaid and the baby boomers quickly entering Medicare, many doctors and providers will stop accepting those patients since reimbursement rates are lower than the physical cost of delivering direct health care. Increasing the constraints and rules for practicing medicine, decreasing the incentives for people to enter the health care industry, and adding 30 million more patients to the medical system may create an enormous amount of chaos due to inadequate supply to cover the exploding demand for care.

Prepaid Medicine Is Not Health Insurance
The entire debate about health care reform has focused on health care insurance instead of improving the quality of care, decreasing cost, and increasing health care availability to the largest number of people. Insurance simply is not health care. Insurance is a product used to share and price risk against an unlikely event.  Medicare, Medicaid, and HMO laws transformed medical insurance from indemnity style insurance into prepaid medical care. So, instead a health care market where individuals pay for most services and only use insurance for unlikely medical events, individual now use medical insurance for virtually every single medical service with a majority of the liability resting on the 3rd party payer.  Thus, prices of insurance premiums must go up to compensate for the the added risk and benefits demanded. When premium receipts are not enough to cover all of the medical services promised, the insurer/payer must decide how to effectively ration care or increase the costs beyond affordability. Thus, giving individuals "insurance" does not guarantee limitless or even flexible benefits when the policy holder is not paying for the insurance or determining the type of coverage the consumer requires. The type of "insurance" that will result from the health care bill will not be "insurance" as much as it will be an entitlement and government subsidized prepaid medicine.

No comments:

Post a Comment