Thursday, July 09, 2009

Unprofitable Health Care

Health care, some contend, is too special to be driven by a profit motive. As one person grappling with serious health issues and the corresponding costs asked, “Who can put a money value on a life?” Health care, it is said, should not be reduced to consumerism.

We all understand this sentiment. It is especially poignant when life circumstances demonstrate the cruelty of a system of care based on costs. Such sad stories frequently steer the course of public and private policy, as well as legal outcomes.

Unfortunately, many of these decisions are based in the concept of the free lunch. The harsh reality of the matter is that there is always a profit motive in every health care situation, with the possible exception of individual acts of pure charity, which usually can occur only within a tight group such as a family or a small community.

The profit of which I speak is not always plainly visible as financial gain. It can come in the form of power or fame, for example. But if you follow the trail far enough, you will ultimately find the money motive.

Health care is not an unlimited commodity and it always has a cost. Like every other scarce commodity, health care must be rationed. Many want to deny this fact, but in reality, the question is simply which form the rationing ought to take. The laws of economics cannot be repealed even when life is at stake. Someone has to foot the bill.

Most that decry the profit motive call for altruistically collectivizing health care costs. Moreover, they desire health care providers that mainly want to help people rather than those wanting to make money.

Collectivizing anything removes some choices from individuals and transfers them to an administrative bureaucracy of technical experts and bureaucrats that are quite removed from the actual providers and consumers. This inserts a third party into the provider-patient relationship.

The basic nature of all such organizations is to demand uniformity by limiting choice. This is unavoidable because it is the very nature of such a structure to produce such results. Yet, health care is a field that cries for specialty work in almost every interaction, since the needs and responses of humans vary so greatly. Enforcement of uniformity in health care is one of the worst mismatches of needs and solutions in any modern market.

Those clamoring today for increased collectivization of health care should consider the Utah State Liquor Store system. Speaking of government run liquor stores, Manhattan Institute fellow Regina Herzlinger explains in this article:
“Despite their ability as the single payer to extract better volume discounts from wholesalers than private liquor chains can, their prices are not lower than private stores’. Additionally, they slight consumers through shorter operating hours, inconvenient locations, limited brand availability, and inadequate advertising. By forcing consumers to adjust their shopping habits, they raise prices through loss of time. Although some advocates hope that these features limit liquor consumption, this is not the case.”
Although some will cry that you can’t compare liquor stores to health care, I beg to differ. The state-run stores provide a good view of what happens in any government controlled market: restriction of choice and increased costs with no reduction of consumption.

Moreover, it doesn’t even matter if government doesn’t run the whole system. Government only needs to have a significant stake in the market to effectively control all of the players in the market. This is what currently happens with Medicare. Is it any wonder that health care is one of the few areas of life where real costs have increased while satisfaction has decreased over the past 30 years?

For those that are fans of government mandated health insurance competition plans, such as the current Massachusetts system, Herzlinger has additional warnings. “Such markets limit competition, do not control costs, discourage entrepreneurial efforts, and thus cause consumer dissatisfaction.” Additionally, they are proven to be effective in moving people from private health care plans to the plans directly run by government.

Nor do you free yourself from profiteers when moving to a government centric model. Herzlinger writes:
“Why do government-controlled markets require insurance plans that people may not want and prohibit others they may want? The reason is simple: Legislatures that run government markets respond to lobbyists financed by providers and insurers. These interests prefer to sell expensive policies rather than cheap ones; and no one lobbies for consumers. Also, the politics of empathy play a role: People with uncovered conditions often lobby, through the government and media, to force insurance companies to cover their maladies.”
The costs imposed by such mandates are not itemized so as to keep them hidden to the premium payers. But in Massachusetts, the requirement to cover in vitro fertilization alone (for a very few) raises “everybody’s family insurance prices by as much as $900” annually. Ouch.

Herzlinger notes that Swiss citizens are required by law to have health insurance, but they have broad latitude in the coverage they choose and they can buy it from any private health insurance company. It works much as does automobile or homeowner insurance. It turns out that the Swiss “are demonstrably price sensitive.” There is no reason to believe that this would be different for Americans or anyone else.

Health care will be rationed in any system. Period. How do you want that to happen: through individual health care consumer choice that fosters competition and innovation and incentivizes providers to profit by meeting your needs, or by the faceless bureaucracy bean counters that limit choice and stifle competition in the name of altruistic but unobtainable fairness?

Government has a role to play in health insurance, but Herzlinger says that the appropriate role is “is to help subsidize those who cannot afford health insurance; to enable transparency so that people can shop intelligently; and to prosecute fraud, abuse, and anti-competitive behavior. It’s not the government’s job to run markets.”

One recently retired fellow praised government for covering the high cost of his cancer treatments. He opined that proponents of such plans merely want to help care for the sick without a perverse profit motive that doesn’t care at all about the ill.

As we have seen, the profit motive still exists, even in government plans. There are still politicians and heavy lobbying firms and groups that seek to profit by limiting your choices and providing higher cost inferior services and products. That translates into more draconian rationing and loss of life, as is currently being demonstrated in the UK. (Unlike the US model where some lack insurance coverage but everyone has health care access, in the UK everyone has insurance coverage but many lack adequate access.)

Moreover, the man mentioned above seems to have failed to learn over a lifetime that there is no such thing as a free lunch. Someone has to pay for his treatments, even if he is not paying for them himself. This means that someone is going without something they could otherwise have. Perhaps that includes the lady I met who is scrambling to make ends meet while covering much of the cost of her own cancer treatment or the single mom that took a job at a different grocery store with fewer benefits so that she could have more take home pay to meet more immediate needs. When government mandates health coverage, no one advocates for the faceless masses that pick up the costs — the forgotten Americans.

Like it or not, health care is a consumer market. Attempting to disguise the harshness of this reality will not make it go away. The current heavy push for choice limiting systems seeks to bring under the heavy hand of government what little personal liberty remains in the health care system.

If politicians really cared about the uninsured, they would sponsor solutions that expand the freedom to purchase cost effective health insurance rather than ‘remedies’ that mainly seek to expand government power. They would promote fair competition in the health care industry and they would offer ways to help those that can’t afford adequate care without trying to usurp control of a massive chunk of the economy.

But I’m not holding my breath while waiting for that to happen. As I said, there is a profit motive….


Dr. Joe Jarvis said...

Yes, the bill must always be paid. Right now, most of our health care bills are paid by the taxpayers. Health care taxation is heavier in the US than anywhere else in the world. Shouldn't we demand best use of our public funds? I don't favor the reforms under discussion in Congress. But I do favor a state based approach that eliminates the waste that consumes half of our health care spending. The opportunity cost of current health spending threatens our way of life.

Scott Hinrichs said...

Thank you for your comment. The state absolutely has a role. But that role is not to open the market rather than to control it.