The American medical care system has been the center of attention for a while now. Politicians have their “reforms” enacted seemingly every election cycle. We are told to fear greedy insurance corporations, but the political reforms seem to be centered on universal insurance coverage. However, this wrongly assumes that insurance results in a lower price of medical care.
Economically speaking, insurance causes medical care prices to increase. Furthermore, the increasingly expensive regulatory burdens and administrative work have skyrocketed the cost of health care. Our current medical care market has been distorted by government policy for decades and, for the purpose of this analysis, is irrelevant. If we allow for more freedom, the cost of medical care would likely decline.
Insurance subsidizes a consumer price through a third party, whether that be government or private. Thus, the price to the consumer is decreased and they are able to consume more. Yes, you pay for insurance out of pocket. However, this sunk cost has relatively no effect on your at-the-counter decision making, nor do those payments cover the entire cost of medical care. If another party covers all or part of the costs, it does not mean those costs simply disappear. However, those costs are no longer fully incurred by those responsible for them, or you.
When prices are lowered, or at least appear to be lower, consumers are motivated to use more of a good or service. In medical care, that translates to seeing your doctor for increasingly minor ailments. You might pay an out of pocket fee and insurance premiums, but that does not necessarily cover the entire cost of your visit. According to the OECD, the portion of out of pocket costs have declined while healthcare spending, as a portion of GDP, has skyrocketed. Shifting money out of consumer pockets and into insurance bureaucracies will not yield lower costs.
Once your visit is over, the doctor’s office will proceed to complete voluminous amounts of paperwork for the third party insurer, whether government or private. They must also complete the paperwork required to comply with various government regulations. None of these tasks are free by any means. In fact, U.S. hospitals use 25% of their annual expenditures, or $200 billion, solely on administrative work. If hospitals spent less time pushing paper and more time focused on medicine, medical care would be less costly to administer and more resources would be available for value-add use.
This does not mean insurance is wholly a bad thing. Unlike medical care, other forms of insurance are for catastrophes. You file an insurance claim if your car is hit, but not when you need an oil change. Why shouldn’t the same be true for medical care? If the price of medical care was actually reflective of costs, people would be much less inclined to go to the doctor for every minor ailment. Insurance is meant to cover unexpected catastrophes, such as major injuries from an accident or the onset of a serious disease.
Like any market, resources in medical care are not infinite. When resources are used to treat a minor pain, the same amount of resources are no longer available to treat a major injury. In other words, there is a shortage of resources in the market. It has become apparent in two major ways. The first, which I have discussed, is the result of over-demand from insurance driven price distortions. Secondly, repealing strict regulations on organ donations may be a major opportunity for cost savings in the market.
According to the United Network for Organ Sharing, there are currently 123,070 people waiting to receive an organ. However, only 30,000 will be lucky enough to receive a transplant and that gap continues to widen. They will be chosen by a mismanaged bureaucracy that uses arbitrary standards and political connections to allocate organs. In the United States, it is illegal to sell your organs to another on the private market. I believe legalizing it would save our medical care industry a great deal of money.
For an example I turn to kidneys since they are the most popular organ in demand. In 2013, 4,453 patients died while waiting for a kidney and about 3,000 are added to the list every month. There are only 1,408 transplants per month so the gap is widening quickly.
However, your demand for medical care does not stop once placed on a waiting list. You will need dialysis and prescribed numerous different medications. Dialysis costs an average of $73,000 per year. More importantly than the cost is that resources were consumed to administer these procedures. With an increasing number of dialysis patients, the costs will continue to increase. If the strain on these resources continues, then resources from other types of medical care will be diverted towards what could otherwise be avoided with a transplant. This sort of pattern is not strictly limited to kidneys.
Price controls have become a political favorite for regulating medical care. However, these are neither feasible nor sustainable. As the medical care has skyrocketed, the prices for unregulated procedures, such as cosmetic and corrective eye surgery, have significantly declined because of their competitive market. Why? Simple economics: When the entire cost is incurred by those who created it, their decision making process is much different.
Not only do price controls hamper the market from reaching equilibrium, but they also result in market shortages as services become less desirable to supply. For example, a doctor may retire early if the government is only willing to cover a portion of his costs. That same doctor, if he does not retire, will still need to recoup lost money. The only way to do this is, of course, by charging other people more money for their procedures.
Immediate solutions would certainly be welcomed by medical care providers. If they did not have to complete egregious amounts of administrative work, we would see costs dramatically decrease and quality would improve. Making more resources available for medical care and not paperwork would yield a positive outcome. As I previously discussed, legalizing the private sale of organs would also equalize the costs of increasingly expensive treatments that could have been avoided.
Other problems certainly exist in the current system, but they are less significant. Occupational licensing drives up prices and create supply shortages. FDA regulation of pharmaceuticals makes it necessary for huge price tags that can cover R&D and FDA testing expenses, both of which easily range in the millions.
Medical care is a heavily regulated industry, so it is not surprise that costs have skyrocketed. We cannot legislate our way to health, nor can we use costly regulations to save every life. If we give freedom a try, I think we would be pleasantly surprised at the positive outcomes of competitive markets.
Perhaps Thomas Sowell put it best: “It is amazing that people who think we cannot afford to pay for doctors, hospitals, and medication somehow think that we can afford to pay for doctors, hospitals, medication and a government bureaucracy to administer it.”