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National Institute for Health Insurance Reform

One little guy - one big goal - fix a broken system. mailto:rereason@hotmail.com

Thursday, July 21, 2005

Why Healthcare Costs So Much

Medicare turns 40 this month, and reflections on the accomplishments of the program seem appropriate.

When Medicare began, old people often could not afford to go into the hospital. Now, people live longer than ever, thanks in part to improved health care and improved access to that care.

Of course, the end of life is when the biggest effort is made to save and extend life; healthcare costs for the elderly population are vastly higher than the costs for younger people. So Medicare costs so much partly because the elderly and disabled population have vastly greater need for hospital and medical services.

In economic terms, the consumer market for healthcare is segmented; government covers most of the costs of the most expensive patients while healthier, working patients are segregated into markets that work without government directly paying the costs.

Third party insurance insulates the consumer from the direct costs. That is, since the insurance pays for the service, or pays the lion's share, cost is not considered by the consumer. Of course, the costs are eventually passed on to the pool of insureds in the form of premiums. In purely economic terms, the arrangement creates a virtually unlimited demand for health services from this segment of the market. Of course, when limitless demand meets limited supply, costs skyrocket.

People with no insurance occupy a peculiar position in the market. Their costs are often borne by providers of services, who pass the costs on to the insureds. Of course, providers are legally obligated to treat only life-threatening conditions. Thus, routine care, including preventive care, is usually simply not provided to the uninsured. So, the single most expensive form of care, emergency room visits, are often the only care the uninsured can afford. Since these costs are passed along to the insured, premiums soar while the average quality of results for all patients suffers.

Piecemeal solutions, such as HMOs or Medicare costs caps are ineffective because the system as a whole operates to inexorably drive up costs.

Of course, healthcare is not a consumer good like soda pop or TV sets or digital cameras. The fact that people do not seek services unless they need them is the only real restraint on consumption of healthcare.

Obviously, a system that enrolled the entire population, including the 45 million uninsured, would result in lower average costs for everybody. Studies show that many people choose to go without insurance, which they feel they don't need so long as they stay healthy. Surely adding them into the mix makes sense.

The architects of Medicare, men like Robert Ball, wanted Universal Healthcare for all Americans. They settled for what was politically possible, coverage for their parents. The economic distortions of segmenting the market were easily foreseen. In considering whether or not Medicare is or was successful, ponder the following question: Would you want to pay for your mother or father's last six weeks of life lived in intensive care out of your own pocket? Would you even be able to?


Blogger Eddie said...

The fallacy in your argument is that Medicare is somehow a zero-sum game. Why is it that liberals can't understand that for every dollar you take out of the private sector and spend by the government, that that hurts our economy and our GDP. There are two sides to the equation. If taxpayer's didn't have their hard earned dollars stolen in the first place, we could all afford this care much more efficiently than the government could spend the money for us. Thanks, Ed.

9:29 AM  
Blogger Mike said...

The government is part of the economy.

I'm not sure you are saying I think Medicare is a zero-sum game or what you mean by that.

For a good analysis of how the health care system works as state sponsored monopoly, read Milton Friedman's "Freedom to Choose." This book is beloved by libertarians and should strike a responsive chord in the heart of a conservative's conservative.

As for the rest of your argument, the issue is whether or not private enterprise is always superior; efficiency is only one element in that judgement.

Incidentally, try to break the habit of using apostrophes to indicate plurals. As a conservative, I'm sure you care as much about the preservation of the language as I do.

3:44 PM  

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