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.

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