The REAL problem in healthcare

[SnikPlosskin]

THE MISLEADING CLAIM: A free market is WHY healthcare costs are rising so high. Government is the solution.

THE REALITY: It's a myth that we had free market healthcare. The government has been distorting healthcare markets for decades, thereby significantly contributing to higher prices. Government is not the solution, it's the problem.

Medicaid and Medicare became law after President Johnson signed the amendments to the Social Security Act in 1965. They then took effect in 1966. [a] When examining inflation, this also happens to be when medical care costs began significantly diverging from other living expenses, rapidly inflating faster than overall CPI. [b] [c] You can see this for yourself in the attached chart. This is due, in large part, to the expansion of demand WITHOUT an equal expansion in supply. As Milton Friedman concluded in his 1992 research paper "Input and Output in Medical Care," "The federal government’s assumption of responsibility for hospital and medical care of the elderly and the poor provided a fresh pool of money, and there was no shortage of takers." [d] He observed three notable stages regarding medical care prices.

Stage One:
After the birth of Blue Cross and Blue Shield, precursors to modern health insurance, Friedman observed the following: From 1929-1940, cost per patient day was indeed rising, but it only rose MODESTLY. [d] It wasn't alarming, as the average of ALL things were also rising modestly, including wages.

Stage Two:
After the birth of employer sponsored healthcare, which today is the most common way citizens receive "private market" health insurance, Friedman observed that "cost per patient day tripled from 1946 to 1965." [d]

Stage Three:
After the implementation of Medicare and Medicaid in 1965-1966, which significantly subsidized healthcare spending, Friedman observed that "cost per patient day then multiplied a further EIGHTFOLD." [d]

The point? The birth of private market health insurance wasn't in and of itself the driver of skyrocketing healthcare costs. Having it tied to your employer moderately contributed to the rise in prices, likely because it added one new layer of bureaucracy to the process, but it too wasn't the PRIMARY cause. What truly and most SIGNIFICANTLY contributed to sky rocketing prices was the government's policy of broadly subsidizing healthcare via the creation of Medicare and Medicaid.

Let's back up and walk through each step to see what went wrong.

BIRTH OF MODERN HEALTH INSURANCE:

• Blue Cross - In the 1930s, hospitals banded together via the AHA (American Hospital Association) to offer groups of employees "pre-paid" plans, agreeing to give them X number of days in the hospital in exchange for Y amount of dollars a month. This operated as a non-profit and was therefore not taxed, unlike traditional commercial insurance companies. [e]

• Blue Shield - Physicians, seeing the growing popularity of Blue Cross, feared they'd lose autonomy over their practices if hospitals expanded into their services, and thus banded together via the AMA (American Medical Association) to offer groups of employees "pre-paid" physician services, similar to the Blue Cross plans. [e]

For decades, traditional insurance firms had shied away from offering health insurance since they feared it wasn't actuarially sound [e], but the aforementioned non-profit models seemed to work because they stuck to employed individuals, naturally avoiding the elderly who are both retired AND the most expensive to care for. All that was needed now, for this new model to be cemented, was an unnatural spike in demand for this particular type of health insurance which was specifically tied to groups of employed people.

UNNATURAL GROWTH IN DEMAND:

"Because much of America’s work force was off fighting World War II, the Roosevelt administration feared that the domestic demand for workers would outpace labor supply, leading to a spiral of higher wages and runaway inflation." [y] "To combat inflation, the 1942 Stabilization Act was passed. [x] "The 1942 law mandated wage ceilings for a broad range of occupations, and required federal approval for any changes thereof. ...But fringe benefits, such as health insurance, were not covered under the 1942 wage controls. As a result, many employers started offering health benefits as a way around the new federal wage limits. This loophole gained further strength when, in 1943, a federal court held that employer-sponsored health insurance was exempt from taxation." [y] Then, Congress passed a comprehensive revision of the federal tax code in 1954 which "officially excluded employer-sponsored health insurance from taxation." [y] As a result of this tax-free form of compensation, "the demand for [employer-sponsored] health insurance further increased throughout the 1950s (Thomasson 2003)." [e]

Ideologically, those who favor reduced taxation may be thinking "but making it tax free sounds good!" While that's understandable, let's clarify that the danger isn't necessarily in the tax free status but the unnatural incentive created when only ONE form of compensation is allowed to be tax free. In other words, to avoid unnaturally incentivizing the growth of this or any other insurance model, it would have been preferential to have all forms of compensation taxed in the same way, even if it meant reducing all tax rates in order to tax the insurance benefits without seeing a net increase in overall tax burden. Whatever the course of action, for the price mechanism to work as it does in most functioning industries, markets must be crafted from the organic and natural feedback of consumers, NOT the inorganic and unnatural feedback resulting from government taxing one form of compensation but not another. The government, without realizing it, accidentally incentivized the widespread adoption of employee-sponsored health insurance, which destroyed any business incentive to create a functioning private health insurance model which catered to ALL individuals, since now, the only individuals left in the individual pool were unemployed, disabled, and retired (the elderly).

Then came the most significant distortion to the healthcare market ever. In 1965-1966, Medicare and Medicaid were implemented, subsidizing health insurance for millions. This was no small change. By 2015, while employer-based insurance covered approximately 55.7% of the population and directly purchased insurance (not through an employer) covered only 16.3%, Medicaid had grown to cover around 19.6% of the population and Medicare another 16.3%. (With an additional 4.7% for military coverage.) [f] Note, the reason these figures add up to more than 100% is because some individuals are “Dual eligible beneficiaries," enrolled in both Medicare AND Medicaid. [g]

That means roughly 40% [i] of the healthcare industry buys from one customer: the government. This is important not only because it represents a massive surge in demand, which means higher prices if supply isn't drastically increased, but because it gives the government enormous power over suppliers. They can, and do, underpay while pushing responsibility onto us. "Payment rates for Medicare and Medicaid, with the exception of managed care plans, are set by law rather than through a negotiation process as with private insurers. These payment rates are currently set below the costs of providing care resulting in underpayment." [h] In the aggregate, both Medicare and Medicaid payments fall below costs. See examples below:

• Combined underpayments were $51 billion in 2013. This includes a shortfall of $37.9 billion for Medicare and $13.2 billion for Medicaid. [h]

• For Medicare, hospitals received payment of only 88 cents for every dollar spent by hospitals caring for Medicare patients in 2013. [h]

• For Medicaid, hospitals received payment of only 90 cents for every dollar spent by hospitals caring for Medicaid patients in 2013. [h]

• In 2013, 65 percent of hospitals received Medicare payments less than cost, while 62 percent of hospitals received Medicaid payments less than cost.

That means costs are shifted away from Medicare and Medicaid as hospitals charge the privately insured inflated prices to make up for the shortfall. Of course the government only gets away with this thievery BECAUSE it's the government.

THE SHORTAGE IN SUPPLY:

Around 1969, the number of prospective physicians applying for residency training began to out pace the number of offered residency positions, which only increased slightly. [j] This gap continued to widen significantly over the last several decades. Today, we have a significant shortage of physicians and it's expected to get much worse. The AAMC estimated that the number of physicians per capita will decrease in the next decade if we don’t train more doctors. [k] Only 17.6% of all hospitals are "teaching hospitals." [k] This makes it difficult to train new physicians quick enough to react to the supply shortage, since no physician can practice without first completing residency training. [k] This is why the AAMC projects that, by 2025, we'll have a 46,100 – 90,400 shortage of physicians, further compounding the problem of increased demand with restricted supply. [k]

"Over half a century ago, Milton Friedman examined the political economy of occupational licensing. He recognized that regulating the professions was not really intended to promote the public interest. Instead, it was demanded by the members of a profession to promote their economic interests. In essence, members of an occupation recognize that fees, prices, wages, and income cannot rise above the competitive level without attracting entry, which expands supply and thereby causes fees and income to decline." [L] Licensing physicians limits entry, curtails supply, increases fees, and reduces the quantity of physician services offered. [L] As a result, those who continue to consume those services are made worse off by higher prices, but perhaps more importantly, some consumers will go without..." [L]

Milton Friedman and Simon Kuznets, who each won the Nobel Prize in economics, argued that "the difference in ease of entry reflects a deliberate policy to limit the total number of physicians to prevent so-called overcrowding of the profession." [m] Friedman and Kuznets attribute the deliberate restrictions of supply to the AMA and its Council on Medical Education. (Friedman 1998). [m] This restriction in supply is exacerbated by the aforementioned subsidization/expansion of demand. Anytime demand is artificially increased while supply artificially decreased, prices skyrocket. This is exactly what we've experienced.

CONCLUSION:
Let's envision a hypothetical America where nutritionists were long ago gifted the power - via legislation - to prescribe each of our meals. You'd be free to pay them for permission to access food, but only the food they recommended for you (and little more). Run through the mock history of this fictitious "food-care" industry while paralleling it to the healthcare industry.

Instead of the "affordable care act," envision the "affordable feeding act" which mandated that everyone sign up for monthly pre-paid feeding plans, whether they wanted it or not. Prior to that, envision the implementation of massive government feeding programs, titled "Foodicare" and "Foodicaid," designed to give millions of individuals free access to the aforementioned pre-paid feeding plans. Prior to that, envision that these monthly pre-paid feeding plans were the only form of untaxed compensation, and firms therefore began offering them in lieu of dollars, as a way to save on employment costs.

Remember that, under this scenario, there would also be a massive shortage of nutritionists, despite the government mandating widespread demand for them, pushing prices sky high. Of course this all sounds preposterous, since we all know that no such "food-care" industry is needed for 300 million U.S. civilians to readily access food. But the same is true about medical care, yet people forget how unnatural our healthcare system is and act like healthcare wouldn't be accessible if not for the government.

The truth is, it's only become prohibitively expensive BECAUSE the healthcare market has been severely harmed through government meddling. It wasn't natural for us to go down this route. Misguided Government policies took us here. Since WWII, our healthcare industry has NOT been the result of free market policies. It has NOT been an accumulation of consumer choices. It is NOT a failed capitalist experiment. It is - quite literally - a failed FASCIST experiment, where the government colluded with a limited group of private enterprises, burdened entities via costly regulation, unnaturally created the dominant form of employer-sponsored, bureaucratically heavy insurance we see today, controlled the market by forcing individuals to purchase a product they then forced others to offer, while subsidizing more than a third of purchases via taxation.

Bureaucracy expanded. Demand shot up. Supply was constrained. The results have been tragically indefensible, and it's the government's fault. Get them out of the healthcare business!
----------------------
Sources:
[a]
https://www.medicareresources.org/ba...y-of-medicare/

[b]
U.S. Bureau of Labor Statistics, Consumer Price Index for All Urban Consumers: Medical Care [CPIMEDSL], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/CPIMEDSL, March 26, 2017.

[c]
U.S. Bureau of Labor Statistics, Consumer Price Index for All Urban Consumers: All Items [CPIAUCSL], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/CPIAUCSL, March 26, 2017.

[d]
http://0055d26.netsolhost.com/friedm...01.01.1992.pdf

[e]
http://www.law.georgetown.edu/oneill...%20in%20us.pdf

[f]
https://www.census.gov/content/dam/C...mo/p60-257.pdf

[g]
https://www.cms.gov/Outreach-and-Edu...t_a_Glance.pdf

[h]
http://www.aha.org/content/15/medica...idunderpmt.pdf

[i]
https://www.cdc.gov/nchs/data/hus/2015/095.pdf

[j]
http://www.nationalacademies.org/hmd...48F665B5B.ashx

[k]
https://www.aamc.org/download/428616...riefingppt.pdf

[L]
http://scholarship.law.ufl.edu/cgi/v...ext=facultypub

[m]
http://research.upjohn.org/cgi/viewc...ntext=up_press

[x]
https://www.griffinbenefits.com

[y]
https://m.forbes.com/sites/theapothe...c=0&s=trending

[SQUIRMIN VERMIN 84]

Very revealing read.....

[Shrike6]

That's exactly the problem, before government started interfering with the free market, which was working fine, costs were reasonable. But the Roosevelt administration, beginning with new deal socialism, decided government should control markets. Socialism started spreading outwards from there. Almost everything government beaurocrats touch, is screwed up. Nothing works better than an unfettered capitalist syztem. It's what built this country into the envy of the world.
The very same happened to higher education. Government sponsored low interest student loans have inflated college costs the same way as healthcare.
The problem is not capitalism, but socialist policies of the government since Roosevelt.

[VITE1]

I've been saying this for decades. Milton Friedman told us this back in the 1970's and he was ridiculed for it.

How to Cure Health Care | Hoover Institution

Even the liberal twits at teh NYT have recognized it.


https://www.nytimes.com/2017/03/18/o...pore.html?_r=0

One thing most Americans don't realize is that when Medicaid and Medicare came into existence Doctors income increased 300%. This was due to the government now stepping in and making sure they got paid.

Also in the min 1990's when Clinton was pushing his HC plan they made a deal with the AMA to freeze the number of new doctors. This freeze was kept in place, due to the parer savings on the federal books, until 2010.

We have the AMA, Insurance companies and the government all in a deal to suck money and power from the american people.

[yell01]

Eliminate health insurance and pricing will go down dramatically. Doctors, hospitals, etc...would have to earn the patients business. They'd have to quote out the surgery, treatment, medication, etc...and the patients would make the decision on who they want to go with based on either price, comfort level or however they'd make up their minds. That $200 aspirin would cost $2, it would cost maybe $800 per day for a room and not $4000, you wouldn't automatically be charged $100 for shitty $10 slippers that you never use. When someone else foots the bill what reasons are there to be competitive??

[thecornerman]

That foodicare analogy made a good point, how would one compare health care insurance to auto insurance to add to yell01' point?