Dan McLaughlin

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To Home Page Latest Newsletter Column Archives Click to get these columns for your local paper	© 2006 Daniel J. McLaughlin The Mystery Of The Health Care “Crisis The crisis in health care is getting a lot of press these days. It seems to be a huge, undecipherable mess that nobody can comprehend. Prices of medical services are increasing at an astronomical rate. People can’t afford insurance and they can’t afford to be without insurance. The problem is, indeed massive, but it is not really difficult to decipher and the solution is not rocket science. Medical services and the insurance industry are subject to the laws of economics in precisely the same way that plumbers’ services, automobiles and apples are. There is absolutely no fundamental difference. When you ignore the simple laws, you pay the price in the long run. When supply is restricted, prices go up. When the cost to the consumer is zero, the demand is infinite. When billions of dollars are injected to consumers, prices have to rise. When insurance companies are required to insure uninsurable events, the premiums have to rise. The supply of new doctors is artificially limited because new medical schools cannot get licensing, and the current medical schools accept and graduate a very limited supply of new doctors. The supply of new drugs is artificially limited by complex, extremely lengthy, costly and largely counter productive procedures for approval by the FDA. Prices have to rise. As with anything else, when the consumer is not the payer, then nothing but the best, the latest, the greatest will do. If someone else is paying, why settle for a Chevy when you can get a Mercedes. With Medicare and regulated medical insurance, everyone believes it is his or her right to have every new treatment that comes along, no matter how expensive. Most people would not be interested in the treatments if they had to pay out of their own pockets. It wouldn’t be worth it for them. The reality is that there is no such thing as a free lunch. Someone pays for that Mercedes. If the consumer of Mercedes medical services doesn’t pay for it, it comes out of someone else’s pocket. There is no other way. When you have a million patients incurring Mercedes treatments, the cost will be a million Mercedes. Many billions of dollars are injected into the medical and healthcare system in the form of government payments to medical consumers. This artificially inflates demand well above what it would be without that injection. When demand increases, the price increases. Insurance is a mechanism to spread the risk of particular occurrences among a homogenous risk pool. The underlying assumption in insurance is that, while it is possible to forecast the number of occurrences for the entire pool, the occurrence with any individual is entirely random. Any instance where the person has any control over the occurrence is uninsurable. That is the reason that suicide is excluded from a typical life insurance policy. The person covered has control over the occurrence. It is not random. With medical insurance, there are hundreds of state mandates which require the coverage of uninsurable events. If an individual with a known disease takes out an insurance policy to cover it, it is like taking out fire insurance after the house burns down. The premium payment from the individual is unlikely to cover the expense. If that person doesn’t pay, every other policyholder who was unfortunate enough to have the same company will be forced to pay higher premiums to cover it. At that point, it becomes re-distribution and cannot be truly classified as insurance. The only real solution to the “crisis” is very straightforward, though not politically palatable and, for that reason, not very likely to occur any time soon. Nearly all of the difficult issues with the health care system have their root in the fact that there is no free market in the health industry. At every level, the market for medical services and insurance is controlled, regulated, managed and politicized by government agencies. The argument is that health care is much too important to be left to the market and that we need government to manage the system. When every government bureaucracy continuously proves it’s inefficiency, lack of accountability and gross mismanagement, the real question is how can we possibly leave an important issue like health care for government to manage? As government takes an ever larger role in health care, look for the crisis to accelerate, prices and taxes to rise, service to decline, and look for politicians to blame the market for it’s “failure”. They always do.
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Daniel Mclaughlin Copyright © 2006 [Daniel McLaughlin]. All rights reserved. Revised: 03/18/08

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The Mystery Of The Health Care “Crisis

The crisis in health care is getting a lot of press these days. It seems to be a huge, undecipherable mess that nobody can comprehend. Prices of medical services are increasing at an astronomical rate. People can’t afford insurance and they can’t afford to be without insurance.

The problem is, indeed massive, but it is not really difficult to decipher and the solution is not rocket science. Medical services and the insurance industry are subject to the laws of economics in precisely the same way that plumbers’ services, automobiles and apples are. There is absolutely no fundamental difference. When you ignore the simple laws, you pay the price in the long run.

When supply is restricted, prices go up. When the cost to the consumer is zero, the demand is infinite. When billions of dollars are injected to consumers, prices have to rise. When insurance companies are required to insure uninsurable events, the premiums have to rise.

The supply of new doctors is artificially limited because new medical schools cannot get licensing, and the current medical schools accept and graduate a very limited supply of new doctors. The supply of new drugs is artificially limited by complex, extremely lengthy, costly and largely counter productive procedures for approval by the FDA. Prices have to rise.

As with anything else, when the consumer is not the payer, then nothing but the best, the latest, the greatest will do. If someone else is paying, why settle for a Chevy when you can get a Mercedes. With Medicare and regulated medical insurance, everyone believes it is his or her right to have every new treatment that comes along, no matter how expensive. Most people would not be interested in the treatments if they had to pay out of their own pockets. It wouldn’t be worth it for them. The reality is that there is no such thing as a free lunch. Someone pays for that Mercedes. If the consumer of Mercedes medical services doesn’t pay for it, it comes out of someone else’s pocket. There is no other way. When you have a million patients incurring Mercedes treatments, the cost will be a million Mercedes.

Many billions of dollars are injected into the medical and healthcare system in the form of government payments to medical consumers. This artificially inflates demand well above what it would be without that injection. When demand increases, the price increases.

Insurance is a mechanism to spread the risk of particular occurrences among a homogenous risk pool. The underlying assumption in insurance is that, while it is possible to forecast the number of occurrences for the entire pool, the occurrence with any individual is entirely random. Any instance where the person has any control over the occurrence is uninsurable. That is the reason that suicide is excluded from a typical life insurance policy. The person covered has control over the occurrence. It is not random.

With medical insurance, there are hundreds of state mandates which require the coverage of uninsurable events. If an individual with a known disease takes out an insurance policy to cover it, it is like taking out fire insurance after the house burns down. The premium payment from the individual is unlikely to cover the expense. If that person doesn’t pay, every other policyholder who was unfortunate enough to have the same company will be forced to pay higher premiums to cover it. At that point, it becomes re-distribution and cannot be truly classified as insurance.

The only real solution to the “crisis” is very straightforward, though not politically palatable and, for that reason, not very likely to occur any time soon. Nearly all of the difficult issues with the health care system have their root in the fact that there is no free market in the health industry. At every level, the market for medical services and insurance is controlled, regulated, managed and politicized by government agencies.

The argument is that health care is much too important to be left to the market and that we need government to manage the system. When every government bureaucracy continuously proves it’s inefficiency, lack of accountability and gross mismanagement, the real question is how can we possibly leave an important issue like health care for government to manage? As government takes an ever larger role in health care, look for the crisis to accelerate, prices and taxes to rise, service to decline, and look for politicians to blame the market for it’s “failure”. They always do.

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