How (Not) to Make Healthcare Affordable

The market for healthcare is similar to the market for any other product, that is, in the sense that it is the basic laws of supply and demand that determine prices in both cases. If so be the case, the only genuine way to lower the prices of healthcare is to increase supply (ceteris paribus). The critics of this view of the healthcare market consider it to be rather too simplistic and allege that the healthcare market is wrought with various kinds of “market failures” that prevent healthcare prices from dropping. This is the case that Mint columnist Gulzar Natarajan argues for:

“There is a large body of academic research, starting with Kenneth Arrow’s seminal half-century-old work, which illustrates that competitive markets do not ensure efficient outcomes in healthcare. They show the sale and purchase of health services are rife with market failures. Therefore, market competition does not keep costs down for the insurers or contain premium growth for consumers. Some form of regulation is needed to achieve these objectives.”

As is explained here by Princeton economist Paul Krugman (who summarizes Kenneth Arrow’s argument), the critics consider the healthcare market to be quite different from the market for other products. Most importantly, they say, the need for healthcare is unpredictable (especially when compared with the need for other products) which makes it harder for patients to make necessary contingency measures to deal with emergency medical needs. Thus, it is argued, there must be a third-party to pay for medical emergencies that patients may not be prepared for.

While this may sound like a convincing case, the unpredictability of healthcare emergencies is actually lower than that associated with a number of other life-threatening emergencies. As is shown here, there are various other emergency situations for which insurance coverage is provided by the market (and for which patients actually prepare for), whose odds are much higher than healthcare emergencies.

The other kind of “market failure” cited by the critics is the high premium associated with such insurance packages. It should be understood that the price of medical insurance packages covering high-risk medical emergencies is bound to be high since it requires treatments that are priced high. The answer to this problem, however, is not (as the critics would want it) arranging the government to pay for insurance but rather to lower the price of treatment procedures required for dealing with medical emergencies.

What becomes clear is, it is not the “unpredictability” of medical emergencies that is the problem but the price of treatment required to deal with these emergencies. If so be the case, it’s only through policies that help increase the supply of healthcare can the price of healthcare be lowered. Government plans as grand as a “National Healthcare Insurance system” demanded by Gulzar do absolutely nothing to address the various impediments that lie on the way towards increasing the supply of healthcare (look here for a rebuttal of other “market failures”).

The four principles of Gulzar’s grand plan should offer no surprise to anybody who knows what to expect to be in a state-sponsored healthcare programme. There is no reason to believe why any of the four principles would do anything to improve the supply of healthcare.

“All successful cost-effective health cover systems across the world have four features. One, health insurance coverage is mandatory for all. Two, all citizens are insured for a basic benefits package. People can buy top-up plans privately, either directly or through employers, to supplement coverage.”

The first two principles effectively mean that basic health insurance coverage is made mandatory for all citizens, irrespective of the ability of citizens to individually afford it, with the government taking the role of a third-party payer. In other words, the government takes over the role of a socialist state by redistributing wealth between economic classes. The fact that even basic healthcare costs would be subsidized by the government exposes the usual excuse that health insurance is essential to deal with rare, unpredictable medical emergencies.

The most pressing problem associated with such free-for-all healthcare programmes is the complete destruction of the rationing system provided by the market. As the laws of supply and demand are forgotten and citizens are allowed to access healthcare according to their needs, the demand for healthcare increases to an unsustainable level. The result is an increase in the price of basic healthcare that the government previously thought it could afford to subsidize through taxes. What follows is usually price-fixing in one form or the other to “control costs”.

“Three, everyone living in an area and of the same age group, irrespective of their health condition, pay the same premium. Four, those who cannot afford the premiums, are provided support.”

The third principle is the next interventionist measure that helps temporarily to deal with rising costs that follow nullification of the market’s role in the healthcare market. Citizens in defined regions (what would be the government’s arbitrary definition of a “region” is anybody’s guess), irrespective of their health risks, will be stipulated to pay the same premium. This, of course, goes directly against the basic principle of insurance and is just another way of forcing healthy citizens (who would pay lower premiums otherwise) to subsidize the unhealthy ones (who would otherwise have to higher premiums). The consequence of such blatant economic redistribution, which makes price signals (healthcare premium) meaningless, is one of moral hazard that encourages citizens with unhealthy lifestyles at the cost of healthy citizens. The fourth principle is a minor one, and is redundant since it is no different from the principle of economic redistribution that underlies the other principles.

The poverty of Gulzar’s analysis continues on the question of how to price insurance, with the false distinction that he draws between the “all-payer system” and the system of price fixing that he admits causes “several well-documented distortions and inefficiencies” and “contribute(s) significantly to America’s high health-care costs”. There is essentially nothing that differentiates the all-payer system from the price fixing system that Gulzar denounces. The all-payer system is nothing less than a programme of fixing insurance prices albeit with slightly different (minor) attributes in its modalities.

The interesting thing is that Gulzar recognizes the nature of price fixing that characterizes the all-payer system in his personal blog. What is required to make healthcare affordable is increased supply which is only possible when supply-side impediments are removed. Rehashing old interventionist arguments in new terms to push forward grand plans is hardly the way forward.