Where I Stand on Health Care

May 23, 2009

I’m not going to defend insurance companies or really anybody else involved in American health care, but I don’t think they are significantly more evil than people in other industries. The CEO of Walmart (or some corporation you don’t hate) may be an evil bastard, but his evil bastardness doesn’t get free rein, and that’s mainly because he is afraid of losing customers. In other words, most CEOs profit from giving customers what they want.

Medicine is a different story. No market is entirely free, but here are some reasons why the market for health care is even less free than other markets:

1. The Supply of Doctors and Medical Licensing

It is illegal for you to provide health care without a license from the government. The economic theory on monopolies, cartels, and unions is pretty unambiguous about the consequences of such a situation. Supply is restricted and the price is higher than it would otherwise be. Easy.

2. The FDA

In More Sex is Safer Sex, Stephen Landsburg points to research showing that the net cost of the FDA, which is measured in pain and death, is… well, I don’t remember the number, but really high.

3. Patent laws

Patent laws are defensible in theory as a spur to innovation. The empirical question is whether that incentive is sufficient to justify the inefficiencies created by patent laws. A new book by Michele Boldrin and David K. Levine suggests that the theoretical defense of patents has scarce application to the real world.

4. Tax breaks for employer-provided health care

The current tax regime subsidizes employer-brokered, insurer-funded health care (or, equivalently, taxes non-employer provided, individually paid-for health care). This might not be so bad except that insurance companies use this to their advantage by using this subsidy as a kind of lever. What I mean is, they negotiate with hospitals so that people who walk in off the street pay something like 4-5 times as much for health services vs. the insurance companies’ “renegotiated” rates. Result: it’s nearly impossible to pay for your own health care; you must have insurance.

5. Regulations on insurance companies

This one is somewhat counter0-intuitive, because regulations ought to restrict the excesses of insurance companies and protect consumers (don’t laugh, I haven’t made my point yet). But actually, #4 wouldn’t be so bad if there were free entry into the health insurance market. But, for insurance companies as for medical providers, there is a welter of rules and regulations governing what they must and must not provide, what they can and cannot charge for, etc. The counterintuitive thing about rules and regulations like these is that they actually reward large companies by providing economies of scale. If you are an individual thinking of starting your own insurance company, it’s going to be really hard and expensive for you to do all the compliance-related stuff you’re going to need to do. So you’ve got a barrier to entry, and we’re back to point #1.

This post was occasioned by me listening to about 15 minutes of Bill Moyers’ special on health care. What I’ve been hearing so far is a lot of complaining about how insurance companies are too greedy and congress doesn’t care enough about people’s health care. Those complaints are way off base. I don’t know what single-payer healthcare would look like in the USA, so it’s hard for me to say whether it would be better or worse than the system we already have. Our current system is terrible, for the reasons mentioned above, and more reasons that I couldn’t think of off the top of my head. But my rather vague impression is that you are unlikely to improve a problem caused by excessive regulation and monopolies by means of more regulation and monopolies.


One Response to “Where I Stand on Health Care”

  1. Grant Says:

    There are countless other ways that regulation distorts the health insurance market, other than just barriers to entry. Try reading this article for a taste. Read the comments too.

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