Setting aside all the nitty-gritty specifics of the various bills running through Congress, it seems to me that reestablishing some baseline facts on health insurance is in order. In writing this post, I am setting out to prove that there is not, in fact, any such thing as a free market economy where insurance is applied to a given industry. To demonstrate this, I’ll build on a few Economics 101 concepts that we all know and love. The point of this exercise is to establish that any economic structure which employs for-profit insurance is endemically doomed to fail.
Economics 101: Supply and Demand
In the capitalist marketplace – in its purest form, what we call “Free Market Economics” – there are two fundamental building blocks of the system: supply and demand. There are those who produce goods and services and there are those who require or want those services. It is the interplay between those two building blocks that determines price, quality and availability.
More specifically, the Marketplace requires an Educated Consumer and an Honest Producer. The educated consumer is not necessarily a college graduate; the education I’m referring to in this case is the knowledge of the product or service that the consumer is buying. In the Free Market, if I require an appendectomy, I check with local hospitals and doctors, patients and consumer groups to determine which doctor or medical facility performs this procedure with the greatest success rate, greatest customer satisfaction and lowest price. Basically, I bargain shop for the best deal. This process, multiplied over all the people in my area seeking appendectomies and other procedures, forces producers to keep honest about what it costs to perform their duties to the best of their abilities. Hence the price and quality of medical services is kept at a balanced level, relative to the ability of consumers to pay.
This is a concept upon which every economist agrees, as do the rest of us who took seventh grade business math. There is no doubt that this concept, like Bernoulli Principle in physics, is a quantifiable, predictable force on our economy. But what happens when, rather than paying for services directly, we pay insurance companies to provide that service?
Enter the Insurance Company
In our current health care market, things work a bit differently. As consumers, those of us fortunate enough to have insurance pay insurance companies a monthly fee, in conjunction with our employers, to have constant coverage for our medical needs. When we require medical services, we go to a doctor, get the work done, get a prescription for whatever pain or antibiotic medication they deem necessary, pay a copay for the service and be on our merry way. But the important point is this: we do not pay our health care provider and we do not consider cost when choosing that provider.
Right off the bat, without much thinking or digging, we find that one of the fundamental pillars of the Free Market is eliminated from the equation. There is no Educated Consumer in this scenario, because we as consumers have no idea whatsoever what a given service costs, what a prescription costs, what the total of the bill will be. What’s more, we really don’t care because as consumers of insurance products, there is an expectation that we will get what we paid for.
With no educated consumer, only unrestrained need, there is nothing to control medical costs. As medical costs rise, so too do insurance premiums. Of course, this is what happens in a supply and demand economy when the cost of supplies goes up without a correlating change in demand. There will be no change in demand, because we all need medical attention from time to time, no one can afford it on their own and thus we all actively pursue jobs with health benefits. The inevitable result is that insurance companies – who have a profit motive and will not simply go bankrupt on moral grounds – need to lower demand the only way possible: cutting off services.
Let’s Stop There
We could go farther with our example, citing case after case where the above scenario is currently in effect and speculating where it heads next. We could continue to expand on how the imbalance of insurance surrogating the Demand side of the equation is continuing to erode our medical security in this country. We could discuss the effects of the uninsured and the Hippocratic Oath that compels doctors to treat them. But while in doing so, we could come up with much that is demonstrably wrong with our current system, we would stray further from the central point and in my opinion, the most critical for a serious discussion of health care reform in this country. That point is to say that there is no scenario in which the unfettered health insurance industry – free of government reform or a public option – will arrive at any other result than the one we find ourselves with now.
It is an important concept which cannot be ignored: we are not in a health care crisis because of a few bad apples; we are not where we are because we need some new laws passed. We are in our current dire straits because our current system is fundamentally, systemically flawed at its core. The solution is to introduce a new player to the field; one which can arbitrarily change the rules of the game to fit the best interests of the American people.
4 replies on “Simple Economics and Health Insurance: a Perversion of the Free Market”
By your reasoning, wouldn’t the solution be either to do away with employer-based health care all together (which Obama, Maffei, etc. say they do not support) or provide people with credits and allow them to truely shop for their own health care rather than just introducing what would essentially be another insurance company?
Solution one would be fine if you could uninvent the wheel or put genies back in their bottles. Absent that, there will *always* be some form of insurance, unless you plan on outlawing it. I don’t begrudge those who want a Cadillac plan, nor do I care to invent another law outlawing something; I just want to make sure the rest of us po’ folk don’t get trampled. Meanwhile, with or without a law banning insurance, the current prices are so artificially inflated that there’s no going home again. Doctors will never again work for a dozen eggs and dinner with the family on Sunday.
As for credits, the important point of my article is that there is no scenario in which we don’t end up where we are now with an insurance economy. A public plan is not the same thing as private insurance because there is no profit motive, which is a natural depressant for the artificial supply and demand imbalance.
You’re partly right and partly wrong. You’re right about the supply and demand side of the equation. You’re wrong about introducing a new player. You need to dig a little deeper and realize that the reason why employer-based insurance is such big business is because of the tax incentives that corporations get to provide insurance for their employees. Those same incentives don’t exist for individuals. As a result, insurance has gone from something that’s necessary only to cover catastrophic, unpredicatable losses to being something that covers everything, which in reality isn’t really the definition of insurance. It has turned into this as a result of the DEMAND for insurance, NOT the demand for medical care. The answer is to remove the tax incentives for corporations or extend those tax incentives to everyone. Furthermore, it was Medicaid and Medicare, the originators of “managed care” that started the whole cycle, which is way they also need to be eliminated.
Thanks for this comment. This is genuinely interesting and I think very valid Conservative thinking on the issue. And I think that, if Republicans in Congress were a little more interested in addressing the actual issues surrounding health care, things like this might make it into the actual bill.
It seems like removing the tax incentive would be preferable to widening it. I’m generally more in favour of a fair tax code than of an equally warped one. I would support removing the tax incentives for companies buying health care except that doing so would be perceived as an attack on the venerated “small business” whose asses are getting so kissed these days.
I don’t agree with your assertion that these tax incentives are what caused demand – or rather, the perception of demand – to switch from health care to health insurance. I think that it is the inherent sense of security for which insurance is designed which inevitably draws that change. I also think it’s entirely reasonable for people to want this kind of security, even if as a matter of economic mechanics, it is not the best option. This is at least one good reason that I believe the current health insurance companies need a reasonable form of non-profit competition, not a complete replacement.