Today, the Supreme Court of the United States (SCOTUS) affirmed the individual mandate of the ACA (Affordable Care Act – “Obamacare“) as constitutional. ThisÂ based on the assumption that the “penalty” was actually a “tax” as described in the law. I am not going to discuss the merits or “problems” with this ruling, rather I would like to discuss a few other principals that directly relate to this ruling:
Summary of American Economics
OurÂ economic system was founded on the Laissez-fairre economic ideas of Adam Smith. All transactions between private entities should be allowed to proceed without interference with the government. (ie: free fromÂ tariffs, subsidies or enforced monopolies)Â The only outside interference throughÂ government regulations should be those that would prevent theft and aggression. This type of economic system known as a free market system is driven by supply and demand.
Now, for a quick economics lesson: If there is a need (or demand) for a product, then a producer will supply the product. When demand equals supply, then price achieves equilibrium, but when either of these fluctuates, then price will change. When supply is greater than demand, then the price will decrease. Moreover, if demand is greater than supply, then price will increase. When there is only one firm, then we have a monopoly and that firm can manipulate price. All firms strive for a competitive advantage over other similar firms. This competitive advantage makes one firm’s products more desirable than another’s. Unregulated, a “monopolistic” firm tries to drive other firms out of the market and manipulate price.
In a free-market firms will be competing against each other for our (consumers) business. This creates incentives for innovation, improvement in service, reduction in price through innovation, etc.
Health CareÂ Example
Health Care: We can all agree that health care costs are all getting out of control but does free-market economics really apply to health care? Let’s think about this from a few different perspectives:
Bob has a group insurance plan offered by his employer with premiums of $25 per week, a $100 deductible and $1,000 out of pocket, no copay. (Great Policy) Bob starts having pain in his knee and his doctor gives him orders to get an MRI. There are two places in his town to get an MRI. The first is the local hospital and the other is an independent MRI office. The hospital is 5 miles from his home and the MRI office is 10 miles from his home and they both offer the exact same service. Where is Bob going to go? Probably the hospital right? He probably doesn’t even know about the other MRI office. 4 weeks later he gets the statement from the insurance company: Total Bill $1200, Paid: $600, Discount: $500, Patient Responsibility: $100.
It’s one year later and Bob has torn something in his shoulder. His insurance plan has the same costs, but there is a caveat: This year, the insurance does NOT pay for certain imaging exams until after the deductible and out of pocket expenses are met. His doctor again gives orders for MRI. Remembering his bill from the year before Bob knows that he’s going to have to pay $1,000 for this exam rather than the $100 from the year before. Bob doesn’t have $1,000 so what does he do? Is there any other place that offers MRIs? (What would he do for and an electrician or plumber?)He asks his doctor and finds out that there is another MRI place in town and he calls them. He finds out that the cost for an MRI is $400.
These two scenarios illustrate a real problem.Â For example: the local hospital fees for a CT scan or MRI is over $1,000. For the same exam at a smaller/private facility, the cost is about 40% of the hospital fee. So why have health care prices skyrocketed so much? Because we don’t apply free-market principals to our healthcare like we do for other goods and services.
When we need a new car or recliner for the living room, we shop around for the best deal. We go where we know we can get the best quality for the best price (within our budget).Â For our healthcare, we’ll go to the best caregiver, but we don’t see all the costs so we don’t consider it. We don’t consider the cost because we’ve become accustomed to insurance paying the bulk of it. Even as costs have increased, when we go to the doctor, we typically only pay a modest copay of $25 to $40 per visit. However, a visit ranges between $80 and $400. We pay the rest through deductibles until the insurance picks up the rest.
Healthcare facilities charge what they want because nobody asks them to justify their prices. Nobody shops around to find quality at a lower price. If we did, then the higher priced facilities would be forced to reduce prices and/or cost to stay in business.Â This isn’t meant as a knock on any hospitals or doctors. We have some of the best in the world, but the industry as a whole has some waste that could be eliminated through innovation, cutting red tape, etc that won’t be eliminated if competition is eliminated.
What we need to be asking is: “How is it that the local MRI facility can charge 40% of what the hospital can for the same service on the same machine?” I understand that there is going to be some added overhead, but when calculating the cost per scan there are Actuarial calculations that are used and these should be similar for similar machines (ie: Cost of machine + cost of maintenance + cost of labor to operate / number of scans per period / length of time machine to be used etc). It might take some time, but forcing health care into a free-market system will force a correction. There’s not going to be a quick fix, but we’re not going to get out of the mess we’ve made overnight.
On the other hand, our government has implemented “individual mandate” saying: “You’ll buy insurance or a pay a penalty”. So, where’s the incentive to provide better service or products by the insurance companies or health care? There isn’t one! The insurance companies know that we ALL have to purchase their products, so why bother improving products? They’ll just get our business anyways. Also, health care institutions will also have no incentive to innovate to drive costs down.