Friday, March 12, 2010

Healthcare Diagnosis

This one is for any fence sitters on Obamacare. I sympathize with anyone who is busy raising a family, earning a living, trying to catch an occasional movie, and somehow hoping to keep up with current events too. Who has the time to fully research a complex issue like healthcare and understand a 2000 page government make-over?

When doctors approach a health problem, they are careful not to confuse symptoms with underlying diseases. That holds for any complex system like economics, computers, rockets, or automobile accelerators. When things go wrong, separating the underlying causes from the resulting effects can be mighty difficult.

This past Tuesday, there was an angry rally outside a meeting of insurance executives in Washington, DC. Protesters called for the “citizen’s arrest” of insurance executives for alleged crimes against humanity. I saw one sign that read “The Market is the Problem!” I’ve heard this before from supporters of Obamacare. According to them, the “market” is the sickness; it has infected the healthcare system, and government control is the cure.

This particular protest, like many in favor of Obamacare, was sponsored by labor unions who desperately want direct access to the US Treasury’s printing presses and insurers currently stand in the way. I’m not suggesting every supporter of Obamacare is a union member, but unions are really motivated here and they are helping shape the debate. They need a scapegoat and insurers and “the market” are rich ones, especially in the wake of a financial market meltdown.

But is there really a functioning “market” in healthcare? Could a lack thereof be just a symptom of some other underlying disease?

Think of markets you interact with everyday. Take food for instance. You use your money, even if you spend food stamps which are issued to you. You choose your items after inspecting them and reading labels. You choose your sources. You price compare. And finally you decide how to consume the items you bought. At every stage of the retail food market, there is direct linkage between the buyer and the seller and a direct exchange of value. Every market that functions properly has these same attributes and linkages.

In healthcare, the linkage has been broken since WWII, to the point that now, there is no direct exchange of value and no direct linkage between buyers and sellers . It started with an unintended consequence of a WWII wage freeze when companies were allowed to deduct health insurance while individuals were not. This seemingly innocent tax tweak, has rendered any discussion of a functioning “market” in healthcare ludicrous. There is no such thing. Thus, “the market” can’t be the disease if in fact, it was the first victim!

When was the last time there was any connection between a health service you received and the payment you made? That $25 copay? It doesn’t qualify. The $400 you paid for your kid being born? I don’t think so. The $5 prescription at the pharmacy? No. Even if you buy your own insurance, the linkage has been ripped away due to “first-dollar” coverage.

Once corporations were given an advantage over individuals, the race was on to maximize the value of the deduction. That led to “first-dollar” coverage instead of actual insurance. When that happened, the perception that healthcare was no longer the responsibility of the individual set-in. Medicare was just a logical extension of that mind-set. If your employer pays for your healthcare until you retire, how can you be asked to suddenly take-over at age 65?

After Medicare took over for those over 65, the market was officially dead. Between Medicare, Medicaid, and SCHIP, roughly half the medical services provided in the US are already socialized. Prices are distorted beyond recognition as providers must make all their profit from half their business. All but a fraction of the remaining “market” is paid for by your employer. The necessary linkages and exchanges for a functioning market are simply non-existent.

Those insurance company executives who were being threatened by the angry protesters, do not answer to individuals. They have not done so for over 50 years. They work for your boss, not you. That makes them a convenient scapegoat, especially for the union workers who see them standing in the way of the government trough.

Democrats, once they understand that there is no such thing as a functioning market in healthcare, need to ask themselves why it has not been fixed after all these years. For that, they need look no farther than the nearest mirror. Their mantra, at the expense of the American people has been; never let a good scapegoat off the hook!

The fix has been around for years. End the employer deduction, and offset the tax implications with lower payroll taxes. Companies would transfer the health policies to their employees, gross-up their wages, and pay lower payroll taxes in exchange. Employees would make more money, buy their own policies, and pay lower payroll taxes to offset any tax implications. This simple fix would restore a functioning market, at least for the remaining un-socialized half.

The poor would end up with an improved Medicaid, and the rest would have unprecedented access to health services through competition. Costs would be driven down and innovation up just like in any other market. Is your cell phone better and cheaper today than it was yesterday? How about your music player?

Would that be it? No. We’d still have to end Medicare, which would be much easier once everyone saw that they can easily and cheaply buy their own insurance. We’d still have to subsidize long-term pre-existing conditions, we’d still have to allow inter-state competition, and we’d still have to cap malpractice claims.

But the cost crisis would be over, and that would be a political waste for some. This is the underlying disease.

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