Aug/094
Capitalized Healthcare
Much has been said about the downfalls of socialized health care, but almost no one has dared to raise the systemic issues with “capitalized health care.” The charm behind capitalism is its fabled ability to efficiently allocate resources. The theory goes, proper allocation and cost efficiency brings prices down and improves quality. This can be attested to in most situations, but sadly, with health care the incentives are all wrong.
Healthcare is what is known as an inelastic commodity. As price increases for this commodity demand will barely decrease. According to a RAND study commissioned for the Department of Defense:
Despite a wide variety of empirical methods and data sources, the demand for health care is consistently determined to be price inelastic. Although the range of price elasticity estimates is relatively wide, it tends to center on -0.17, meaning that a 1 percent increase in the price of health care will lead to a 0.17 percent reduction in health care expenditures. (page xi)
The reason behind this is pretty simple. When someone gets sick or injured money is often the last thing on their mind. After all, if you don’t have your health, you don’t have anything. So basically, people will pay whatever is necessary to keep themselves healthy. This makes sense, but the inelasticity of health care as a commodity becomes a problem when you consider the incentives it creates for those involved in supplying health care.
In a pure capitalist system, if people are willing to pay almost anything for a product, it shouldn’t be surprising if the cost of it starts to float upwards. After all, the suppliers of health care exist for the sole benefit of their investors and shareholders. Corporations with higher returns on investments attract more capital and can thus become larger. Those that can provide a good return are the ones that grow and conquer. Therefore, the obvious incentive here for a health care corporation is to raise the price as high as possible, but not so high as to create a public outcry and have pesky regulations created.
Secondly, since the outcome of all quality health care is the same — health — health care businesses with satisfactory records providing care must compete for customers by using gimmicks and small but ultimately irrelevant perks. For instance, one that is quite common now is proclaiming the greatness of brand new therapies as being the most “high tech” available despite there being little or no actual improvement in results offered. Another common one is simply inviting new patrons by offering “VIP” treatment. Both of these offer no substantial improvement to one’s health but add to the costs of treatment.
Then, as prices inevitably rise health care becomes prohibitively expensive insurance becomes mandatory. Insurance, while not an intrinsically bad thing, adds yet another layer of profit on top of what is being charged by hospitals and physicians. Then to compound the problem for the average consumer is the fact that insurance corporations also exist for the sole benefit of their shareholders. As income is fixed by monthly payment schemes, revenue maximizing action is taken on the costs side. Minimizing costs as an insurance company is quite easy: simply deny coverage in as many instances as possible.
A Capitalist system of health care without significant and intrusive regulation will produce high costs and terrible coverage for this simple reason: the incentives are designed to maximize the good for investors and corporations at the expense of the average person. Health care providers are encouraged to raise prices as high as the political zeitgeist allows while innovating on sometimes very frivolous things. Costs thus become prohibitive and insurance companies, with a desire to minimize losses, begin deciding who receives treatment and who does not.
Pick your overlords carefully: the government responsible to voters, or corporations responsible to shareholders.
1:05 am on August 11th, 2009
In a capitalist system, the incentive is LARGELY profit (I don’t buy food because I think I can sell it for a profit after I’m done with it…). While it’s true that nobody but Ayn Rand would consider this morally pure, the alternative in a socialized system is significantly less palatable – do what we tell you or men with guns will put you in jail.
At least with a capitalist system I get to choose how much I think healthcare is worth. There are many areas I would rather invest my resources in than trying in vain to keep myself alive forever, and if we as a culture didn’t put such a ridiculous emphasis on life-at-any-cost, the market wouldn’t charge us so much for it. :)
3:39 pm on August 13th, 2009
Great article, James! I didn’t ever consider that healthcare was an inelastic commodity (actually, you made me aware of the term).
But aside from the fact that corporations have the capability to raise prices (which when done reasonably makes sense), what kind of impact do you think frivolous lawsuits have on prices for medical services? Do you think that caps should be placed on lawsuits, as well as a “loser pays” system for lawyer’s fees?
After all, before we became an incredibly litigious society, a man could pay for his family’s medical bills without breaking the bank. These lawsuits cost doctors big.
5:46 pm on August 13th, 2009
This was actually written by me, Kyle. I ought to fix it so it shows the user who wrote the article. :)
Dmoney:
Is coercion any better if it comes in the form of red ink? The problem being here, is that for a Capitalized system the incentives are setup to foster exploitation rather than to reward good care. Socialized health care is far from perfect for sure and I would love to see a healthy hybrid of the two working in the US. Most of the best healthcare systems in the world are a mix of public and private. Australia, New Zealand, Norway, and Sweden are all this way. They have private clinics that take anyone who has private insurance, as well as public hospitals that will take both public and private insurance. Its sad that this myth of these two systems being mutually exclusive is so prevalent here.
Jeremy:
You’re right, it would reduce costs somewhat, but it wouldn’t be a huge change. Tort fees and malpractice settlements only account for 0.46% of total health care spending in the US. Source
Thanks for the Comments guys, its always good to have feedback!
12:10 am on August 18th, 2009
I tend to prefer red ink to guns, personally. :) If someone says to me “I will only treat your disease if you give me $1 million (or the equivalent in red ink),” I’m free to give him the finger and keep my money. If someone says to me “Give me $1 million or I will take it from you anyways and throw you in jail for tax evasion to boot,” I don’t have the same choice.
It admittedly gets murkier when the consequence of not getting treatment is death or long-term disability. Is “Give me $1 million or I will let you die” any better than “Give me $1 million or I will kill you”? I’m not sure. All I know for certain is that I would never want to tell someone either.
In an ideal capitalist system (admittedly such a thing is as unrealistic as any other “ideal” system :)), the incentives would work in favor of good, cheap healthcare rather than exploitation. People will ideally choose the providers that offer the best value for the money. The reward for exploiting your customers is ideally that you no longer have any customers, as they have flocked to someone else providing a better value. If existing providers are all offering high prices, there is ideally a huge incentive to enter the market as a supplier, offer lower prices, and take all of the customers.
As you point out in the original article, this works well for a lot of things but isn’t working out very well for healthcare in the US. A hybrid system that provides basic care on the taxpayer’s dime, but still allows people to opt in to better care may well be the best practical compromise between the two ideals of capitalism and socialism.
At any rate, thanks for giving me something worthwhile to think about while I’m at work. :) It’s always a pleasure to read other people’s perspectives and try to formulate my own into actual English sentences.