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Health Care: Economic Reality vs. Political Capital

May 13, 2009

This just in from Politico:

People who like the tax-free status of their company health benefits could be asked to ante up. Money in the pot: more than $700 billion over 10 years.

Treasure the tax benefits from your health savings account? Some experts say the accounts encourage “excess consumption” of health services…

“I know that there is some controversy around doing so,” Baucus said. “But the current tax exclusion is not perfect. It is regressive. It often leads people to buy more health coverage than they need.”

Hang on a minute! Did Senate Finance Committee Chairman Max Baucus just admit to an economic reality? Namely, that demand for health care services goes up when the cost is low? It will be interesting to see if this economic truth finds its way further into political rhetoric.

Low perceived cost, and who really pays for employee benefits

Whether he intended to or not, Baucus is making a very valid point. Because health insurance is often provided by employers, individuals (employees) are far less likely to consider actual medical care costs. Just ask how many people with employee provided benefits run a price comparison around town before seeking out medical care? I certainly don’t.

Also, since the employer usually chooses the insurance package – it is likely that some employees may be getting more insurance than they actually would choose to receive otherwise. The problem is that employees don’t realize they are paying for their own insurance coverage, even though it appears their employer is.

This is again, a simple economic reality. Hiring an employee is a cost to the employer. That cost includes the employee salary, PTO, and any benefits package offered, among other things. Thus, employee salary is likely reduced as a factor of the total employee cost, including the employer provided benefit package. Therefore, employees essentially agree to lower pay – and receive greater benefits, even though they may not perceive it this way.

The false perception that employee benefits are, “free,” has economic ramifications. Back to Baucus’ point: Employees with employer provided health insurance are less likely to consider the actual cost of the health insurance and medical expenses received, which results in higher demand for health care services. Higher demand drives up health care prices, as well as driving up the price of health care insurance. “Excess consumption,” is just a symptom of the perception of low cost. We would see the same phenomenon if health care prices were artificially driven down through government action.

Which brings us to the next logical conclusion:

Universal Health Care will create much higher demand for health care

Take the current, “Excess consumption,” and multiply it by some arbitrary huge number, like, say…oh…let’s be conservative with $1.85 trillion. Since everyone will be covered under a government program – no-one will think about the cost of medical expenses, because it will be perceived as, “free”. This will obviously create a huge increase in, “Excessive consumption,” which will further drive up the real cost of medical care. The rising costs will then be paid by the government, who is really you – the taxpayer.

So in a universal coverage program, how will the government combat the increase in demand and cost?

Rationing, and much higher taxes.

The government will have no other option but to place limits on health care usage through bureaucracy. This isn’t because the government has bad intentions, but simply because, regardless of the public’s perception of cost, the real economics of medical service will still be in effect. The government will be paying the bill the public doesn’t see. As price goes down, demand goes up. Government will have no choice but to ration medical care and radically hike taxes, or the nation will face shortages and/or bankruptcy as real medical costs skyrocket.

This probably seems too simplistic, but this isn’t just some crazy theory. We already see this happening in Canada and the U.K. In a way – we even see it here in the U.S. with employee provided health insurance, as Baucus pointed out.

Of course, none of the economic factors really matter here because the notion that “everyone should have health care” is excellent political capital. How can you possibly run against “health care for everyone”, without appearing like an uncaring jerk? Thus, I doubt Baucus will make this logical progression when he talks about universal medical care.

Similar to demographic facts, economic realities are always depressing wet blankets thrown on any nice sounding, “fix all,” political vision. As economist, and former Marxist, Thomas Sowell said:

The first lesson of economics is scarcity: there is never enough of anything to fully satisfy all those who want it. The first lesson of politics is to disregard the first lesson of economics.

Will the economic reality Chairman Max Baucus stumbled into find it’s way into discussions of universal health care?

One can only hope.

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3 Comments leave one →
  1. June 23, 2009 9:01 pm

    The baby boomers joining Medicare over the next 10 years will bankrupt the country. (If you don’t believe this, Google David Walker, the just retired head of the GAO.) That is the elephant in the room sitting on Obama’s head. Offering more people health insurance is not realistic given this reality. Health insurance is too expensive for the same reasons that flood insurance in New Orleans and hurricane insurance in South Florida is unaffordable for everyone except for Bernard Madoff before he got caught. Everyone needs to use it too often. We have a pandemic of Diabesity. 1 out of 5 American 4 year olds is obese. The average teen has high blood pressure. 90% of Americans get high blood pressure before they die. Health insurance covering “pre-existing conditions” is a non-starter. Could you get State Farm to sell you a new fire insurance policy if your house was in flames and the fire engines on the way?

  2. Janet Brown permalink
    July 7, 2009 5:35 pm

    Thank you for finally explaining that so well. This is just one more reminder that the only real way to keep our economy strong is not by raising taxes, but by keeping taxes low, fair and simple. I’ve been looking for a way to take action and contact our legislators and sign petitions and found some good policy the U.S. Chamber of Commerce backs (here). I don’t have a lot of money or time, but I figure this will help other people do good.

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  1. Answering the President on Public vs. Private Healthcare « Appeal To Heaven

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