Kimball Corson's  Instablog

While many have strong feelings for or against the proposed Health Care bill, few understand the economic issues involved or even what the bill contains. As of now, we are the only developed nation without a national health care program. Yet, we spend almost 19% of GDP on health care. Even so, according to recent polls, only 5% of Americans believe that the health care system we have is workable or working. The situation is a colossal mess and it reflects badly on us and our understanding in the eyes of the civilized world.

To start with, free markets do not work in the health care area. Nobel Laureate Kenneth Arrow showed us that and how, many years ago. Absent free markets that function properly, it is clear that government has to be involved to assist in achieving results similar to what we might get from free markets if they could work in this area, that is, cost effective and efficiently provided medical care.

The reason markets do not work properly is two-fold (1) the varieties of uncertainty involved are too great for free markets to handle, and (2) doctors feel morally obligated to treat whoever comes to them, regardless of whether they can pay. Consider first, the varieties of uncertainty involved in purchasing medical care. One, you don’t know when you are going to need it. Two, you don’t know what type of medical care you will need. Three, you don’t know who (what specialist) will provide it. Four, you don’t know whether the proposed treatment will be effective or whether further treatment will be required. Five, you don’t know what the medical care will cost. Six, you do not know where you will be when you need it.

Such price and product uncertainty are enough to cause any market to malfunction, but add in the remaining elements of uncertainty and  free markets have little chance, especially given the possible magnitude of the expenditure by a person, which can rival buying a house. Then, in addition, we have doctors who refuse not to treat those within their purview who need care. Just making it to an emergency room usually assures treatment regardless of capacity to pay. All of these factors together destroy the free market mechanism for efficiently allocating resources in this area at minimal cost. That doctors practice or try to practice medicine to a uniform, single standard of care further compounds this problem.

As a result of doctors’ refusal to not treat, we have the ensuing situation of paying patients being subsidized by those who can pay or are insured. This cross subsidization in large measure accounts for hospital bills to patients and insurers being so high. Call it socialism of a sort, if you will. Excessive compensation to doctors, who run many hospitals economically as though they were doctors’ cooperatives, accounts in further part for high treatment costs. The AMA has worked dutifully for years to restrict the number and expansion of medical schools and the supply of doctors. State licensing requirements have additionally involved the same ends.

Then, into this mix, we throw health insurance companies seeking to make a good profit and the problems become compounded. Insurers would like to insure only the young and healthy, screening aggressively for pre-existing illnesses and denying coverage to the elderly, even if they are healthy. Now, the recession has added a new twist. Many of the young and healthy cannot now afford health insurance and so they are dropping it, leaving a higher percentage of those sick or ill among the insured. Insurance companies now feel compelled to raise their rates and are doing so by as much in some instances as 35% to 50%, but then even more young and healthy drop their coverage and the situation is spiraling out of control. Some insurers now think national health insurance is necessary. Nearly everyone seems to agree that the present system is not workable and cannot survive.

While people face excessive uncertainty as individuals, and so do free markets, in trying to address health care needs under the free enterprise model, the situation is different at a macro level. If everyone is included in coverage, then the law of large numbers kicks in very aggressively and, with some time and experience, we can develop very good estimates of the number of different treatment types and profiles the public will require. We can also estimate aggregate costs and by experience and regulation based on that experience, come to control medical costs quite well. Doctors themselves control quality or the standard of care, for the most part.

To some extent, of course, large insurance companies have the advantage of the law of large numbers as well, at least when the market for health insurance is stable, which it has not been for a while now, for reasons I have explained and for other reasons as well. Insurers’ profits are under fire. So are doctors’ salaries. But adjustments in both these compensations are in substantial measure required if we are going to provide cost effective and efficient health care. Medicare payments are in the process of being reduced by 20% and there is the expectation that insurance companies might well follow suit, as a means of controlling their cost.

Expect much shouting from doctors, however. But they have taken advantage of their oligopolistic pricing, afforded by the AMA, for too long and it is time to get serious. If the problem is medical school costs are too high, more such schools, a bit of competition between them and substantial tuition aid with a service requirement taken back, is a good means of handing the adjustment required in doctors’ salaries. While most don’t, many doctors do earn between $500,000 and $3 million a year and think of their practices as businesses to earn a profit. This viewpoint and these compensation levels are inconsistent with cost effective treatment provided in an efficient manner.

How to proceed now with national health care is the question. Watching law being made, as the old saw has it, is too much like watching sausage being manufactured  -- not a pleasant sight, nor  a principled one. What the proposed health care bill attempts to do, in every way possible, is to get everyone under the tent of health care coverage initially or as quickly as possible, and then sort out many of the smaller details based on present knowledge and future experience as we go. Getting everyone covered is no small feat, but that prospect now appears at hand, as we are about to have a national health care system for the first time, befitting our position as a developed nation and world leader.

Republicans are uniformly opposed to the health care bill and predict that with its adoption, the end of the world will be on us quickly. Most Democrats are already on board. A few of the more conservative ones had to be rounded up, like runaway calves.  Points to keep in mind here are that (1) virtually no one thinks that the health care system we have is working or workable, (2) 83% of Americans believe, based on a recent poll, that lawmakers in Congress have not been doing their job, and (3) we need to do better than spend 19% of our GDP on a system that is broken and does not work and does not help everyone.