Neither Obamacare Nor Its Repeal Fixes The Healthcare Pricing System: The Only Long Term Solution To Healthcare Costs And Medicare Is To Repair And Restore The Pricing Mechanism At The User Level

About 20 months ago, in a post on this blog, "Health Care Is A Pricing Mechanism Problem Not An Insurance Problem," I wrote that the breakdown of the pricing mechanism in healthcare, and not health insurance, is the source of the problem of the high cost of US medical services. The fix of the pricing system requires users, the consumers, to have to budget part of their own income for medical costs.

Next week, the US House Republicans will vote on and likely pass a bill to repeal Obama's landmark healthcare legislation, The Patient Protection and Affordable Care Act, colloquially and disparagingly known as Obamacare. It is extremely unlikely the US Senate will undo the new healthcare law and even if by some odd fluke, the Senate passes a repeal, President Obama will certainly veto the bill.

Unfortunately, neither the new healthcare law, nor a repeal of that law, fixes the consumer pricing mechanism for healthcare services. One strong step towards fixing medical services' pricing in the US would be complete repeal of the employer tax deduction for medical insurance as an employee benefit.

As I wrote in my earlier post:

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.

Read the complete earlier post here.

The Marginal Value Of US Medical Service Is High So Medical Prices Are High

A comment I posted to "Health Care Prices: Ignored Once Again?" by Chris Fleming on HealthAffairs Blog:

It is the prices stupid, but if researchers only look at the cost of the medical service, as the authors mentioned above do, they miss the total economic price that a patient pays.

Opportunity costs to patients have to be included. Opportunity costs help explain the value of medical services to patients and why prices for US medical services appear to be high. As long as the price of a medical service has a positive marginal value to the patient, the patient will be willing to pay the higher price.

The US has very high productivity and high GDP per worker. A lost day's work has a very high opportunity cost to an American worker. Even if the worker receives sick pay, a day's absence from work often means for many a backlog of work when they return. An extra few day's work missed by going to the doctor more often for treatment or staying in the hospital longer is very expensive to an American worker. It is also not just the number of visits, but also the lost productivity due to the time it takes a patient to get better. For example, imagine a patient with a bad knee who can get knee surgery in a couple of weeks versus one who has to wait a few months for the surgery. The longer waiting time surgery might be cheaper, but the opportunity cost of the lost worker productivity until the surgery has to be included in the comparative cost. Medical costs studies as a rule do not include these opportunity costs to the patient and the employer.

American workers are willing to pay more for medical services because US medicine is more efficient and reduces the number of days of wait until treatment, of missed work due to doctor visits, uncured illness and hospital stays. This is why we visit the doctor less and have fewer days of hospital stay.

Opportunity costs extend to relatives of the patients. Often a parent is taking a child to the doctor or staying home with the child until the child gets well. Likewise, adult children often assist with the care of their elderly or sick parents.

I would say that the reason these studies were ignored is that they presented an interesting fact but also an incomplete story. Show me a comparative study that analyzes medical prices that includes patient (or caregiver) opportunity costs.

My gut feeling is that prices of medical services in the US are at a level where the marginal value to patients equals the marginal costs, including opportunity costs, to patients.

Also see my later post, "Health Care Costs And Worker Opportunity Costs" relating to this topic.

ObamaCare Will Decrease Workforce Labor And Increase Healthcare Spending On Previously Uninsured Says CBO

From CBO Director Doug Elmendorf's October 22, 2010, presentation, "Economic Effects of the March Health Legislation" at the Schaeffer Center of the University of Southern California:

• The legislation will reduce the amount of labor used in the economy by roughly half a percent, primarily by reducing the amount of labor that workers choose to supply.


• The legislation will increase spending on health care for people who would have been uninsured in the absence of the legislation.


• The legislation will decrease spending on health care for people who would be insured with or without the legislation. The magnitude of that decrease, and the extent to which it will be achieved through greater efficiencies in the delivery of care or through reductions in access to care or quality of care, are unclear.

See the complete slide presentation here, on Scribd or embedded below.

CBO Economic Effects of New Healthcare

Is Government Mandated Health Insurance Constitutional?

In an August 22, 2009, Washington Post article, "Illegal Health Reform," David B. Rivkin Jr. and Lee A. Casey argue that Congress cannot mandate the purchase of healthcare insurance.

President Obama's proposal to reform the medical system requires every individual to obtain medical insurance.

Rivkin and Casey write:

But can Congress require every American to buy health insurance?

In short, no. The Constitution assigns only limited, enumerated powers to Congress and none, including the power to regulate interstate commerce or to impose taxes, would support a federal mandate requiring anyone who is otherwise without health insurance to buy it.

Read the complete Washington Post article by Rivkin and Casey here.

Hidden Costs Of Free Government Health Care: The French Example

City Journal has an article about the true cost of having free government health care in France. Read "Paying for Le Treatment" by Guy Sorman, City Journal, 24 August 2009.

Sorman writes:

France’s costly national health insurance is mostly financed by taxes on labor. A Frenchman making a monthly salary of 3,000 euros will pay approximately 350 of them (deducted by his employer) for health insurance. Then the employer will add approximately 1,200 euros, making the total monthly cost to the employer of this individual’s services not 3,000 euros but 4,200. High labor costs in France affect not only consumer prices but also unemployment rates, since employers are reluctant to pay so much for low-skill workers. Economists agree that unemployment rates and the cost of national health insurance are directly related everywhere, which partly explains why even in periods of economic growth, the average French unemployment rate hovers around 10 percent.

High as they are, taxes on wages are not enough to cover the constant deficits that national health insurance runs. France imposes an additional levy to try to close the insurance deficit—the CSG (contribution sociale généralisée)—which applies to all income, including dividends, and which Parliament increases every year.

The French system negatively affects employment in France and increases the cost of drugs in the US for Americans.

Read the entire article here.