Monday, July 20, 2009

The Universal Healthcare Myth: Will Result in Rising Costs

I'm happy that some people in Congress are standing up and pointing out the flaws in Obama's healthcare reform bill. This morning House Republican Leader John Boehner wrote a short column on how the Democrats' prospective health plan will result in higher costs for everyone.

Last week, Douglas Elmendorf, the director of the nonpartisan Congressional Budget Office (CBO) sent shockwaves through Washington when he told Congress that the Democrats’ plans would make health care more costly. Throughout this debate, President Obama has spoken of the need to “bend the cost curve” or drive health care costs down. During a congressional hearing, however, Mr. Elmendorf testified that the Democrats’ plans would have the opposite effect, saying that under their proposals, “The curve is being raised” and costs would “significantly expand.” That’s because the Democrats’ plan adds a new layer of taxes, mandates, and bureaucracy on top of the current system. If that’s not bad enough, the Democrats’ plan cuts Medicare and takes away choices for millions of seniors. What does all of this mean? Higher costs for the medicine and treatments you need.
I'll be honest, the objectives of the healthcare reform bill actually sound quite reasonable. Keeping costs low and having a broad array of affordable health care choices for consumers are definitely laudable goals. I also agree with the government's stance that healthcare costs are rising too rapidly and may cause major economic problems for our nation both now and in the future. However, the current ideas that are being discussed and analyzed are not a solution to any of these problems. Instead, the proposed bill will have the opposite of its desired effect.

There are several reasons that healthcare costs have risen so dramatically: the cost of cutting-edge technology used in American medical facilities, stringent government regulations reducing competition for medical supplies, and health insurance plans that encourage consumer irresponsibility. These are all very simple economic reasons for why the price of healthcare has risen. Let's look at these factors briefly.

Living in country that is as technologically advanced as ours has its advantages. Many diseases and conditions that would be fatal in other countries are treatable here in the United States. However, this benefit comes at a high cost. The medicines and machines that are used for advanced medical proceudres are not cheap at all. As a column from Business Week says:
Technological advances go hand in hand with productivity gains in most industries, but in medicine, better technology almost always means higher expenses.

Rising costs could be seen as a sign of progress: The cheapest medical outcome, after all, is death. Major advances in the treatment of heart disease, cancer, pulmonary disorders, and a broad range of once-fatal diseases have prolonged life, but the longer the life, the higher the medical costs. "We're not realizing cost reductions as a result of increased longevity," says Michael Thompson, principal with PriceWaterhouse Coopers. Survive a heart attack, for example, and you raise your chances of living long enough to die of cancer or Alzheimer's disease, two of the most expensive diseases. Not to mention the cost of the drugs and follow-up care you'll need to avoid another heart attack.
We have made a trade-off in America. Longevity and survival is something that we have determined is worth any cost. Therefore, when given an option between a less-expensive treatment and a more-expensive modern treatment, many patients are demanding the higher-cost option, even if it will not provide a significantly better treatment. The Pareto Principle states that 80% of the results are derived from 20% of the inputs. To improve something beyond a certain level of functionality requires a relatively large investment for a very small functional gain. In the case of medical procedures, many doctors and patients are choosing to use hugely expensive machines and medicines that are only slightly better than ordinary ones. You see a similar phenomenon with cars or computers, where a car lover would rather buy a Lamborghini, even though it is not much functionally better than less expensive car, or where a computer-lover will spend $4,000 for a computer than is only marginally better than one which only costs $1,000. A premium price is paid for something just because it is cutting edge, even though its actual function rarely merits such a price-tag. One of the reasons healthcare is so expensive is because many Americans have chosen to pursue premium healthcare, regardless of the cost.

Another reason why healthcare is so expensive is because there are challenging barriers to market-entry, which results in fewer suppliers of medicines and medical technology. The high aggregate demand meets a lower than desirable aggregate supply, which sets the equilibrium prices higher than they should be. This is very similar to the problem of having a monopoly or oligopoly; prices are much higher than they would be if there was more competition. If this were a naturally-occuring phenomenon, it wouldn't be such a horrible thing; prices would be high simply because not many suppliers see a chance to make a profit. But, this is not a natural economic phenomenon. Instead, it is a case of market failure. The FDA is a branch of our Federal Government which oversees and regulates the medicines and medical products that can be legally sold. Before any drug or medical device is sold to the public or used in medical facilities, it must undergo a stringent period of testing and approval. The regulations governing health products are extremely restrictive, such that the sale of a product often entangles years of red tape and bureaucratic finagling. I currently work for a small company that manufactures cutting-edge blood testing devices that have dominated the veterinary market for years, but we're only just starting to be able to sell our machines to hospitals since it took us a long time to receive FDA approval. If we didn't already have a large client-base and ample cash-flow from our veterinary sales, our blood-testing machines, which are superior to all our competitors' blood-testing products, never would have reached the human medical market. The government's interference in the market, in the form of stringent regulations, sets a difficult hurdle for potential suppliers resulting in very little competition in the human medical market. To compete, you basically have to be a large, established company with lots of financial resources. Because of the lack of competition due to government intervention, healthcare costs are much higher than they would be in a free-market.

The third major factor contributing to high healthcare costs is the proliferation of health insurance. Health insurance is not an intrinsically harmful thing. However, the current health insurance system definitely enables consumers to make uninformed and costly decisions. Since most healthcare consumers pay only a small co-pay on most standard medical procedures, with the insurance company paying the remainder, it makes very little difference to consumers how expensive their medicines and treatments are. If you pay the same amount of out-of-pocket money for inexpensive, decent care or for expensive, cutting-edge care, you'll want the very best you can get. Since the insurance company eats most of the cost (at least initially), there is really little or no incentive for patients to find reasonably-priced treatments or perform significant research into the effectiveness of different methods of treatment. It's easier to go for the one that sounds the most modern and just pay the insurance policy's deductible than to put needless time and effort into making informed decisions. To be sure, an individual patient does economically benefit from getting expensive treatments at very low direct cost. What is not seen is the resulting effect of many patients using this sort of decision making. First of all, doctors are more likely to recommend expensive procedures rather than cheaper ones in order to maximize their profitability. Since consumers don't directly pay they cost, they are quick to consent. Then, the doctors send massive bills to the insurance companies who have to pay exorbitant piles of money for these expensive treatments. Having to pay so much for the various medical bills puts the insurance companies in a bind, and they quickly have to raise their premiums just to make ends meet. Consequently, because of the expensive treatments some patients elect to receive, the prices rise for everyone. Though individual consumers and doctors benefit in the short-term, there is no such thing as a free lunch, and soon the costs of health insurance skyrocket. The problem is that consumers do not have to directly pay for their own expenses, and so the consequences are artificially removed from their decisions. Separating the natural consequences of a choice from the choice itself always creates an environment that fosters irresponsibility or abuse. That's what our current proliferation of health insurance has done.

As you can see, all of these factors have contributed to the high costs of healthcare that we see today in America, which is why healthcase expenditures (as a percentage of GDP) have nearly doubled in the past thirty years. Based on these factors the solution that we need in order to achieve true healthcare reform and restore medical costs to reasonable levels must entail several factors. First of all, consumers need to take responsibility for their own healthcare and make informed, cost-effective decisions. Consumers will naturally do this as long as they face the consequences of their decisions and have to pay for their own costs rather than riding on a system where everyone contributes. Americans will be more likely to be proactive towards their own health if they don't have a safety net of insurance and government guarantees to pay for an infinite array of costly medical treatments. Secondly, the FDA needs to take a step back and reduce their smothering regulations on medical products, so that more suppliers will be able to compete in the medical market. Once more suppliers enter the medical market, all medical suppliers will be forced to be more efficient, eliminate waste and cut costs in order to sell high-quality products at reasonable prices. Those companies who don't find ways to lower their prices dramatically will quickly find their market share decreasing as new suppliers create superior products and sell them at better prices. No longer will a few companies have so much market dominance that they can engage in price-fixing. In short, what we need to ensure effective healthcare reform is a narrower form of health insurance that leaves more responsibility with the consumer and we need less government medical regulation.

Now, let us examine what the government is seeking to do with the currently proposed healthcare reform bill. They are seeking to increase government regulation over the medical industry and they are seeking to expand healthcare coverage to those who can't afford it. As regulation increases further, there will be even less competition in both the health insurance market and the medical products market. Because there will be even fewer medical suppliers, the current medical suppliers will solidify their iron grip on the market, allowing for more price-fixing and ultimately causing treatment costs to rise further. Additionally, since there will be more insured Americans, if the government's new insurance program is even remotely like the current HMOs, the government will be directly encouraging more consumer irresponsibility. Because more people will be electing to receive expensive treatments than before, premiums and healthcare expenditures will rise even further. The effect of the proposed healthcare bill will be exactly the opposite of what it is supposed to do. Rather than bringing prices back down and ensuring that healthcare is affordable for everyone, this bill will cause the already out-of-control prices to leap for the sky and guarantee that only the wealthy will be able to afford healthcare.

Therefore, we see that not only is the new healthcare bill founded on a lie, but it will only serve to exacerbate the conditions that currently haunt the American healthcare market, resulting in higher costs and lower-quality service than before. Do not be deceived by government propaganda about the alleged benefits of this brand of healthcare reform. America would be stupid to adopt any such legislation!

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