Saturday, December 08, 2012

Supply, Demand, and Obamacare

Let's say you go to the doctor.  The improvement in your health as a result of this visit is worth $2,000 to you.  The total resources used at your visit, i.e., before profits, is $1,000.  If that's where things stopped--you paid $1,000--that would be a really, really good deal for you.  You just got $2,000 worth of benefits for $1,000.  From your perspective, you just profited $1,000 (you took your profit home in improved health).  However, for everyone else in the transaction, that would be a really bad deal.  They invested in the clinics, pharmaceuticals, and human capital, and all they've gotten for their investment is their money back.  They'd have been better off putting their money in a savings account and getting a job at WalMart.  Now suppose you had the same visit, only now it cost you $2,000.  From your perspective, that's a terrible deal.  You could have made more money by putting it in a savings account at half a percent interest.

In a theoretically perfect world, the extra $1,000 is elegantly divided among every party to the transaction.  The pricing mechanism (on which entire textbooks are written) communicates and creates information.  The price communicates the total resources each party has invested, how scarce those resources are, and how valued they are for other purposes in society.  It also creates information, as the profit opportunities are not lost either on the parties to the transaction, or to the economy as a whole--other individuals and businesses will see the money to be made, and decide to try for a piece of the profits as well.

Unfortunately, this doesn't work perfectly for you.  If we turn to game theory, since your health is unique to you, you are a single-shot player in this game.  All the other parties in the game are repeat players--you aren't, after all, the first and last patient of the doctor's career.  Your negotiating position is consequently weakened, because you don't have the strategic options or information that the other players in the game have.  Consequently, you end up with a smaller share of the profit than you otherwise would.  What this means for the other parties to the transaction (and potential competitors) is that the profits are out-sized, and thus they supply more health care than they otherwise would, but you are simultaneously signaled to demand less health care.

So what happens if there's an insurance company?  Basically, instead of you being a single-shot player, your insurance company becomes a repeat player on your behalf.  This is a step better for you, because the insurance company's negotiating position is better than your own.  However, the insurance company's interests are not identical with your own (see the principle-agent problem), so even though it's better than paying for things yourself, you're still not capturing as much of the profit as you'd like (though, of course, you'd like to capture all of it).  However, the increased profit captured by you and your insurance company reduces the profit captured by the other parties.  This sends a signal to the parties, and to the rest of the economy, to supply less health care, and you to demand more.

Enter the government.  So what happens if there's a single-payer health care system?  A single-payer system has all the advantages that an insurance company does in negotiation, but now it's the only game in town: a price-maker.  The other parties can either quit the business or take what's on offer.  If the government pays less than even the insurance company does, it sends an even stronger signal to supply less health care and you to demand still more.  Since many of the parties already have significant sunk costs (the doctor's investment in human capital, for instance), many of them will stay on to recoup what investments they've made, but it still causes a long-term reduction in health care investment.

The long-reduction in health care investment is not inevitable.  It is just as likely that the other parties to the transaction will invest in political activity of their own to protect their profit margins, e.g., by restricting the number of individuals who can attend medical school.  Thus even though the profits are there, and the profit signals are there, there is no additional investment.  This, with a combination of single-payer (Medicare, Medicaid) and insurance companies, is approximately where we are in the United States.

In a single-provider world (the government provides all healthcare at taxpayer's expense), there's no reason for you NOT to seek health care.  Unless restricted, only the inconvenience of seeing a doctor prevents you from demanding that society invest in curing your every minor ailment.  Such societies typically use queuing to prevent just such a situation, which is a failure of prioritization, investment, and a monumental waste of time.  In this circumstance, you demand far more health care than you need, and society invests resources that could have been better used elsewhere.

In an optimal world, you would demand healthcare until there was something better you could do with the money, e.g., if you're starving it's better to buy food than a cancer screening.  Unfortunately, the free market doesn't give you an incentive to demand an optimal amount of health care because you lack information and repeated transactions.  Consequently, under the free market model, you demand a less-than-optimal amount of health care and the economy devotes too many resources to providing health care.  That disconnect causes waste on all sides.  On the other side of the spectrum, the single-provider world, you demand an excessive amount of health care and the economy devotes too many resources to providing that health care.

Wherever on the spectrum the ideal arrangement lies, Obamacare isn't there.  To borrow from Hitchens on the HMO, Obamacare entails "the maximum of capitalist gouging with the maximum of socialistic bureaucracy."  The government and insurance companies are wastefully duplicating functions, voters and corporations are wasting money on political activity, profits have no effect on supply and demand and Obamacare cannot provide that balance.


Blogger Yoel Natan said...

If you want to make sense of what happened under Obama, one really only need to appreciate one fact: unions used to make up 30% of the workforce as late as the 1970s, but now only 4% of the private sector is unionized, and 7% of the govt sector is. Unions have never been interested in the general populace receiving health benefits, since that would dilute the attractiveness of unions (see link at bottom saying they held the same attitude in the 1920s). But now that Republicans have decimated the unions first by making sympathy strikes illegal in the 1970s, and through other laws, and then by enacting free trade with low wage countries (directly and indirectly, e.g., Mexico can import products largely made elsewhere but assembled in Mexico). Thus, the unions were not there to stand in the way of socialized medicine, and won't be there to stop the single-payer option if ObamaCare doesn't work out.

So everything you said was true, but Obamacare is what was politically possible to date. It's seems the rationale was if ObamaCare doesn't work (or was found unconstitutional by SCOTUS), it would be tweaked to the extent possible, and if it still doesn't work, the US will have to go to the single-payer option. Because in a capitalist society, you can't go directly to a socialist solution without trying something intermediate. They only went to ObamaCare after everyone was convinced that pure capitalism wouldn't solve the situation of the uninsured. Capitalists had over a century to make it work, and only some diehards still claim that if only capitalism was truly ever tried, it would work. That's similar to how commie diehards claim that if only communism was ever tried, it would work. Now that communism is defunct (according to Daniel Pipes and others), there's one less reason to keep the system we had.

Under Samuel Gompers's leadership, the AFL's "business unionism" had attempted to promote the union and collective bargaining as the primary answer to the workers' concerns with wages, hours, and working conditions. The AFL officially opposed any government actions that would have diminished worker attachment to unions by providing competing benefits, such as government sponsored unemployment insurance, minimum wage proposals, maximum hours proposals and social security programs.

2:33 AM  

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