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The Health Care Reform Agenda (Revised Version)

While many have strong feelings for or against the initial health care reform legislation, few Americans understand the economic issues involved. Popularization of the economics of health care has been neglected. This is one reason reform has been so difficult.
1.  Why health care reform is necessary.
Before passage of the New Health Care bill, we were the only developed nation without a national health care program. Yet, we spend 16% of GDP on health care. That is almost 1/6 of our entire economy, as measured by GDP. It is as large as our housing sector. Yet little is written here or elsewhere for the public to understand the issues and economics involved with the sector. Housing, on the other hand, gets lots of ink.
However, according to recent polls, only 5% of Americans believe that the health care system we had was workable or working. This can in part be seen from the Congressional Budget Office's (CBO) projections for the old health care system. In the absence of the changes in federal law, that is, the heath care reform just passed:  
 
1.  Total spending on health care would rise from 16 percent of gross domestic product (GDP) in 2007 to 25 percent in 2025, 37 percent in 2050, and 49 percent in 2082.
 
 2.  Federal spending on Medicare (net of beneficiaries’ premiums) and Medicaid would rise from 4 percent of GDP in 2007 to 7 percent in 2025, 12 percent in 2050, and 19 percent in 2082.
Between 2000 and 2005, insurance industry administrative overhead – including both administrative expenses and industry profits – increased 12% per year. Premiums have skyrocketed, increasing over 87% over the past six years. What is going on in health care is America's dirty little secret. Those raking in the money and their friends don't want the word to get out or any reform to pass -- just say "no" has been their position. The problem is they have over reached and the present situation is obviously not a viable prospect and most seem to understand that intuitively, except those wanting to maintain the status quo and the profits it affords.
2. The health care problems we face.
The problem is optimal effective reform is not possible until people understand specifically how the markets in this area are in fact distorting resource allocations, at the most basic level, theory aside as I have learned. Consequently, most people’s proposals for reform or change are (1) non-existent or (2) incoherently all over the place. There is little understanding or agreement. Some even urge the old system that 95% of Americans correctly recognize is malfunctioning!
Among the public and politicians there has been too little practical understanding of the problems in the markets involved and even less useful thinking about how to fix them by what has to be government intervention to produce the kinds of results obtained in other areas of the economy by free markets that work, i.e., good resource allocations and cost effective pricing.
The reason the Republicans lost here is (1) they are apologists for and sometimes enablers of excessively high prices in the relevant markets; (2) many don’t understand the problems of markets in this area. (3) they made no systematic and sensible alternative proposal for reform, especially reform that included protecting those not receiving adequate medical care, and (4) by just saying “no,” to any reform proposal they cast their lot with the old health care system that 95% of Americans recognize was not working. This was not the best way to go.
The problems the old health care system faces are clear, although few wanted to admit them and even fewer understand them as an interactive package. They are:
     1.     Excessive oligopolistic pricing of health care and malpractice insurance by insurance companies ineffectively regulated by the states, but which are exempt from the antitrust laws and which are relative few in number because they have eliminated their competitors (There have been over 400 health care mergers in the last 10 years and just two companies dominate a full third of the national market.);
     2.     Some patients being treated for free creating a cross subsidization in their favor on hospital charges and doctors fees and against those who are insured or pay for their own treatment;
    3.     Excessive prices for doctors’ services (a) due to AMA restricting number of doctors by restricting number and size of medical schools*, and (b) due to excessive charges for malpractice insurance for reasons cited in (1) above, causing (c) too much expensive, defensive medicine being practiced by doctors which is not cost effective, and (d) due also to an excessive paperwork load on doctors that cuts into to their treatment time and compensation.
    4.     Lack of systemic incentives to practice preventive medicine;
    5.     Drug companies engaged in fraud (e.g., Pfizer, repeatedly), oligopolistic over-pricing and other misdeeds and abuses; and
     6.     Inadequate economies of scale in the treatment of patients, including underutilized facilities, due to so many being excluded from the medical care treatment system because of (1) and (3) above.
3. The health care reforms at hand.
The question has been how and where to have the government intervene, but it is now with a new wrinkle: as a matter of public social policy, it has been determined that “everyone” is to be covered by health insurance for medical care.  No one is to be left uncared for. This is a quantum leap because, under the old system, over 45 million Americans—including over 8 million children—lack health insurance and 80% of the uninsured are in working families. A good part of that omission however was due to the failings of the markets involved.
In other words, we have two proposals at hand, (1) intervene to correct the markets’ misallocations in the area, and (2) try to expand and extend medical care to everyone by extending insurance coverage for all. The two goals are very much related and interactive, given the problems in the relevant markets.
The needs of the system to emulate free markets are simple but not that easy to implement because of seriously entrenched economic interests that profit from the status quo. That is part of the reason issues have been confused and opposition has been so strong to the changes coming.
In a nutshell, the reforms needed are:
    1.      Insurance premiums for both health care and malpractice have to drop to more competitive levels, which will be easier if more people are insured, malpractice claims are reduced, doctors cut back on practicing defensive medicine and the government aggressively applies the antitrust laws and laws of unfair competition and establishes an insurance exchange to force competition and make it easier to shop for insurance based on rates and coverage;
    2.      Doctors salaries need to drop, medical schools be expanded, more tuition help needs to be available in exchange for service time, and doctors need to stop practicing so much defensive medicine and be more cost effective; Medicare compensations are already starting to be dropped by 20% to force the issue because it will take time for the number of doctors to change;
     3.     Malpractice suits need to be screened when they are filed to eliminate “strike suits” and frivolous or bogus claims so they are not an expensive and silly burden on the system;
     4.     People need to be able to buy their drugs worldwide at the cheapest prices; the antitrust laws and laws of unfair competition need to be more aggressively enforce against the pharmaceutical companies, with the term of patent protection individually tailored to actual R&D cost amortization and a reasonable profit for each drug and the drug companies need to get their oligopolistic prices down;
     5.     Outlaw drug companies from fraud, unfair competitive practices such as blocking or buying off generic drugs that would otherwise be available to consumers at much reduced cost and finally also allow cooperative drug purchases by groups at lower negotiated prices;
     6.     Have health care policies encourage wellness check-ups and promote preventive medicine similar to Kaiser Permanente because it is cheaper in the long run; and
     7.     Everyone needs to be insured and pay as much of their own way as they can, with taxes levied to make up the difference for those less fortunate financially, which taxes will be less than they otherwise would be because (a) premiums will be lower because (b) doctors will charge less, (c) hospital charges will be lower (no more cross subsidization), (d) the cost of medicines will be less, and (d) much greater economies of scale will be possible with more people insured.
This is a tall order, given where we are, but where we are is not a position in which we can remain. The system is interactive and if properly handled can be made to work, but expect continued fighting from those getting unfair oligopolistic profits from the status quo. They very much want to hang on to their ill gotten gains. Too, for the apologists out there who want us to stay put, it is important for them to know what is wrong with the system for they are apologizing. This is the basic, not so hidden agenda for health care reform at this point.
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footnote *

(Doctors per 1000 population
3.40 per 1000 people Germany
3.40 per 1000 people Austria
3.37 per 1000 people France
3.90 per 1000 people Belgium
3.82 per 1000 people Israel
3.60 per 1000 people Switzerland
3.20 per 1000 people Spain
4.20 per 1000 people Italy
4.50 per 1000 people Russia
4.40 per 1000 people Greece
vs.
2.30 per 1,000 people USA, on par here with
2.25 per 1000 people Slovenia
In “free” markets, it is simply supply and demand: fewer doctors => higher doctors' salaries that in turn means higher medical bills => higher insurance premiums => fewer people can then afford health insurance => fewer people insured => more people uninsured and without medical care.
Canada and the United Kingdom have 2.1 and 2.2 per 1000 respectively, for similar reasons, but both have national health care systems that cover everything for everybody (instead of the seriously malfunctioning “free” markets we have in the U.S.A.) and that are much, much more efficient at delivering medical treatment than ours because of massively less bureaucracy, overhead, red tape, hassle and paperwork.
If we wanted similar results to what they have, we could adopt either of their systems or some hybrid of the two. The core problem is entrenched financial interests have been making a ton of money off our “system” as it is and they don’t want any change. That is much more the problem than what changes should we seek. Because of the opposition to change, Obama has chosen the path of least resistance, politically, which is probably not optimal and will be much more time consuming to fully implement. America has a mean-spirited greed problem and it is not just limited to the medical area either. We are awash in too many "no's," lies, misinformation and the blocking of accurate information.) 

Disclosure: No positions.