The Supply and Demand of Health Care

It is often useful to go back to first principles when trying to discover the underlying nature of a problem. We have, ostensibly, a problem with the cost of health care. It is a cost that is growing faster than the rate of inflation. It has been suggested it will eventually bankrupt the nation. Medicare and Medicaid costs are going through the roof. The cost is a weight upon business and a worry for the population. The Obama administration and Democrats in Congress have proposed a very big and unwieldy instrument they argue will limit health care costs and bring them more in line with the rest of the economy. Their approach is wrong in a very fundamental way. It ignores the cause of the rise of health care costs.

All societies have a market. A market is nothing more than that mythical place where goods and services are exchanged. Excess goods and services from one person are swapped with another. Markets can be one of two basic types. They can be controlled or free. A controlled market requires a group or groups of people arbitrarily decide on the worth of these goods and services and require the buyer and seller adhere to these prices. A free market allows individuals to pick and choose from whom and what they buy and sell and the price fluxuates accordingly. Both have merits and weaknesses.

A controlled market relies on the controllers ability to measure and evaluate the supply and demand of a good or service. The more control these people have, the more they must weigh and direct the production and distribution of these products. The less control they have, the more they must rely on the market to self-direct and fix costs in an approximate manner. The supply and demand become part of the process

The supply and demand is the mechanism which fix the costs regardless of whether the market is controlled or free. The more supply there is of a good or service, the more there is for people to access. When supply ebbs, there is simply less of whatever it is to go around.

Demand is the need or desire of people for a product. The greater the demand for a product, the greater a supply is needed for it. If the supply does not meet the demand, the cost of the product goes up. If the supply outstrips the demand, the price goes down. The more supply, the lower the demand is in proportion to it. This makes the producers lower the price to compete.

Our health care system is partially controlled and partially free. Medicare and Medicaid are government programs that supply a great deal of demand. They arbitrarily fixed the prices they will pay for these goods and services at a level that isn’t ‘natural’ and is artificial. Because these programs are so huge and endemic, the health care industry is forced to accept their payments regardless of either the market or the costs actually associated with production. It creates a void. Markets abhor a void.

Because the health care industry must, in essence, subsidize their Medicare and Medicaid patients, they must raise the costs for other customers. But, other customers are also huge and powerful. Health insurance companies also demand lower costs and have tied their payments to the rates the government pays to health care providers. There is even a larger discrepancy now. Even more patients are being subsidized by the health care purchases of a shrinking group.

However, the market still demands equity. To keep the supply of health goods and services high, the accompanying costs rise quickly. It creates enormous pressure on all those involved. This pressure increases costs faster than other elements of the market because of the inequitable payments and the need for the industry to subsidize them. The costs are not ‘naturally’ high, they have been leveraged by the government and a few giant health insurers that can demand artificially lower costs.

The Obama administration and the Democrats are looking at the demand side of this equation. Their plan is to somehow artificially lower demand by picking and choosing what health care can be offered. This is the rationing part of their plan. They also want to sap demand by making people healthier. They propose to regulate behavior and environments in order to make fewer people need health care. Setting aside the moral questions on whether this is the right thing to do or not, there is the very real question over whether this would actually lessen demand at all.

On the supply side of the equation, the plan promises dramatic savings from fewer emergency room visits by those without health insurance and increased premiums from those who are currently outside the system. This, the argument goes, would provide more resources for the health care industry driving down the costs by increasing the supply. There is nothing but anecdotal evidence and speculation to support this idea. That is because most of the people now outside the system are simply paying for their own health care costs or declaring bankruptcy if it becomes to onerous. That is certainly not a promising pool of ready cash.

When you look at the equation as simply supply and demand, the most promising solutions are those not readily apparent. Everyone is looking so intently at the demand side they are practically ignoring the supply side. If we created a greater supply of health care and took off the controls, it would grow explosively. That supply would necessarily drive down the costs because the market would be saturated. We have an artificial cap on supply now. There are three important caps that restrain the unfettered growth and subsequent lowering of prices.

The first is the biggest hurtle. The government has to begin paying market, not arbitrary, prices for health care. They must shop for savings and not dictate them. This would create an incentive for health care companies to find innovations and thrift where needed. Lift the restrictions on hospitals and let entrepreneurs build smaller, more flexible care centers instead of the behemoth enterprises protected by government. Have health care professionals charge their rates and negotiate, not demand, savings. They will create new products to accommodate these situations more fluidly.

Next, empower individuals with products they manage. Individuals can find deals and savings the government and insurance companies could never find. Bureaucracies are notoriously inefficient at finding savings. In fact, a bureaucracy is designed to not cut costs, but increase its budget. Decrease the overall costs this overdone oversight has created. Make health savings plans work and major medical programs feasible by increasing competition by making them universal. State insurance restrictions limit companies and individuals by requiring coverages that may not be appropriate or desired.

Finally, to truly create more supply, the legal industry must be restrained. Tort reform would flood the markets with more, less expensive doctors and health professionals who have abandoned the industry. These people didn’t leave because they are quacks. They have left because the ponderous burden of ambulance chasers and bad actors.

Supply would quickly outstrip the demand we have in this country for quality care. That oversupply would bring down costs and create more health care for our population. Limiting demand is like pushing a chain. It just puddles the demand and does no work. We can do these things quite quickly. It would stimulate our challenged economy and put millions back to work. By using the market, instead of directing it, we will have a health care system that helps all and is affordable.