Ten Things That Truly Have Not Been Mentioned in the Healthcare Reform Debate

It is heartening to see the dialog over healthcare reform expand as the debate has heated up. In the past weeks some of the issues that I have discussed in previous blog posts (previous, previous) have started to get mention in the mainstream media such as Whole Foods' CEO John Mackey's Op-Ed in the Wall Street Journal. Yet despite the magnitude of discussion on radio, television, print and blogosphere I am surprised to find little or no mention of some salient points. So here are ten things that truly have not been mentioned in the debate about healthcare reform. Don't miss number 10 because it's the most important of all!

1) There are two separate economic systems at play within healthcare: normal and catastrophic

Not everyone suffers a serious illness but everyone needs healthcare. During the course of any year most people visit the doctor for routine visits or are prescribed pharmaceuticals either for preventative care or to take care of a chronic but not debilitating condition. A much smaller percentage of people end up receiving medical attention for emergencies or debilitating chronic conditions. The economics of these two situations are wildly different. The economics of supply & demand are in full effect for routine care whereas for emergency care demand shoots to infinity. The difference is in timeliness. For routine care (and even many elective surgeries such as hip replacement) individuals have enough time to price shop while, obviously, no-one is going to price shop from the ambulance bed. Discussions on the costs of healthcare tend to mangle these two disparate economic systems together and in doing so fail to adequately define the problem.

2) Very few people actually have health insurance

Most people have managed care. "Insurance" is only one component of managed care. True health insurance is found mainly in the high deductible plans associated with HSAs and typically only individuals purchase such accounts. The reason why individuals purchase health insurance and not managed care is obvious: it's cheaper. The reason why companies provide managed care is more complicated and involves state regulations, tax incentives, and the legacy of the "company man". Managed care is a much more complicated business than insurance. This is why you don't see many traditional insurance companies in the managed care business (Aetna is a notable exception). If such a thing as a wise politician existed they would note that government would stand a better chance of successfully operating the simpler of the two businesses.

3) Non-profit insurers already dominate the marketplace

Much of the rationale for the public option in healthcare is based on the theory that a public program would run more efficiently because it would not have a profit motive. This rationale falls to pieces when one notes that non-profit providers already cover 48% of all enrollees in the US. Kaiser Permanente, Blue Cross/Blue Shield and HIP are names almost everyone is familiar with. The rates provided by non-profits are usually very close to those provided by for-profit insurers although sometimes they are forced to operate with lower reserves due to state regulations.

4) Doctors operate as a legalized monopoly

There has been a lot of discussion about the multiple personalities that doctors must don. They are caregivers first but they also benefit financially when you get sick. This will never change because it is the nature of the profession. Less often mentioned is that the license to practice medicine is, in economic terms, a legalized monopoly. Hippocratic oath or not, the legalized monopoly artificially restricts the supply of doctors and allows them to charge high rates. While one may be thankful for the this regulation when it comes to picking a cardiologist one might not be so thankful when one is forced to pay more for a psychiatrist instead of a psychologist, an obstetrician instead of a midwife, or need to arrange an appointment to get a prescription of Ambien, Propecia or antibiotics. The American Medical Association (AMA) works quietly behind the scenes lobbying on behalf of doctors, mainly general practitioners who derive a significant amount of their revenue from routine visits.

5) Healthcare costs are a supply side issue

An important economic theory is that price is determined by the cost of supply. If I am making a high profit people will notice and enter my industry to compete. This will force costs lower. Eventually with enough competition my prices will fall to the slimmest acceptable profit margin over my costs, that is until there's not enough profit left to attract competition. Cost of supply is inevitable. It is sometimes slowed by monopolies, marketplace inefficiencies and government regulation but it is as inevitable as an object falling to the ground when confronted by gravity. Healthcare is always in high demand. It's no secret that as our demographics turn older that the demand is going up. The supply of providers is limited and therefore they are able to charge more. Doctors make good money. So do drug companies. Eventually more people will be attracted to those profits. By reducing regulations we could speed up that process.

6) Personal bankruptcy is keeping our costs lower

Some of the discussion involving the public option and the effect of achieving universal coverage is that many personal bankruptcies will be eliminated. The majority of personal bankruptcies are the result of expensive medical conditions. Unfortunately when you consider the cost of supply issue it can be shown that universal coverage will actually increase the overall cost of health care. Currently who pays the hospital bills when you file for bankruptcy? That's right. No-one. Those costs are eaten by the hospitals and doctors. One can argue that those costs are then baked in to everyone else's costs but this isn't really true. Bankruptcies simply serve to lower the profit margin on expensive treatments. Universal coverage will allow providers to get paid where otherwise they wouldn't. It would be naive to believe that they will be willing to lower their costs elsewhere as a result.

7) We've been through this before

Originally most corporations who provided health insurance self-insured. Self-insuring makes sense when a company gets to a large enough scale. Even small companies self-insured into the 1990s. A typical small company might self-insure and then purchase a $50,000 re-insurance policy. Self-insurance is rarely seen anymore however.

During the 80s and into the 90s the cost of providing non-catastrophic medical treatment soared. Companies that self-insured ended up paying exorbitant amounts. Focusing on their core businesses they lacked the staff necessary to negotiate with doctors. This ushered in the era of the HMO. HMOs evolved to contain the cost of medical care by negotiating rates with providers.

The HMO, dreaded acronym as it is, was wildly successful. HMO (and later PPOs) held down the cost of medical care for almost three decades. Who else other than an insurance company has the clout and the chutzpa to negotiate the price of a triple bypass? Unfortunately supply side economics is now crushing the HMO levy.

8) The high cost of healthcare is a negative byproduct of the FIRe economy

Finance, Insurance and Real Estate. These are the industries that have driven the economy for the past 25 years. In the 1800s Frederic Bastiat described the phenomenon of the unseen effect of economic action. While the average US citizen prospered during the 25 year economic boom there were unseen economic effects underway. The FIRe economy drew innovation, specialization and the labor pool in general into what our fathers in the 1970s called "paper pushing". What seemed like miraculous growth was an illusory bubble. As any child knows, paper pushing does not provide any real economic value.

This is why our fathers used the term with such chagrin. Bastiat's unseen effect was that innovation, specialization and labor were drawn away from the very things we needed most. One of those is healthcare. If one considers where the profit opportunity lies in a non-FIRe economy it becomes quite obvious that the one thing everyone needs and is willing to pay for is healthcare. The latest unemployment statistics already show that people are being drawn into the health services field. You may be surprised in a few years to find that the real estate agent that sold you your home is now treating you as your nurse.

9) Immigration reform is the key to lowering healthcare costs

One part of the furor over the public option is the possibility that it will cover illegal immigrants. Indeed this is a factor in California's current economic woes. Again if one considers the economics of supply and our aging demographics it becomes obvious that in order to pay for the health care of our seniors we will need to boost the population of young workers. Surprisingly the current, newly birthed generation is almost as large as the baby boomer generation. This will help as they will be coming into the work force just as our boomers are needing the most medical care but it is still not enough. Dramatically increasing the number of legal immigrants is the only way to increase the tax pool and pay for Medicare.

10) The cost of healthcare is a poverty problem, not a healthcare problem

Arguably the healthcare reform proposal addresses a social condition which is universal health care. 40-50 million individuals do not have health insurance, most of them because they cannot afford it. Progressives make a rational point that a wealthy society should not allow the poor to suffer unnecessarily. Conservatives argue that incentives should be diverted from the rich to the poor in the form of subsidies. Healthcare is decidedly affordable. The average cost of a managed care program for a family of four is $10,000 per year. The average take home pay for the same family is $50,000 per year. If employer subsidization is factored in the costs are even lower (on average). 20% or less is a reasonable amount for health care. This is more than food costs but less than your mortgage. The cost to insure the health of your teenager is just slightly more than the cost to insure his automobile.

The problem is that what is affordable to the average citizen is not affordable to the poorest. Yes, the cost of medical care can be lower but by how much? 10% lower? 30% lower? Such wild possibilities would still not address the issue. The only way to get more people covered is to address the underlying poverty issue. This admittedly is an even bigger can of worms but I believe the solution is buried within the analysis of the FIRe economy. Economists' favorite statistic is GDP but this is flawed thinking. GDP does not evaluate how well an economy is functioning. If GDP grows but so do costs then of what use is it? If GDP grows but an increasing number of people fall below the poverty line then of what use is it?

No, GDP should not be the number economists look at. They ought to be looking at the poverty level. Not the number of people who are poor but the actual annual income that denotes the level. Imagine an economy where food for a family cost $1000 per year. If rent were $7000 per year. Clothing would cost $1000 per year. Healthcare cost $5000 per year. What would be the poverty level? It would be $14,000 per year. Below that amount you would not be able to afford the necessities of life. Guess what? Earning minimum wage you'd still have $500 left over.

It is fruitless to focus on boosting incomes. Incomes from where? Who pays the incomes in an economy other than the people themselves? "Growth" is illusory. No, the focus needs to be on prices. Prices are lowered through competition, innovation and efficiency. Unfortunately this means that most economists need to completely re-evaluate their beliefs regarding deflation. Don't believe in the myth of the deflationary spiral. Deflation is progressive. It is the key to achieving a more equitable society.