Thursday, August 13, 2009

Followup on health care reform

See the below comments from a friend on my post on health care reform:

“Every discussion I've heard by knowledgeable people on the topic of healthcare is that the current system is going to collapse.”


“[C]an you point to any example in the history of the world in which a completely private healthcare system has A) been designed for anyone but the wealthy, and B) actually caused the general health of the nation to rise or remain even?”

I agree the status quo is unsustainable. However, the same is true for every single federal entitlement program in existence, including Medicare, Medicaid and Social Security. Why would this be different? All these programs have enormous negative consequences, many of which are hidden. Even if their positive effects outweighed their downsides, it’s irrelevant. Why? Because we can’t afford any of these programs. They are all insolvent.

Even many people who think Medicare or Social Security are bad ideas that have caused more harm than good are unwilling to end them, because they’re afraid of the damage that will result from unwinding the mess. This is no excuse to continue an insolvent program until it eventually and inevitably collapses on its own. It is a great opportunity, however, to learn from our mistakes with these programs and avoid repeating them with public health care.

As far as examples of private health care working, consider the United States prior to Medicaid and Medicare. Was health care that bad compared to today? Now, house calls are practically extinct. After childbirth, mothers now get 2 days in the hospital. It used to be a week. People weren’t dying in the streets en masse. Of course, many things are better now, but this has more to do with subsequent scientific and technological advances rather than the availability of Medicaid.

Also, consider that cosmetic surgery is becoming steadily less expensive, while quality and innovation are getting better. This may seem paradoxical, until you consider that cosmetic surgery is largely free of government or insurance company influence. As technology and science advance, allowing more efficient production of goods or provision of services, the costs of those goods or services should decrease. If they don’t, it must be because of an outside influence.

Why should anyone believe more government health care will drive down costs when previous government health care involvement has done the opposite? For example, government caps on Medicaid payments for certain procedures forced providers to make up the difference by raising prices for those covered by private insurance.

Health care costs have also been skyrocketing because health insurance, unlike any other type of insurance, typically extends to all medical costs, no matter how routine. You buy home insurance to protect against fire, floods and tornadoes. You buy car insurance to protect against accidents, especially the medical costs of your potential victims. You buy term life insurance to protect your family in case you die. These types of policies do what insurance is supposed to do: leverage the risk of unlikely events that would be catastrophic if they occurred.

My health insurance pays for me to visit the doctor if I get the flu. It covers annual physicals. It covers all manner of regular, routine care. This is equivalent to filing a claim with your auto insurance carrier every time you need your brakes changed, tires replaced, oil changed or gas tank filled. Or even filing a claim on your home insurance when your lawn needs mowed. Health insurance isn’t really insurance in its current state. It’s more like a pre-paid extended warranty.

That sounds ridiculous, but the above analogies have merit. Imagine if workers were provided home insurance under a similar scheme. Third parties (insurance companies) would pay for landscapers (medical providers), and fourth parties (employers) would pay the third parties for their services. Under this model, lawn care (medical) costs would rise simply due to the middlemen and bureaucracy involved.

Prices would trend upward even more if the homeowner paid a flat deductible (copay) each time the lawn was trimmed. The homeowner would lack any incentive to compare prices, because he’s only paying $30 whether the landscaper charges $50 or $200. Landscapers would lack any incentive to compete on price, because the decision makers have no incentive to seek lower costs paid by someone else. As a result, they'd charge whatever they could get away with, driving costs higher for everyone, especially the uninsured.

Ultimately, homeowners’ salaries would be artificially held down, because their employers would be paying increasingly high premiums out of their finite labor budgets. Unemployment would be artificially higher, as per capita labor costs rise. However, the connection would be so indirect that most would never realize it exists.

Ideally, health insurance would cover catastrophic but unlikely events such as cancer, major diseases and accidents. If this were the case, the costs of both insurance and basic medical care would be drastically reduced. I could more than afford reasonable prices for routine care and catastrophic insurance coverage if my employer could increase my take home pay by the amount it currently pays for my insurance. Unfortunately, the status quo makes this impossible.

But this is no reason to demand a government solution to these problems. Our flawed system is largely due to the unintended consequences of government meddling. For example, wage controls were implemented during WWII. Unexpectedly, these controls were circumvented by fringe benefits such as employer provided health care. This caused someone to pay for health insurance by someone other than those who used it. But this didn’t make health insurance free to the average insured. It merely changed the direct costs into hidden costs such as lower wages and higher unemployment, as demonstrated above.

The HMO Act and tax exemptions for medical benefits contributed to this as well. Allowing medical benefits to enjoy tax exempt status encourages people to choose flawed medical coverage over a commensurate salary increase. All of these things funnel money into medical care, which necessarily drives prices up in the same way cheap credit fueled the tech stock boom and bust, the housing boom and bust and the college tuition boom and (coming) bust.

Government intervention pushed the health care system into becoming the mess it is today. No matter how noble the intentions behind government meddling in the marketplace, such meddling invariably causes painful, unanticipated consequences, many of which are hidden and under-appreciated. Predictably, government blames the very problems it caused on the free market to justify increasing its power by promising to fix things.

And the cycle continues in perpetuity.

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