Health Care Is A Pricing Mechanism Problem Not An Insurance Problem

The US health care problem is not an insurance problem. The crisis is that Americans want more health care than they can afford. In 2003, the US per capita medical expenditure was $5700. Today, it is estimated at about $8200 per person. The under 65 age group medical expense per person is about 70 percent of the 65 and above average or about $7700. The 65 and above is about $11,000 per person over 65 years old.

Obviously, these are averages. If we do not put people into different health risk categories, then the average family of four has to pay almost $31,000 per year or about $2500 per month for health insurance just to cover the actual medical expenditure in that group. An individual would pay almost $650 per month.

An individual average senior citizen medical cost is about $1000 per month.

Many people find these amounts unaffordable and outrageous. Many users of medical services, government employees, union members, teachers, and other employees with health benefits, are used to having most, if not all, of the cost medical services paid for by a third party. To these users, health care became like air. It became both a necessary item and a free to use item, or at least a very low cost in comparison to benefit item.

The pricing mechanism for health care broke down because users did not bear anywhere near the full cost of the service. In effect, health care became an externality in economic terms to the users. The whole society is paying the costs of those who are heavy users of medical services and it drives non-users to use the service more often.

Most users only have to consider their want of healthcare and do not have to budget and allocate their resources to get it. Without consumers allocating their income for healthcare, the economy's pricing mechanism for allocating investment resources is broken and dysfunctional. It is over allocating investment and resources to the medical industry that otherwise would go to other industries with a better return. Consumers are also using more medical services than they would with a functioning price mechanism.

Any government program must be funded, but to most people their actual expected cost of medical services is higher than they want to or can afford to pay. If people were willing to pay for medical services out of pocket, they would only need insurance for catastrophic illnesses with extraordinarily high expenses.

Most government solutions attempt in part to keep the cost borne by the average user low by subsidizing and shifting some of the unpaid cost to a few others who pay more through higher taxes. This resolution does nothing to restore the pricing mechanism, and usage and cost will continue to grow. When costs are shifted and not borne by the end-user, the government is forced to delay, ration, deny and otherwise restrict services to contain growth in costs and use. The experience of most countries with a government health care system is rationing, delays and denials of services.

The true long-term solution to our healthcare problems is to repair and restore the pricing mechanism for consumer use of health services. One way to do it is to remove the employer tax deduction for health benefits and to end all government employee healthcare benefits. These changes will reinstate the pricing mechanism at the user level. However, the government will need to develop backstop programs for catastrophic illness and catastrophic injury and for consumers who are too poor to pay for healthcare or health insurance.

Once there is a fully functioning pricing mechanism for medical services, most of the problems will disappear. Usage will slow down without any ill effects. Producers will have tremendous incentive to lower costs of services. Consumers will decide how to best allocate their income between health services and other uses of their income. Medical services as a part of GDP will decline. Only cost effective drugs and treatments will be developed and promoted. With a proper government program, the poor and those with catastrophic illness will have medical care at a much lower cost than now.

Our current problems of excessive cost and excessive usage are the result of a broken pricing mechanism. A government program, whether it is government healthcare, government insurance, cost effective restrictions on usage, or other restrictions, will not fix the pricing and medical system. They will create new problems. Only a complete reinstatement of the pricing apparatus at the consumer/user level will solve our healthcare industry problems.