Tuesday, January 18, 2011

Neither Party Knows How to Fix Healthcare

The Democrats want to make us like Europe, and the Republicans want us to keep the system that we have been using for years. Both systems are wrought with problems. Europeans do nothing innovative in terms of healthcare unless they learn about it from another country. They face long lines and rationed care. The United States has skyrocketing insurance costs that deny access to many people. I know that Republicans have proposals, but they do not answer the fundamental issues in my opinion. Democrats just want to ignore the problem and make healthcare a collective cost. I have a better solution.

First, what are the main issues plaguing our healthcare system? A shortage of doctors, an obscure price system, and government favoritism, just to name a few issues. This will be the first of a series of posts on healthcare since this is and will be a big issue. Right now, though, I will merely post a snippet about these problems and what to do about them.

The shortage of doctors
Doctors in this country get paid great salaries, but they are in a mountain of debt when they get out of medical school. The problem here is that new medical schools are impossible to open because of pressure from the American Medical Association (who want to keep the salaries of doctors high, hence they act like a union). And the effect of this is simple: lower supply means higher prices all other things being equal. Adding more doctors to this industry can do nothing but help to fix the problem.

An obscure price system
Do you know how much an appendectomy costs? How about open heart surgery? A simple physical? Nobody knows these costs because government incentivizes the purchase of medical insurance. HMO's were unheard of at the beginning of the century, limited mostly to people in very high risk lines of work. Because of this incentivization, nobody knows the price of most operations, hence an obscure price system. This only serves to allow prices to rise because competition cannot work correctly if consumers do not know prices.

Government favoritism
Besides the obvious case of insurance plans, government also shows favoritism in hospitals. Non-profits get many tax exemptions, and for-profit hospitals are not allowed to open. What is the difference between for profit and non-profit hospitals? For profit hospitals would seek to become more efficient and lower prices in order to keep profits high. Such an incentive does not exist for non-profits. It does not matter for them.

Medicare and Medicaid
The problem of unintended consequences was largely ignored during the Great Society era, and this is one of its hallmarks. These programs raise demand. The result is obvious: higher prices. Programs such as these do nothing to answer the underlying problem of economics, which is scarcity. We should incentivize optimization and new techniques that allow us to provide more services. The only way to help people in the long run is through more production.

Do you have any other ideas on what causes our healthcare problems?


  1. You make excellent points, Tony. I specially like the one about the limitation on the number of doctors and the role of the AMA. I've argued for years that we don't need permission from the AMA to do anything. If we need more medical schools, let's do it. If the AMA won't give them accreditation, we establish another accrediting agency. I repeat, we don't need the AMA.
    Also, I would add to your list tort law reform which drives insurance costs for doctors and hospitals into the stratosphere.
    Great post.

  2. I always hear tort reform tossed about, and I know it would help, I'm just not sure about how much it would help. So I'm just kind of torn on the issue. Do you have any stats about it?

  3. Since 1975 the number of physicians in the country has increased by 147 percent - more than three times faster than the U.S. population growth rate. The number of physicians per capita has improved every year for the last 35 years.

    Physician shortages are not the work of some conspiracy - it's the work of the free market. Physicians choose to practice in certain specialties and geographic locations. This has resulted in a maldistribution of physicians and created shortages.

    A large physician supply does not automatically translate into lower consumer prices. New York City has one of the nation's highest physician concentrations, yet physician fees in Manhattan are among the highest according to Dartmouth University.

  4. It's not as simple as that. The number of doctors is not directly proportional to the price of healthcare. Look at what else has increased since 1975: services that healthcare can provide. With more fields you need more doctors.

    Now if you want to see something interesting that might explain why US healthcare prices are so high.

    And why choose 1975? Take a look at this quote:
    "By 1963, despite advances in technology and a huge growth in demand, one effect of the report was to keep the number of doctors per 100,000 people in the United States — 146 — at the same level it was at in 1910."

    So tell me, why does the AMA refuse to open new medical schools?