Simple Economics and Health Insurance: a Perversion of the Free Market

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.


Gas Below $2 a Gallon. Gosh, That Was Quick.

CNN Money is reporting that gas prices nationally have fallen below $2.00 a gallon. Of course, here in Rochester, we’ve yet to see it. The lowest price I’m seeing on Gas Buddy is about $2.35 a gallon. Still, we’re talking pre-Katrina prices of gasoline. That’s quite a jump in two months.

And I’ve said it before, but I’ll say it again: nothing about the production of oil has so changed that could possibly accommodate a 50%+ drop in the price of a gallon of gas. Wasn’t that the idea of Free Markets? That producers charge what it costs to make a product plus a little extra for profit and no more? If only the useless government regulators would get out of the way? I believe that is the Randian Utopia the Conservatives have in mind, complete with gold-foiled cigarettes.

Yet now that their number 1 consumer is broke, wow! Suddenly gas is a whole lot cheaper. I think we know now whom the Free Market benefits, and whom it fucks over.