Montag, Februar 22, 2010

Understanding The Hole Being Dug...

The health care initiatives are grounded on a number of concerns. There is an excellent overview here. Go read the whole thing: it is more illuminating than anything the Obama Administration has put out, and does so without putting you to sleep.

The core of the problem, as far as I am concerned, is the abrogation of market rules (i.e. the market does not set prices, but rather these are determined by committee) such that for consumers of health care, there are no price incentives on choosing health care options. As a result, demand for the most expensive - which may or may not be the most efficient - health care faces no obstacles, because a third party - the insurer - is paying for the services.

To put it as simple as possible: if you're not paying, who cares what it costs? You choose the most expensive care, obviously, as your doctor likes it and everyone involved (except, of course, for the insurance company) prefers it because even if profit margins are equal, it earns them the most money.

Hence: if you are really serious about lowering costs, then you need to remove market limits on pricing. Plain and simple.

Of course, this means that there will be, automatically, rationing: the most expensive, cutting-edge health care will be something that only the rich can afford. If you then say that is unfair, that the poor deserve the same kind of care: you are part of the problem.

Right now, if a clinic delivers high-quality care at low cost, they will be punished, financially, because there is no incentive to use them. There is, if anything, a positive incentive to increase costs but to hide them from everyone but the insurance company, since this is how you can maximize your profits. Private practices and clinics therefore have a perverse incentive to make sure their care is high-cost, because that is how you can make a profit best and stay in business.

Change that if you are sincerely interested in lowering health care costs: however, this doesn't mean removing the profit factor from health care, since that is exactly part of the problem.

Economics is about the proper allocation of scarce resources. Create incentives to distort the market and you end up with improper allocation of capital, i.e. waste. Change the rules so that there is more competition amongst health-care providers and you'll be amazed who survives and appalled at the waste in the current system.

If you say that competition would reward those who make the choices for consumers, rather than letting the consumers decide, then you are part of the problem.

Health care, right now, in the US, is firmly under the jurisdiction of the states. While this will be heavily defended on the basis of state's rights -  correctly so, but that is a political problem that will be hard to unravel - it does lead to a heavily fragmented market, one that is made vastly worse by state oversight for required coverage. While basically a sound idea, it is an idea that has become perverted by the willingness of state oversight to include mandated coverage for what is fundamentally frivolous, such as cosmetic plastic surgery and sex operations (on the basis of successful lobbying by those who benefit from such regulation), meaning that even if you never contemplate these things, you have to pay for it.

Congress does have the power to regulate inter-state commerce and in this case could regulate to prohibit closed insurance markets, much as it prohibits, say, Delaware, from raising import duties on goods from, say, Ohio. Let the states continue to require sets of minimum coverages, but on with an annual review and a path to correct stupid decisions that increase costs for everyone in exchange for benefits for a fringe few. Allow competition nation-wide and prices will fall, as they always fall when competition increases.

Always. If you refuse to allow nationwide competition, you are part of the problem.

To sum up, consider this:

In short, neither the patient, the doctor, the insurance company, nor any government program has much incentive to spend health care dollars efficiently. A system that determines prices through administrative procedures rather than market processes disconnects the prices paid for health care services and products from both the costs incurred to provide them and their value to patients. A tax code that rewards employees who purchase insurance through their jobs and punishes individuals who purchase health insurance in the outside market further distorts these incentives. A litigious tort system that encourages doctors to order unnecessary tests and procedures at no cost to themselves in order to forestall lawsuits exacerbates the problem. However, the main problem is a system that insulates both patients and producers from normal market incentives to reduce prices and spending.

So change the incentives. See above.

Without tort reform, nothing will change: without cost reform, nothing will change.

But what the Obama Administration plans to do?

Nothing but change for the worse. Costs will increase. Incentives will be worsened to keep costs down. It is a classic, classic case of a truly muddled understanding of how the world really works.

I'll repeat this: I know I sound like a broken record, but we simply need to demand a higher quality of work from our government.

We certainly aren't getting it now.

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