June 1, 2011
Should The Government Have A Role In Healthcare?

Thanks to Keyneswasdrunk for posing the following question to me, which I am re-posting in rebloggable format:

Privatized grocery stores seem to work just fine and mass starvation isn’t in the news despite the fact everyone seems to need food of some sort. I wasn’t aware that the American people faced a draconian choice of either government subsidy or catastrophic levels of death and disease. The demand for healthcare is of course unlimited. But so is the demand for all goods. Human beings are almost never happy with what they have. The man with bread wants cake. The man with cake wants hamburger. The man with hamburger demands steak. Demand in the abstract is uncontrolable but how resources are allocated and, by extension cost, certainly is. If resources are allocated more efficiently waste is reduced and costs fall. This works in practially every industry. Why wouldn’t it work in medical services? The government already heavily subsidizes med students, and college students in general in the form of Pell grants, low interst student loans, etc etc etc. The ultimate result of that is way more people go to college than they should which dilutes the value of a college degree. There are plenty of med students. Too many in fact. As for Dr. K’s socialized insurance plan, well every now and then Dr. K seems to fall off the wagon. For instance his crazy scheme to cut payroll taxes and make up the loss with a carbon (gas) tax to stimulate the economy was…well… dumb. A simpler solution would be for the government to adopt some species of tort reform and to prosecute people for fraud and abuse of the civil justice system. Alternatively governments could simply grant doctors immunity from malpractice law suits in all but the grossest of cases. In any case, the problem isn’t that medical liability insurance is unaffordable. It’s that abuse of the civil justice system is unchecked and rampant.And besides a socialized medical liabiltiy system would essentially insulate doctors from responsibility for their mistakes and become a giant pinata for the unscrupulous. Government minders would have no reason to rigorously investigate claims and would simply dole out cash to claimants. In a socialized regime the number of malpractice claims would likely skyrocket while doctors carelessly lopped off appendages, confident the taxpayer will pick up the tab if they make a mistake. So subsidized med school and socialized malpractice insurance would do nothing to reallocate medical resources in a more cost-effective way. It would just create a lot of doctors of dubious ability and a cash cow for fraudsters.Contrary to the belief of many, a free market system in health care does not spell the demise of millions of impoverished people. All it does is remove government from the business of allocating medical resources. Plenty of politicians see fit to generously give to the poor (from public funds) certainly such generosity is not confined merely to government officials.

keyneswasdrunk

Thanks for the response.  (original post here).  You’ve actually given me a lot to work with here!  Forgive me if my response is lengthy, as you challenge two pillars of my political beliefs: regulated markets and public administration of health insurance.  If I may speak to your points:

Privatized grocery stores seem to work just fine and mass starvation isn’t in the news despite the fact everyone seems to need food of some sort. I wasn’t aware that the American people faced a draconian choice of either government subsidy or catastrophic levels of death and disease. 

So are you in favor of repealing laws that require hospitals to treat patients who cannot afford to pay for healthcare?  If so, then these patients will necessarily suffer and/or die for lack of medical treatment.  Do you believe that private charity will pick up the slack?  History renders no such example, save Mutual Benefit Societies, who in a completely free market, would be free to discriminate as they please amongst their membership; which makes sense, because MBS’s were often organized along ethnic lines.  The net result is that some voluntary aid societies would naturally be more equal than others.  

Furthermore, it is important to remember markets can only control costs if demand can be mitigated via the Price Mechanism.  When you’re dealing with a sector of the economy driven by a small group of extraordinarily skilled laborers working with highly advanced technology, the price of that labor is going to to be naturally high.  As such, the clearance price for healthcare is not going to look anything like the clearance price for food; the clearance price for healthcare is going to either be a) unaffordable for a certain subset of the population, or b) uncomfortably high, such that most poorer individuals with minor preventable health problems will ignore them due to negative short-term cashflow incentives.  This happens even in a system where access to healthcare is supposedly “guaranteed.”  That’s because without health insurance, one serious illness could cause you to lose everything.  And many insurers have lifetime maximum benefit payouts.  Guess what happens when you exceed your maximum?

The grocery store example may seem to be the Prima Facie “hard case” for individuals that advocate against private health insurance, because relatively speaking, they seem like the same thing: both are inelastic goods that everyone needs to survive, yet food is plentiful and affordable (except for the 1 in 10 American who can’t afford it).  It does indeed seem obvious that private grocery stores provide a very affordable means of procuring adequate food for the vast majority of the populace; that in this sense, free markets have “delivered the goods” (forgive the pun).

Of course, that affordability is being buttressed by agricultural subsidies to the tune of $20 billion/year in “income stabilization” payments to farmers.  And many states subsidize meat production, both of which we experience the benefit of in the form of cheaper prices at the grocery store.  So once more, we are not talking about a strictly free market when we talk about grocery stores; but this by itself isn’t the relevant distinction between healthcare and food.

The more important distinction is that while demand for both healthcare and food is inelastic, we do not consume food and healthcare in the same way: if you don’t like the prices at your local supermarket, chances are you can drive <15 minutes in any direction and find a competitor. Not so with healthcare.  Doctors regularly turn away patients when their schedules are as full as they please; or if they simply don’t care to treat a certain type of patient.   Grocery stores don’t turn away customers when they’re “full;” You simply get in line behind the last customer.  Of course, if doctor’s offices looked more like supermarkets, you could probably just go to Register 12 and get “checked out.”  That’s not feasible, though, because grocery stores can divide their labor between relatively simple jobs that require minimal education.  Doctors, however, require upwards of a decade of training.  So healthcare consumption is also different because the delivery mechanism requires highly skilled, highly educated, highly trained labor to operate effectively.  Grocery stores serve everyone because they can afford to hire however many people they need.  Yet there are only so many doctors; and only so many people smart enough and willing to become doctors.

Healthcare is also different because rational consumers act differently when making healthcare decisions vs. what food to eat.  Put the above examples aside for a moment and imagine that you are having a heart-attack.  The closest hospital is 10 minutes away.  Another hospital with cheaper rates is 20 minutes away.  A rational person under these circumstances is not going to tell the ambulance driver to drive them to the hospital that’s 20 minutes away and charges $2,000 less for the services of their on-call Cardiologist.  You might die in that span of time.  Indeed, rational actors in a life-threatening medical situation will seek the quickest care that’s available, not the cheapest.  As a man who believes Keynes was drunk, I must assume your familiarity with the concept of rational self-interest in markets.  The rational thing for a self-interested person to do when they are in a life-threatening medical situation is not to seek the cheapest care, but the fastest.  How can the Price Mechanism regulate a service in which rational individuals, placed in circumstances which make it necessary to consume it, will not gravitate towards the cheaper alternative?

Another difference between healthcare and food is one of ignorance: people go to doctors because they don’t know what is wrong with them.  It’s pretty much impossible for a lay person to know whether that strange bump on their chest is a cancerous growth or just a cyst.  The fact that all individuals are constantly working with a certain degree of ignorance when making economic decisions is part of the reason markets fail.  Nowhere is this more true than the healthcare industry.  There is a reason that doctors advise against self-diagnosis.  It’s not because they want your money.  It’s because of the same reason my mechanic told me not to try to replace my head gasket on my own; I’m not a mechanic, and I could’ve easily ruined my engine.  Conversely, one should not self-diagnose because you don’t have 10 years of medical training.  The average person does not need to consult a Nutritionist to effectively purchase food.  The average person does need a doctor to effectively treat their medical problems.

Another difference between food and healthcare is that you don’t need food insurance to purchase it.  Healthcare in America has become extremely technologically advanced.  We are not talking about 19th century America, where paying for someone’s medical care meant just paying the doctor’s fee and perhaps a few pennies for the medication.  The type of diseases and illness that would’ve killed people back then, even with medical attention, are now eminently treatable and diagnosable.  But in order to spot that tumor or lesion in your brain, you need a $1,000+ MRI to catch it.  And if it is a tumor or lesion, you might need surgery to remove it.  Or perhaps you are unfortunate enough to have a rare neurological disorder.  What happens then?  Private insurance companies will deny your treatment because you’re no longer profitable; or they’ll cut you off once you reach your life-time maximum benefit.  And of course, if you have a pre-existing condition, they will outright refuse to insure you; all the while doing everything in their power to get people with expensive diseases off their payrolls.  The expense of modern medicine requires insurance.  And the profit motive of rational actors in a free market works against consumers in the health insurance industry, because the more you need their product, the less they want to give it to you.  It is against their interest to give you the product you’re paying for.  There is quite literally no other industry where that’s the case.  That conflict of interest doesn’t exist at the grocery store.

Another difference between food and healthcare is that the rate at which we consume food is flexible and does not increase in price exponentially as your need for it grows.  What I mean by that is this: you could consume 1000 calories one day, 3000 the next, 1500 the next, 2500 the next, and so on; this pattern, while perhaps uncomfortable, is roughly sustainable by the average person.  You can make significant adjustments in your calorie intake, as well as the type of food you’re eating, and still thrive.  The same cannot be said of healthcare.  An asthmatic who has to go without Albuterol Sulfate for a week might develop Severe Bronchitis or a life-threatening case of Pneumonia.  A person with Hypertension might experience a heart attack if they have to miss a couple days of medication every other week.  A person with Diabetes who can’t afford their insulin shots for a few days out of the week might die or injure themselves severely after going into Diabetic Shock; or worse, someone else.  

Modern-day healthcare requires health insurance to pay for.  if someone can’t afford to purchase health insurance, they will likely ignore most minor, treatable medical problems due to negative short-term cash flow incentives.  Most of those problems will probably even go away on their own.  But when they don’t, they become serious medical issues that are exponentially more costly; it costs more to treat a patient with Pneumonia than it does a patient with the common cold.  It costs more to treat a patient with stage III cancer than it does a patient in stage I.  And because of the ignorance of lay people with respect to medical problems I discussed earlier, they often have no idea that they have a serious problem until the symptoms have become intolerable.  The remedy for a person who hasn’t eaten for days is a big meal.  That means $20 worth of food at the market instead of $10.  A person who let one of their cavities go because he couldn’t afford to get it filled needs a root canal.  That means $1000 instead of $200.  

Moving on:

The demand for healthcare is of course unlimited. But so is the demand for all goods. Human beings are almost never happy with what they have. The man with bread wants cake. The man with cake wants hamburger. The man with hamburger demands steak. 

And of those things, you only need bread to survive (not true actually, but that’s the fitness geek in me, and we are speaking metaphorically).  A man who wants an upgrade from hamburger to steak is not making a necessary decision.  The hamburger will feed him the same as the steak; the stake just tastes better.  A man who has a hamburger and asks for steak is fundamentally asking for something unnecessary.  A man who wants an MRI because he’s been having crushing headaches, dizzy spells, tinnitus, and vision problems (all of which happened to me last October, fwiw) isn’t asking for an unnecessary upgrade.  He’s asking for a necessary upgrade.  ”Wanting more” in this case is a matter of necessity, rather than a refusal to be satisfied.

The government already heavily subsidizes med students, and college students in general in the form of Pell grants, low interst student loans, etc etc etc. The ultimate result of that is way more people go to college than they should which dilutes the value of a college degree. There are plenty of med students. Too many in fact. 

Part of the reason so many people are going to school is because the availability of living-wage jobs among those without a college education is abysmal.  This problem, of course, starting picking up steam in the 80’s when companies like GM shipped profitable factories off to Mexico, and with them went thousands of living-wage jobs that unskilled workers had access to.  Combine that with a little help from the CATO-supported NAFTA treaty, and you’ve got a recipe for the worst employment market for uneducated workers in recent history:

Should we be subsidizing these uneducated individuals to go to college?  There is a strong argument that we should not.  But there would be far less demand for college education if it was possible to make a decent living without one.  Or to find a decent job.  Right now, unemployment among uneducated workers is close to 15%.  Unemployment among people with 4-year degrees is closer to 5%.  Why?  Because our manufacturing powerhouses moved all their factories to China and Mexico, despite the fact that many were being run profitably.  But this is admittedly tertiary to the subject at hand, so let’s address med students specifically: Your point regarding “too many” med students is very, very incorrect.  The supply of doctors is one of the most commonly cited issues with ourhealthcare system.  To claim that we are graduating too many doctors in light of the ample evidence of provider shortages is absurd.

As for Dr. K’s socialized insurance plan…A simpler solution would be for the government to adopt some species of tort reform and to prosecute people for fraud and abuse of the civil justice system. Alternatively governments could simply grant doctors immunity from malpractice law suits in all but the grossest of cases.

True, it would be a simpler solution.  But it has several flaws, the first of which is that it wouldn’t be the true free market you’re arguing for.  Indeed, in a true free market, every single medical provider would probably make you contractually indemnify them from any liability whatsoever before agreeing to treat you.  The only reason they can’t do this with impunity now is because there are laws against it in every civilized nation.  Also, your suggestion seems to suffer from the very malady you mention in your following point:

a socialized medical liabiltiy system would essentially insulate doctors from responsibility for their mistakes and become a giant pinata for the unscrupulous. Government minders would have no reason to rigorously investigate claims and would simply dole out cash to claimants. In a socialized regime the number of malpractice claims would likely skyrocket while doctors carelessly lopped off appendages, confident the taxpayer will pick up the tab if they make a mistake.

Krauthammer addresses this by pointing out that the incentive not to malpractice under a socialized malpractice insurance scheme is to not lose your license to practice medicine.  Throwing away upwards of 10 years of medical training strikes me as ample incentive for doctors to avoid malpractice.  

But as I mentioned earlier, your proffered alternative seems to result in the very evil you’re arguing against: if patients are not allowed to sue for malpractice in all but the grossest of cases, then that would surely be an incentive for doctors to be less careful; there is also a question of how we should define “gross.”  Won’t that be relative with respect to each individual patient?  A socialized malpractice scheme still protects the right of modestly injured patients to recover for a doctor’s negligence.  The scheme you’ve suggested does not.

So subsidized med school and socialized malpractice insurance would do nothing to reallocate medical resources in a more cost-effective way. It would just create a lot of doctors of dubious ability and a cash cow for fraudsters.

Again, I see no evidence of that happening for the reasons I cited above.  Socializing malpractice insurance removes the cost of malpractice insurance from a doctor’s operating costs while preserving the incentive not to malpractice by putting his medical license, and the 10 or so years he spent earning it, on the line.

Contrary to the belief of many, a free market system in health care does not spell the demise of millions of impoverished people. All it does is remove government from the business of allocating medical resources. Plenty of politicians see fit to generously give to the poor (from public funds) certainly such generosity is not confined merely to government officials.

The advantage that the government has over kind-hearted individuals is scope, access and reach.  If a person on the other side of the country is in need, I have no way of knowing about it.  There are literally millions of Americans who will fall on hard times who I will never meet.  Having a government program in place for those individuals to appeal to means that people who have fallen on hard times are more likely to get the help they need than if they simply relied on hand-outs from private charity, who are under no obligation to give it to them in the first place.

Programs like Medicare weren’t created simply because Big-Government Liberals thought the government could do a better job; they were created because the private sector won’t do the job.  State high-risk insurance pools exist for the same reason. Programs like Food Stamps aren’t created because the private sector isn’t capable of producing affordable food; they exist because the free market doesn’t guarantee anyone a job with which to derive income to pay for said food.  Affordability, in this sense, is relative.

Furthermore, private charities, in a completely unregulated free market with no government intervention of any kind, would be free to discriminate against people who come to them for aid.  Alternatively, the Federal and State government(s) cannot Constitutionally discriminate when administrating any of its programs because of the 5th and 14th Amendments.  The Constitution doesn’t apply to private actors.  In theory, the profit motive at least lends some protection against invidious discrimination in the open market, because competitors who don’t discriminate will reap the rewards of new customers.  But there is no profit motive involved in private charity; only the bare willingness of people to help whom they deem worthy of charity.  Or whose need is commensurate with peoples’ willingness’ to sacrifice the luxury they’ve earned.  The disparity between these two often shocks the conscience.  And relying on the profit motive for the distribution of health insurance results in the same moral hazards I mentioned above.  The marginal protection that the profit motive normally provides to consumers works against them when it comes to health insurance.

Privately insuring people also costs more money.  Overhead for private, for-profit insurance was 27% in 2007; Medicare had 3% overhead the same year.  Even non-profit insurers had 16% overhead that year.  The government can insure its people cheaper, more efficiently, and most importantly, will insure you regardless of age or pre-existing condition.  Are their problems with Medicare?  Absolutely.  But look what happens when you tell Seniors you’re going to take it away from them.  Scaring people about privatizing Medicare works because the consequences of privatizing Medicare are scary.  The reluctance of Seniors to tolerate Medicare reform should tell you something about how effective the program is at the meeting the need it’s designed to meet.  People like Medicare; even in districts friendly to the reformers.

At the end of the day, the only way for a market without any government involvement to regulate cost and access is through the Price Mechanism.  This requires rational consumers who always seek the best service for the smallest price.  But rational consumers in healthcare are always working from a certain degree of ignorance because they aren’t doctors.  They don’t know if the bump on their knee is cancer or just a cyst; they don’t know if the dizzy spells are just a passing bout of Vertigo or indicative of a brain tumor.  And the rational thing to do when in a life-threatening medical situation is not to seek the cheapest service; it is to seek the fastest, closest service.

Markets can and do fail; and when they do, the government has to step in.  When private insurance companies won’t insure the elderly, Medicare gets created.  When private insurance companies won’t insure people with pre-existing conditions, State high-risk pools are created.  When the average person can’t save enough money to last through an extended period of unemployment, Unemployment Insurance is created.  When low-income workers can’t save enough over the course of their working lives to retire, Social Security is created.  When markets don’t serve a need adequately, government steps in.  It’s not encroachment; it’s picking up the slack.

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