Cost Controls are Important
The Senate won’t reach agreement on healthcare reform before taking their summer recess. The main obstacle seems to be Blue Dog (fiscally centrist or conservative) Democrats worried about the impact of reform on the federal deficit. It is a legitimate concern. Here’s how the issue can be framed using our basic tools in economics.
Demand Side: The most talked-about element of healthcare reform is expanded, almost universal coverage for everyone in the U.S. This would put us closer to the status of just about every other industrialized, first world country, and would help meet our moral, social obligation to provide access to basic, better health.
What this does to the demand curve for healthcare services is rotate it clockwise (see graphic). No rocket science here – we would expect that if more people had health insurance there will be more demand for services. Conceptually we would move from Pt. A to Pt. B. The important question (see later in this post) is, “What kind of services will these newly insured people demand?”
Supply Side: We learn in class that a shift or change in demand (in this case higher demand) increases the number of services provided and increases price. Left to its own, invisible hand, forces the healthcare market would see a dramatic increase in the use of healthcare services and total costs.
If this were the end of the story, and we were left with our current methods of financing healthcare we could expect many of the following:
- premiums for existing health insurance would rise as prices for individual healthcare services increase.
- employers who provide health insurance as a benefit would face increasing costs, and many of them would choose to drop this benefit.
- states and localities that provide our safety net would see higher costs – particularly in Medicaid. Medicaid is probably the most important funding issue for states today.
- the Medicare system for the elderly would be strained as prices rise. Medicare has some built-in restraints against increases in fees, but the pressure on the system would be immense.
- to the extent that the Federal government absorbs costs of insuring people who would otherwise be uninsured, the Federal cost would rise significantly – hence the objection from the Blue Dogs.
- …and much more…
So, cost controls are important. As a nation we could not afford taking on that added costs at any of the local, state, or federal government levels, and there doesn’t seem to be much enthusiasm for new taxes to cover these additional costs.
But, aren’t there some built-in cost savings if we introduce universal coverage? Yes, but probably not enough. One example would be the impact of providing easier access to early, preventive care for those who don’t currently have health insurance. We know that the uninsured get less preventive care, make more use of expensive and inappropriate emergency services, and do not have the advantages of a sustained relationship with a physician or other healthcare provider. Improving these would certainly help the quality of life (and length of life) for the uninsured. It is not as clear, however, how much money would be saved. Many preventive services do improve the health of individuals, but only a few preventive services actually save money in the long run.
As painful as it is for an economist to say that the government needs to step in and reshape the healthcare marketplace, I believe that is what we must do. Those steps will each require their own posts, but let me suggest that two current policy arguments swirling around Washington are mostly red herrings.
Should the government sponsor a public plan to compete with private insurance companies? Perhaps, but the reform will just as easily fail if we don’t design insurance coverage, payment options, mandated actions, and government support correctly. It is just as possible to have a successful reform effort with no public plan, if the design is right.
Should we tax the wealthy to pay for healthcare reform? If we need more tax dollars, then the wealthy are a good target. Wealth and income gaps have widened considerably in the last couple of decades and there are good arguments why a little redistribution of income can be good. The tax on the wealthy, though, just papers over the underlying cost issue. A well-designed healthcare system should reduce national expenditures (public and private combined). If we need a tax, then that means we have not found a better way to organize healthcare. Here’s a simplistic simile. If a town ran a school bus service, and the bus was old, creaky, expensive to maintain, and at times not safe, we could tax the wealthy to hire more mechanics, and to buy repair supplies. Or we could replace the bus.
I teach principles of economics courses and a course in the economics of healthcare at Southern Oregon University.
Great article! There might be one more important consideration, however:
As demand shifts and price goes up, new players will enter the market on the supply side, shifting the supply curve to the right as more health care professionals enter the market. Over time, this will move E2 (Point B on your graph) down, resulting in lower prices as the quantity of services goes up.
This is backed by hard data from the WHO and UN studies, as well. In every industrialized nation with universal coverage, the number of medical professionals in the population is considerably higher (as much as 25% for the Netherlands and Germany) than in the United States, and cost per capita is substantially lowered as a result. Those markets have all had time to stabilize, mind you. The short term prospects are exactly as you say, but it’s important to remember the long term outlook, as well. Market forces don’t exist in a vacuum, after all.
One other thought might be that we could accelerate the supply shift by providing government subsidization for medical and nursing students. Deficit hawks would no doubt rail against the idea, but in the long run such an investment would be very likely to repay itself in lowered costs.
Hmm – I’d have to reserve judgment on whether we’d see more professionals as a result of healthcare reform.
First – the micro theory piece – When demand rises, as shown in the graph, supply increases along the demand curve. In this case going from Pt. A to Pt. B. It would take a change in some other determinant of supply to actually shift supply to the right. In English, we might expect existing providers to respond to an increase in price by increasing office hours, or making better use of ancillary staff to get more patients through the door during the day.
If something else changes, such as liberalizing of scope of practice laws which would allow other, non physician providers to provide more basic services, then we would see a shift in supply.
Now the thing that always saves economists’ bacon is ceteris paribus (all things being equal). I’d have to ask about the international studies to see what other things changed in the healthcare system – in addition to demand and price.
Thanks for digging into this Paul!