Healthcare Economics: What will happen if Healthcare becomes “Free”?

Healthcare Economics: What will happen if Healthcare becomes “Free”?

As a healthcare professional I am very concerned with Healthcare economics, but as a consumer I find that there are huge problems regarding the affordability of healthcare.  We all have likely suffered the anxiety of opening a bill from a healthcare provider. This anxiety comes from not knowing how all of the factors will play out.   Some of the common unknowns people might have could be phrased as follows:

1.      Will insurance cover the procedure in question, and if so at what percentage?
2.      What if any of my deductible have I met?
3.      How much can a five minute procedure really cost?

Too often it seems we are surprised by the answers to these questions.  It seems now days that you need a law degree and an English degree to understand the terms of our insurance, and if you are uninsured you need to be independently wealthy to afford healthcare. (Some may also argue that you need to be independently wealthy to afford insurance).  The simple truth is that most people do not fully understand what the end price of their health care will be and when they get the price it is much greater than they expected.  This is where much of anxiety surrounding healthcare comes from, and this anxiety has caused a great number of the population to cry out for healthcare reform, and many of them even ask “What would happen if Healthcare were free?”

I believe that simple economics can answer that question.  The quantity of healthcare services demanded at a price of zero would certainly overwhelm the quantity supplied by suppliers at the price of zero.  Although consumers would be thrilled to have someone else pick up the tab this would increase their economic cost because they would have lines larger than anything ever seen at Disneyland.  Many people would find that they pay the price of free healthcare with their life because it is simply not in supply at that price.

Another problem would be the fact that for-profit healthcare providers would not supply services for nothing (which is what the Government currently pays), and this would leave us with federally funded healthcare providers.  We have seen how well this form of healthcare works through Veteran Healthcare services. 

It is plain to me that free healthcare is a myth and clearly not an option.  But the question for discussion I have is what can be done if anything to fix healthcare in the United States?  For your reference I have included a link to an article that describes many of the options available to lawmakers.  Please look them over and let me know your thoughts.  

As for current healthcare reform, following the last presidential election I was very surprised to see people posting on Facebook and other social media sites that they were “moving to Canada”.  I was surprised because Canada already has much of what our current leadership is moving towards which includes somewhat free healthcare with low supply and great demand. People wait months just for a simple CT scan. Please post what your thoughts are current healthcare reform.  Do you think it will help or not?

  It seems to me that current healthcare reform is looking to make Employers and Healthcare providers foot the bill for healthcare, which I believe will ultimately lead to higher unemployment and less for profit healthcare.  Again because of the law of supply and demand employers will hire less people due to increased costs, and for profit hospitals will close doors because they cannot compete while being paid what the government offers. 


Dave Tufte said...

Joey: 94/100 (were not where)

There's a lot going on in this post, and I wouldn't be surprised if it generates quite a lengthy thread.

For those of you interested in learning a lot from people at the top of the field, check out the link that Joey found. This isn't a knock on other peoples' links, but this one is exceptionally high quality.

For now I want to correct one factual mistake: The government does not pay "nothing" for the healthcare it helps provide. It is correct that the government pays less than healthcare providers would like (or need), but it isn't zero.

And let met steer the economics a little. This post is some way along the road to a decent explanation of a third party payer system. This is like a price ceiling (from Chapter 2) but a little more complex (and Baye doesn't cover this topic). Start with a standard supply and demand model of a price ceiling. If the ceiling is below the equilibrium price, the ceiling is binding, and quantity demanded will exceed quantity supplied, creating a shortage. This is what Joey describes. This isn't what we have though, because it would be a policy disaster. This is because the amount transacted would be where supply intersects the price ceiling. But, with a third party payer system, the third party agrees to pay for whatever quantity is demanded. This means that quantity supplied will have to equal quantity demanded, which is directly above where the ceiling intersects demand. Now, if you look at your diagram (that I hope you've been drawing), both the quantity and price are higher than they would be in equilibrium. And, if you lower the price that demanders face (say by making healthcare "free-er"), you get both quantity and price to rise. That's why total healthcare expenditures are high in all developed countries.

Lastly, let me talk a little about the actual policies we have. There's a saying related to internet marketing that if you can't figure out what the product being sold is, then you're the product (think Facebook). Obamacare has similar features in that most proponents and opponents can't even agree on what is being provided: better access, lower costs, higher quality, portability, coverage for pre-existing conditions, preventive medicine, and so on. This is because these things are the window dressing that obscures the actual product. This, and all other healthcare reforms, are really about providing funding to pay for healthcare for the old. This is provided through Medicare, which — ethics aside — is a really dumb idea. The problem with Medicare is that it is designed as an open-ended entitlement: if you need care, you get it cheaply, and if it helps you live longer so that you can consumer more healthcare. Medicare is already expensive, and cannot get cheaper without extraordinary reforms. The alternative is to convince more people to contribute more to its support. Most arguments are about the details of Obamacare, but miss the big picture that those details are in place to raise funds.

Dawn said...

The problem with "free" healthcare is that it is not free. The people that are hard workers, have full time jobs, and probably still pay for some of their insurance will start to see the cost of their insurance, doctor bills and taxes go up. This price increase is for the people whom are receiving "free" healthcare.

There is always going to be a flaw in the system, when there is something free offered. The insatiable wants of human beings will overpower the time offered by doctors.

I do believe that there are deserving people that need help with medical bills.To lump an entire country into a category to receive free services is not a good idea. The problem with doing this is there will be less incentive to become a doctor. The cost and time it takes to go through medical school will not be worth the compensation. This also can be said for pharmacists and other healthcare providers. This will end up creating a shortage of doctors that will not be able to keep up with the the services demanded.

I have recently seen the effect of the current healthcare reform from the pharmacy side. Independent and small chain pharmacies lose money almost every time they fill a prescription for a government insurance. Pharmacies cannot purchase medications at a low enough cost to receive a reimbursement from the insurance company, which would be the government, without taking a loss on what they are selling to the customer.This is taking away free market and the capitalistic idea of how companies are running their businesses.

There is another concern with free healthcare, if doctors are getting paid by the government why isn't every profession? I don't believe that every profession wants to be paid by the government, but I do believe that healthcare will not be the only profession provided by the government in time. Can our government support this amount of compensation? Not without taxes and other support from its nations citizens.

There is a never ending battle with taxes and lowering healthcare costs. No solution is going to be right for every person, but I do believe that free is not a good solution for anyone in the long run.

Dave Tufte said...

Dawn: 38/50 ("who" not "whom",
"prescription for a government insurance" sounds kludgy but how I'd restate that depends on exactly what you were trying to say there, "taking away the free market" not "taking away free market", and "nation's citizens" not "nations citizens").

"The problem with 'free' healthcare is that it is not free." is an excellent point. Prices involve more than money, and costs usually end up getting covered one way or another. When we try to make the monetary price of healthcare lower (without increasing supply), then the costs will just be covered in other ways.

Dawn also points to doctors and other providers not getting paid enough under the new system. I disagree. If anything, passage of Obamacare required buy-in from a lot of sellers who felt that they were likely to make more money under the new system. For example, doctors would charge less if there were more of them, but reducing that cost was never on the table.

The addition of the prescription example is helpful. Healthcare providers have complained for many years that reimbursements from government agencies don't match what they can get by selling to other payers.

Bronson said...

Let me put the issue in terms of real life in business: An important aspect of the cost of health insurance is that employer premiums are typically 200% to 300% of that of the employee. Example: If as an employee I pay $100 for my health insurance premium, my employer pays $200 to $300. I see the increasing cost of healthcare every day from both an employer and employee perspective. Since Obamacare, my health insurance premiums have increased an average of 15% from both an employer and employee standpoint. My theory is that healthcare is a privilege, not a right. I should not have to subsidize anyone else's healthcare because they choose not to work/get insurance, choose not to be healthy, etc. My toughest college professor summed it up best: "get off your butt, onto your feet, out of the shade, and into the heat....or it is going to be a long time before you eat..."

Dave Tufte said...

Bronson: 50/50

I agree with the sentiment and economics expressed in this comment.

Having said that, I think there are a lot of other issues in the mix here. And they make a focus on one view, as in Bronson's comment, problematic. Just to name a few, we could start with moral hazard on the part of consumers, a third party payer system that confuses price signals, lack of understanding of how insurance actually works, hysteresis in why our healthcare system is financed the way it is, inertia, how we deal with the bad (health) luck of individuals, whether we should shift costs across individuals because people won't adequately shift costs between their current and future selves ... I could go on.

Lacey said...

I see the healthcare reform as being very similar to the "No Child Left Behind" act. Not only are public school teachers already paid less and have fewer resources than those at private schools, but rather than bringing the lower achieving out-layers up to an average range, the average has dropped. I have spoken with many teachers and none of them believe the "No Child Left Behind" movement was a good thing. I don't see how the healthcare reform will be any different. This article by the National Center for Policy Analysis shows that the privatized healthcare structure of the US is simply better than those of other developed countries with more governmental control of the industry.

On a different note, I don't believe citizens should be forced to play what is ultimately the "unlucky lottery" by contributing to a fund they may never benefit from. Furthermore, I trust that I have a better understanding of my personal needs and am more capable of filling them than a government that is increasing its national debt exponentially and has a lacking record of success in its public involvement.

Dave Tufte said...

Lacey: 47/50 (outliers not out-layers). Also, you mentioned a link, but didn't provide one.

The "No Child Left Behind" program is off subject for this thread, but may be a good analogy. I'm not sure how good the analogy is though when you ask the people who were found lacking (teachers, administrators, and school districts) whether or not they like the program they weren't in favor of in the first place. Anyway ...

You are correct: data that matches patients with similar diagnoses found that the U.S. healthcare system (prior to Obamacare) provided better outcomes to patients than did the healthcare systems of other countries. This is why most of the arguments in favor of Obamacare were in terms of the inputs rather than the outcomes to patients.

As to your second paragraph ... hmmm ... a lot of people feel that way, but the evidence is that on average we're not very good at that.

Judy said...

Healthcare is one of the necessities therefore, it’s responsive to the income levels people do have, this is to say, if government is providing poor quality healthcare at a subsidized costs then at a higher level of income people will be using it at a decreasing trend and they will shift towards higher quality healthcare depending upon their affordability. The question of “free healthcare” is beyond the scope because the policy says itself that “larger number of Americans will enjoy the best quality healthcare at an affordable cost”. Thus the question here is about the quality, if the income level of individuals increases how they would respond to this healthcare policy?
Government spending will surely increase the national income flow but matter to be pondered here is; at what cost? Because if its benefits to the society are more than its costs to economy (in shape of lost individual spending) then it can be said that this policy has a positive impact on the people and economy. But no doubt, the benefits of this policy cannot be submerged as it will provide the healthcare to those who cannot afford it.
The question Dawn raised about the compensation of doctors is also interesting one; because considerable costs would be required to analyze and decide the pay levels for different doctors, the social costs may also be there in shape of inefficiencies etc. In order to keep the quality of healthcare government will also be required to keep the motivation level of doctors up, hence more costs.

Dave Tufte said...

Judy: 47/50 for run-on sentences.

Ooh. No, no, no ... Judy starts out by repeating a very popular trope that is not supported by the economic data.

Judy is right that healthcare is income elastic like a necessity. But that doesn't mean it's price inelastic like a necessity. Many people say healthcare is a necessity. But if we are to believe that it should be supported in both pieces of data. But necessities, by definition, need to be things with inelastic price demand. And yet the fact that many people go without appropriate healthcare for financial reasons points to demand that's actually quite elastic. It's arguable that a lot of trouble that governments have ensuring adequate healthcare start with this misperception about preferences.

In "... government is providing poor quality healthcare at a subsidized costs ..." I think you mean prices rather than costs.

Both of these comes up later in the comment with the idea that evaluating the policy is about whether its benefits exceed its costs. Do we measure the costs to be what the government actually pays? The elastic demand of consumers is saying that measure would be incomplete, because it would miss the costs some consumers used to choose to avoid. If this is large (and that's an empirical question), it means that trope may have led to a bad decision.