Health Care Debate

Just a very quick note: today is a watershed for reform of the American health care system. The final committee deliberating on the subject has voted, 14 to 9, to send it’s bill to the floor for a full vote. That means that all five – yes five – such committees have produced a pro-reform bill and have so agreed to push reform forward. For American consumers that can only be considered a good thing.

Naturally there is a long way yet to travel for the reform movement, but today’s progress effectively ends the anti-reformist’s chances of stopping the passage of legislation. The only issue now is the exact nature of the reform. We will know more about that as the reconciliation process winds its way toward conclusion.

The most contentious aspect of reform remains the institution of a ‘public option’. This is the offering of insurance by the government, probably in a Medicare style package, as a way of forcing proper competition onto the insurance industry. It has been one of the least understood parts of the reformist agenda that the level of competition, and therefore choice and price of health care policies, is highly restricted currently. The majority of states have only two major insurance companies operating within them. So effective private competition is, as a practical reality, non-existent. This has facilitated profiteering and poor service by the industry which has resisted – naturally – change as a consequence. It is one thing to argue for free market solutions to public policy problems, it is another to avoid reality. In the case of health care the private system lacks practical competition, without which all the usual benefits of said competition are obviously lacking. So to defend the status quo is not to defend private enterprise, it is to defend profiteering – or ‘rent seeking’ in the jargon of economics.

There is a vast difference between defending a market system that operates the way economists like to imagine, and defending one that is rigged in favor of one side of the market. No economic theorist could present a defense of monopoly of oligopoly without undermining the efficacy of the ‘market magic’ so beloved of the free market advocates.

Besides, between one third and one half of our health care dollars are funneled through a government agency in one form or another – Medicare being primary – which is an indictment of the pre-existing state of the private sector. That fact also eliminates the public/private discussion: we already have a vast public health system on a par with all those effete foreigners we so vilify. Extending that service as a ‘public option’ to the rest of society would go a long way to curtailing the egregious cost spiral that we find ourselves stuck in.

We should all recall that the central drive behind reform is cost containment. It is not possible for a private system to be universal: the private sector will always want to cherry pick the profitable parts and leave the rest to the government. Nor is it possible for a private system to be cost efficient without proper competition. Our current system has incentives that prevent efficiency: the ultimate customer – the patient – doesn’t pay the full cost of the product being bought. It is heavily subsidized by tax deductions that go to companies that provide benefits. This skews the system towards the over use of unnecessary services, and hence towards an overly heavy weighting in our economy.

I find it odd that free market advocates do not want to reform the system to bring it into line with their own theories. They could advocate the necessary steps: cut subsidies and enforce a free market. Increase competition and squeeze profits. In other words remove the distortions that prevent the market magic from working. But that would hurt consumers who would face huge premium increases, and providers who would actually face credible competition. In the absence of such moves we have only one way to reduce costs: a public option.

So. In a way the pro-market folks brought this on themselves. Their fear of the real effects of a truly open market stopped them from supporting its creation. They were reduced to supporting various groups who contributed to the inefficiency we now wallow in. This was inevitably a losing proposition as today’s vote has shown.

Now it’s on to reconciliation.

Addendum:

Let me remind you that the benefits of a capitalist system derive from the possibility of making a profit. Not the attainment of that profit. The profit motive is thought to induce competition. This competition drives innovation. Competition also erodes profit as each competitor struggles to attract customers by cutting prices. In theory this process should drive out all long term profit, leaving only short term profits as a possibility. In the real world markets are never ‘free’ enough for profit to be eliminated. The existence of profit over the long term is actually proof that there are no free markets. Markets are constantly being rigged and distorted to ensure long term profit – think of all that industry led lobbying. So defenders of ‘free markets’ are either deluded by the textbook and divorced from reality, or they have an interest in maintaining one of those distortions. In this health care debate it was the latter – in the form of the insurance industry lobby – rather than the former.

It is one of life’s delicious ironies that those who most strongly advocate free market economies usually turn out to be the very people with the biggest vested interest in preventing their existence. I have yet to meet a CEO truly committed to opening up a market to more competition. More to the point not one CEO I know runs his/her company as if it were a free market. They all run centrally planned economies a la the Kremlin. It is a premier example of NIMBY – ‘Not In My Backyard’ – thinking, and is an observation that usually eludes anyone who hasn’t studied economics. Come to think of it: it eludes most economists also!