Monday, June 15, 2009

The Economics of Health Care

Opinions on how to solve the "health care crisis" are like belly buttons. Everyone has one and no one really cares about yours.

Some want to blame insurance carriers. Others the government. Seems like quite a few blame the "profit motive" in the health care system.

All contribute but like most complex issues, there is no simple solution and there is no single way to fix.

The challenge of how to pay for health care is not just a U.S. problem, it is world wide. Socialistic health care systems to our north and across the pond have the same challenges we have. Their tax coffers are running dry and the response is to cut services.

I studied economics in college and never thought I would ever visit supply and demand curves after graduation. I won't bore you with college level economics, but if you really want to learn more, consult with Professor Google and enter phrases like "health care economics".

The economics of goods and services can be reduced to simple demand and supply. Health care is no different. It follows economic theory just like every other consumer good.

Economists look at "price curves" to determine how much a good or service should cost. In other words, how much the market will bear.

At either extreme you have inelastic price curves and elastic curves. Most consumer items track a bell curve but some things are totally elastic or totally inelastic.

Sugar has price elasticity. As the price of sugar rises, demand decreases since there are substitutes for sugar. If sugar suddenly rose to $10 per pound sales would drop to almost zero.

Gasoline is inelastic. As the price moves toward $5 per gallon consumption drops but not proportionately. In parts of Europe gasoline is $10 per gallon but consumers are still buying gasoline and driving gasoline powered cars. At this time, there really is no substitute for gasoline so (at least in theory) the price could rise to $40 per gallon and there would still be demand.

Health care is also inelastic. Consumers want to be healthy and the way most of us deal with it is through medical services. We ignore the fact that 70% of health care services could be eliminated with a healthier lifestyle and instead put demands on health care providers to produce more and more.

Health care providers are limited and since there is no real substitute, the price can increase geometrically and someone will pay.

But unlike food or gasoline, where the consumer pays for the goods, health care is different.

Consumers do not pay (directly) for health care. Over 80% of health care is paid for by insurance carriers and taxpayer funded programs.

In other words, consumers don't have any skin in the game. As long as someone else is paying for their care there are no incentives to take personal responsibility and improve health, or to look for less costly ways of treating the individual.

What is so disgusting to me about the rhetoric coming from Washington about changing health care is that they either do not have a clue or simply don't care.

An op-ed piece by Robert Samuelson in the Washington Post addresses this much more eloquently than I can. My only complaint is that he misses the mark too, by blaming the providers.

The central cause of runaway health spending is clear. Hospitals and doctors are paid mostly on a fee-for-service basis and reimbursed by insurance, either private or governmental. The open-ended payment system encourages doctors and hospitals to provide more services -- and patients to expect them. It also favors new medical technologies, which are made profitable by heavy use. Unfortunately, what pleases providers and patients individually hurts the nation as a whole.

That's the crux of the health-care dilemma, and Obama hasn't confronted it.
The health care problem is demand driven and priced on an inelastic curve. The price of health care continues to rise but demand is not showing a corresponding decrease. As long as consumers, or more specifically, the carriers and government programs are willing to pay for services ad nauseum there will continue to be a crisis.

The only way to reduce demand is for us as individuals and a nation to become healthier.

That is not going to happen.

Until then, consumer demand for health care services will continue unabated and the price will continue to rise. Premium and tax increases do nothing to limit demand for health care and do nothing to solve the problem.

Washington is playing the public like a fool and, sadly, it seems like the consumer is going along. All Washington is doing is rearranging the deck chairs and running up more and more deficits we cannot afford. The unfunded liability for government programs exceeds $100 trillion dollars against a U.S. GDP of $15 trillion and a global GDP of $60 trillion.

This is completely unsustainable. We are walking an economic plank and are mere steps from the end.

Do have a nice day . . .
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