Monday, October 22, 2007

Is “free market health insurance” a nonsense phrase? - Part 2

In Part 1 last week, I presented an argument that America’s current system of public and private health insurance was socialism at its worst, since it transfers responsibility for health care from the individual to society in a way that provides few mechanisms for restraining demand or cost. (Click here for Part 1.)

In the final installment, we will look at two opposing paradigms for replacing the current unsustainable one.

To start with, we need to confront head-on one of the most disingenuous and dangerous phrases ever uttered by a politician: “We don’t want a system that rations health care”. Of course we need to ration health care. An economy cannot provide unlimited resources for any function lest it bankrupt itself in the process. And make no mistake, the current American system does ration health care. We provide access only to the well-to-do, the very poor, the elderly, and working families lucky enough to have an employer that provides it. Oops, I forgot one category – our system also grants one-time access for catastrophic illness, as long as you are willing to accept bankruptcy in return. A rational method to control the amount of our national wealth that goes to health care is critical to our economic survival. Of course, the current system isn’t rational, and so we see yearly increases in health care outlays far in excess of inflation, which every honest analysis predicts will eventually bankrupt the country, especially given our aging population.

The first alternate paradigm we will look at is a true free market system. For this to work economically (in other words, to provide a mechanism for limiting waste and excessive profits), you have to re-establish a link between the payer and the consumer. In drastic terms, imagine a system where health insurance was completely eliminated and the only health care provided was what the consumer was able to pay for out of his or her own pocket. Since almost no one can afford to individually pay for things like drugs or hospital visits at their current rates, the cost of these products and services would have to fall precipitously or demand would evaporate. This would cause a tremendous upheaval to providers of health care, but the market would do its job.

Would such a draconian step be feasible? Probably not. But some basic steps would be absolutely necessary to re-create the link between consumer and payer. The tax system that encourages employers to provide health insurance would have to be eliminated, and families would have to be made responsible for purchasing their own so-called “health insurance”, without subsidies. Any economist will tell you subsidies are anathema to free markets. Medicare would have to be eliminated, and possibly replaced with a monthly lump sum to retirees that could be used to purchase their own health care. Most importantly, Medicaid would have to be eliminated, together with laws that require hospitals to treat anyone regardless of ability to pay. So-called “charity health care” is poison to a true free market system. Calling it “charity” is a farce; hospitals force paying customers to subsidize non-paying ones, and it gives people the option of avoiding responsibility. Free market discipline requires denial of access to those who cannot pay. Any breach of that critical principle causes the whole thing to fall like a house of cards, because it removes the key ingredient of Adam Smith’s “invisible hand”. Those who propose free market health care reform who do not also advocate denial of access to those who cannot pay are either being dishonest or lack understanding of how free markets work.

The second alternative is what I call the police/fire protection paradigm. Our society has decided that access to police and fire protection should be universal. Such services are funded by a single payer (state and local governments) where representatives of the people set yearly budgets for the police and fire departments. Once the police chief gets his yearly budget, there is nothing he can do to increase the amount of money he has to work with, so he must make the most efficient use of that money. Speaking in precise terms, society rations the resources used for police and fire protection through the budgeting process, allocating money to entities responsible to provide the service, and combines this with oversight of the function by elected officials responsible to the voters.

Is this as economically efficient as a true free market system? No, but it seems to work okay. Our local police and fire departments are run by competent professionals, the police and firemen are dedicated, and our elected officials do a pretty good job of oversight. These services are provided to communities across America at a reasonable cost to society. The public is not crying out for free market police or fire protection, where each family would have to contract with a private security service.

Admittedly, the details of using the police/fire protection paradigm to providing health care services would be more complex. But there is clear evidence that with a few functions in a free market economy, this paradigm is the correct one. Even conservatives tacitly admitted this when the first thing they did after the terrorist attacks in 2001 was fire the private security firms at our airports and replace them with the Transportation Security Administration.

So, which is correct for health care from an economic sustainability standpoint? The free market paradigm, or the police/fire protection paradigm? To me, the answer to this is very simple. It goes back to a simple question: Is society willing to make individuals responsible for their own health care expenses, including the indispensable step of denying access to those who cannot afford it? If the answer is yes, free market health care is the most economically efficient way to go. However, if the answer is no, then Adam Smith’s invisible hand has just been cut off, and the market paradigm ceases to function – which is the system we have now. In that case, the police/fire protection paradigm is the most economically efficient – and the correct – model.

This has nothing to do with bleeding heart liberalism, by the way. These are the cold, hard economic facts.

Given this analysis, which paradigm do you think makes the most sense?


Jesse Harris said...

Steve, you did a great job at boiling down the options. I agree: we can either treat health care as a public good or we can truly create a competitive environment that's controlled by the free market. Trying to keep a toe in each pond is why we're in this mess in the first place.

It shouldn't be any surprise that I favor the free market approach. If properly regulated to prevent collusion and government-protected monopolies (like our current abusive patent system), we can minimize the number of people without access to adequate care. With a fewer number of "have nots", private charity might have a fighting chance to fill in those small gaps. Heck, most hospitals engage in forgiven hospital bills because they reap tax benefits (not to mention good PR) from the practice.

Anonymous said...

Adam Smith's "invisible hand" metaphor falls apart when applied to healthcare (and certain other goods and services as well). The idea of the "invisible hand" is that if everyone does what's economically best for them, then that will produce results that are the best for society as a whole. However, if I'm a doctor, the best economic outcome for me is to keep all my patients as sick and unhealthy as possible. Yet this is the exact opposite of what's best for society as a whole. What's best for society is if all my patients are healthy, but this is the worst outcome for me financially. Fortunately, most doctors do their best to keep their patients healthy. But, to the extent that they do, they're working AGAINST their own economic interests.

The market is simply not a good fit for healthcare.

- lucidity

Richard W. said...

Because of our "socialistic" government, I'm still looking for those black helicopters and UN Tanks to drive in our neighborhoods.
We can't have "socialized" medicine, but it's ok that government can spy on our privacy.
I guess that is part of the "free market" world.

Anonymous said...

“An economy cannot provide unlimited resources for any function lest it bankrupt itself in the process.”

An economy can provide for those you can afford it – just look at food as a commodity.

“Free market discipline requires denial of access to those who cannot pay.”


“Our society has decided that access to police and fire protection should be universal.”

Yes, but only property owners pay for this, so renters and transients use these services for free.

“Even conservatives tacitly admitted this when the first thing they did after the terrorist attacks in 2001 was fire the private security firms at our airports and replace them with the Transportation Security Administration”

Yes, and look at the outcome...TSA…Thousands standing around

“Given this analysis, which paradigm do you think makes the most sense?”

What makes the most sense is to leave the system as is – take the profit out of medicine ; you remove the quality – Just look at Canada and the UK.

Jeremy said...
This comment has been removed by the author.
Jeremy said...

Mr. Olsen,

Nice straw man you've created and knocked down here. You've constructed a scenario where a hybrid system using the best elements of the free market and government welfare for the poorest among us isn't possible. Instead you argue that the only conceivable solutions are either laissez-faire free market free-for-all or absolute nationalization of the health care system with a government bureaucracy administering the rationing of care. What an ugly and unrealistic choice.

Held to your strict but fallacious either/or scenario I guess I'd have to agree with Jesse that the free market approach is more likely to serve society successfully. I've worked for enough federal and local departments of government to know that I don't want jokers like me holding complete power over our health care system. I also know enough about history to know that the free market is historically more reliable at creating and allocating goods and capital than any form of government in history. In the few hundred years since the enlightenment capitalism has made starvation, disease, and real poverty the exception in our society rather than the rule. I only have to work a few minutes at my pathetically low paying county job to have the means to pay for a loaf of bread where if I were a typical peasant in the days before Adam Smith's much maligned invisible hand started working its magic I'd spend much of each day working much harder than I do now just so my family and I could barely subsist.

I don't buy into your phony either/or argument in this post. I think we do need to improve our nation's health care system but I can't see how that is going to happen without a combination of better use of the market to provide proper incentives to health care customers and wiser government administration of welfare for the poor. I'd love to participate in a serious discussion on how we could make those things happen.

Jason said...

The sound of free market is one of those things that makes everyone feel warm and fuzzy inside, but apparently in this world the greed is too thick to make it work. Maybe in another existence or world, but here it is obviously not working. Something different needs done. Maybe we can have a free market, with the exception of health insurance.