The Economics of Health Care

Although the content of this article addresses health care and health insurance issues primarily from a national perspective, Alaska’s unique geographical position as well as its rich historical record is an appropriate introduction. Alaska Native people have experienced nearly the entire spectrum of the issues presented, from the highly regarded modern tribal healer personified by the late Dr. Della Keats to the travesties of infectious diseases evident in the flu epidemic of the early 1900s.

Moreover, the Alaska Native people have only recently assumed responsibility from the US government for management and administration (ownership) of Native health care under self determination, having been beneficiaries of the federal government, most recently the Indian Health Service, since the purchase of Alaska from Russia. Alaskans as a group are hostage to federal health care policy, in particular Medicare fee schedules that do not adequately compensate providers, much less serve to attract and retain qualified practitioners to the farthest north, largest and least populated state in the union.

Modern medicine has evolved from a superstition-based quasi-religious practice to a sophisticated scientific and evidence-based art that has extended human life expectancy in the United States from 49 years at the beginning of the 20th century to 77 years today. Among the factors credited with decreased mortality is the development of vaccinations to prevent infectious disease and implementation of safety measures to reduce injuries. Screening and early detection of cancers, such as colorectal, breast, prostate, and cervical cancers, concomitant with significant advancements in cancer treatments, also contributed. Advancements in treatments for heart diseases, such as coronary arteriography, percutaneous transluminal coronary arterioplasty, and coronary artery bypass grafting are other significant advances adding years to life expectancy. Unfortunately, along with increased life expectancy come associated increases in the incidence of chronic diseases and related increases in economic costs that burden individuals, families, communities, and society as a whole.

Prehistorically, illness and injury were believed to be evidence that supernatural forces were unhappy with the clan, or a member of the clan. The shaman, a member of the clan believed to have special knowledge or power, conducted ceremonial interventions and prescribed remedies intended to placate supernatural powers and restore a healthy relationship. Fundamentally, the shaman was the clan’s primary health care provider and, although some of the remedies did have medicinal value, the care provided was primarily spiritual in nature. Accordingly, the shaman received elevation in status as a respected member of the clan. For the ability to prepare medicinal applications and cast out demons to restore a healthy relationship with the supernatural, the shaman did not want for much. The shaman’s basic subsistence needs were provided for by the clan and gifts from individual clan members supplied adequate measures of comfort and pleasure.

The witch doctor, on the other hand, saw opportunity for material gain and provided services in exchange for something in return, be it a pig, a shiny silver trinket, or a soft fur blanket. Thus, health care evolved from a pro bono spiritual service to a bartered agreement for services in return for some item of value. Health care as a service was thus given a value determined by the value of an item or service one person was willing to exchange for the services of the doctor, and the value the doctor placed on that item. Eventually, a fee for services model for health care delivery emerged as civilization evolved from the shaman’s pro bono care to the witch doctor’s bartered care, to what is currently a collection of communities with educated physicians providing services for a fee.

With the advent of money the value inherent in the services of the primary provider was clarified. The doctor, who had essentially become a commodities trader as well as a physician, bartering pigs, chickens and bushels of wheat on a local commodities market, could insist on money rather than goods or services for the services provided. Rumor has it that in isolated U.S. areas, such as Eastern Appalachia and the Southern Bayous, some doctors continue to accept commodities in return for their services, although the situations are rare and dependent on the charity of the doctor.

Two important points are evident in this broad historical characterization of the practice of medicine. First, and most important of all, health care was originally archaic and was provided primarily pro bono as a spiritual service. Eventually, as the practice of medicine progressed to become a modern, highly specialized service demanding a fee for services, achievements in medicine have also resulted in an increased demand for the services available. Not unlike diamonds, the limited availability of medical services translates into a higher price for those services due to a limited number of providers, and the technologies used by them, in the practice of medicine. Like the diamond, if the number of health care providers and the technologies used by them could be increased substantially, the cost of health care would decrease proportionately.

Unfortunately, the supply of diamonds can be increased far easier than the number of health care providers and the advanced technologies they use. Thus, the economics of supply and demand are complicated and very difficult to apply as a market force to decrease expenses related to medical services. As mentioned earlier, increased chronic disease associated with increased life expectancy is itself adding to the demands placed on the limited number of medical providers and the technologies incorporated into the practice of medicine. Hence, even if a significant increase in providers were possible, it would still fall drastically short of meeting increasing chronic care demands enough to stabilize prices.

In summary, the market forces increasing the demands on modern medicine are substantially greater than the market’s ability to meet the demands with an increased supply of providers and additional technology to support them. The only method available for the market to reduce the demand is by increasing the cost of the medical services, a function of the free market. The more expensive a service becomes, the fewer the number of people capable of paying for the services. On the other hand, as is true in virtually every adverse situation that has faced the United States, American exceptionalism owing to individual liberty and free enterprise has resulted in profitable, yet effective market based solutions. There is every reason to believe that somewhere in a garage or in a basement in AnyTown, USA, an entrepreneur is currently working hard to develop a solution to the health care problem.

Meanwhile, free markets are a means of rationing to determine who receives available, but very expensive advanced medical care. Community standards are also a determinative factor. Community standards are different in New York City than they are in Little Rock, Arkansas, than they are in Great Falls, Montana, and consequently standards of care vary slightly between geographic regions and localities. For the federal government to intervene and apply external forces, such as cost controls or subsidies in the health care industry is an invitation for disaster. Worse yet, if the federal government instituted a single payer system, it then would assume total responsibility for the rationing of care and the results would be a disaster of epic proportion. It would mean an end to America as a land of free people with equal opportunity and burden society with obligations seeking obscure fairness in outcomes in lieu of tangible fairness in opportunity. Today it will be termed as social justice, and in the future it may well be written of as an injustice to the principles on which the nation was founded.

Community and market based standards of care that incorporate the family as the nucleus of the decision making process is the predominant national public policy currently in place. It is harshly criticized as a failed status quo, and as an affront to fairness and to concepts of social justice. A centralized single payer model of the decision making process incorporating algorithms based on the "complete lives system" or another yet to be determined set of criteria to determine the availability and eligibility for care is currently competing for acceptance as the predominant national health care policy.

Regrettably, the advocates for nationalized health care have co-opted free market concepts of competition between private enterprises by proposing that a government entity could provide the "competition." Arguments against the federal government inserting itself as a competitor in the health care industry are numerous, and rational as well. Foremost among the arguments is that the government cannot enter as a competitor in good faith. A second argument suggests the government simply uphold its responsibility to regulate commerce between the states by removing the barriers to interstate purchases of health insurance products. Currently, federal policy actually serves to discourage interstate transactions in health insurance rather than promoting it, in stark contrast to the intentions of the commerce clause in the Constitution. If the current government were truly interested in providing competition, this is the easiest and most market friendly approach available. To the contrary, the motives of the current government appear directed toward an expansion of government rather than an attempt to solve the health care problem.

Economist Arnold Kling, PhD., on the blog Library of Economics and Liberty, writes that "…the locus of power between states vs. the Federal Government is sometimes the reverse of what the Constitution intended, with Washington regulating things that have almost nothing to do with interstate commerce and states impeding trade with fifty-one regulatory fiefdoms, as is the case in health insurance." The fact remains, however, that even if interstate health insurance was more easily and economically available, the demands on health care will not decrease any time soon. The demands are going to continue to escalate as the "baby boomer" generation enters the golden years in force, demanding medicine and treatments for the chronic diseases they will inevitably develop as they grow older.

Unless of course the motives of public policy can be directed toward continued but modest improvements in and achievement of market-based community standards that accept that life is not always fair, despite how much we would like it to be. Those who can afford technologically advanced care will continue to obtain it while those who can not afford it will not. It is deplorable to consider the possibility of government forcing those who can afford technologically advanced health care to also pay for the whole of society’s desire for technologically advanced care as well. Ironically, it is logical to conclude that continued advancements in health care delivery will actually be retarded if government intrudes, and instead of continued progress as evidenced by the observed results over the last century of free market medicine, status quo stagnation will occur as incentives for continued advancements will no longer be evident.

Many federal interventions designed and implemented to mitigate regional and societal disparities in health care outcomes have been noble and effective. These interventions contributed to the development of a quality health care system that is the envy of the world. It is for that reason that many Americans consider it unconscionable to believe that a total overhaul of the system is warranted. The record clearly demonstrates that it is the best system available because it is a product of the free market system. The record also demonstrates that because the system is malleable and dynamic it can be incrementally improved upon, as it has been so successfully been improved upon in the past.

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