Saturday, March 27, 2010

Easter egg economics: a health care parable

This weekend my town, Villa Rica, Georgia, had a public Easter egg hunt at the local recreation park. As I stood among the multitudes with my family, it occurred to me that this was similar to what we will soon be experiencing in our health care system.

To begin with, the Easter egg was free of charge on the surface. Of course, it wasn’t really free, but there was no charge at the gate and there was no fee for the games and activities. The cost was paid by local tax dollars. As the law of supply and demand dictates, since the price was low, demand was high. There were hundreds of kids lined up to hunt the eggs. So many in fact, that when the hunt actually started, it was over within minutes. Each child was lucky to get a handful of eggs.

There were also bouncy rides, face painting, balloon animals, and other activities. Because these were also free, there were long lines. The lines were also partially due to the fact that there were few volunteers who were running the activities. These people were dedicated and you could tell that most of them enjoyed making kids happy, but as the day wore on and the lines became never-ending, some of them understandably became a little frazzled.

My son stood in line for quite a while to get a balloon T. Rex. The girl who was making the balloon animals was very patient and talented (I had never seen a balloon tyrannosaur before!). Nevertheless, I noticed that the first balloon animals were very intricate and decorated with magic marker fur, eyes, and teeth. By the time that my son got his T. Rex, the product was a little more hurried and little less detailed. She was very nice, but I could tell that she wanted us to hurry so that she could get to the next balloon and, hopefully, to the end of the line before dark. Similar circumstances were found at the face painting booth and other activities.

The healthcare system will be under similar stress as the government begins to subsidize health insurance. The apparent price of health insurance will be zero to many people. This will fuel a sharp increase in demand. More people will be competing for a finite amount of resources, in this case, appointments with doctors. There simply won’t be enough doctors to go around and some people will likely have to wait weeks or months for care. When you do get an appointment, the doctor will likely hurry you though to get to the next patient and quality of care will suffer.

As people see that medicine is no longer the profitable and rewarding career that it used to be, fewer and fewer people will make the long and difficult commitment to finish medical school. There will ultimately be fewer doctors (supply) for an increasing number of patients (demand). When this happens, economic law dictates that the price should rise to reduce demand. (In fact, Investor’s Business Daily reported that 45% of doctors would consider quitting if Obamacare passed [1]. This would reduce supply even further and cause more of an imbalance with demand.)

The government is unlikely to let prices rise sharply. Over the past few years, Medicare’s reimbursement rate for doctors has been below market rates. In essence, if a doctor visit costs $100, Medicare might only authorize reimbursement of $60. The remaining $40 has to be passed along to patients with private insurance, driving up insurance rates. As a result, many doctors are not accepting Medicare patients [2].

The only alternatives to letting prices rise is to either increase supply (more doctors) or keeping prices artificially low (price controls). Since it takes a lot time to train a doctor, the supply of doctors is unlikely to increase in the short term, no matter what incentives the government provides. To cut corners on medical training would decrease the quality of care.

If the government chooses price controls, the effect will be further shortages. Demand will not be reduced, but the limited supply will doled on either a first-come-first-served basis or some sort of rationing scheme. In either case, not all of the people trying to get medical care will get it.

An obvious way to resolve these problems would be to charge more. Even an admission price of a dollar to the Easter egg hunt would cause some people to forgo the egg hunt for other activities. Only the people who really wanted to hunt Easter eggs would come. Similarly, having people pay more of the cost of their own health care would encourage people not to go to the doctor if they don’t really need to go.

Some of the proceeds from the admission fees could be used to pay the volunteers who paint faces and make balloon animals. This would encourage more people to learn these skills. More volunteers would mean fewer and shorter lines. If the volunteers were allowed to charge a dollar per face or balloon, they would make even more money and people who didn’t really want a painted face or balloon T. Rex would be provided with an incentive to stand aside in favor of those who did.

Finally, imagine that the community rose up and 60% of Villa Rica and Carroll County told their elected officials in a loud, strong voice that we do not want our local government to pay for further Easter egg hunts. Some people might be philosophically opposed to publically funded Easter egg hunts in general. Others might simply feel that in the current economy, public dollars should be saved to spend on projects that are absolutely necessary.

I hope that if a strong majority spoke in a clear voice, the city and county would reconsider spending money on the Easter egg hunt. In contrast, when almost 60% of Americans stood up to tell congress to junk Obamacare and start over [3], the government ignored them and proceeded to ram an unpopular plan down the throat of the country.

President Obama ignored signs of public discontent in numerous elections since he took office. Strong Republican victories in New Jersey and Virginia, plus Scott Brown’s senate victory in Massachusetts (which already has government-run health care), should have encouraged President Obama to seek a bipartisan solution. Instead he did the opposite. Seeing the writing on the wall that he would likely lose his Democratic congressional majorities in November, he pushed through his plan against the will of the people in hopes that the Republicans would not become strong enough to repeal it.

Election Day, judgment day for the Democrats, is less than eight months away. Currently signs are pointing to devastating Democratic losses at the hands of an angry electorate. Our democracy depends on a government that is subject to the will of the people. When a party in power so blatantly disregards the will of the people, they do not deserve to hold power. They deserve to be discarded like a rotten Easter egg.

Monday, March 22, 2010

Thoughts on the passage of health care reform

Freedom is inversely proportional to the size of government. Last night, our government suddenly grew in size to control almost one-fifth of the national economy. We will surely notice the loss of freedom as soon as the “benefits” of this new law go into effect in 2013. First, we will see fewer choices in our health care options and higher taxes. Later, our children will see a large loss of economic freedom as taxes are raised even further to pay for this “free” health care and Big Government makes even more of our personal choices for us.

We can see what is likely to happen in the next few years by looking at government run health care that already exists in this country. In Massachusetts, RomneyCare has caused health insurance costs to increase at a higher rate than the rest of the country [1]. Increased demand for health care with no corresponding increase in supply is causing shortages in the form of long wait times to see a doctor. Nationally, many doctors refuse to see Medicare patients because of the price controls and bureaucracy associated with the program [2]. In the future, many doctors will likely leave the profession rather than submit to restrictive regulations.

Insurance companies will be forced to cover patients with pre-existing conditions but without charging these sick people more. This means that rates will rise for everyone to pay for those who elect not to buy insurance until they are sick. Eventually many insurance companies will decide that the new rules are unprofitable and may withdraw from the marketplace entirely.

This will lead to an additional health care crisis. Depending on the party in power, further government “fixes” will be needed, which may consist of the longed-for “public option” – fully nationalized health care – of the Democrats.

Ayn Rand described this process her novel Atlas Shrugged. The government enacts regulation to fix perceived flaws in the free market. The government fix causes more problems, which require further government fixes since the marketplace is failing. Eventually, the government totally controls the market.

As both Speaker Pelosi [3] and President Obama [4] pointed out, none of us will know exactly what is in this monstrous law until it is in force. That alone should be sufficient reason to throw from congress each and every Democrat who voted for the bill, but there are plenty of other reasons as well.

The passage of the law directly contravened the will of the people. A recent poll [5] showed that 54% of Americans opposed the plan, while only 41% favored it. Moreover, only 26% strongly favored it, while 45% strongly opposed it. This is not democracy in action. Conversely, ramming the plan through will do more to erode the confidence of the people in government, especially when their worst fears are confirmed and things get worse.

This health care plan will also bust the budget in spite of claims that it will save money [8]. Analysts put the cost of Obama’s health care reform at over $1 trillion dollar, boosting the already record-breaking deficit to its highest point since WWII. Back then, we had a plan to reduce the deficit: win the war. Today, the deficits will keep rising until the government can either no longer, raise taxes or print more money. The true cost of health care reform will be measured in lost jobs, or jobs never created, as higher taxes and new regulations strangle the economic recovery.

Furthermore, the hyper-partisanship of Obama’s first year will likely become the norm. The health care battle is not over; in fact, it is just beginning. The next step, after a massive Democratic loss this November, will be to start the battle to either repeal or reform the reform. Obama is almost certain to veto any attempt to repeal his signature legislation. While Republican gains are not likely to be enough to override an Obama veto, they may win enough seats to at least make positive changes. Off the top of my head, I cannot think of any entitlement that has ever been repealed.

The battle will also move to the courts and the states over the next few years. There will certainly be lawsuits filed over the constitutionality of the government forcing people to buy insurance. I am not optimistic about this avenue since a large number of judges have questionable views about what the constitution actually says. After all, 4/9 of the justices on the Supreme Court don’t believe that “the right of the people to keep and bear arms shall not be infringed” actually means that the right of the people to keep and bear arms shall not be infringed.

At least thirty states have proposed or passed legislation that will allow their citizens to opt out of federal health insurance mandates [6]. Georgia’s senate passed a proposed opt-out constitutional amendment last week, and it should go to the house this week [7]. There is some question about the effectiveness of such measures since federal law typically trumps state laws. However, the tenth amendment to the constitution says “The powers not delegated to the United States by the Constitution, nor prohibited by it to the States, are reserved to the States respectively, or to the people.” This issue will probably have to be settled by the courts as well. Even if the courts decide in favor of the states, opt-out laws will not be able to mitigate all of the damage of the federal regulations.

The first step on the road to recovery will be to remove as many Democrats who voted for the bill from office. With a few exceptions, Democrats have controlled congress since the days of FDR. The country now has a federal budget bloated with entitlements and restricted freedoms to show for it. To begin correcting this problem, we must throw the spenders out of congress, and then hold the Republicans who replace them accountable.