Entitlement Reform is the Real Answer   Leave a comment

Senator Rand Paul has introduced an alternative health care bill to what he calls, “Obamacare Lite,” a.k.a. the American Health Care Act, introduced by House Speaker Paul Ryan. Now that the House has failed to pass the AHCA, they should perhaps go speak with Senator Paul and see about introducing a version of the bill in both houses, so as to assure passage.

While Paul’s plan is more free-market oriented than Ryan’s, no offered plan addresses the entitlement elephant that must be slain before anything resembling a free market in medical care can emerge.

Related imageWhen demand significantly increases, supply and other factors being equal, prices go up. Economics 101. Most of us learned that in high school … and it’s true, everywhere and at every time, even under government price fixing because the cost of artificially controlling price is usually something we don’t really want … like fewer jobs or less access medical care.

While Medicare and Medicaid’s effect on the federal budget is generally acknowledged (and then quickly swept under the rug), there’s seldom mention of the percentage of overall healthcare spending that is tax-subsidized and the effect that has on prices.

The Georgian Institute of Technology did a study and found that of over $2.5 trillion in total U.S. health care spending in 2014, Medicare, Medicaid and “Other Public Insurance” accounted for 44% of it. By comparison, spending by private insurance companies accounted for only 33%, with out-of-pocket spending a mere 13%. Most of the remaining 10% was attributed to “other payers” (probably health care cooperatives and primary care clinics).

In other words, almost half of all medical care purchases in the United States occur free of strong price-limiting market forces like the freedom to not purchase and finite demand.

Yes, the patients have a choice of which medical services they utilize. They just don’t pay for them. Taxpayers foot the bill and we haven’t any choice in the matter.

In economics terms, “demand” means not only the desire but the ability to purchase a product at a given price. I may want to purchase a Caribbean island for my exclusive use, but my paycheck will never stretch to buy one even on credit, so I don’t represent “demand” for a private Caribbean island. I’ll have to leave that demographic to Richard Branson.

Price is determined by the intersection of supply and demand. By adding over $1 trillion to the total funds available for medical care spending, government health care programs significantly increase demand. When demand significantly increases, supply and other factors being equal, prices go up. Economics 101 … again.

If half of all automobiles were purchased by government programs, the price of automobiles would behave just as medical care prices do now. Of course, politicians and other “experts” would become all lathered over how to solve the “automobile crisis” and ensure everyone has the opportunity to exercise their “fundamental right” to drive to work.

Anyone who points out these rather uncontroversial economic realities can expect to be answered with, “What? You want to let my grandmother just die because she can’t afford health care? Do you believe only rich people should be treated for sickness and injuries and everyone else should just be left to suffer?”

Invariably, opponents of these programs take the bait and respond as if government health care programs were solely entitlements for consumers. They’re not. They’re actually for providers, who demand fees their markets won’t bear.

Rick is a doctor (albeit one who works on a salary) who works for a hospital and Lela spent 15 years solid and another 10 before that intermittently working for physicians and clinics. We have a unique opportunity to understand their thinking. Rick’s wife worked for some evil HMOs for much of her career. There are, with exceptions, two things we agree are true about most physicians:

  • They are among the most generous and compassionate people in society.
  • They share academia’s absolute contempt for the free market.

This naturally leads to a Jekyll-Hyde approach to reimbursement. When faced with a patient who has no ability to pay for needed care, a physician will still provide care without hesitation and usually without complaint. They make enough money that they don’t see the occasion charity case as a hardship to themselves. Physicians and hospitals provide a considerable amount of care every year for which they are not paid, without complaint.

The moment there is a payment avenue, that same physician suddenly loses his compassion and any tenuous connection with economic reality. Lela and I have both heard physicians say “I’m entitled to higher compensation in return for the years of training I completed and the money I spent acquiring it.”

I (Rick) work for a salary, so I have no dog in this fight, but I think they’re wrong. Yeah, my skills are scarce and so are worth more in the market than skills that are less scarce. But I am only  entitled to what others have agreed to pay me … like everybody else. This culture of entitlement extends throughout the medical care industry. Even the doctors I work with in research, who are also paid a salary, will argue for our entitlement.


Related imageI’m not suggesting physicians’ salaries necessarily must be cut to restore price reality to medicine. A free market may reduce their compensation or it may not and I don’t really care. I’m more concerned about the many costs other than the physician’s salary involved in medical care delivery because there is no real pressure to improve efficiency in any of them.

How many times do you provide your insurance information to your doctor’s office? Brad’s been going to a lot of doctors lately, so he’s kept track for me. They ask for it on the phone before even agreeing to make an appointment. Then, he writes it on a form when he gets to the office, sometimes more than once, on more than one form. Why? They’ve already captured that info on the phone. It’s in their billing system. Do they not have a photocopier?

“Seriously, I’ve been a mental patient for 15 years, 12 of them at this agency. Don’t you have a photocopier? Why do I have to keep writing down the same [story] over and over again?” Spoken to Lela when she was an administrator for a community mental health center.

Many medical practices run the way they did in the 1950s because they don’t have to change. Half their revenues are guaranteed, at any price, by a customer base that can’t say no. Meanwhile, grocery stores, which provide products just as vital to human survival as medical care, operate on razor-thin margins. Their prices behave normally when adjusted for inflation. No one seems curious about why there’s a difference.

Occasionally, you hear proposals to phase out Medicare and Medicaid … followed quickly by weeping and gnashing of teeth and caterwauling that mass die-off will occur if there’s any major market disruption. That’s just another manifestation of the strange notion that medical care is sacred, far more than any other good or service … it cannot be changed or reformed.

While there are plenty of government interventions on the supply side that artificially inflate medical care prices, the most effective way to normalize pricing would be to abolish Medicare and Medicaid tomorrow. Okay, maybe allow people a year to get find alternative coverage. That would cut demand for those services immediately by over $1 trillion per year. Economics 101, again. With a significant decrease in demand comes a significant decrease in prices.

There would still be doctors, hospitals, pharmaceutical companies and other providers who want and need to deliver care and make profits. Only they’d have to adjust their business models to deliver their products at prices their customers could afford. Yeah, that sounds scary, but industries have repeatedly demonstrated their resilience to disruption throughout history. Doctors are really brilliant people with higher than average IQs and a lot of education. They’re not imbeciles. The turmoil would be far briefer and less harmful than the hysterical predictions would lead us to believe … predictions offered, by the way, from those benefiting from the current system.

Abolishing these programs won’t cut off Granny. It will cut off McKesson, Merck and a lot of very wealthy medical providers from the government till. We’d all be treated much more like customers by the people whose medical services we purchase and medical insurance premiums would plummet.

Proposals like Senator Paul’s will produce positive results on the margin, but until the entitlements are abolished, they won’t succeed in restoring normalcy to the health care market.

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