The Economic Way of Thinking About Health Care

Health insurance does not grow wild and abundant in nature or fall from the sky like manna.



I realize Mike Lupica is a sports columnist—and that Howard Cosell called sports "the toy department of life"—but maybe that's what makes Lupica's recent declaration about Obamacare all the more representative a reaction. Appearing on a morning cable news program, Lupica declared that "health insurance for all is a noble idea." He repeated this a few times, apparently to make sure we all heard it.

What's curious is that it was all he felt he needed to say. It's a noble idea. Period. If you can't say something nice about it, say nothing at all.

Apparently it's of no interest to him what the term health insurance actually represents today. Of even less interest is how this noble idea is to be achieved under the Affordable Care Act, namely, through the exercise of force, specifically the government's taxing power. I suggest those two things matter and should be of interest to anyone who wants to be taken seriously on the issue. (If Lupica wants to plead, "But I'm just a sports writer," fine. But then don't go making public-policy pronouncements on national television.)

It's appropriate to begin with this spot-on reminder from Murray Rothbard:

It is no crime to be ignorant of economics, which is, after all, a specialized discipline and one that most people consider to be a "dismal science." But it is totally irresponsible to have a loud and vociferous opinion on economic subjects while remaining in this state of ignorance.

(By the way, do you know why economics was dubbed the "dismal science"? It wasn't because the discipline deals with nature's miserliness, but rather, David Levy writes, because the British conservative opponents of the 19th-century liberal economists saw the liberating potential of free markets for common people, especially black people, whom white people were accustomed to subjugating one way or another.)

Now, Lupica may not have realized he was voicing an opinion on an economic subject, and that's the problem. People often make pronouncements that have profound economic implications without knowing it. They care about ends and are content to leave the means to others. That's irresponsible, the intellectual equivalent, as I've said before, to drunk driving.

Health insurance, whatever it is, does not grow wild and abundant in nature or fall from the sky like manna. It constitutes a command over goods and services—that is, over the products of human effort in conjunction with scarce resources. When government provides health insurance through subsidies or Medicare or Medicaid, it presides over the disposal of the fruits of other people's labor. Government personnel decide who gets what, even though they had no hand in producing the resources they "redistribute." In other words, they traffic in pilfered property. Hence H.L. Mencken's immortal insight:

Every election is a sort of advance auction sale of stolen goods.

Aside from the fact that whatever the government gives it must first take from someone else, there is also the manner in which the government gives it. Thanks to government policy, the word insurance has been fatally corrupted in the health care industry. Insurance arose as a way for groups of individuals to protect themselves against insolvency by pooling their risk of unlikely but highly costly happenings. Today, private and government health insurance is merely a scheme to have others—the taxpayers or other policyholders—pay one's bills not only for rare but catastrophic events, but also for predictable and likely, that is, uninsurable, events—and even for goods and services used in freely chosen activities.

The system is so camouflaged that the privately insured are often simply prepaying for future consumption, but the prepayment includes a hefty administrative overhead charge, which means the policy would be a bad deal if customers were paying the full price with eyes open.

What makes private medical insurance look like a good deal today is that employers seem to provide it for "free" (or at low cost) as noncash compensation, or a fringe benefit, which is treated more favorably by the tax system than cash compensation. If an employer pays workers in part with a $5,000 policy, they get a policy that costs $5,000. But if the employer pays workers $5,000 in cash, they'll have something less than $5,000 with which to buy insurance (or anything else) after the government finishes with them. That gives employer-provided insurance an appeal it would never have in a free society, where taxation would not distort decision-making. Moreover, the system creates an incentive to extend "insurance" to include noninsurable events simply to take advantage of the tax preference for noncash compensation. Today pseudo-insurance covers screening services and contraception, which of course are elective. (This does not mean they are trivial, only that they are chosen and are not happenings.)

Obliviousness to economics lets Lupica avoid thinking about the consequences of interventions such as Obamacare and the long-standing corporatist system on which it stands. Because the system makes medical services (defined in ever-broader terms) appear to be inexpensive or even free of charge—the real price is hidden—people overconsume them.

This artificial stimulus of demand (other things equal) must then cause the real prices of medical inputs to rise, with multiple rippling consequences: the price of insurance goes up; the government's health care budget rises, requiring higher taxes now or later (because of the debt); and resources and labor flow into the stimulated health care industry and away from other valued purposes, raising the prices of other goods and services. Higher insurance premiums in turn prompt demand for more government subsidies, higher taxes, and more debt. The less that consumers need to be cost-conscious, the more distorting their decision-making and the more disruptive their actions. Individual rationality under deceptive pricing leads to social irrationality.

At a certain critical point, the politicians could decide to ration services—that is, to limit what we may buy, or prohibit some purchases entirely—in order to control the budget. Politicians certainly won't want to spend all of the tax revenue on medical care and interest on the debt. (For details, see my "Medicare Is Doomed.")

So economics does matter, Mr. Lupica, and the inability or unwillingness to engage in the economic way of thinking is a recipe for disaster, your good intentions notwithstanding.

Still, there is something noble in envisioning the day when everyone can afford good health care.

What sound economic thinking can teach us is that just because government can't provide universal high-quality health care, that doesn't mean there's no other way to achieve it. The way to do that is to remove all the impediments to the production and provision of medical and insurance services that have accumulated over many years in the form of privileges that restrict competition. This includes occupational licensing and accreditation, facility permits, protectionist and market-narrowing regulations (such as FDA requirements), patents, tax distortions, and more.

"These kinds of legal privileges," Gary Chartier writes, "are sold to the public, of course, as designed in various ways to help ordinary people. But their practical—and, in many cases, intended—effect is to take money away from ordinary health-care consumers and transfer it to people and organizations with more political privileges." Chartier also points out,

Another dubious legal privilege that also drives up costs: the opportunity for plaintiffs in tort cases to obtain punitive damages. A punitive damage award can turn an individual person into a scapegoat, someone to be "taught a lesson" on behalf of the entire class of victims of conduct like his or her own. Punitive damage awards drive up costs unnecessarily while forcing health-care professionals and hospitals to focus on practicing defensive medicine.

Together these interventions function as a planning mechanism for the health care and insurance industries. Markets are too complex to be amenable to even piecemeal central planning. Bureaucrats and their counterparts in Organized Medicine and Big Insurance could never know what they would need to know to create services that best served all consumers. Without those interventions and privileges, competition, which when fully freed would improve quality and push prices down toward costs, would approximate universal and affordable care and coverage. Ingenuity and entrepreneurship would see to it. (Years ago, before the corporatist medical system was fully in place, working people left to their own devices managed to obtain health care through mutual-aid societies.)

Yes, universal and affordable health care is both a noble objective and a practical goal. All we need do to achieve it is sweep away the political privileges and free people from the impositions of politicians, bureaucrats, and their "private sector" patrons. Understanding the economic way of thinking is the beginning of wisdom.