The US Health Care Crisis
Warning: This post is not for the faint of heart!
I picked up my local Sunday Paper this last week and saw a nice big spread on Where The Candidates Stand: Health-care. It’s was a relatively simple, full-page graphic about the major candidates for President and what they feel should be done to “fix” the health care crisis.
As most people are aware, the US spends more more per-capita on health care than any nation in the world. Despite this, there are still numerous uninsured persons in the country. Politicians are still fighting on how to fix the problem and make sure every American affordable health care. What they really mean is, make sure every American has affordable health insurance, not health care.
Now, I’m not an economist, but I do play one in the classroom when I’m teaching. So, let’s review some of the simple economics of today’s health care issue.
- The price of health insurance is too high for many people to afford on their own. Those with insurance typically rely on an employer to pick up part of the tab or are forced into the Medicare system.
- From the article above, the majority of democrats want to force every American into one of the two categories listed in #1. They would prefer that every employer offer medical insurance. Those who aren’t employed or chose not to use their employer plans would be forced to pay an premium to be part of the Medicare system.
- From the Republican side, they seem to focus on giving more tax breaks to individuals for medical insurance to try and make the current system more affordable. I guess they figure if you can save 15% off the premium, you’d buy a private policy.
If you can remember back, here is a typical supply and demand graph in equilibrium (Qe, Pe):
Time to pick these apart. Let’s start with the fact that health insurance is too expensive. Why is that? Well, by insuring consumers for something like healthcare, you effectively reduce the cost of them going to the doctor and receiving medication (this is evident if you remember your health insurance rates at work a decade or 2 ago, I used to pay $6 a week for better coverage than I have now). By making an effectively lower price, consumers change their quantity demanded by sliding to the right on their demand curve.
This change put the market in an imbalance. There is now insufficient supply of health care at the quantity demanded (if you’ve looked at your local help wanted ads the last 5-10 years, you can attest to the shortage of supply in this market). The graph below shows our new situation. With the larger quantity demanded (Q1) the consumer is now paying price P1, but the provider is expecting price P2.
So, what happens next? There are 4 ways to fix the problem in order to return to equilibrium:
- We could get let the market continue to increase cost for the consumer in order to bring us back up to the original equilibrium of Pe & Qe.
- We could increase Demand (shift the Demand curve to the right), such that the consumer is paying much more (P2) to keep our current quantity of health care (Q1). Anyone willing to go for this?
- We could drastically reduce our demand for health care (shift the demand curve to the left) such that we are still paying the same price (P1), but only getting the smaller quantity of health care. Again, like #1, that will be a tough sell.
- We increase the supply of health care (shift supply curve to the right) so that there are enough providers they are willing to provide Q1 amount of service at the P1 price.
None of these are answers people want to hear and thus no politicians wants to propose them. Instead, we continue to focus on making healthcare cheaper for consumers. Over the past several years, the market has started to correct itself such that we are working on solution #1 above.
Instead of letting it run it’s course, people are asking politicians to interfere and drop our prices back down, increasing the quantity of health care demanded even more. That will just make the disparity between the supply and demand even greater.
Let’s say whoever get’s elected President manages to get control of health care costs for the nation and we stay where we are currently. Who pays the difference between P1 & P2 in order to have enough Doctors and Nurses available to provide the services that are being demanded? My guess is it will be added to the national deficit. Otherwise, there will be cheap health care with no one around to provide it.
While no one want to hear it, the real answer to this crisis is simply to leave it alone. The market will find it’s own equilibrium over time if we continue to let it. Yes, there will be people without insurance, just like there will always be people without jobs.
Personally, I wish things were simple enough that we could pay our doctor’s our selves and that all that money would be tax deductible. Without the extra overhead of processing the plethora of insurance paperwork, the Doctor’s cost is sure to decrease and I’d be paying not much more than I am now (assuming I stay relatively healthy). Realistically, I would like to someday have enough savings that I could keep just some basic catastrophic medical insurance and then pay any regular prescriptions and doctor visits out of my own pocket, knowing I’m covered in the case of major illnesses.
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March 3rd, 2008 at 1:11 pm
I’ts not a matter of having health insurence anymore, its a matter of health care reform within the insurance industry. Health care companies bonus people based on how many claims they deny. People die every day because their claims for brest cancer treatment or bone marrow transpants are denied by their health insurence companies. The health care industry is criminal.
March 11th, 2008 at 5:55 am
You assume the consumer is paying. No. With third party payers, consumers become price insensitive.
The only health care to become cheaper/more affordable are things not covered by insurance, that are in a pure competitive market, with the consumer paying: cosmetic surgery, LASIK surgery, etc.
March 12th, 2008 at 3:34 pm
High deductible policies with HSAs will change this though…the consumer will become price-sensitive because any HSA money you keep, you get to save and invest and build wealth. With self employment and small companies, this type of plan will become more common; larger organizations will probably start moving to it too.
I think we should be able to save and accumulate our Sec. 125 FSA health care spending accounts. That’s part of the solution and would smooth out the bumpy ride for many Americans.
My breast cancer treatment so far has cost close to $400k and not all the bills are in yet; of which, my out of pocket copays were $120 (and my monthly premium is $26). I’m keeping a spreadsheet. When the dust settles, I’ll blog about “What Cancer Costs.”
March 12th, 2008 at 4:06 pm
One of the first problems that needs to be fixed is the price discrimation against the uninsured. For a variety of reasons, hospitals and doctors charge insanely high rates known as “gross charges” and then just write off most of it when the insurance pays. However, if you don’t have insurance, then you get to pay the gross charges straight up. This creates an artificial need for health insurance. The system is simply flawed from the start. Paying your own charges is just not really an option because you’d pay at least 10 times what the insurance company pays. The end result is that healthy people who rarely go to the doctor are forced to buy insurance at the same price as and subsidize people who go to the doctor all the time. This totally hoses the supply and demand.
Another problem is that with each health care purchase you are paying for a lotto ticket. The ticket pays off if you are injured by some type of negligence on the part of the health care provider. The ticket is not optional. The health care provider must provide it to you, so they much charge you for it. I am talking about the excessive damages awarded to plaintiffs who get hurt by negligence. If you could opt out of it and pay less, you probably would choose to do so. Economically, it makes sense to cap the damages at some reasonable fairly small amount (such as a percentage of the charges - maybe 1000%) and allow the patient to buy insurance that will pay him in the event of malpractice. That will definitely cut down on the cost of health care.
Related to the lawsuit lottery problem above, patients need to be able to get more information about whether a doctor has had a lot of malpractice issues before choosing whom to go to. Right now, you really just go and hope nothing bad happens because you really have no idea about the doctor who is treating you other than anecdotal evidence from friends or acquaintances. If you could investigate the history of a doctor and see that he’d only had 2 minor complaints in 20 years of practice, you’d probably feel fairly comfortable making an informed decision. If you are informed about your choice of doctor, do you really want to buy a lotto ticket that will pay you $20 million if the doctor should happen to screw up and amputate the wrong leg or something or would you rather save the money and just take your chances that you won’t be the first one in 20 years?
March 12th, 2008 at 6:09 pm
Agree @ James. A coworker’s mom almost had cardiac surgery recently, and the brand new cardiac surgeon totally missed the fact that the patient had a raging staph infection in her leg. The surgery would have killed her. Coworker had the instinct to go to a bigger cardiac center in the city; staph infection detected, BP rock bottom near death, aneurysm in brain, cardiac surgery delayed. The doc there knew the idiot cardiologist and was shocked that the noob doc was practicing unsupervised straight out of residency. YIKES!!!! Yes, we go to docs and don’t really investigate them.
OK I said $400k, just saw the January and February bills, updated the spreadsheet. Make that $523k plus.
Re reimbursement percentages, some things are paid in full, some denied, others are quarter-third-half range of reimbursement. I’ve rarely seen merely 10% reimbursement level. But the overall point is valid. One must go in and beg and negotiate with the docs/hospitals. They can do a lot of writeoffs and subsidies. Our local hospital has multimill’s in charity write offs for a county of 70k population.
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