Healthcare – The Monster Among Us?

The nation is politicized into socially bifurcated populations. One population expresses the fear that the very life saving services we hold dear has evolved into a monster among us delivering poor results and only government force can bring it under control. The second population is satisfied with the services and fear the recent legislative initiatives are a prelude to a European style takeover. Both are horrified by the rapid rate of price increases.

Nevertheless, this long term problem has all the earmarks of a breakdown in market supply and demand coordination. First consider the U.S. has experienced immigration enhanced population increases over the last twenty years. Second, employer provided insurance has evolved into mimicking a single payer system where people are behaving as if medical services are free, i.e., consumers face no penalty for using extra medical services resulting in overuse. These two reasons alone, has put us on a very long and dangerous economic path where the growth in demand outpaces growth in supply.

The roots of this crazy system go to WWII when wages were frozen and firms would use free Medical Insurance to entice potential employees. From when The IRS ruled it was a tax free benefit, employer provided insurance became a creature of the tax law.

In the 1960s, Medicare/Medicaid was legislated as single-payer systems adding additional demand. Today, these two programs have grown to provide one-half of the dollars flowing into the system.

On the eve of immigrant enhanced population increases, the Reagan Administration was sold on the idea that medical schools were graduating too many doctors and the administration should use its licensing power to reduce new graduates. The AMA is a powerful lobbying organization and it’s in their interest to limit supply increases, to insure higher fees for its members. Subsides, controls, and import regulations usually serve to protect existing businesses from the need to compete with new rivals, new services, and new ways to do business. The application of these economic regulations will always get a cheer from established businesses which became painfully clear during the recent legislative initiates on healthcare. For example, to build new hospitals, entrepreneurs are faced with overlapping Federal and State regulations, among them the  necessity to  obtain a government issued “certificate of need”. It isn’t possible to establish the supply side effects of all this regulation, except to say it attracts a lot of attention by special-interest groups.

Hence, the slow evolution of single payer behavior in the private sector; and of single payer Medicare/Medicaid in the public sector; government engineered supply shortages, have all combined to seriously unbalance the medical industry with excess demand resulting in ever increasing price levels, leaving government rationing to avoid any brutally twisted allocation distortions that are sure to emerge from this situation.

Why has the market failed to coordinate increased demands with increased supplies? Why haven’t high prices reduced demand? Why aren’t investors responding to the high prices with sufficient new investments? Whatever the answers, demand cannot be greater than the supply without creating shortages that must fall somewhere, and is at the center of this nasty political firestorm of who is to suffer the shortages?

Why should a person lose healthcare insurance when he/she changes (or loses) employment? Eliminate the income tax distortion and let people buy their own policies with before tax income. Employers could continue to provide the insurance or alternatively move this expense to the paycheck, where the employee buys it directly.

Eliminate economic controls; licensing of medical schools, hospitals, pharmacies, and medical doctors and other health-care personnel. Retain the parts of these licensing procedures that insure competence.. These actions will free up and allow for the badly needed supply side expansion, reducing shortages and begin to bring down these high price levels. Tort reform would have a similar effect by raising real incomes to physicians encouraging increases in medical students’ enrollments and reduce and maybe reverse the scary trend of physicians either leaving the business or switching to part-time[ii], particularly OB/GYN practitioners.  

Deregulating the insurance industry would have a big effect on cost and overuse. Allowing interstate competition might be the only way to reduce insurance mandates by forcing the state “regulators” to compete with each other for the most sensible set of mandates as determined by a free-to-choose public and away from the special interest driven state legislators.

In summary, stop moving the service decisions toward government and away from consumers. We urgently need to start moving in that other direction.