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Healthcare as an Economics Problem

Stethescope Money
Oh Google Images, you so wacky!
With the Supreme Court set to deliver its verdict on the constitutionality of certain controversial parts of PPACA (Obamacare) this week, it is important to take a step back and look at the entire healthcare debate from a more fundamental point of view. Most Americans and politicians--myself included--have been swept up in talk of rights, privileges, mandates, fairness, and the meaning of insurance, but few people have bothered to consider the problem from the standpoint of basic economics. Economics, for most people, is enigmatic and esoteric, but the great secret of the discipline is that, behind all the disarming jargon and complicated statistical analyses, economic theories are quite simple. For example, most of us have a hard time telling the difference between a scarcity and a shortage, but once you grasp the subtle distinction between the two, you will know more about economics than the average pundit.

A scarcity is a limited supply of something. For example, there is only a finite amount of silver in the world, so you can say silver is scarce, which is what makes it valuable. As a resource, silver has multiple uses, so any attempt to manage its scarcity and control where and by whom it is used requires the application of economics. Its value is what determines its cost, which in a purely capitalistic system would also determine its price. If somebody wants to sell you an ounce of silver at $27.40, that's because $27.40 an ounce is a measure of its value. At that price, silver manages to get to those who want or need it most without the scarce supply running out. The price changes because the cost changes; new reserves are discovered, better technology is developed to extract the silver, it becomes easier or harder to transport, there is a sudden spike in demand because some new device requires a large amount of silver, etc.

If the government wanted to do away with this and suddenly decreed that silver should be free for all, we would very quickly run out of it. People would take it, first-come-first-serve, and would then have no incentive to sell it. We would, as a result, have a shortage of silver. A shortage occurs when the demand for something is greater than the supply. This is the inevitable result when price is kept lower than cost. This is crucial to understand, because politicians often want to help the less fortunate by reducing the price of a good or service they require. If they do this without addressing the cost of that good or service, the unavoidable outcome is that there will be a shortage of it; there will be even less to go around than there was before.

The Silver Rush
...and then the apocalypse, the New California Republic, Caesar's Legion, super mutants, irradiated ghouls, giant ants, and so forth
So what does this have to do with healthcare? Put simply and generally, healthcare is a scarce resource. There are only so many doctors, so many MRI machines, so many drugs, so many nurses, etc. Therefore, there is an inevitable cost involved. If there is an economic healthcare problem in this country--and almost everybody agrees that there is--it is either because the cost is prohibitively high or because the price does not accurately reflect it.

If we assume the price of healthcare is higher than the cost, we must ascertain the reasons for it. In a properly functioning free market, competition is the primary incentive for sellers to keep their prices as low as possible. If McDonalds weren't competing with Burger King, Wendy's, and hundreds of other fast food joints, they would have no reason to sell their McChicken Sandwich for as low as 99 cents. The price of the McChicken Sandwich would then be determined solely by supply and demand, by how much people would be willing to pay. If people were willing to pay ten dollars, McDonalds would comfortably make huge profits and would have little to no incentive to change how they do business. They would stop taking gambles on new products, would stop caring if people wanted them to offer healthier options, and would stop trying to come up with new ways to lower the costs of production.

If this is what's going on with American healthcare, then the most logical course of action would be to improve competition, ensure that the healthcare industry is a race to see who can provide the best product for the lowest price. In order to do that, we must determine where the roadblocks to competition are and eliminate them as painlessly as possible. This is why some politicians talk about allowing insurance to be sold across state lines, allowing prescription drugs to be sold from other countries, and similar ideas. They are trying to increase competition in order to lower the prices of healthcare without creating a shortage.

If, however, we decided to legislate that healthcare prices must be kept below an arbitrary standard--if we assume that prices are only kept high because of corporate greed and that the only way to deal with it is to strongarm healthcare providers--the results would be as predictable as tomorrow's sunrise: both the quantity and quality of healthcare would go down. There would be fewer incentives to start up new healthcare enterprises and those enterprises that do survive would be so concerned with keeping costs down they would ignore the quality of their goods and services and would not invest any capital in developing newer and better healthcare.

PPACA Kindle edition
If you download this, your Kindle will commit cyber-suicide
The "contraceptive mandate" that was in the news recently is a perfect example. Forget all the talk about women's rights and religious liberty that people have been using to distract from the basic economics at work. The government wants birth control pills (and certain other things) to be available to all women free of charge. Any drug company that makes birth control pills will now get all of their money from insurance companies, who will refuse to pay more than they need to in order to satisfy the government demand without cutting too badly into their bottom line. Thus, there will be no incentive to produce newer or better forms of birth control, there will be no reason to get into the birth control market, nobody will be willing to invest in birth control companies, and the supply of birth control pills will rapidly decline once the mandate goes into full effect. In other words, we face a severe and permanent shortage. It starts with noble intentions, but the unintended consequence is exactly the opposite of those intentions.

PPACA is incredibly complex, dense, and enormous, but the central, driving concept of the law is that the government wants to reduce the price of healthcare without addressing the underlying costs. This is dangerous, because if the price of healthcare is not higher than the cost, all PPACA would accomplish would be to make healthcare poorer and less accessible; it would turn a blind eye to scarcity and thus create shortages. For every story about a disadvantaged kid with Type I Diabetes who is unable to afford insulin under the current system, there will be ten more as an ultimate result of PPACA. This is not a political talking point designed to scare people; it is simple economics. No matter what the Supreme Court ultimately decides concerning Obamacare's constitutionality, it will remain one of the most counter-productive laws ever passed.

[I must give credit to Thomas Sowell and his excellent book Basic Economics: A Common Sense Guide to the Economy, from which I shamelessly appropriated several of the ideas found in this article.]


-e. magill 6/26/2012










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Copyright 2012 e. magill. All rights reserved.