Health Care Microeconomics

When Susie was living in Oceanside, the local hospital was located at – I’m not making this up – One Healthy Way.   Evidently the Democrats had already implemented their health care plans.

Of course, there are many healthy ways, but the only way to get all of them going at once is to put decision-making power in the hands of actual consumers.  In the latest Atlantic, David Goldhill takes a close look at the perverse economic incentives currently embedded in our health care system, incentives that create all sorts of inefficiencies.  In this case, “inefficiencies” can mean longer waits for worse care at higher prices.  Virtually all of these distortions originate from a house of cards of government policies, each policy intended to fix the problems that the previous ones created, all the while making things steadily less stable.

It’s a brilliant piece, really, applying basic supply-and-demand economics and marketplace dynamics to the pieces of this system, and showing how they explain what’s wrong, and why our health care and insurance are costing us so much.

As with housing, directing so much of society’s resources to health care is stimulating the provision of vastly more care. Along the way, it’s also distorting demand, raising prices, and making us all poorer by crowding out other, possibly more beneficial, uses for the resources now air-dropped onto the island of health care.

Starting with insurance,virtually everything we do in health policy prevents prices from finding their own levels, providers and consumers from adjusting to dynamic market forces, confuses prices with costs, discourages cost competition, and then punishes people for responding to the incentives that policy creates.  Fundamentally, the problem is an unwillingness to confront actual costs and to pay for what we use.  We expect insurance to cover routine expenses, which ought not be insurable events.  Medicare gets away paying less than cost for services that are only available because someone else picks up the difference.  We’re recklessly borrowing from our future.   The patient is rarely the customer, and when he tries to be cost-conscious, hospitals won’t let him.

Every distortion we complain about has some weird incentive behind it.  Insurance costs so much because we expect it to pay for too much.  We have to restrain hospitals from buying new equipment because we subsidize it.  We prevent specialty facilities from competing with hospitals because we overpay for some services and underpay for others.  And the hospitals’ objections to competition mirror those of the railroads 100 years ago.  Britain right now is suffering through the Conrail of public health.  He doesn’t specifically address the growing wait-times for specialists, but there’s probably a perfectly good awful policy behind that, too.

Goldhill also comes up with reasonable estimates of how much the current bogeymen actually cost us.  You could take the entire insurance industry profit for 2009 and pay for America’s medical care for 4 days.  Think about that.  The “excess profit” that insurance-company-haters rail about amounts to 1% of our health spending.  IT efficiencies would probably improve service, but would also return about 3% of actual costs.

Goldhill proposes shifting the decision-making and purchasing back to the actual patient.  You pay for routine expenses out of income.  You pay for big expenses out of savings and credit.  And a single, government-run policy would backstop against catastrophe.

It shouldn’t be a surprise that, in an article full of what should be commonplace economic observations, the one false note is political.  A government-run catastrophic health plan would be under constant political pressure to carve out exceptions to favored groups and to lower the ceiling for everyone.   Competing catastrophic plans would be able to experiment with coverage amounts and price points.

Still, this is the kind of rigorous application of basic economics that’s been missing from the debate, and especially missing from any Democrat proposals on the table right now.

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