The U.S. healthcare system was unsustainable before Obamacare and is even less sustainable with Obamacare. The implosion of Obamacare is happening before the eyes of anyone who is willing to look. The nation is at a crossroads: The nation will turn to either a collectivist “solution” or a more free market “solution” to deal with the demise of Obamacare. The quotation marks around “solution” are there to imply that neither approach will solve all of the problems of healthcare. Each presents a different set of tradeoffs. The issue before the House (and the Senate and the nation) is which direction we should take. The answer will be momentous.
The issues that must be understood to make a sound decision about healthcare are many. Why are both the pre-Obamacare approach and the Obamacare approach to healthcare so unsustainable? Why is there mass confusion about what to do with U.S. healthcare? What are the tradeoffs of both paths? All of these issues desperately need to be sorted out, and this topic is too large to cover in one blog post.
This is the first post of what is planned to be a three part series. Part I explores why the pre-Obamacare approach and the Obamacare approach to healthcare are unsustainable (the understanding of which is essential to responsibly supporting any healthcare policy). Part II will explore how politicians and pundits are confounding a clear understanding of what is at stake with changes to healthcare. Part III will explore the better approach to dealing with healthcare.
Let’s get started.
Everywhere and always, people’s need and ability to pay for healthcare varies from one person to another. Much has changed about healthcare over time, especially its effectiveness, its cost of delivery, and the skills needed to deliver it. Another important change is the growing sentiment that people’s access to healthcare should not be limited because they cannot afford healthcare. In light of the greater wealth today, the growth of those sentiments is understandable, but the extent to which they should be accommodated is an important issue. The rationales for and benefits of greater access to healthcare are obvious and well-chronicled. Understanding “the cost of healthcare” is as essential to good policy as understanding the benefits. The public discussion of the costs of healthcare is mired in confusion, however. The following discussion will hopefully bring some clarity to the subject.
Neither politicians of any party nor the press are telling the People about the real issues and problems of Obamacare. Essentially, every discussion of the cost of healthcare confounds the important difference between the cost paid by a patient for healthcare or health insurance with the cost of delivering healthcare. I fear that the more that people listen to the confused public debate about healthcare costs, the more misinformed they become. Supporting a particular policy without a reasonable grasp of its positive and negative consequences is both irresponsible and foolish. Teasing out the real and hard issues about healthcare from what you hear from Washington is essential to deciding which policy to support. Let’s try to sort this out.
We should start with the basics, first taking the perspective of healthcare providers and then taking the perspective of healthcare consumers. Healthcare insurance (how the costs of healthcare are managed) is a different subject that will be discussed later.
PROVIDERS: For there to be healthcare, people must produce healthcare. Therefore, the producers of healthcare must be paid enough to induce them to produce it. The more profit that can be made from producing affordable healthcare, the more healthcare will be produced; and the greater resources and incentives there will be to improve healthcare goods and services. Just as important, the less profit that’s available from the innovation and provision of healthcare, the less innovation and provision there will be.
CONSUMERS: From the healthcare consumer’s perspective, when a person or her family needs healthcare, few things are as important and pressing as acquiring healthcare. Consequently, people are willing to give up or forego many other things when someone’s health is in jeopardy. On the other hand, everyone prefers to give up as little as possible to gain the things they want, including healthcare. In addition, while people are willing to give up a lot for healthcare, they generally are not willing to give up everything they have for healthcare (and buying health at a cost that leaves no money for other things, including food, shelter, or clothing, can be a bad choice). Additionally, the most important economic consequences of this are: 1) the less a person must give up to get the things she wants (e.g., healthcare), the more of those things she will consume, and 2) on average, the more things people have to relinquish in order to acquire healthcare, the more likely they will be to do what they can to avoid the cost of healthcare (including adopting healthier and safer lifestyles), i.e., the less healthcare they will consume. (Note: This is one main reason that extra taxes are imposed on cigarettes – to encourage healthier lifestyles and a lower consumption of healthcare.)
THE CONSEQUENCES: If unicorns dined exclusively on rainbows and pooped money and the government had a large enough stable of unicorns, the fact that neither the pre- nor post-Obamacare systems did much to induce less demand for healthcare would be a non-issue. The government would just make sure it had a large enough stable of unicorns to induce healthcare producers to produce enough healthcare. Inasmuch as the cost of healthcare is huge and there are no unicorns, however, what the government does with respect to healthcare has a huge impact on the delivery of healthcare, the pace of innovation in medical treatments, and the economies and people’s health in the U.S. and around the world. This means that we had better come up with a good set of tradeoffs.
The immutable reality of healthcare is that the demand for partially or fully subsidized healthcare (nearly or fully free healthcare) is exceedingly high while the amount of healthcare that will be produced free or nearly free (or even below the cost to produce it) is exceedingly low. The same is true of food. A big difference between the purchase and sale of food and healthcare is that food is, for the most part, purchased in a vastly freer market: i.e., there are many fewer subsidies for and government tinkering with the manufacture and delivery of food than the same for healthcare (and subsidies are only available for poor people and are funded by general government funds instead of other purchasers of food insurance). Food transactions are between the buyers and sellers of food – with the buyer bearing the costs of her decisions as to what she can and should afford. (Other big differences exist, but they are not relevant to this discussion.) While some people shop for food at Walmart and others at snooty gourmet stores, for the vast majority of people, there is a large supply of life-sustaining food at prices they can afford. For those who cannot afford food, there are charities and welfare programs to address that problem. As a result, obtaining food is easy and reliable because food is accessible and affordable to everyone (or to as close to everyone as the government can be expected to achieve).
The salient point of the previous paragraph is that the country has not messed up its food delivery systems by turning them into welfare programs. The food delivery system works much better than the healthcare system because the government has stayed out of the production and delivery of food to a significantly greater extent.
So, for some inexplicable and serendipitous reason, politicians appear to understand that not being able to afford food is a welfare problem rather than a food delivery problem. As a result, they have kept their sticky fingers (some of any money that passes through the government tends to stick to the politicians’ fingers) out of the delivery of food. For an all-too-explicable[i] and premeditated reason, however, politicians have treated the problem of people who cannot afford to buy healthcare as a healthcare problem, i.e., not the welfare problem it actually is. The confusion of healthcare with welfare by politicians and pundits has mired us in nearly hopeless confusion and bad public policy and policy proposals. If Americans do not wise up to this confusion, things will continue to get worse.
In sharp contrast to food, most purchases and sales of healthcare take place in highly regulated markets in which intermediaries (insurers, employers, government bureaucrats, and politicians) involve themselves in the acquisition and delivery of healthcare. So, unlike freer market transactions, the cost of “healthcare” includes payments to multiple intermediaries who are not providing healthcare. All of these third parties add thick layers of costs to the cost of purchasing healthcare.[ii] That adds greatly to the cost of healthcare, but that is only one of the problems with the government’s involvement with healthcare.
In addition to adding layers of costs, the process of siphoning off so many healthcare dollars to intermediaries creates other huge problems. Perhaps the biggest issue is that it reduces the amount of money received by the healthcare providers. This is a problem because with less money to be earned from providing healthcare, less healthcare is produced, i.e., healthcare is scarcer than it would be without the intermediaries. The scarcer something is relative to the demand for it, the higher its price will be. (No man-made law can overcome this immutable law of economics.) So the presence of intermediaries not only adds layers of costs, those costs are layered on top of artificially heightened prices because of the siphoning of money to intermediaries.
Siphoning: Another big problem is that, when the government sets the rules of money flowing from some parties to others, how these rules are written and enforced makes a huge difference in where the money flows. When the government controls the flow of money, it can be profitable for businesspeople to do what they can to cause lawmakers and regulators to make and apply rules that send more money toward their businesses. The government exercising power over the flow of money not only invites corruption and costly lobbying, it welcomes and encourages it. Businesspeople paying politicians (via campaign contributions or otherwise) increases politicians’ chances of getting reelected. The richer the big companies become, the more money they will have available to give to politicians. This creates an unvirtuous cycle by causing politicians to do even more favors to induce more campaign contributions. The accumulation of special advantages from regulatory schemes confers monopolistic powers to large healthcare companies (enabling overcharging) – which leads to more healthcare money being siphoned off from the provision of healthcare to company profits and campaign contributions. The more the government gets involved in healthcare, the more healthcare dollars get siphoned off to things other than providing and inventing new and better forms of healthcare. In short, government involvement greatly increases the cost of healthcare.
There are negative consequences of giving welfare money to people who cannot afford healthcare, but doing so would cause healthcare to be much cheaper than is the case under the current system.
The artificially high demand for healthcare caused by subsidies to patients[iii] also artificially increases the cost of healthcare. In a system in which 1) people rely exclusively or to a great extent on others (e.g., employers or the government) to pay for their healthcare and do not directly bear (or even perceive) more than a small fraction of the total cost of providing the healthcare they consume, and 2) much of what they pay for healthcare does not reach the healthcare providers (because of siphoning), people’s unconstrained demand for healthcare will always be greater than the constrained supply of healthcare. (The supply of healthcare is constrained by the fact that providers must be paid in order to buy and maintain equipment and facilities and hire highly skilled people to provide the healthcare.) This causes the cost of healthcare delivery to increase because of the excess of demand for services relative to the supply of people willing to provide services for what little is left after all of the siphoning.
Note that whether people do or do not have a “right to healthcare” is irrelevant to the economics with respect to the provision of healthcare. The immutable economic reality is that if healthcare is to be provided, the money needed to produce its production must be paid for with funds that could be used for other beneficial things. If the costs of healthcare are unnecessarily high, the amount of money that must be withdrawn from wealth-creating activities and spent on wealth consumption increases. As discussed in my blog on “Wealth,” shifting resources from wealth creation to wealth consumption slows the rate of wealth creation, and slowing the pace of wealth creation creates a separate set of problems both in healthcare innovation and elsewhere.
In short, the cost of spending money on healthcare is exceedingly high, especially in terms of the kind of world we will deliver to our children and grandchildren and their children and grandchildren. For example, spending on the consumption of healthcare includes money that will not be used to invent and develop better medical treatments and other life-enriching things. Given such a high cost of spending on healthcare consumption, it is selfish and unwise to support policies that cause the cost of healthcare to be higher than it needs to be.
STRUCTURAL REALITIES OF HEALTHCARE: With the background presented above, we can now turn to longer-term structural issues related to healthcare.
The effectiveness (and therefore the value) of healthcare constantly improves. Technology is constantly making available improved lifesaving and life-enriching equipment, techniques, and drugs that enable people to live ever-longer lives. As a result, there are progressively more and better things to buy for one’s health, and buying them allows people to live on and consume healthcare that cures or ameliorates conditions that they would not have survived in earlier times. In other words, people consume exponentially greater amounts of more valuable healthcare over time. The per-person consumption of healthcare over a lifetime has increased significantly, and there is every reason to assume that it will continue to increase in the future (unless the government blocks people from obtaining healthcare or shuts down innovation in healthcare – which countries that adopted nationalized healthcare have done to a large degree). The amount of money needed to provide healthcare also rises as new devices and procedures become available. The number of doctors with the skills needed to deliver that healthcare also increases. It takes a lot of money to induce people to endure the many years of study and preparation and constant updating required to be a good physician; to pay for medical research and the development, manufacturing, and delivery of new methods and devices; and to pay for the buildings, equipment, and staff to provide that healthcare. In addition, because regulatory hurdles are constantly being raised, the cost of introducing improved treatments and drugs, and the risks of being sued for malpractice in the event of a mistake have grown, the cost of innovation has and will likely to continue to increase.
So, the more that medical treatments improve over time, the more valuable and expensive they become, and the more people will want medical treatments. Because of the higher cost and value of these wonderful new treatments, there will likely be even more people who cannot afford to defray the cost of their delivery. From a national perspective, we must multiply these multiplying costs by a growing number of citizens. Is any of the above a “healthcare problem”? No. It is a wonderful miracle and a blessing that medicine has so improved and that people can live longer, healthier lives. We must acknowledge, however, that these miracles and blessings to mankind[iv] are and will continue to be a growing welfare problem. This welfare problem will be made more costly if we continue using the same approaches to healthcare as are currently in place.
The government has promised, “It’s going to be — what my plan is is that I want to take care of everybody” (Trump). This approach, however, creates no limits or inducements to cause people to choose less healthcare and retains a high degree of government involvement in the delivery of healthcare. Therefore, the country probably does not have the financial resources to deliver on that promise without destroying the economy (which will lead to even fewer resources). If an insufficiency of resources is not true as of this minute, it will be so soon.
In conclusion of PART I, any alternative to Obamacare that enables everyone to have whatever healthcare they want at little or no cost to them will be both unworkable and unaffordable[v] and is funded and controlled by sticky fingered politicians subsidizes unhealthy lifestyles, would 1) raise the cost of the delivery of healthcare, 2) suppress the amount of healthcare produced, 3) suppress the invention of better medicine, 4) allocate an unlimited amount of the nation’s resources to healthcare – whether or not there are more urgent need for that money, and 5) would bequeath to our children a drained economy loaded up with event more debt and unfunded promises.
So how are politicians dealing with this reality? Stay tuned for Part II.
[i] Sadly, this is a politically acceptable (but deceptive) way for politicians to grab additional power for themselves.
[ii] That most people get health insurance through their employers is the result of government policy. How detrimental and costly that way of purchasing healthcare is, however, is the subject of a future blog. Do note here that the cost of groceries would be considerably higher and more cumbersome if they were being purchased through intermediaries. Note also that: 1) Much of routine healthcare that could be purchased directly is currently being purchased through insurance companies – much of which is purchased by employers; and 2) The cost of medical procedures that are not covered by insurance (such as Lasik and cosmetic surgeries) has fallen rapidly over time as the quality of the results has improved. Compare and contrast that to healthcare bought through insurance companies.
[iii] Unlike most government subsidies, which are funded by general funds, the subsidies provided to those who cannot afford or are ineligible to buy health insurance through Obamacare are designed to force some healthcare insurance purchasers to pay for insurance coverage that they cannot use and to overpay for insurance that they could but probably won’t use.
[iv] The medical treatments, devices, and drugs, most of which are developed by U.S. companies, eventually become available to people around the world. Without the fountain of U.S. medical research and development, most of the recent advances in medicine would not be available to anyone in the world. (Germany used to be the world leader in medical research, but the German medical industry has become too regulated and socialized to retain that position.)
Note also, much of the medical research and development in other countries is justified only by the expectation that wealthy Americans will pay market prices for the good ones (something their nationalized healthcare system will not do), i.e., those drugs would not be invented absent wealthy Americans willing to purchase them.
[v] By “unaffordable” I mean that the country will not be able to afford it. The federal government could not afford to do all that it was doing back when Obamacare was enacted (in fact, it was over $13 Trillion in debt and it was annually spending about twice the amount of tax revenue it was collecting – and none of its unfunded promises to pay even more in the future were not included in the national debt figure). Taxing more would suppress the economy even more. A suppressed economy would result in fewer jobs (when we need more jobs), which would lead to fewer taxpayers and more people in need of government help.