or Why the Economics of Healthcare is Failing
Healthcare insurance has evolved into an unsustainable enterprise. The why is different than the how, but it’s important to understand both. It is however a paradoxical result that what has essentially become a Ponzi scheme has yielded some of the most amazing innovations the world has ever seen. But only those like me who believe in free market enterprise would see this as a paradox. Statists, socialists, and progressives (forgive the redundancy please) will see it as validation of their cause. What they fail to recognize is that the entire model of healthcare insurance, like all other Ponzie schemes, may eventually collapse resulting in an end to further innovation.
The Why
The why–the reason it is unsustainable, is due to the public’s expectation that we should be able to pay a company a premium that will yield a reimbursable service exceeding the cost of those premiums. By any measure, this is an unsustainable business model.
All forms of insurance are based on a legal gamble. With the notable exception of life insurance, insurers use actuarial data to bet that the insured will not incur events that require a claim against them. On a basic level we all understand this. This is why we believe automobile and homeowner insurance is a good value, worthy of our hard earned dollars. It is one of the few things for which we pay, knowing that we’re unlikely to ever use and still believe it to be an acceptable cost. Consumers perceive the value in peace of mind, knowing that an automobile accident or house fire will not result in substantial or even catastrophic expense.
Healthcare insurance used to be like that. It isn’t anymore. Even though many won’t admit it, our collective thought has evolved to the point that we expect healthcare to be something for which we should not pay (if you expect to pay less than the cost of what you receive, you’re expecting something for free). Much of this revolves around the notion that healthcare is a fundamental human right. I am sorry to inform you, but despite the wishes of many, human rights never have and never will require the labor of others to provide. That would be better be defined as theft, belying the concept of property rights.
Part of the healthcare provider industry, namely drug companies, device manufacturers, and scientists invest in innovation because of the potential for profit. That concept is purely a free market endeavor. But healthcare does not by any stretch of the imagination operate in a free market. Like all entrepreneurs, investors find a way to work around and even exploit government incursions into the free market. But healthcare is not unlike other businesses. While business enterprises in healthcare have done so under the notion of helping mankind, without the potential for financial reward, innovation would simply not have occurred at the staggering rate it has in healthcare.
The How
Much of the health insurance problem began when employers began paying for all or part of it as a perquisite. This began in 1940 with government imposed wage freezes. As with nearly all government regulations, this inspired innovation from corporations to circumvent those freezes by offering health insurance. Unable to attract workers by paying more, employers instead improved benefit packages to include health and disability insurance hoping to entice prospective employees as a competitive advantage.
In 1942, congress made the cost of providing that insurance deductible for employers. Eventually, labor unions used it as a bargaining chip for better benefits. It was then that the American psyche began thinking of it as a free service, and eventually perceived as a right. Why? Because the expense was transferred to the employer, making it an invisible, or transferable expense to employers. Then it got worse. Enter the government once again. In 1965, Medicare and Medicaid was signed into law. By 2000, Medicare and Medicaid accounted for 32% of all healthcare spending. In 2015, federal, state, and local government paid for approximately 45% of healthcare1.
Not unlike the rapid increase in the cost of college tuition, the injection of government payments resulted in inevitable inflationary pressure, causing it to increase at a much higher rate than other consumer products or services. And where there’s money, opportunity and investment will follow. This opportunity resulted in massive investment in medical technology and innovation. What came of that was a nearly unprecedented improvement in healthcare. In just a few decades, we had vastly improved surgery techniques, new lifesaving drugs, disease mitigation, and a vast new understanding about how the human body works.
The Paradox
So what is the paradox? For free market advocates like me, it’s a bit hard to acknowledge that government intervention and overreach – wage freezes in 1940 to free health care in 1965 – eventually resulted in improved healthcare for all. The progressives out there must be smiling with that smug I-told-you-so look plastered on their faces. Ah, but the chickens are coming home to roost. What to keep in mind here is that the innovation often occurred by working around the obstacles put in place by the government. Like all Ponzi schemes, this behemoth is being exposed right before our eyes. While some of us are screaming at the television and ranting on social media with our so-called simple solutions to this nightmare, some of us are realizing there is no good politically feasible fix. We’ve backed ourselves into a corner and we can’t get out. Politicians are scrambling. Most of them know there is no good solution, yet they continue to coddle the public with yet more government solutions.
There are solutions. Unfortunately, they are not politically acceptable because the solution is not government. There is only one sure way to get this cluster&^*& under control. Let the free market do what it does best and get the government out of it entirely. But that’s neither acceptable to politicians nor the public because we’ve come to expect our healthcare to be free. Unfortunately, if we do that, which means a single payer system, we can say goodbye to future innovation.
It is a sad state of affairs. You give something to people for free for long enough and they will never accept having to pay for it again.
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