Health Care: Rationing By Any Other Name

I have abstained from getting too vexed over the health care debate simply because we are still waiting for yet another round of ‘scoring’; from the Congressional Budget Office. Once that arrives it will set off a flurry of amendments and updates, after which we will arrive at a slightly more clear understanding of what is likely to emerge from the Senate.

Meanwhile I want to remind everyone that the discussion, such as it is, revolves around which form of rationing we all would prefer: market based or government mandated.

The need for reform is fundamentally based on affordability. As a nation we vastly over-allocate resources to health care. This means we starve other aspects of our economy. While so far we have lived under the illusion this is all OK, at some point our current trajectory becomes untenable.

The simple truth is that the debate over the national debt and future Federal deficits, is a debate over health care costs, because our over spending on health care is the single largest reason we will have all that debt.

With that in mind we should all evaluate any proposal for it’s potential cost saving ability.

For instance: any objection to cutting Medicare expenses via use of bargaining power – this was the essence of the McCain opposition to reform – must show where an equivalent amount will be saved. In my view it is just silly to object to a clear example of a cost saving measure. It does not represent a cut in service, it is a cut in the price of that service. Conflating the two and then suggesting that the cut equates with a reduction of care for the elderly is simply disingenuous.

Likewise, those who argue for a market based system must come clean with the consequences of such a system. The kind of market dynamics we rely on to make capitalism work in other sectors of the economy do not work in health care. The incentive system puts no pressure on doctors to limit the cost of their services. Competition is negligible. Information is asymmetrically biased in favor of care providers. And tax deductibility masks the true cost of insurance. Each of these factors is a well known cause of ‘market failure’. I have yet to hear anyone argue cogently how they would force doctors to compete on price which is the very essence of a free market. And how would they balance the information asymmetry? Give everyone a medical education so that they can check the efficacy of the doctor’s prescription?

The simple fact is that health care does not conform to most of the essential characteristics needed for a market to work efficiently. This means that no amount of tinkering can ensure that a market based system will be any more efficient than a government mandated system would be. This is unequivocally the case. It is written into all our text books on economics.

To give an example: for us to bring market forces to bear on doctors we would have to regulate them in some way. Only then can we overcome their natural information advantage. How can a consumer without a medical education ‘know’ that the care they are buying is the best? Free market economics assumes that such knowledge is freely and costlessly available to all. Its called the assumption of ‘perfect information’. It has been proven over and over again that only by making such an assumption can we ever guarantee a market is a better solution than a government mandate would be. Any relaxation of that assumption – at all – and we are left guessing. So: how many of you know enough to challenge your doctor? I didn’t think so.

My point being that we need to understand the underlying economics before we get too worked up over such arguments. There are times when markets just don’t work well and need to be replaced or shored up. That means the government plays a part whether we like it or not. That involvement can be in the form of a heavy regulatory hand, or it can be in the direct provision of the service in question.

So the realistic choice in our health care debate is not a government versus no government one. It is how much and what form of government involvement do we need to get the current cost trajectory down within tolerable limits.

This is, or should be, the central issue under debate.

Just don’t hold your breath.