Public Health Care: An Economical Look

With the recent attempts by Obama to get public health care legislation passed by congress, I want to discuss a bit of the economics of public health care.

No - I'm not a crazy neo-con who hates Obama with every fiber of my body. No - I'm not a cook who thinks that all Democrats are evil maniacs bent on evilness. No - I'm not a liberal hippy (or whatnot) preaching that we're all, like, on this planet together and that, like, we're all brothers, y'know?

This is just simply going to be a rational, economically based discussion of the theory and constitutionality of Universal Health Care, the history of health care, and a discussion of the seemingly more acceptable 'public option'.

A Brief History of Why Health Care is the Way it is

Few people understand why the system is the way it is. Why is it that we get our health insurance from our employer instead of just paying for it out of our own pockets? Some people say (surprisingly it's usually the liberal-minded people) that people are just too stupid to save up their own money. This is, thankfully, not (entirely) the reason.

Employer provided health insurance was not nearly as common as it is today half a century ago. The reasons why health care is so messed up today can in all honesty and fairness be chalked up to government intervention.

Here are the biggest reasons how the government got involved in the health care market and began our 'slippery slide' into the current mess (yes, it is a mess. Everyone can agree).

1942 Stabilization Act

After the war and with the new ideals of FDR's god-awfully designed New Deal (please read FDR's Folly - linked in the advertisements), people were becoming worried that all the soldiers coming home would create havoc on the economy.

In a ... well... idiotic attempt to manage the assumed chaos, Congress passed the 1942 Wage Stabilization Act (I've seen it called the Wage Stabilization Act of 1942, the Stabilization Act of 1942, and the 1942 Stabilization Act, amongst other titles) and FDR signed it. It put a ceiling on workers wages in farming industries, of all things, but was later expanded as the federal government seemed to take for granted that it didn't matter that such an act was unconstitutional.

As employers couldn't raise wages, even though they wanted to, they began to provide health insurance policies instead of raises...

"What?!", I can hear everyone yelling, "Employers want to raise wages?!". Yes, of course they do: it's the best way to get the best workers! Many people seem to just assume that the market, if left ot its own devices, would make life miserable. This is horribly inaccurate almost by definition. In order for a market to work, people have to actually want things; if someone can get a better deal working somewhere else, or can find a competitor that makes a better deal, they'll do it (before you yell at me about cartels and monopolies, please see my 'Evan's Easy Economics')! A market, almost by definition has to make people happy.

Tax Exempt Status

In addition to this piece of legislation, there were many other government decisions that led to the current mess. Probably the biggest reason why employer provided health insurance became such a common practice was because such benefits were tax exempt!

If you had the choice of receiving $500 of health insurance, or $125 in raw money (income taxes were up in the 75-95% range back then!!), it would be an easy choice!

Originally the tax-exempt status wasn't applicable to everyone, but it was greatly expanded in the '50s to cover a much larger range of people.

Other Weird Ones

Many people demand that we currently have a free-market and capitalism based health care market. If what I discussed above doesn't convince you otherwise, here are a few other tidbits.

46% of all medical expenditures, as of 2006, were paid for by the federal government. 46%!!! We already have universal health care! (I kid, I kid, but that is a large percentage!)

Medicare, Medicaid and Social Security are all government provided.

French Health Care costs 20% of income, on average, and still runs in the red. Germans blow 15% of their income. (I mention this only because of how shocking it is! - imagine if income taxes had to increase 25%) For more info on comparisons check out this.

What does This Government Intervention mean

Ultimately, all that government intervention means is that more people can pay for health insurance, which is good. But it also means that someone else is paying for your bill. This reduces your incentives to care about the price of health care, and in turn makes the bill slowly increase.

If demand increases, then prices increase as well.

Here's a study discussing how the price of health care as a share of GDP has pretty much consistantly risen since the 1940s, when the government began to get involved.

The Theory of It

Let's just go through and think of how universal health care and public-option health care would compete with free-market health care (which, once again, we don't have currently).

Here we won't use anything but sheer logic. This is a practice known as Praxeology -the idea that, because it's impossible to prove via empirical data which system is better due to the sheer insane number of uncontrollable variables involved, so we rely on just simply thinking about it in a simplified way.

For example, many people who demand universal health care argue that 'because Canada has a lower infant mortality rate, they have a better system for health care'. It sounds like a valid argument, doesn't it? Well, upon further examination, we notice that such a statement is literally impossible to prove; what about violence and crime rates? what about the rates of teenage pregnancies? what of the rate of malnourishment? what of the rate of naturally occurring diseases? what are the effects of each country's local government policies?... not only is it impossible to take all this into account, it's impossible to even hold a controlled experiment to prove the claim!

Thus we need to rely on the method of Praxeology, not the scientific method. As much as I hate abandoning the scientific method - anyone who knows me personally can easily attest to my love of science - it is a reasonable thing to do when you can't run controlled experiments.

Universal Health Care

The main argument for UHC is that it would lower costs, and all those evil health insurance companies would stop making evil profits off of the poor sick people.

Does this argument hold any water?

First and foremost, profits are a good thing. I won't go into too much detail here (check out my Evan's Easy Economics), but profits are nothing more than a signal telling the world that there is a demand that is not being supplied well enough, and thus profits are high. This encourages people to start supplying the demand.

Second, the major argument that health insurance companies don't want to help people in need is kind of misleading. The argument that health insurance co.s are evil because they won't help people with preexisting conditions doesn't really make sense. If we were to apply the same logic to car insurance the entire argument dissolves: if you got into an accident and totalled your car on Monday and then bought car insurance on Tuesday, would it make any sense to expect the company to pay for your repairs? Nope!

This argument - that health insurance companies are evil because they don't help those with pre-existing conditions - clearly doesn't make any sense. But why does it prevail? The real reason this argument exists is because it costs so damn much to pay for health care. As shown above, the price for health care increased dramatically after the government got involved. Although it's impossible to actually prove a correlation between government intervantion and prices (because we're relying on praxeology) I think it's relevant.

Claiming in general that health insurance companies just want to make profits really mis-portrays how capitalism works. Everyone wants profits! The farmer doesn't grow his food because he thinks 'John Smith in Hawaii wants to eat a steak, so I'd better spend my whole life growing cattle for him!'.

If anyone actually thinks that this is how people get fed, then I've got some nice ocean-front real estate to sell them in Idaho.

The reason people get fed is because the farmer says 'If I work to bring up cattle and sell steaks, I can make enough money to lead a decent life!'

Similarly, the reason why health insurance companies get into the system is because they say 'if we create a giant pool of money that people pay into for exclusive use on health care, we can probably receive enough money to let us have a decent standard of living!'

Third, UHC can not be considered a right. Walter Block discusses this in one of the many great lectures he gives on the subject. How is it possible that anyone has the right to someone else's money?

Health insurance is the idea of pooling numerous people's money together and spending the pool on the ones who actually get sick. Because (...currently...) health insurance is voluntary, it means that if you don't want to put your money in the pool you don't have to, but if you get sick you can't ask for any money.

If health insurance were a right, it would necessarily mean that you have the right to not pay into the system (for example, the poor who are on welfare) but then demand money when you got sick. Or, from another 'it's a right' perspective, it would mean that you have to put your money into the pool and that you would have to get money when you got sick.

Claiming that health care is a right necessarily means that you have the right to other people's money. This doesn't quite sound right, or like a right, right? (sorry, I couldn't resist)

Going further on the subject, why is it even considered a right? The only half-valid argument I can find that health care is a right is that it falls under Thomas Jefferson's 'Life, Liberty and the Persuit of Happiness', or John Locke's 'Life, Liberty, and Property'. But this argument doesn't quite hold.

If health care is a bit of the 'life' or 'persuit of happiness' or even the 'property' right, then so should food, water, clothing, shelter and just about every other necessity. If we make health care a right, and then let the government dish it out, we have to allow food to be a right and allow the government to dish it out.

I don't want to do that - communism has already been shown to fail!

Fourth, if everyone can pay, then prices have to go up! This falls under absolute basic scarcity laws (see my Easy Economics). If you were selling your service of changing tires, and you knew that the people who needed tire changes were only paying for half (or whatever the percentage will be) of the cost, then... wouldn't you charge more? I know I would!

Well, what if we institute price restrictions (see my Easy Economics)? This won't work, either. Price controls are... bad. If someone can't make as much money doing something like saving lives, then less people are going to try to save lives. Just like our previous discussion of profits - if you can't make as much money saving lives as you can doing something else, there is a strong incentive to do that something else!

Fifth, what about personal life style choices? Do I, the health-nut-who-always-plays-it-as-safe-as-possible really have to pay for the racecar driver's health care? This sounds like robbery to me!

One of the biggest reasons why UHC just simply won't work is that it forces the safe people to pay for the suicidal people! Some of the biggest debates about UHC regard whether or not Christians have to pay for other people's abortions; or whether or not non-smokers have to pay for the health care of smokers; or whether or not people who don't want to have children have to pay for the delivery of other people's babies; or whether or not people who don't use heroine have to pay for the overdoses of those who do; or whether or not the amish, who's religion goes against things like insurance, also have to pay into the system.

UHC destroys personal freedom and choices.

Sixth, and quite possibly the most overlooked problem, is that, unfortunately, doctor's are humans, too. This issue was discussed very well in the book Freakonomics, which I can do nothing but demand you read (and the sequel, Superfreakonomics. Both are linked through amazon).

Doctor's respond to incentives the same way that any other human would. If UHC is established, then everyone can always pay for the treatment they need or want. This makes them raise prices...

...but it also makes them prescribe medication or surgery or tests that they might not if they knew their patients (read: customer) is worrying about the cost.

I know, first hand, that this is a problem. In Japan, with UHC, when you go to the doctor they do a lot of crazy things. First off, getting a physical for work (required) took a total of 3 hours from start to finish. We (my fiance and I) had to see at least 10 different doctors, and wait 5 different times. Also, in a few seperate episodes, going in for a bad cold results in the prescription of 3-5 different drugs - this one is for your headache, this one for your cough, this one for your sneezing, this one for your throat... In even another episode, I was experiencing panic attacks from a drug that was prescribed for eczema. The doctors diagnosed it as panic attacks... but... were treating it as a heart attack. I was given beta blockers, heart monitoring, and many other completely unnecessary tests.

These are the six best reasons that UHC is not quite the intelligent way to go. As these arguments - which, in just about everyone's opinion that I've discussed this subject with agree - the best solution is to go back to a true market health care and just completely get the government out.

What About the Public-Option?

I was trying to figure out the argument about having a public option. Basically the public option idea goes along the lines of just simply letting the government compete with private companies. I originally couldn't even understand why this would even be argued for: the government doesn't run anything well; it wouldn't have a chance to compete; and if we wanted more competition we could just repeal the government imposed restrictions that private health insurance companies have to overcome before they can even be a health insurance company (i.e., being forced to insure for a huge number of medical issues that the customers don't even want).

Then it dawned on me. Public-Option Health Care is quite possibly the most sinister idea ever thought of by mankind.

Think about it - in a market, you have a bunch of competitors trying to outperform everyone for customer satisfaction and money. But the key part to this is that they all, by definition of a market, have to play by the same rules.

If government 'became a competitor' it can just change the rules as it wants to benefit itself: If it's running defecits, it can just raise taxes; it can't go bankrupt - it can just print more money; it could demand it's competitors give it money (taxes); and it could just, at any time, completely change the way the it wants to do things, or how its competitors have to do things; or it could allocate money that was supposed to be used for other purposes in order to pay for what it couldn't afford.

Talk about 'unfair business practices'!

The simple run down argument against Public-Option Health Care is just that... well, it's sinister!

The barackobama.com Discussion

I just went to the Obama website to see what their arguments for health care reform are. I was kind of surprised to see the arguments.

Here is a point by point refutation of their logic.

"Insurance reforms to protect consumers from insurance company worst-practices – like denying coverage based on pre-existing conditions, capping total coverage, and dropping or watering down coverage when you get sick and need it most"

We've already discussed why denying coverage for pre-existing makes complete and total sense.

'Capping total coverage' makes sense because a health insurance company can only afford to pay out a certain amount of money at any one time - if twenty people's bills come to a million dollars, not only is this not the insurance company's fault, but they just simply can't afford to pay this (we discussed earlier why health care prices are more the result of government intervention than company intervention'.

Also, the idea of 'protecting consumers' is a bit strange. If consumers don't like a companies policy for health insurance... can't they just go to another company? OR, if all the companies are bad, (and if we got government out of the way) couldn't they start their own company?

"Consumer protections that will restrict how much of your premium dollars insurance companies can spend on marketing, profits, and salaries "

We've already discussed this one. Profits are a good thing, and salaries are also a good thing - who would want to provide health insurance to anyone if they couldn't make a living doing so?

Advertisement, on the other hand ('marketing' as it's called here), isn't to be poo-pooed: if you make the best chicken alfredo in the world, but no one knows about it, how can you benefit anyone? Advertisement exists for a good reason.

"Creation of a health exchange to increase consumer choice and guarantee coverage"

Now, I have to admit that I was not familiar with what a health exchange was. I looked it up on google, and all that popped up were websites arguing that health care and insurance policies should be displayed and compared in a wide open fashion.

... how is this different from advertisement? Obama's website demands an end to advertisement... but... then... says we ... need to have advertisement...

hmmm....

"Affordable health options, with subsidies for working families and a hardship waiver"

As much as it sounds heartless to make this statement, health care is not a right. We've already discussed that it can't be a right. Subsidizing health care means taking someone else's money to pay for another's problem.

Also, the term 'affordable health options' doesn't mean much... it sounds like... price controls? ... yikes!

"Tax credits to help small businesses afford coverage"

If I'm not mistaken, employer provided health insurance is mostly tax-free. So... I'm not quite sure what this means, other than providing small businesses with a tax break so that they can afford to pay both the minimum wage and health care to their employees. Basically this argument means lowering minimum wages, because, without minimum wages, health care would be more readily available for low-wage workers.

Don't get me wrong, I'm all for reducing taxes! But it should be done en masse!

"Making preventive care completely free – with no co-payments or deductibles "

Ain't you never heard that thar' ain't no such thang as a free-lunch?!

Preventative care being free is the biggest lie ever. Unless the doctors, and everyone who works to provide the services and technology required agree to work for free, and the people who mine the metals and make the plastic agree to sell their materials for free - someone has to pay for it!!! The only difference this argument is making is that the government will pay for the services through tax dollars. ... that isn't free!!!!!

"Lowering the cost of health care for our seniors"

I'm gonna catch a lot of flack for this one, but the people who need health care the most are the seniors. If we lower their cost by any means other than making doctors work for lower wages and having pharmaceutical companies sell their 'seniors-aimed-products' at a cheaper price... this just means that taxes will have to increase.

This argument is just a restatement that health care is a right, but then adds that seniors deserve more of the money than everyone else. So... I guess seniors have more of a right to other people's money than others? I'm reminded of George Orwell's Animal Farm, "All animals are equal, but some are more equal than others." (Linked through amazon, along with 1984 - read both of these fantastic books!)

"Improving the quality and extending the life of Medicare"

Isn't medicare bankrupt already?... hmm....

"Ensuring that reform is not only fully paid for, but actually significantly reduces the federal deficit"

So, basically, this statement just means that there's going to be a huge tax increase. There is, literally, no other way to accomplish this goal.

Conclusion

Honestly, and logically, and easily - the only logical way to make health insurance work is to allow it to be a free market.

When was the last time you asked your doctor how much something would cost? Last time I did, the doctor had to call in his secretary to discuss the price (I didn't have insurance because I had been in Japan for three years).

Next time you go into your doctor's office, give it a shot - ask them how much the 'procedure' or whatever is going to cost! I bet you'll be surprised at what happens.