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Nikhil Raheja
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Work in the Healthcare Industry. I have an interest in small and mid cap stocks, and buy them for the long term. Been at it for a couple of years.
My company:
kmnk
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seeking alpha
  • The Health Care System: A Manufactured problem 0 comments
    Aug 28, 2009 11:23 AM
     
                The Health care debate has assumed major importance over the last few months. The voting on the bill should be done at the end of September. The debate has taken huge turns has transformed itself into a much larger debate about whether the government should be involved in any social programs, including Medicare and Medicaid.
     
    Before beginning analysis of whether the bill should be passed, we must first determine the key cause of the need for government involvement in the health care system; extremely high health care costs. It is often stated that health care spending is unaffordable and the status quo is unsustainable. The statement is true on both counts. Health care costs are extremely high, not because the free markets are unable to lower costs for the needy, but because the free markets are absent from the health care sector. In any free market system, cost of a product/service is controlled by limited demand from the consumers and competitive forces amongst the businesses. In the current system, we lack the former.
     
    There are many reasons why health care costs in the country have risen so much. The most important one is the presence of the government programs, Medicare and Medicaid. Medicare provides free medical services to those older than 65, while Medicaid provides the same to people with lower incomes. Both programs are funded by the payroll taxes. These services are designed to meet almost all medical needs of the old and the poor, and that’s where the problem lies. Medical services are expensive, simply because the medical services are not a beneficiary of mass market production system that increases production enough to keep per unit costs low. Medical services are provided directly to the consumer by Doctors and Nurses, whose numbers cannot be increased with the press of a button. Hence if the demand for these medical personnel is to rise, supply would prove insufficient to keep costs lower. Since the customers of the Medicare and the Medicaid system are treated for all their illnesses for free, more medical services are utilized and hence the total costs rise. Also, since the beneficiaries need not care about the magnitude or the duration of the treatment, there often tends to be overuse of these services.
     
    Due to this overuse, the portion of the national income spent on health services rises. As a result, the total expenditure on health care in the US is 16% of the GDP, while the comparative expenditure in Canada is 10%. This may be counterintuitive since Canada, unlike the United States, has a 100% government provided health care system, so following the logic above about the high costs of Medicare, we would expect the Canadian health care system to be really expensive. However, that is not true since the fees and salaries paid to the doctors and other medical personnel in Canada are fixed by the government, so the costs can only rise so much even if the doctors are drenched with patients. To put this in perspective, imagine that the federal government of this country offered free movie tickets to kids under the age of 18. If this were passed, many kids would overuse the system and quadruple their movie watching. This will generate huge profits for Hollywood and the fees paid to the actors would rise. However, if the government stipulated the fees paid to the directors, actors, and the movie theatres, costs of watching movies could be contained.
     
                The other cause of high health care costs is health insurance. Insurance has historically been used in many sectors to protect against unseen, catastrophic losses such as insurance against fire, accidents, earthquakes, etc. Car insurance covers the individual against unforeseen accidents or thefts, but it does not insure against transmission problems, oil change or DUI. If it did, there would be misuse of insurance since people would expect the bills to be covered by the insurance company and hence be careless in the upkeep of the car and in driving. This would drive up the costs for the insurance company and it would in effect raise premiums. The only alternative would be to deny insurance or raise premiums for those with any “preexisting” history of negligence. If the insurance company did not do that, the insured individual would have no reason to keep costs lower. The insurance company can not be blamed since if the mechanic needs to be paid, then the money must be raised through higher insurance premiums. If such an insurance policy existed for cars, there would be overuse, and the car servicing industry would become huge and the mechanics would earn a lot more money. Sounds familiar? The same happens with the health insurance industry, where they cover all benefits including regular doctor visits. The problem would be less severe if the health insurance companies could deny coverage or raise premiums on those who overuse insurance, or else they would have to raise premiums on everybody. Under the law, an insurance company cannot deny health insurance to an individual under a group insurance plan, and hence the cumulative increase in employer-sponsored health insurance premiums have been four times the rate of inflation and wage increases during last decade, all because of the benevolent law.  
     
                Nobel Laureate in economics, Paul Krugman believes health care costs are high because of the use of expensive technology in healthcare. Strangely, that would be a case of the tail wagging the dog, since newer technology in health care is a result of the higher revenues in the health care industry, not the other way round. As the revenues at the hospitals rise, more and more technology companies position themselves to develop health care technology since their customers have higher paying abilities. As a result, a greater portion of the economy goes into providing health services. The rapid improvement in the health care technology and innovation in the US is largely attributed to the increase in health care prices.
     
     
    President’s Solution:
     
                President Obama would like to introduce the government as a health insurance provider, so as to limit the rise in premiums charged by the Private Health insurers. The private health insurers would then need to compete with the government to provide health insurance. However, past experience tells us that no businesses can compete with the government since the government can run perpetual losses, as opposed to the private sector. The insurance provided by the government would be kept artificially cheap despite rising health care costs, in effect providing an incentive to everyone in the country to buy insurance from the Government than from Blue Shield or Aetna. Once the government has established itself as the only health insurance provider in the country by undercutting every other provider, it would dictate to the doctors and hospitals how much to charge for which service. In short, the health care will have been socialized.
     
                Also, the employers will be told to buy health insurance for the employees or else pay an 8% penalty. As more and more people get covered under the government health care plan, the usage will increase and so will the costs, until it becomes feasible for the companies to pay the penalty instead of providing medical coverage. Most people would then move under the government plan, and the grasp of the government on the medical providers will become stronger, leading the way for price negotiations with the doctors and hospitals.
     
     
    Socialized Healthcare:
     
                The key elements of a government provided health care system are health care for everyone and price fixing. Since there is overuse under a free healthcare system, doctors’ fees and salaries are fixed by the government so the prices do not rise exponentially. Due to the overuse, the healthcare industry is always burdened with too many patients and too few doctors. To correct this imbalance, the number of doctors must be increased significantly, but that would also mean total expenditure on health care, which would stretch the government’s budget.
     
                Hence, the government always takes the easy way out and rations care. Also, the government faces other problems such as shortages of doctors in rural areas. In Canada, just 9 per cent of doctors work in the rural areas, servicing 21 per cent of the country's population. This is so, since doctors, like any other professionals, prefer to work in Urban areas, but in a free society, such a high supply of doctors in a city would lower the medical fees, while a shortage of doctors in a rural area would drive fees higher, hence providing an incentive to doctors to practice there. Unfortunately, this is not the case in a socialized health care system, where the doctor’s fees are decided by the government without regard to demand and supply.
     
                Most importantly, a society that premeditates the profits or salaries of individuals takes away the incentive to work hard. The best technologies of the world never come out of government owned institutions, but from private entrepreneurs trying to make fortunes for themselves. This idea is often overlooked while debating the disadvantages of a socialized system. It is competition that breeds innovation.
     
     
    Alternate Solution:
     
                The government should completely get out of the Medicare and Medicaid systems, and do away with the silly regulations that prevent insurance companies from denying coverage. Instead, the insurance companies should be encouraged to offer longer maturity insurance, which would promise to provide coverage for longer periods, for a fixed, predetermined annual premium. So for ex: An individual could buy health insurance for 10 years, at a fixed premium of $1300 per year, and the insurance company would not refuse the patient treatment even if the person fell terminally ill during the life of the insurance policy, neither would the insurance company raise insurance premiums during the term of the policy. However, insurance companies would have an absolute right to increase the premiums on those who overused their portion during the term of the previous policy. This way, the insured would have both an incentive to stay healthy, and also have the time to save enough money to pay for higher premiums at the end of the first policy period.
     
                This is not an absolute solution since many with terminal illnesses would be denied coverage at the end of the first policy period. But this will go a long way in reducing overuse, and ensuring most people are not denied coverage soon after having discovered that they have an illness. 
     
     
     
    Will Health Care Reform be achieved?
     
                Yes, some form of the health care bill should be passed by both the houses in the next 1 year. The mood of the people in this country prescribes radical changes in the economic and social environment, and this will get translated into a range of social welfare schemes, including health care for all.
     
    Ironically, as the stock market rose over the last few months, the president’s popularity declined. This is not surprising since the socioeconomic trends suggest that as inflation rises; people always tend to blame the government for it, and for good reason. They develop free market ideas and choose politicians that endorse those ideas. For ex: Ronald Reagan and his free market ideas became popular during the end of a long inflationary cycle that lasted more than a decade. It must be noted that President Obama`s help was much demanded by the people in the economic arena until March this year. This led to the passing of the Mortgage Bailout plan and the stimulus package. However, the turn in the stock market started the inflationary fears, and led to events such as the Tea Bag parties which protested high impending taxes, and the town hall meetings, protesting the health care reform, both aimed directly at the President.
     
    However, as noted in the previous article, there is no inflation coming in the next few years. In stead, the country should undergo a deep deflationary spiral, resulting in a decade long depression. During recessions and depressions, the citizens generally look to the government for support. As was the case during the Great Depression, when people embraced President Roosevelt’s social schemes, President Obama`s social ideas will be embraced by the country with open arms. His popularity would soar to the same level as that of Roosevelt and Lincoln. He would be the new age Messiah.
     
    Unfortunately, the policies approved by this president would be far more harmful than were those passed by Roosevelt. The government is likely to increase its debt over the next few years, eventually paid back through higher taxes on the rich. The rich, however, cannot be expected to stick around as they get pummeled by the President for causing the financial crisis, and then get taxed at high rates on their well deserved profits.
     
     
     
    Conclusion:
     
                Health Care for all is a wonderful idea, as long as those paying for the free health care are compliant and approving. However, it must be asked whether it is moral to force one group to yield its hard earned money to another group, because according to a few intellectuals, health care is a “right”. In addition, there is no way to keep everyone covered under Health care and keep the costs down, except through force and stipulation of salaries, and that lowers the incentive for innovation and the spirit of competition.
     
    The debate between Socialism and Capitalism is not necessarily an ideological debate, but about whether people work better under the care of the government or when they are free. There is nothing to indicate that socialism has worked anywhere in the world ever. Despite that, there is always a new generation of politicians that looks to it for solving economic problems. The ideas of these politicians are always noble, as are the politicians themselves, but what they lack is an understanding of history. Such politicians can never answer in a debate why China, Cuba, Russia, India and so many other countries remained poor after decades of applying the socialist ideas, but they would always plug their ideas in a new package filled with fresh dislike of the rich, calling it “Change”.
     
     

    "When the people find they can vote themselves money, that will herald the end of the republic." Benjamin Franklin
     
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