. . . isn’t the public option or the individual mandate or employer play-or-pay or the conversion of private insurance companies into public utilities or government funding of abortion or end-of-life counseling or any other detail of the so far rather nebulous plan. Regardless of the specifics, Obamacare won’t work, because the President has set incompatible objectives, each of which stultifies the rest.
On the one hand, the President believes that a large number of Americans currently receive too little medical care. He has repeatedly cited the 40-plus million who aren’t covered by health insurance, using “no insurance” as a proxy for “no care”. Objective number one, then, is to bring more medical services to this portion of the population.
On the other hand, the President thinks that medical care is too costly. Accompanying his statistics on the uninsured is the plaint that the U.S. spends a considerably larger fraction of its GDP on the health sector than any other country. So the second objective is to cut the cost of doctor visits, hospital stays, medication, etc.
Translated into the terms of an economic textbook, Obamacare aims to raise the demand curve and lower the point of intersection of supply and demand. By implication, the supply curve must shift, too. At the current price level, the amount of medical care demanded post-reform will be greater than it is now. Only if providers are willing to supply more care without any economic incentive will prices go down rather than up.
To look at how this contradiction might be resolved – or, rather, to see why it can’t be – let’s consider a simplified country with two doctors, ten hospital beds and 1,000 people. Right now, 800 of the people have health insurance, which pays all their medical costs. The other 200 don’t and have to fend for themselves. The doctors charge 10 ducats for a visit; hospital beds go for 100 ducats a night. At these prices, the doctors are as busy as they want to be, and the hospital beds are kept in steady use.
Appalled by the problem of the uncared-for, the government enacts measures that give them insurance coverage. The demand for medical care immediately jumps. The providers’ first reaction is to raise their prices. The doctors aren’t willing to give up leisure unless they get more income in return. The hospital beds are limited in number. To create more requires new capital for the hospital sector, which won’t be attracted there unless the profitability of beds increases.
The government, however, doesn’t like the idea of higher prices. In fact, it thinks they are already too high. What can be done?
Idea 1: Cut out waste. Maybe the doctors spend 20 minutes per patient when 15 will do. Maybe the hospital keeps patients more nights than necessary. Improvements in efficiency would make it possible to treat more patients with the existing resources. The gains could be so great that competitive pressures will lead the providers to reduce their prices.
Questions about Idea 1: If the current system has gross inefficiencies, what factors caused them? Will the reform eliminate or exacerbate those factors? If it doesn’t correct them, how will the inefficiencies be identified and removed?
Idea 2: Prevent illness. If a smaller proportion of the population gets sick, expanding the number with access to medical care won’t result in a greater work load for health care providers. A really healthy population will use less care, and, again, prices will decline.
Questions about Idea 2: Prevention costs money, too. How do we know that preventive care costs won’t equal or exceed health care savings? If there are net savings, why hasn’t the prevention strategy already been adopted? Does the reform remove the impediments?
Idea 3: Impose price controls: If there is only one insurance company (presumably controlled by or beholden to the government), it can tell providers what their prices will be. Henceforth, doctors will get 9 ducats per visit, and hospital beds 90 ducats a night.
Questions about Idea 3: Since the price is now below the market clearing level, the doctors’ offices will fill up with more patients than the doctors want to treat, and the nightly demand for hospital beds will exceed the number available. Meanwhile, the sub-market prices will attract no new doctors or hospital bed investors. How will the providers’ resources be allocated in these circumstances? And what can be done to ensure that there will be new doctors and hospital beds when the present ones retire or wear out?
While the real world is more complicated than our imaginary country, the options available for squaring the supply-demand circle are the same. The President has put forward all three ideas – and has conspicuously failed to address the questions about them.
Everyone knows, or at least believes, that American medicine is rife with inefficiency. Conventional wisdom suggests two reasons: Insurance covers so much that patients have little incentive to pay attention to costs, and the world’s most plaintiff-friendly malpractice laws encourage doctors to practice expensive “defensive medicine”. The President obviously doesn’t believe either of those is to blame. Obamacare would further attenuate the connection between consumers and prices, and it contains not a smidgeon of malpractice reform (nor will it, given that plaintiffs’ lawyers are one of the main economic bulwarks of the Democratic Party).
So, instead of dealing with the causes of wasteful medical practices, Obamacare will try to treat the symptoms. A board of experts will figure out, on the basis of “the evidence”, how best to treat each ailment. As the President has put it, these wise men will inform their ignorant colleagues that the blue pill works just as well as the red pill and costs half as much.
It sounds to me like a better idea for auto repair than for the care and treatment of human beings. There is, however, a way to find out whether it is feasible. The federal government operates the world’s largest health insurer, Medicare. Why not test the President’s money-saving ideas there, before inflicting them on the entire population? Why is the Administration’s only proposal for making Medicare more affordable the tired old nostrum of paring reimbursements to physicians and hospitals?
The President is also a great believer in the proposition that preventive care will save money. Earlier this month, the head of the Congressional Budget Office pointed out that, according to empirical studies, while preventive measures may often be the best treatment, they are usually not the cheapest.
Researchers who have examined the effects of preventive care generallyfind that the added costs of widespread use of preventive services tend to exceed the savings from averted illness. An article published last year in the New England Journal of Medicine provides a good summary of the available evidence on how preventive care affects costs. After reviewing hundreds of previous studies of preventive care, the authors report that slightly fewer than 20 percent of the services that were examined save money, while the rest add to costs. Providing a specific example of the benefits and costs of preventive care, another recent study conducted by researchers from the American Diabetes Association, the American Heart Association, and the American Cancer Society estimated the effects of achieving widespread use of several highly recommended preventive measures aimed at cardiovascular disease – such as monitoring blood pressure levels for diabetics and cholesterol levels for individuals at high risk of heart disease and using medications to reduce those levels. The researchers found that those steps would substantially reduce the projected number of heart attacks and strokes that occurred but would also increase total spending on medical care because the ultimate savings would offset only about 10 percent of the costs of the preventive services, on average. Of particular note, that study sought to capture both the costs and benefits of providing preventive care over a 30-year period. [footnotes omitted]
That leaves us with price controls, a panacea that fails whenever it is tried. In the short run, the insidious effects may be cushioned, because medical care providers have a lot of sunk capital and can’t readily switch to other occupations. Over time, though, doctors and nurses will retire and not be replaced; hospitals will deteriorate owing to underinvestment; pharmaceutical firms will find it hard to attract capital. In theory, everyone will, as the Left desires, have a “right” to health care. But who will have the duty to provide it? Will we conscript men and women into the medical profession?
Of all the sectors of the American economy, medical care is already the one with the highest level of government intervention. Perceiving the results of that intervention to be unsatisfactory, President Obama proposes to intervene further, with a scheme that can achieve its declared goals only if the laws of economics are repealed. Is it excessively “right wing”, “obstructionist” or “racist” to think that Obamacare is fatally deficient, a disease rather than a cure?
Interesting comments. Thanks for the OMB info about preventive care costs not being that cost effective.
Medical services are inelastic, that is, a slight reduction in availablity pushes up prices dramatically, just like supply & demand for gasoline.
Health care is run by insurance companies, pharma, and wall street interests. Their greed has no compassion. Obama makes promises to Pharma, blocking foreign drugs, etc. Clearly, he is no marxist, as the Wrong Wing nuts say.
We need a single payer plan. Because of greed and Republicans not wanting to let a democrat have the biggest progressive change since Medicare in the 1960's they will do anything and I mean ANYTHING to block real health insurance reform. Money has poisoned our electoral and legislative process.
We are in this together. What moral failure do we have if we neglect caring for our brothers, sisters, friends and neighbors?
As a decent country we need single payer government option. Thank you.
Posted by: Mark in Boston | Saturday, August 29, 2009 at 10:49 PM