In re health care (part 1)

This is the first of a multi-post series on health care (I’m projecting four right now).  This has been inspired by the passage of Democare, of course, and the reaction to it, including several conversations and emails I’ve shared with many of my friends.  In this part, I will examine how we view health care as a whole, and why it is so badly mistaken.

First, let’s remember what health care is: it is a service, like any other good or service in the economy.  Now, it may be more valued than other goods, but that does not mean the laws of microeconomics suddenly cease to apply.  Yet politicians and pundits across the spectrum seem to have forgetten this fact.  Why?

The reason is the classic danger to every republic: the tyranny of the majority.  The best example of this (other than health care) is rent control, where the focus on the small minority of landowners in urban areas has led to the tenant majority demanding price ceilings for rents.  Nearly every American city adopted rent control of some form during the first half of the twentieth century.  A few have since discarded it.  New York remains infamous for the myraid regulations that have come with “rent stabilization.”

What was forgotten in the discussion was this: in any market – grocers, restauranteurs, toy sellers, clothiers (for lack of a better word), dry cleaners, barbers/stylists, etc. - the suppliers are a small minority, yet no one talks about price ceilings in those markets.  What makes rent different is that housing is a good that everyone “consumes” (for lack of a better word) continuously.  Thus, the consumers dominate the discussion.

It’s exactly like that with health care; Americans “consume” it, and their employers (for the most part) pay for it.  Thus we have the situation where the 83-84% of the economy not involved health care considers it a “cost” and a “drag” on their business.

This situation has led the majority (non-health-care firms and individuals) to blame the minority (health care providers and insurers) for over two decades.  In the 1980s, it was doctors; in the 1990s, it was doctors and health insurance firms.  In this decade, it has been health insurance firms and pharmaceutical companies.  In every case, however, the discussion avoided basic economic theory in favor of scoring political points.  Even Republicans and conservative lunged for personal-injury lawyers to blame.

Before we can look at any of these groups, however, we need to look at what happened to the health care market in recent years.  To do that, we need to look at not just the cost of health care (which can be found in the NHE Summary including share of GDP file on this page), but also the price of health care (which the Bureau of Labor Statistics has), from which we can calculate the quantity of health care consumed.

So what did we find?  Well, going back to 1960, health care prices have risen by more than 6% a year, but Americans consume over four times as much health care now as we did then (2.5 times per capita).  Looking back to 1994, health care inflation actually falls to an average of less then 4.4% annually, while Americans consumed 34% more health care (18% more per capita) than that year.

So, the rising cost of health care has two causes.  Prices have risen, but Americans have also consumed more health care over time.  The basic rules of supply and demand tells us that when this happens – demand is gaining faster than supply.

One of the implications of this – that health care is more expensive – is obvious, and well known for some time.  What is not discussed as much is this: health care is a major industry in America, and a growing one.  In fact, if the cost were not felt by everyone else in the economy in one form or another, odds are health care would be considered one of the crown jewels of the American economy, to be celebrated instead of pilloried.

Instead, because health care is seen far too often in political terms instead of economic terms, the tyranny of the majority has sicked government regulation and subsidies on the health care market.  While Democare has quickly become the best-known and least-liked of these government interventions, government was sticking its nose into health care long before last Sunday, with predictably bad results.  I’ll discuss those results in Part 2.

Cross-posted to RWL

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