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Wednesday, July 22, 2009

The last thing we need is a healthcare "system"

After my recent posting, "Should healthcare be a 'system'?, I went back into my old emails and dug out this one, which I sent to my state legislators in January, 2006:
What Vermont needs is a healthcare market. The last thing it needs is a government-run and/or government-financed plan or system. No group of bureaucrats has access to enough information to successfully plan a healthcare system.

Vermonters do not need a healthcare system that is imposed on them by government. What Vermonters need is a healthcare market that emerges from individual consumers being free to choose to do business with the providers they prefer and to withhold their patronage from the providers they do not prefer.

Many if not most of the problems related to healthcare today can be traced to previous government interventions, including the tax treatment of employer-provided health insurance. The solution to today's healthcare problems does not lie in increasing government intervention in healthcare. The solution lies in undoing all previous government interventions, most if not all of which have failed.

Vermonters who feel strongly that a government-controlled, government-financed healthcare system is the solution to today's healthcare problems should ask themselves why is it that our government-controlled, government-financed educational system is such a failure. If bureaucrats can't plan and run a high-quality, cost-effective education system, why should Vermonters believe they can plan and run a high-quality, cost-effective healthcare system?

Sincerely,

Mark Tele

PS For a description of the differences between a planned system and an emergent ("spontaneous") order, see "A Marvel of Cooperation: How Order Emerges without a Conscious Planner" and "The Reality of Markets", both by Russ Roberts, professor of economics at George Mason University.

The distinction between a planned order and an emergent or spontaneous order can also be seen in this excerpt from the biography of economist Friedrich Hayek from the online "Library of Economics and Liberty":
The major problem for any economy, [Friedrich Hayek] argued, is how people's actions are coordinated. He noticed, as Adam Smith had, that the price system—free markets—did a remarkable job of coordinating people's actions, even though that coordination was not part of anyone's intent. The market, said Hayek, was a spontaneous order. By spontaneous, Hayek meant unplanned—the market was not designed by anyone but evolved slowly as the result of human actions . . . .

In the late thirties and early forties Hayek turned to the debate about whether socialist planning could work. He argued that it could not. The reason socialist economists thought central planning could work, argued Hayek, was that they thought planners could take the given economic data and allocate resources accordingly. But Hayek pointed out that the data are not "given." The data do not exist, and cannot exist, in any one mind or small number of minds. Rather, each individual has knowledge about particular resources and potential opportunities for using these resources that a central planner can never have. The virtue of the free market, argued Hayek, is that it gives the maximum latitude for people to use information that only they have. In short, the market process generates the data. Without markets, data are almost nonexistent.
One of my state legislators responded, as follows:
Thanks, Mark. I'm sure that you must have looked at the State of Texas--they have one of the largest numbers of insurers in the country and among the highest (I think the highest) number of uninsured in the country. the free market works until there's no profit. the real advantage of a single payer (it could be blue cross or any other non profit) is decrease in administrative costs, incentives for wellness, and information technology improvement. that won't happen with many separate companies competing against each other for the profitable pieces of the market. I'm still listening. [Name withheld]
To which I replied, as follows:
I'm not familiar with the particulars of healthcare in Texas. However, since the government has intervened in the healthcare marketplace time after time, we know for certain that a free market in healthcare does not exist in Texas (nor does a free market in healthcare exist in any other state, including Vermont). If a free market in healthcare doesn't exist, how can we blame the number of uninsured on free markets?

As economists Gene Callahan and Robert Murphy write, "It is true that under current arrangements, the health-care situation of those who are not insured at work but who do not qualify for Medicare or Medicaid is quite difficult. Those with less wealth have more difficulty acquiring any good or service than those with more. But their particularly dire circumstances with regard to health care are almost entirely due to previous government interventions. The government-backed AMA severely restricts the supply of physicians and thus drives up the cost of doctors’ services. The special tax status granted to employers’ expenses for insurance further increases prices, as do Medicare and Medicaid subsidies".

Previous government interventions have caused most--if not all--of the problems we have with healthcare. We now have a choice between (a) piling new government interventions on top of the old, causing even more problems, or (b) undoing the old interventions and returning healthcare to the market. For instance, if we eliminated the tax treatment of employer-provided health insurance, there would be no incentive for employers to include health insurance in compensation packages. Employers could and would pay more of the compensation package in the form of cash with which employees would buy their own health insurance. A desirable side effect of this would be that individuals who find themselves between jobs would not be without health insurance and the ranks of the uninsured would shrink dramatically.

The preferential tax treatment of employer-provided health insurance dates back to WW II--over 60 years ago! It is a government intervention that itself was designed to compensate for an even earlier government intervention: wartime wage controls. It is unfortunate that the government didn't just eliminate the wage controls instead of piling on yet another intervention. How many families in the last 60-plus years have suffered financial ruin because a family member became ill or injured when the family breadwinner was between jobs and thus without insurance?

It's possible that a single-payer system would lead to a reduction in administrative costs (although I have my doubts!), but I don't think that's the correct (or most important) metric by which to measure a healthcare system or a healthcare market.

In a free market, insurers would be free to charge according to risk, which would provide strong incentives for individuals to focus on wellness. For example, in a free market, insurers could (and most likely would) charge higher rates for overweight individuals, who would then have a strong financial incentive to lose weight.

Information Technology ("IT") ought to be attractive to both insurers and providers because IT ought to help both of them reduce costs. In the industry in which I work, there is a very large number of companies competing with each other and they all have made, and continue to make, very large investments in IT to improve profits by reducing other costs. (I say "other costs" because profit is itself a cost--it is the cost of capital.) I don't understand why the situation is, or would be, different in the healthcare industry. The existence of companies like IDX suggests that at least some providers and/or insurers recognize the value of IT and are willing to pay for it.

Single payer will require rationing. Otherwise, when healthcare is "free", demand will increase markedly and quickly outstrip supply. Government is going to have to determine who is going to get what healthcare products and services and under what circumstances--and who is not going to get them. In short, Government is going to have to come up with a plan for matching demand with supply. Suppose that in order to reduce the level of demand to meet supply, that plan involves ignoring your need (demand) or mine for a certain medical product or service?

Government planning of the economy has never worked in the past. What reason is there for us to believe that government planning of a healthcare system will be any different?

I think the clamor for a single-payer system is being done with the best of intentions. But intentions don't count; results do. Single payer is not the magic bullet its supporters believe it to be. If it is adopted in Vermont, Vermont and Vermonters will suffer dearly. And we won't be able to laugh the next time P.J. O'Rourke crosses the Connecticut to quip, "If you think health care is expensive now, wait until you see what it costs when it's free."

Well, my coffee cup is empty so my break must be over!

Best regards,

Mark

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