Why Obamacare was Destined to Fail (and still is)

I’ll try to make this short and sweet. Back in 2008-2009 when the Patient Protection and Affordable Care Act (PPACA or ACA, aka “Obamacare”) was being debated across the country and in Congress, we were told of all the wonderful things that the law would do. This included:

    • Making health care available for all. The law would bring millions of currently uninsured people onto a health care plan. These were people who could not afford the current plans on the open market (for various reasons).
    • Making health care affordable for all. Proponents of the ACA promised that the law would bring down costs. This included wiping out restrictions on people with medical preconditions.
    • Making health care quality better for all. The ACA required that health care providers offer basic plans with more provisions than plans currently on the market. This requirement applied whether you needed or wanted to pay for these health care provisions or not.

Now don’t get me wrong; this sounds wonderful does it not? With one stroke of a signature, the President was proposing to increase coverage for those uninsured, bring down costs, and raise the quality of care. Yet how good an idea or law sounds does not automatically translate into actual reality; in other words, nice words and good intentions don’t equal good policy. I’m sure those who proposed and implemented the Soviet Five-Year Plans from 1928-1991 thought they made excellent economic sense and would raise the standard of living. Yet they turned out to be a disaster, effectively starving millions to death. [1] Basically, we need to move beyond rhetoric, promises, and idealistic visions and examine the economic assumptions and mechanisms behind far-reaching laws like the ACA.

A law that proposed to do all these things at the same time has to be evaluated in numerous ways, but especially economically. In other words, does this make good economic sense? Or, is it even economically feasible? For starters, what is economics? Here’s a basic definition:

Economics is the study of the use of scarce resources which have alternate uses. [2]

Here are the components of economics applied to the medical field:

    • Scarce resources: medical services are a scarce resource; meaning, there aren’t enough doctors, medicines, hospitals, and supplies to go around. There is greater demand and need than there is supply.
    • Alternate uses: none of the raw materials that go into creating medical services, goods, hospitals, etc. must be used for the medical field. Raw materials do not have commodity teleology (aka, a predestined use). The materials currently used in health care could be diverted to the restaurant business, to education, to space exploration, or a thousand other things. In addition, all the people who are currently doctors or who are becoming doctors aren’t destined to do so. They could drop out of the medical field and start a new vocation; or they could switch their educational training from medicine to engineering to teaching or something else.
    • Use: in this little word lies the concept of human action. How do humans use the raw materials on this green earth? Do we use them wisely as stewards or do we waste them? How are we to determine what raw materials should be used to do what? (Answer: supply and demand). How is knowledge dispersed throughout society and how does this effect the debate between market economists and central government planners?

Now let’s apply our understanding of medical economics to the three major planks in Obamacare (availability, affordability, and quality). If doctors, hospitals, and medical goods are a scarce resource, then adding millions of patients all at once means that all these goods have to be stretched even thinner among the widening ranks of those demanding service. Since demand will spike (more people added to health care plans), and plans must meet a minimum quality requirement (in essence a floor price control), this necessarily means prices will increase (law of supply and demand). Why is this? Prices are determined by both the demand side and the supply side of the equation. From the demand angle, there is a disequilibrium between the commodity that is available for use and the number of people trying to access that commodity. From the supply angle, prices reflect the cost of creating and delivering a good or service (e.g., raw materials, education, administration, etc.), including the time and effort involved in such production. Raising prices is one way of reducing the demand of a commodity (since those who can’t afford the higher prices look elsewhere) while maintaining or increasing the quality of the good or service offered.

If by arbitrarily increasing health care demand we drive up prices or deteriorate quality, not only does this effect patients, but also those working in the medical field and medical suppliers. The consequences here could be huge: students might be deterred from becoming doctors and nurses since there is little profitability or reward for their expensive education and hard work; hospital suppliers might find it harder to be equitably paid for their products if hospitals and doctors are unable to manage costs, in which case suppliers could divert their production to other markets; this would in turn lead to a scarce resource becoming even scarcer. In addition, medical innovation, which has historically been a strong suit of the U.S., might quickly decline since innovation needs venture capital and a stable market where risk-taking becomes worthwhile. We need to think carefully about how we as individuals and collectively as a society are using medical resources. This doesn’t just include the raw materials, but also the knowledge of what makes good medicine, healthy living, quality care, and efficient pricing. There is no way that “experts” (politicians or hired health experts) can learn and manage this knowledge from a central location or through a single, massive law. This kind of approach leads to the destruction of knowledge, harmful consequences, increased prices, and a more fragmented health care system. (See note [1] below).

An Example

Adding millions of patients to health care rolls (availability) is going to result in one of two things: either an increase in prices or a decrease in service and quality. But since decrease in quality is prohibited under the ACA (actually higher quality is demanded), the only option is for prices to increase – dramatically. For example, say a hospital employs 100 doctors and each doctor can see 20 patients a day (about 25 minutes per patient). This means the hospital can serve around 2000 patients a day, giving each of them roughly 25 minutes of care at a comparable quality (assuming an 8 hour workday). Imagine however that the hospital is suddenly inundated with 10,000 patients a day. If the number of doctors are not proportionally increased, or if the quantity of services (hospital beds, sheets, x-ray machines, surgical tools) are not likewise proportionally increased, the hospital is left with little choice. It can either increase the cost of seeing the doctor, which will necessarily exclude those people who can’t afford it and thus drive down demand, or it will decrease the quality of care given; namely, each person will only get to see the doctor for about 5 minutes. But since the ACA forbids deceasing the quality of plans, then the only choice left is to increase the cost of doctor visitations. Or perhaps all the doctors start working 12 hours a day in order see a greater number of people; yet a longer work day requires the hospital to pay the doctors for overtime, meaning the hospital must pass this employee salary increase along to patients in order to adequately cover overhead expenses and not go into the red (lose money). Although some might ask doctors to altruistically do overtime without pay, not only is this unreasonable and unfair, but even unbiblical (cf. 1 Tim. 5:18).

Continuing with the above example, let’s say the hospital is determined to maintain the quality of care, not raise prices, and still treat all the new patients. The only option it has is to increase its ranks of doctors (of course this assumes that such doctors exist; meaning, there is a doctor employee pool to draw from). Yet this again will result in a hike in prices. Why? Well, in order to see 10,000 patients a day at 25 minutes each, the hospital will have to hire thousands of more doctors. Adding this many doctors to its payroll increases the hospital’s monthly expenditures. In addition, the hospital will have to supply all these new doctors with the appropriate and necessary medical supplies in order to treat patients; this too costs money (and assumes such supplies are available for purchase). Perhaps too the hospital doesn’t have enough space in their current building to hold all the new doctors and so opts to build a second hospital building. This obviously costs money as well. In essence, all of these costs are going to be reflected in the price to see the doctor since the profit margins for the hospital is too small for them to absorb all the costs themselves. Since few hospitals are capable of hiring dozens of new doctors in a short period of time (and since U.S. health care education doesn’t produce enough doctors currently), the only realistic outcome will be a high spike in health care-related prices and/or a decline in quality (unfortunately, these aren’t mutually exclusive; they can happen simultaneously).

Summary

In short, it is economically impossible to legislate (1) an increase in availability of a commodity while (2) decreasing the cost and (3) either maintaining or bettering the quality. [3] This is why Obamacare was destined to fail from the beginning as a legislated health care policy. We are beginning to see the results of this poorly conceived, constructed, and implemented law: rising premiums (and deductibles) for many people, health care plans being dumped, doctors being stretched thin, the pool of available doctors shrinking, and more. Expect to see much more of this in the coming days. If I was a betting man, I would predict that not only will prices continue to rise, but waiting times will get longer, inefficiency in the health field will increase (aka paperwork), medical innovation will decline, and a black market might possibly arise. Stay tuned.

Notes

[1] For more on the relationship between prices and the failure of socialism, see “Information, Prices, and Socialism’s Flaw.”

[2] Thomas Sowell, Basic Economics: A Common Sense Guide to the Economy (New York: Basic Books, 2011), 3.

[3] It should be noted that these three characteristics are not intrinsically exclusive of each other, since market forces are able to accomplish these three goals. For example, when Apple released its iPhone in 2007 it started at $500. Yet by delivering a quality product that people bought and by being innovative and staying ahead of the competition, the iPhone today is far better, faster, and more capable, is delivered to a wider customer base, and is cheaper ($99-$199). The question that should be asked is, How did Apply do this? The answer is quite simple: through investing with venture capital to innovate and create a faster, more efficient, longer-lasting phone with more capabilities to do what people want; through competition with Android and other smartphones that forced Apple to produce a phone of comparative quality at a similar price; and by listening to customer needs, Apple was able to deliver a phenomenal product while lowering the cost and increasing availability. This is why we should let the market regulate the health care industry since it’s possible for a similar phenomenon to occur.

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