Monday, August 10, 2009

Worse Than Doing Nothing

“When health care is subsidized, no one should be surprised that people demand more of it and that the costs to produce it increase.” —Arthur Laffer

I realize that we are currently in a major economic slump. But over the last four decades the overall economic picture has improved dramatically in dynamic ways. Most life necessities and nonessentials are less expensive in real terms (i.e. number of labor minutes) than they were 40 years ago. Despite the expansive increase in the purchase of luxury and restaurant foods during this time, for example, Americans spend a much smaller chunk of their take home pay on food than in the golden era of the mid-60s.

The resulting increase in discretionary income has expanded our choices by orders of magnitude. The average American today has ready access to literally millions of products and services that simply didn’t exist 40 years ago. Many of the things we buy today could not have been had at any price back then. (Think home computers, iPods, and breathable odor resistant clothing for athletics.)

And many things that were once luxuries have become common as the real costs of these things have decreased. (Think home carpeting, power car windows, air conditioning, and even recreational vehicles like boats and motorcycles.)

Detractors like to say that wages have decreased during this time, but they are using carefully selected data that ignores total compensation, compares newer immigrants with long-term residents, and uses archaic measures for determining economic class. Tellingly, most of this nation’s ‘poor’ have cell phones and enjoy more individual dwelling space than do many members of other nations’ upper classes.

There are, however, some economic pockets that have not enjoyed this kind of reduction in real costs. Health care is one of those fields. While there have been tremendous improvements in health care technologies and services, real costs have increased.

The common explanations of why health care costs have increased while most other costs have decreased simply don’t hold water. Some like to point to expensive new technologies. But in every other field, new technologies have reduced costs over time. Why would it be different in health care? Greedy professionals have been mentioned. But highly compensated professionals exist in other arenas that have seen real costs decline.

Another favorite whipping boy is the health insurance industry, which operates with a profit motive. But casualty insurance also operates with a profit motive, and yet real costs in that field have not increased like in the health care field. Besides, I have previously discussed how there is always a profit motive of some kind in human transactions, except in certain highly personal interactions where individuals willingly sacrifice.

Literally every single reason bandied about in mainstream media and policy circles for the increases in medical care costs do not, upon proper scrutiny, prove to be major contributors to the problem. So what is at the root of this matter? Economist Arthur Laffer suggests in this WSJ article that government subsidies that distort the market are the real troublemakers, because they provide incentives for health care consumers to consume too much.
“Consumers are receiving quality medical care at little direct cost to themselves. This creates runaway costs that have to be addressed. … When health care is subsidized, no one should be surprised that people demand more of it and that the costs to produce it increase.”
This creates a “health-care wedge … that reflects the difference between what health-care costs the specific provider and what the patient actually pays.” Someone else picks up the tab for the difference. That someone is the faceless mass of American taxpayers. (It’s so much easier to justify theft when the victim is a faceless and compliant mass.) Laffer says that the result is “like a negative tax: Costs rise and people demand more than they need.”

The current proposals for expanding the role of government in health care would not only do “nothing to address the gap between the price paid and the price received,” but implementing these “reforms would literally be worse than doing nothing.” Proponents of the government centric plans claim that these initiatives would be better than the status quo, but Laffer cites his own research that demonstrates that such claims “couldn’t be further from the truth.” Laffer’s research found that:
“a $1 trillion increase in federal government health subsidies will accelerate health-care inflation, lead to continued growth in health-care expenditures, and diminish our economic growth even further. Despite these costs, some 30 million people will remain uninsured.”
It is interesting to note that one of the major purposes cited for expanding government control of health care — covering the uninsured — will remain unfulfilled even if these schemes are realized.

One of the favorite rants by supporters of expanding government’s power over the health care industry is that opponents of the plan have no plan of their own. There are some easy comebacks to this.
  • When doing nothing is better than implementing these plans, no alternative plan is necessary.
  • Why is it that progressives are always so concerned with ‘planning’ other people’s lives? Didn’t we learn anything from 20th Century Communists about the follies of centralized economic planning and what happens when you try to plan other people’s lives?
  • Opponents of the plans have presented many plans of their own. Political power brokers hate all of those plans because they diminish government power rather than growing it.
Consider, for example, Kevin Delaney’s medical and savings and loan proposal, which I discussed in this post. Kevin has added some pertinent thoughts on this concept in a series of posts on his y-intercept blog.

As for what to do to fix health care, Laffer proposes the following:
“Rather than expanding the role of government in the health-care market, Congress should implement a patient-centered approach to health-care reform. A patient-centered approach focuses on the patient-doctor relationship and empowers the patient and the doctor to make effective and economical choices.

“A patient-centered health-care reform begins with individual ownership of insurance policies and leverages Health Savings Accounts, a low-premium, high-deductible alternative to traditional insurance that includes a tax-advantaged savings account. It allows people to purchase insurance policies across state lines and reduces the number of mandated benefits insurers are required to cover. It reallocates the majority of Medicaid spending into a simple voucher for low-income individuals to purchase their own insurance. And it reduces the cost of medical procedures by reforming tort liability laws.

“By empowering patients and doctors to manage health-care decisions, a patient-centered health-care reform will control costs, improve health outcomes, and improve the overall efficiency of the health-care system.”
I like Laffer’s proposal, but I doubt anything like that will actually happen. When was the last time politicians voted to reduce their own power over the lives of citizens? Let’s be honest. These people don’t actually care one iota about improving health care or decreasing health care costs. This whole thing is entirely about power. Period.

The same was true when the Republicans controlled the levers of government. You never saw them voting to reduce their own political power. They might have gone for centralized government lite, but it was still all about power. If we understand this one principle, it will make it a lot easier to figure out why the political class acts as it does. It will also help us to see through the current government-as-savior health care sales job.


y-intercept said...
This comment has been removed by the author.
y-intercept said...

The ruling class is motivated by a desire for power not profit. It is easy to mask that as altruism.

The debate about profit motive is simply a diver. The heart of a free market is people seeking to optimize their resources.

The highly regulated employer based insurance industry broke the natural process of people saving for times of need. The result of breaking the natural given and take of the free market is that healthcare has become a struggle between those seeking obscene profits and those seeking untold power.

IMHO, the only way for people who love freedom to protect that freedome is to find a way to reduce their dependency on pool based insurance.

I am opposed to the Health Care Reform since it destroys the ability of people to opt out.

Chris said...

This post rings true with me. Thanks for sharing in such a clear and thoughtful way. I'm going to share this with others!

Anonymous said...

First of all, let me thank you for your several posts these past couple of months on health care. I have read them all, and thoroughly enjoyed them. They have helped educate me.

I haven't commented because blogger is usually blocked at work, but today must be a leak in the system. I can read your blog through RSS, but I can't comment.

Thanks for helping us understand this mess a little better. I agree that a medical savings and loan option would be the best. I am interested in your thoughts on employer funded programs of this nature. Would that also lend the the "company store" type aspect of the current system that we have?

Scott Hinrichs said...

The main opposition I have to employer funded programs is the tax subsidy involved. If there were no tax subsidy, employer provided plans would have to compete with the market at large. I'd be perfectly happy with that.

As an example, my employer actually does offer auto insurance. The only advantage is that it can be paid by automatic deduction from the paycheck. Since my employer receives no tax subsidy for this (i.e. since my fellow American taxpayers do not subsidize my purchase of car insurance), my employer does not offer a better deal than I can get on the open market for the same coverage. Consequently, most employees buy their car insurance other places where they are not tied to the limited number of plans offered by my employer.

The problem with the employer subsidy is that it skews the market and effectively forces others to pay for a benefit I receive. Even people that can't afford insurance but pay taxes are effectively helping pay for others' health insurance.

So, I'd say that employer funded health care and MSL plans are just fine, as long as there is no government subsidization of the program.

Charles D said...

I don't like the public option either. I really don't care whether a public option would cut into the profits of private insurers - if they provide worse service at higher costs, then they deserve to fail.

What I want is to end private health insurance altogether, have the government fix drug prices so they are affordable, and divert the zillions of dollars American businesses and individuals are paying to inefficient and high cost insurance companies to pay for universal coverage birth to grave for every American. Is that socialist? You bet. Do I care? Hell no.

I am interested in every single person living in this country having high quality health care available 24-7 at no additional cost to them beyond the taxes they and their employers pay in lieu of insurance premiums. No co-pays, no deductibles, no maximum out-of-pocket amounts, no out-of-network providers, no lists of drugs they can't get, no bureaucrats being paid bonuses to deny them coverage. Health care as a basic human right.