Senator Rand Paul has introduced an alternative bill to what he calls, “Obamacare Lite,” a.k.a. the American Health Care Act, introduced by House Speaker Paul Ryan. Paul’s criticism of Ryan’s bill was mild compared to Rep. Thomas Massie’s. Massie called Ryan’s bill a “stinking pile of garbage.”
While Paul’s plan is more free-market oriented than Ryan’s, no plan is addressing the one elephant in the room that must be slain before anything resembling a free market in health care can emerge: entitlements.
Distorting Supply and Demand
When demand significantly increases, supply and other factors being equal, prices go up. It’s Economics 101.
While Medicare and Medicaid’s effect on the federal budget is generally acknowledged, seldom mentioned is the percentage of overall healthcare spending that is tax-subsidized and the effect that has on prices. A study by the Georgia Institute of Technology 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.”
In other words, almost half of all health care purchases in the United States occur free from the two strongest price-limiting market forces: the freedom not to purchase and finite demand.
Yes, the patients have a choice of which medical services they utilize. But they don’t buy them; taxpayers do. And the taxpayers don’t have a choice.
Also, “demand” means not only the desire but the ability to purchase a product at a given price. I may want to purchase a Rolls Royce. But if I don’t have enough money, I don’t represent demand for a Rolls Royce.
Price is determined by the intersection of supply and demand. By adding over $1 trillion to total funds available for health care spending, government healthcare programs significantly increase demand. When demand significantly increases, supply and other factors being equal, prices go up. It’s Economics 101.
If half of all automobiles were purchased by government programs, the price of automobiles would behave just as health care prices do now. And politicians and other “experts” would be wringing their hands 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?”
“I’m entitled to higher compensation in return for the years of training I completed and the money I spent acquiring it.”
Invariably, opponents of these programs take the bait and respond as if government healthcare programs were solely entitlements for consumers. They’re not. They’re much more entitlements for providers, who believe they are entitled to fees their markets won’t bear.
Having worked in a past life with physicians, hospitals, and other providers for over a decade, I had a unique opportunity to understand their thinking (Disclosure: much of this time was spent in management positions at two of those “evil” HMOs). And while there are many exceptions to what I’m about to say, there are two things I found to be true about most physicians: One, they are among the most generous and compassionate people in society. Two, they share academia’s absolute contempt for the free market.
This results in a kind of Jekyll-Hyde approach to reimbursement. On one hand, a physician who encounters a patient with no verifiable ability to pay will nevertheless care for that patient, if the need is serious, without hesitation. Physicians and hospitals provide a considerable amount of care every year for which they are not paid, without complaint.
Yet the moment there is a payment avenue, that same physician suddenly loses not only his compassion but all connection with reality. Many were the times when a physician would say to me words to the effect of, “I’m entitled to higher compensation in return for the years of training I completed and the money I spent acquiring it.”
No, doc, you’re not. It is true that your skills are scarce and will fetch a higher price on the market than skills that are less scarce. But you’re only entitled to what others have agreed to pay you, like everybody else.
Free from Market Influence
This culture of entitlement extends throughout the healthcare industry. How many times have you spoken with the billing manager for a hospital or medical practice who makes some form of this passive-aggressive complaint: “Our billed charges for this procedure are $835.00, but your insurance only pays $520.”
The most effective way to normalize pricing would be to abolish Medicare and Medicaid tomorrow.
I’ve taken to responding, “Yes, I know how you feel. My billed charges to my employer are $1,000.00 per hour, but my paycheck is only for what he agreed to pay me.”
I’m not suggesting physicians’ salaries necessarily must be cut to restore price reality to medicine. A free market may give them a haircut; it may not. But there are many costs other than the physician’s salary in delivering health care and there is no real pressure to improve efficiency in any of them.
As just one example, think about how many times you provide your health insurance information to your doctor’s office. They get it from you on the phone before even agreeing to make an appointment. Then, you have to write it on a paper form when you get 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. Who’s reading, filing and otherwise processing the paper form(s) and why?
Many medical practices run the way they did in the 1950s for one reason: they don’t have to change. Half their revenues are guaranteed, at any price, by a customer base that can’t say no. Grocery stores, which provide products even more vital to human survival than medical care, operate on razor-thin margins. Their prices behave normally when adjusted for inflation. No one seems curious about why that is.
Deflating Healthcare Prices
From time to time, proposals are made to phase out Medicare and Medicaid, the assumption being that there can be no major market disruption. That’s just another manifestation of the strange notion that medical care is in some sacred and holy category that more important goods and services don’t occupy.
Abolishing these programs won’t cut off granny. It will cut off McKesson, Merck and a lot of very wealthy physicians.
While there are plenty of government interventions on the supply side that artificially inflate health care prices, the most effective way to normalize pricing would be to abolish Medicare and Medicaid tomorrow. That would cut demand for those services immediately by over $1 trillion per year. With a significant decrease in demand comes a significant decrease in prices.
And guess what? 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. This may sound scary, but industries have demonstrated their resilience to disruption over and over throughout history. And we’re talking about one composed of people at the far right of the bell curve. All experience says the turmoil would be far briefer and less harmful than the hysterical predictions we can expect 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 physicians (who’d still be wealthy afterward) from the government till. We’d all be treated much more like customers by the people whose medical services we purchase and health 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.