Healthcare – A Primer 2.0

There are two economic concepts that every American should understand, and they are very similar, so I want to discuss them together.

The first is what economists call the ‘unholy trinity of monetary policy,’ which says that a nation can pursue two, but not all three, of the following monetary policy directions: a fixed/pegged exchange rate, an independent monetary system, and free movement of capital. If a country could do all three of those things at the same time, then it could print money out of thin air without causing inflation, and we could end scarcity. Countries have been trying throughout recorded history to do all three of those things at the same time, and the amount of harm done to flesh and blood human beings, by these failed attempts to do all three things, is incalculable.

Show me a war, and I will show you at least one country that tried to do all three of these things.

There is another unholy trinity that has also done incalculable harm to flesh and blood human beings, but that does not get discussed as often, and that is the ‘unholy trinity of healthcare’. As with the unholy trinity of monetary policy, a country can pursue two, but not all three, policy directions: quality, affordability, and universality.

Somehow, if I tell people that a country cannot print money while letting capital flow freely without seeing inflation, they get it. We know intuitively that scarcity exists and that we must make trade offs with regard to monetary policy. Somehow, however, people do not apply the same rules of scarcity to healthcare.

We would get better policy decisions if we did.

We can have universal healthcare, but to have it we have to sacrifice quality and/or affordability. The reason prices are skyrocketing under Obamacare is that Obamacare tries to have universal healthcare without any quality sacrifices, making healthcare prohibitively expensive. We are reaching a point where we all have healthcare insurance, but the deductibles are so high that only the rich can afford to see a doctor, and in the meantime, about half of all Americans pay more for their healthcare insurance than they pay for their homes.

Obamacare did not fail so much as it made a bad set of trade offs.

If we want healthcare that is universal and affordable, we have to let the quality suffer, and the more affordable it becomes, the worse the quality will be. If you want healthcare that actually helps keep you healthy, it will either not be universal, or it will not be affordable.

Most economists would prefer that we have high quality, affordable healthcare. Most Republicans want this too. Of course, that means it will not be universal.

We have to make trade offs.

In the past, we used Medicaid to cover healthcare for the poor. Everyone else had to decide for themselves what kind of insurance, if any, they wanted to have, and then based on those decisions, if they had to see a doctor, they had to pay whatever the insurance did not cover. We had the highest quality of healthcare in the world, and it was affordable, but some people would go bankrupt if they gambled on insurance and then got sick.

Thanks to wage controls in the 60s, employers began to supply healthcare insurance as a fringe benefit. They did not do this because there was a great demand for employers to provide insurance rather than more pay, but because the government would not let them pay more. Insurance was something they could provide to attract workers.

Government, thinking that employer provider healthcare insurance was a good thing, made it tax free, encouraging more and more employers to provide it.

An obvious downside to employer provided insurance is that you lose it if you change jobs. Obviously, an insurer is not going to cover you for something you already have when you first get insurance (that would be like trying to get car insurance only after you crash your car), so having people changing insurance programs every few years, as they changed jobs, made pre-existing conditions a major problem.

That is where we were before Obamacare. We had another problem on top of that: too many onerous government regulations created waste and increased the cost of providing healthcare.

The solution to all of this is not single-payer healthcare. Single payer systems have the same unholy trinity that all healthcare systems have – they can only control costs by reducing quality – but with no incentive to reduce waste, they always reduce quality, and often at higher cost.

A free market system provides incentives to reduce waste and improve quality. Price becomes a way to balance the unholy trinity, allowing different providers to provide different levels of quality at different prices, generating the optimum mix for the society at large.

As for insurance, the government must either make healthcare insurance tax free when bought by individuals, or it must remove the tax free status employer provided insurance currently gets. Either of those options will encourage employers to get out of the healthcare insurance business, and encourage individuals to find insurance on their own, that will be portable when they change jobs (solving the problem of pre-existing conditions).

Government must also let individuals join pools to buy insurance in groups, so that individuals can negotiate on price with the same clout companies have.

Free market healthcare and free market insurance is the only way to go. Sadly, it is a hard sell for the very reason it works: by making the optimal balance between the unholy trinity, it also admits that the unholy trinity exists. The public, when given a choice, wants to vote the unholy trinity away, even though doing so is impossible.

The fact that the people tend to vote to do all three things, both with monetary policy and with healthcare, in spite of those attempts always failing (and often doing great harm), is why these two trinities are called ‘unholy’.

Our inability as a society to recognize the need to make trade offs, makes the ideal balance of trade offs (a free market) difficult to sell. The public likes to vote for perfection, even in an imperfect world.

Note: I originally wrote this a couple of years ago. I have a previous post called, ‘Healthcare – A Primer,’ that I wrote as a part of this blog, but that was after having lost this post to the black hole of history. The original post has been redound, and it added a number of things to the previous blog post on the same subject, so I am posting it to my blog.

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