An Economic Look at Healthcare - Part II

In part I, we examined why government intervention in the healthcare market leads to higher prices. Specifically, we looked at why Medicare and Medicaid create many more problems than they solve. If we abolish these socialist forms of healthcare, we would already have gone a long way towards reducing costs and increasing efficiency.

While abolishing Medicare and Medicaid must be the first step in reforming healthcare – and it would be very big step – more must be done. Government does not provide the answer to this important question. It has been government intervention in the healthcare industry that has caused prices to spiral upwards, so it makes no sense to think that even more government intervention would fix the problem.

We must dig deep and try to find the root of the problem instead of just addressing the symptoms. Government “fixes” to the problem will never work because they only address the most recent, obvious symptom of the problem, while doing nothing to address the cause.

For example, a recent proposal seeks to “solve” the problem by simply capping premiums and co-insurance payments. Just capping the price so they can’t climb any higher does nothing to address why prices were climbing in the first place. In fact, it’s through governmental policies such as these that directly lead to higher prices in the first place.

It’s an unfortunate reality that most government programs have consequences opposite of their intended effect. By capping prices, the government just creates perverse incentives. Insurance already has a built-in flaw. People don’t pay the full amount of treatment so it seems cheaper than it really is. Capping prices exacerbates this problem. By capping prices, people are in effect encouraged to use more healthcare, thus causing prices to spiral upwards.

If increased government intervention in the healthcare market is not the proper way for reform, then what is?

Many people argue that healthcare is a right, that some things just transcend economics. If that’s the case, then people don’t care if government healthcare is efficient or not because people’s health is much more important than efficiency.

That argument seems logical and has a lot of appeal. However, we can do much better. Is it really okay to settle for a broken healthcare system and dismiss it away as okay because “healthcare isn’t about efficiency anyway?” Efficiency means we’re putting our money and our resources to their most highly valued use. It means that we get the maximum value out of our dollar, our capital, and our healthcare workers. It means, in short, that we get the most bang for our buck.

Isn’t our healthcare worth our maximum effort? Don’t we deserve to see our dollar go as far as it can possibly go? Don’t we deserve to know that we’re getting the maximum and most beneficial use out of our healthcare equipment and employees? To say that the government has a duty to provide healthcare is to accept that we will never strive for efficiency and in turn will ensure we settle for a healthcare system that falls far short of its potential.

Excuse me for wanting and demanding better.

Government-run healthcare may seem like the easy fix, but if we really examine it we’ll find that it’s neither a fix nor is it easy. Please don’t accept the “easy” way out just because it’s obvious and appears to require very little work. Government-run healthcare will not give you want you want, no matter the humanitarian arguments behind it.

Instead, we can follow simple economic principles to reform healthcare. There is a role for government in the healthcare market; it’s a very limited role, but very, very important. Government’s failure in healthcare is twofold:

First, it intervenes when it shouldn’t by providing healthcare in the first place.

Second, it doesn’t intervene when it should. One of the legitimate functions of government is step in when there’s a market failure. One of the few areas the market fails is in the case of monopoly. By not enforcing anti-trust legislation against insurance companies, they giving in to large insurance lobbies and fostering monopolies.

This is a problem for several reasons. Insurance companies have been granted special legislation by politicians which has led to the fostering of monopolies, perverse business practices and an upward spiraling of prices.

If the proper kind of reform was implemented, healthcare costs would be pushed low enough that everybody would be able to afford it and nobody would be excluded, this eliminating government’s urge to “save” us from the healthcare debacle.

Most people are risk-averse. They would gladly pay $1,000 to avoid a potential loss of $100,000. But if government interventions cause prices to increase, suddenly they have to pay $5,000 to avoid a potential $100,000 loss. The change in the situation might make a risk-averse person decide to take the risk of losing $100,000 rather than pay the $5,000.

As costs continue to increase, all of the healthy people that would normally choose to purchase insurance decide not to. This leaves only those high-risk customers as the ones who carry insurance. Because they are high risk, the company must increase premiums in order to make a profit. Since the healthy, low-risk people choose not to carry insurance, the risk pool is very shallow and thus the company cannot afford to take on those who are already sick or are a high risk. This leads to insurance companies dropping coverage and refusing to cover pre-existing conditions. The fewer people they have, the higher costs rise. The higher costs rise, the fewer people they have. This is clearly an ugly negative reinforcing cycle.

This terrible cycle could be easily broken if the government let competition work like it is supposed to. If insurance companies were allowed to operate in such a way that they don’t need to seek protection from the government in order to make a profit, the costs wouldn’t be so high as to discourage people from enrolling in insurance.

If the risk-averse people find that costs are low enough that it’s in their interest to carry coverage, the risk pool becomes deeper. With this deep risk pool, outlays by the insurance company wouldn’t be nearly so damaging. Since insurance companies would be taking in more money than they pay out, costs would drop even further. The further costs drop, the more people will decide to carry coverage. The more people that enter the pool, the less damaging outlays become. In order to stay competitive, if their costs went down, they would be forced to pass this savings on to the customer, thus lowering premiums. The lower the premiums, the more people will choose to participate. Thus, a negative reinforcing cycle is turned into a positive one.

Since insurance companies would no longer be offered protection from the government and would no longer be forced to comply with legislation that creates perverse incentives, there would be no reason to not cover pre-existing conditions. The risk pool would be deep enough and overall healthcare costs would have dropped so much that a pre-existing condition would no longer be a catastrophic liability to an insurance provider.

Also, if true competition were allowed to flourish, it would no longer be in an insurance company’s interest to deny coverage for any reason. They only do so now because it makes financial sense to do so. As the situation exists now, a pre-existing condition would hurt their bottom line and they don’t have anything to fear by angering their customers because they are protected by the government from competition.

If the right kinds of reforms were implemented, where insurance companies truly had to compete with one another, not only would costs be low enough that pre-existing conditions wouldn’t be an issue, but the negative backlash against any company that denied coverage would be devastating.

People do business with companies for many reasons, only one of which is price. If an insurance company got the reputation for dropping bad customers, it would turn people off. You can bet there would be another insurance company willing to exploit its "heartless" competitor. If the system were constructed in such a way that true competition could flourish, dropping bad customers wouldn't be nearly the problem it is today (not even close).

Okay, so what about the indigent and the people that really, truly, can't afford healthcare? Don't we need a program like Medicaid to provide for them? The intentions of Medicaid are something to be proud of. It's a great thing that, in this country, nobody will be denied medical care because they lack monetary resources. That's the theory anyway.

In reality, Medicaid is so broken that it often leads to doctors refusing to treat patients. If they find care in an emergency room, the cost is passed along to insurance holders contributing further to rising prices. As medical costs go up, the Medicaid system becomes even more inadequate leading to even more patients being unable to get treatment. It's a tragic negative cycle.

This problem is only compounded by the outrage that many Americans feels because they are already forced to pay for Medicaid through taxes and then they have to pay for it again through rising insurance costs.

We can do much better, all through the free-market and personal choice. Consider this: CSPAN is a commercial free channel that airs government proceedings. It receives no tax support. CSPAN is funded through a small fee that is added to your cable or satellite bill. We could fund medical care for the indigent in a similar way.

If you choose to make a claim on your insurance, it will be with the understanding that you will also be paying a small fee that will go towards healthcare for the poor. If you don't want to pay the fee, then you will choose to pay for your healthcare costs out of your pocket. This will lead to a decrease in insurance claims which will further drive down insurance and healthcare costs.

Many people will gladly pay the small extra fee on their claim, knowing it's a matter of choice and it will go towards a good cause. The backlash that comes with paying taxes will be eliminated and personal choice and liberty will be maintained.

In light of all of this, it is clear that government intervention in the healthcare market does nothing but increase costs. It would be insanity to think that more government involvement in healthcare would reduce costs. It’s government that created the problem in the first place so why on Earth would we think that more of the same would fix the very problem it created?

Einstein said it best, “The definition of insanity is doing the same thing over and over again and expecting different results.” Government-run healthcare will NEVER solve our problems. Government might seem like the easy answer, but just because it seems easy doesn’t mean it’s right. We need take a step back and look at the problem critically and logically. We need to address the causes of the problem, not just the symptoms.

If we take a detached, clinical look at the problem, it becomes clear that a free-market approach to reform is where the answer is. It truly will work and it truly is that simple. This is the real “easy” solution. Imagine, we just sit back and let the market work. It really is that simple. No massive bureaucracies, no million pages of legislation, no committees, no formulas, no rules and regulations, no ever-increasing government whose only purpose is to support itself.

Why would we so vehemently fight for a policy that is so clearly not in our interest? Are we really that insane?