Thursday, July 3, 2008

Economics Dictate the Health Care Solution

The fact of the matter is that many Americans feel that the price of health care is too high. Lawmakers and pundits have confused this problem with the price of insurance, but that price is secondary to the high cost of health care.

Why then, is the cost of medical care high? Let’s boil it down to the simplest answer. Economically speaking, medical care, like all other commodities, is scarce. It is limited. Like every other good or service on this planet, there is only so much medical care to go around. There are only so many doctors who can work only so many hours. There is only so much staff to help those doctors. There are only so many pharmaceutical companies making so many medications. The price of health care reflects this scarcity.

Realizing that commodities are scarce is the bedrock concept of economics. Only accepting the fact that health care is a limited or scarce commodity and understanding its implications will allow Americans to crack the nut of health care prices.

Such a degree of emotional irrationality has been connected with health care, that let’s simply refer to it as Commodity A in this commentary. Commodity A is expensive because it is scarce. What can be done about it?

First and most obviously, we can produce more of it. To produce more of Commodity A, America needs more physicians, nurses, medical staff, pharmacists, chemists, research, chemical resources, etc. It needs more educational institutions and it needs greater focus from the consumer population. Without going into long economical explanations, we can with complete assurance say that if the market is undisturbed by external tinkering and if health care remains a priority for American consumers, then more of Commodity A will be produced. It’s availability will increase, scarcity will decrease, and prices will drop.

What else can be done to deal with the scarcity of Commodity A? Let’s think of a shortage in another commodity, say oil. That’s one we can comprehend. If America was faced with a shortage and thus high prices in oil, how would consumers respond?

Americans might be a little bit slow to respond to the price changes at first, but they would eventually become more frugal in their use of oil. They would try to use less of it. The high price of oil would force them to determine which uses of oil were most important. Is the use of oil for heating important? Is the use of oil for transportation important? Are there substitutes for oil that might be more cost efficient?

Compelled by high prices to make responsible decisions, American consumers would decrease their dependence on oil. They would find other fuels for transportation. They might decrease their overall need for transportation, perhaps by working from home and carpooling when necessary. They would find new ways to heat their homes and produce synthetic goods.

It may require a lifestyle change, but through conservation and substitution, Americans would reduce their need for oil if prices stayed high. Demand would decrease. Supply will be better suited to meet demand and the price of oil would fall as suppliers were forced to entice a now diminished number of demanding consumers. The oil crisis, if that’s what it is, would be over.

Let’s assume that the market for Commodity A were similar to what it is for oil. Commodity A is limited. The product is scarce. Demand exceeds supply and as a result, prices go up. American consumers for Commodity A are forced to start making decisions. How important is Commodity A to them? Are there ways that they can reduce their need for Commodity A? Are there substitutions for Commodity A? Are there some uses for Commodity A that are more important than others?

American consumers might be slow to respond and adjust, but they would be compelled by the high price of Commodity A to start making responsible decisions. They would find ways to decrease their dependence on Commodity A. High prices may compel them to better eating, exercise, reduced alcohol, tobacco, and other drug consumption. High prices would compel them to determine which uses of Commodity A were more important than others.

Eventually, through conservation and substitution, overall dependence on Commodity A would decrease. As demand fell to more closely match supply, scarcity would decrease. Prices would drop as suppliers were forced to entice a now decreased demand. The health care crisis, if that’s what it is, would be over.

Unfortunately, it is the sad truth that the market for health care (calling it now by its true name) is not a normal market. Americans have attempted to insulate themselves from the price of health care in order to avoid tough decisions about substitution and conservation. They try to avoid allowing cost to play into their health care decisions. They argue that health care should be obtained regardless of the cost and then complain about the cost.

Their philosophy is apparent in the health insurance industry. Americans choose comprehensive insurance plans that cost more than the actual price of health care, but allow them to be insulated from and thus escape facing the cost of each purchase of health care. Americans on comprehensive health insurance plans often behave as though health care were not a scarce commodity. They make office visits and obtain procedures without regards to cost, trying to "get their money‘s worth," since they have already paid their premium. As they use up available health care, scarcity increases. Supply decreases. The price of health care and thus their insurance premiums go up.

The philosophy is apparent in Medicare and Medicaid. Americans are opposed to certain populations going without health care. These populations are insulated from cost or even given free health care. As a result they do not seek substitution or conservation as they otherwise would and consume health care at an increased rate. The scarcity of health care increases. Supply decreases. The price of health care goes up.

Many politicians propose solutions to the “crisis” in health care. Such solutions generally involve more extensive insulating of consumers from the price of health care. For example, Hillary Clinton proposed that all Americans have access to the same level of health insurance that members of congress receive as a means of bypassing price and increasing access to health care. However, it is apparent that such a plan would only encourage an increased consumption of Commodity A. It does not address scarcity, nor encourage conservation or substitution for the commodity. Supply decreases. Scarcity increases. The price of health care goes up.

The same result can be anticipated with any plan to socialize health insurance or directly socialize health care. Any plan that treats health care as if it weren’t scarce will increase its scarcity. Price fixing, price subsidization, and increased numbers enrolled in Medicare and Medicaid- all these will encourage consumption, increase scarcity and thus raise the price of health care and likewise insurance premiums.

So, what can be done to decrease the price of health care? Of course, supply should be and is increasing. However, a rescue by increased supply will seriously lag as it becomes apparent that government tinkering in the market will increase.

The principal solution for the scarcity and thus the high price of health care is found in allowing the consumer to be exposed to and thus compelled by high prices to make responsible decisions about health care. There is no terror to be found in conservation and substitution. Consumers will face the scarcity in health care as they do with any other commodity- by limiting their use of the commodity to the most important purposes. As consumers shoulder this responsibility, they will find financial prosperity, increased health education, and an overall increase in good health.

And of course, demand will decrease. Scarcity will decrease. Supply will be better suited to meet demand and suppliers will be compelled to entice consumers to use their product. And the price of health care will fall.

Rusty Scalpel


Stephen Gashler said...

This is a well-crafted article. Very insightful. More people need to read this. But I'm not sure about the conclusion:

"Consumers will face the scarcity in health care as they do with any other commodity- by limiting their use of the commodity to the most important purposes. As consumers shoulder this responsibility, they will find financial prosperity, increased health education, and an overall increase in good health."

The reality is, health care isn't like any other commodity and hence it is so universally treated differently. Compare it to food. If we live a padded life, we can afford Lucky Charms. For us college students, we may have to downgrade to Marshmallow Maytees to get by. But as far as nutrition (in America at least), even the most destitute, by conserving and substituting, can usually maintain a reasonably healthy diet (whether or not they do).

With health care, this argument only goes so far. True, the unhealthily reliant on health care (irony intended), who consume it as an administer of placebos, could do to back off and take care of their own health. But when the human body malfunctions, such as when my baby turned out breach, we didn't have the option of choosing the standard, silver or premium C-Section, we just needed a C-Section, and we needed it right then, notwithstanding the unforeseen thousands of dollars it would throw our way. I believe that the anticipation of detrimental blows like this is why most people insulate themselves with health insurance, not so they can frequent the doctor to their hearts' content (though I'm not dismissing that demographic).

If anything, it seems that until some serious dissolving of federal regulation takes place and some very serious decentralization of the industry is born through competition, a more common reality to your conclusion would be just the opposite, that in order to change the economy, the majority of people who do not abuse health care but rely on it for emergencies will either have to seriously jeopardize their health or occasionally take very hard financial blows. And who's willing to be the pioneers here? Who's going to let a few of their babies die in order to boycott the industries and lower the prices?

As I see it, we're in an inescapable Catch 22 until the AMA in shut down and the market is granted complete freedom. No easing in or easing out is going to work, it calls for revolution.

stephen said...

a perfect article. very thoughtful and well explained must read for everyone.