The Cost of Healthcare (Part 1) - The Economic Case for Healthcare Reform

By the time you have finished reading this, more than one person under age 65 and over 18 will have died in the U.S. due to lack of health insurance. Every 12 minutes someone else becomes a number in that statistic. It is entirely possible that the best care in the world may not have saved that someone, but that family member, neighbor, friend, acquaintance, or six-degree-separated addition to that statistic was unable to know if it could have been the case. Ensuring the best possible healthcare is provided to members of our society who need it is an issue that has dogged the nation for over 100 years. Tinkering and baby steps have created institutions and programs such as the CDC, The VA Hospitals, Medicare and Medicaid, smallpox eradication, polio, rickets measles and other common disease minimization, flu immunization, and the End-Stage Renal Disease (ESRD) program among others; programs that sometimes work, and sometimes are bogged down by rules that contradict the objective of the program. Yet, over 160 million Americans every year have claims denied, problems with their claim or are outright uninsured, facing deteriorating health, bankruptcy and death. The cost of not reforming health care is greater than otherwise, and this case can be made in economic, moral and political terms. This is the first of a three part essay addressing healthcare reform on these terms.

The Economic Case for Health Care Reform: The Doctor’s Bill

In a free and unregulated market, public goods are monopolized by private providers that are driven to serve the most profitable segment with the lowest risk. Government has generally understood this “market failure” principle, as in the case of public education, an example of private, public, as well as non-profits mixing together in an effort to make education accessible to everyone. If no possibility of a publicly funded basic education existed, natural oligopoly forces would drive the price of education ever higher, while the same schools would try to lower their cost by being increasingly selective in their admission policies. Having a public option, makes private schools more affordable for those who want it, and guarantees access for all to an education that improves the intellectual and skill pool of the labor market: a productivity bonus for everyone.

The notorious “death panels” are alive and well, and get paid bonuses when health care is denied to those in need. Repeated cases of insurance companies engaging in this practice in order to increase profits are well documented. There is no control mechanism or regulation to make these private companies behave differently in their natural drive for profits, and it is entirely within the rights of these companies to seek to maximize their profits. In a free, unregulated market, their actions are perfectly understandable. It is the mission of these companies within our free enterprise system to seek to decrease costs and increase profits. It is logical then that they will try to increase the rates as much as they can, and drop as many expense creating liabilities (people in need of health care) as they can. If Big Company A is not as effective diminishing liabilities and increasing profits as Big Company B, the shareholders of A will not be happy, sell Big Company A stock, and buy stock in B. The end result of this market structure is that it skews to the healthier and the wealthier, a diminishing pool that eventually has limited growth for A as well as B. As people are dropped either actively, by coverage denial, or passively by the unaffordability of the premiums, they may get bombarded by Little Company C, D, E and others, with seemingly affordable rates and coverage; except that when they actually need the service, exclusions, limitations and deductibles are even more pervasive than in A and B.

The 46 million or so Americans with no insurance includes a great number that can afford it but do not get it because they think they do not need it; and to a certain extent that may be true. They are young and healthy, and live a healthy lifestyle. Insurance companies would very much like to mandate these people to buy policies to increase their market pool of healthy customers, especially when not competing with a player that focuses on healthcare as a public good, not as a profit market. The market structure as it exists drives the insurance companies to cater to the healthier and the wealthier. It is in society’s best interest to alter this structure so as to change the incentives.

The costs of the healthcare plans being discussed in Congress are astounding, in the trillions of dollars. But, let us be clear, that money will be spent, regardless whether it is by the government or by private individuals, unless nobody goes to the doctor anymore. This is the doctor’s bill for the nation, as charged by the whole of health services provided. The essence of health care reform is cost driven, in order to get the inefficiencies out of the system and so that we can all spend less in this essential public service, whether through the private market or as part of a public option. To focus on the great amount of money allocated by the government on healthcare for all Americans is to focus on the wrong issue. This is money that is simply shifting from one pool to another, and its sheer size just amazes us when we see it in one big number. The cost of health care, those trillions of dollars, is already being borne by all Americans by:

1. Paying private insurance. Sometimes paid from the insured’s own pocket or as an employee benefit; moneys which come from the stagnant wages of the employee and the company’s customer’s purse;
2. Subsidizing local, state and federal taxes health services for the uninsured, typically emergency and critical care, shifting from wellness management, chronic and preventive treatment to acute treatment, the most expensive of all treatment, and
3. Lost productivity in the economy, e.g., sick days and underperforming employees.

This is a short overview of the economic structure problems in the healthcare industry, a structure that requires an extra player to at least balance somewhat its shortcomings in servicing the public good. The market structure as described favors the private sector profit motive, but ignores the character of public good (in the economics definition of the term) that is implicit in healthcare. Undoubtedly even relatively mild illnesses such as the flu cost our economy billions in lost productivity and therefore output. More catastrophic illnesses or medical needs, and death have also a direct economic impact. The loss to our economy of five lives per hour is not just in output lost, but in the increase of costs due to greater use of emergency and high cost procedures instead of preventive medicine. When our society is healthy, productivity is higher and there is an economic benefit for all.

• Link to Harvard study on deaths caused by lack of insurance.
• Link to Commonwealth Fund report "Losing Ground: How the Loss of Adequate Health Insurance is Burdening Working Families"