Friday, March 26, 2010

The real problem with Health Care in the US

Well now that health care reform has passed, it's time to look at the real problem with health care. The real problem, and the reason that health care in the United States is so expensive, and takes a larger share of our GDP than that in other industrial nations, is that the United States does not provide adequate health care to its people.

With health care, an inadequate supply will show up in things like reduced life expectancy, higher infant mortality, use of emergency rooms by the poor because there are not enough clinics, shortages of doctors in some areas, especially rural ones, and higher prices than in countries that have adequate or better than adequate care for their people. These things we see. Also, the mere fact that payment is such an issue suggests there is demand among those who cannot pay for it.

With health care, people only need so much, but that much they need. They are willing to pay high prices if they have to, and if they can. But even with low prices, they are not, individually, going to buy that much more health care than they need. ( Unless they are sold more. We have heard of some places where they are sold more, driving up expenses still further.)

If our health care is inadequate, why is it also so expensive? The paradox of a nation paying more and getting less is explained by elementary economics. Health care is an
example of what in economics is called a service with inelastic demand. (More properly the equilibrium point of supply and demand for health services is in the inelastic region of the demand curve.) The demand for such a service, or such a good, like oil, does not change much, no matter what, within reason, is the price. If the supply decreases, the quantity demanded does not change much, but the price goes up a lot. An inadequate supply will lead to excessive prices.

Conversely, increasing the supply a comparatively small amount will lead to a dramatic decline in prices. The paradox arises because, if the health care system supplied enough services to meet or exceed demand, the share of the nation’s resources consumed by the health care system would be less than it is now. Competition would drive the price down. (Down to zero, in fact. The role of government would be to keep compensation up to cover costs, despite prices being insufficient to cover those costs. But the total cost would still be less.)

The calculation is simply quantity of services provided times the costs of those services. This equals the burden the health care system places on the economy. For an inelastic service like health care, a small increase in that service, times the large decrease in price, would bring about the reduction in total costs, reducing that burden on the economy.

And clearly health care is an inelastic service, because other industrialized nations provide their people more health care, and usually more than adequate healthcare, for a smaller share of their countries’ GDP than ours. If instead the demand for health care were always elastic, no matter how low the price, no country could afford a nationalized health care system. Then the nominal prices charged by many national health care systems, which are much less than the costs, would lead to an uncontrollably greater demand, and the total costs to an economy would be impossibly large.

On the contrary, it is the cost of the US’ privatized system that is becoming impossibly large. Already 17 percent of GDP, it is estimated to increase to 20 percent of GDP, an incredible burden that the rest of the economy perhaps cannot even bear. This is happening because a privatized system is unlikely to provide adequate, and thus inexpensive care, or even to restrain its costs. It simply cannot be expected. Since adequate care will drive down prices, and thus drive down profits and force down costs, it is in the interests of a privatized health care sector to keep health care inadequate. That is, to keep it in short supply. It is rather unreasonable to expect private health care providers to act altruistically, and contrary to their own interests. Indeed, the future may well correspond to the delivery of an even more inadequate service, especially with reform expanding demand, but not supply.

Many would claim competition is in fact keeping the price of health care down. However, by this principle, we would expect competition to keep prices lower than the non-competitive nationalized health care systems in other countries. It does not. Therefore the amount of competition in the health care industry is simply not enough to restrain its prices. The sheer cost of privatized health care, as it is in the United States today, justifies its replacement.

If the United States had adequate health care, it would cost less for individuals, however they paid, and take up a smaller share of our GDP. It would be more efficient. This would increase the efficiency of the entire economy, free up resources for other, more vital, uses, and increase the competitiveness of American industry in the world market.


No comments:

Post a Comment