Healthcare Realities

In the Financial Times this morning Clive Crook says that America needs a does of healthcare reality:

Last week, after meeting groups representing hospitals and insurance companies, Barack Obama announced a breakthrough on reforming US healthcare. It was “a historic day”, he said. The providers had made “an unprecedented commitment” to curb the system’s costs, running at 16 per cent of gross domestic product. They had agreed, he said, to reduce growth in healthcare spending by 1.5 percentage points a year, enough to save $2,000bn (€1,480bn, £1,320bn) over the next decade.

Exactly how was something of a mystery. Was this an aspiration, a target or a forecast? Within hours all parties began clarifying the declaration to the point of meaninglessness. The producer groups, facing agitated members demanding an explanation, denied they promised anything. White House officials repeated the president’s assertion, then withdrew it saying he had misspoken, then affirmed it again.

Political slapstick is routine on this issue. What matters is whether the administration, the healthcare industry and the US electorate are moving any closer to facing the hard choices that Mr Obama is always telling the country he is willing to confront. So far the answer is no.

Healthcare reform is urgently needed here. Due to the magnitude of current commitments, failing to engage in substantial reforms will sink any other projects in which we might wish to engage. That President Obama recognizes this is signalled by his moving healthcare reform from the back to the front burner of the national agenda.

It’s understandable that econbloggers are ruminating on healthcare reform. Recently, Tyler Cowen has published a series of posts on healthcare costs fallacies. Stated in bullet form so far they are:

1. Major items in the federal budget should not be considered in isolation.
2. Medicare is the problem.
3. Any healthcare reform should be consistent with current fiscal realities.

Steve Verdon has expanded on the first two of these here and here. Frankly, I think that Tyler commits an error quite common to economists: failing to consider secondary effects adequately. So, for example, if Medicare is eliminated or substantially curtailed it will result in adverse public health effects and will impoverish significant numbers of seniors who could otherwise be self-supporting. I do support means testing for Medicare (implied by Tyler) and capping of the deductability of employee health insurance (suggested by Clive Crook).

I’d like to propose a few healthcare reform realities myself:

1. Nobody but the poorly informed or deluded believes that we can achieve “universal coverage”, presuming that it’s defined as more people having health insurance than have it now, without spending more money than we do now.
2. More people having health insurance will result in greater demand for health care. This is a tautology.
3. Our healthcare system does not respond to greater demand by increasing supply.
4. Without price control greater demand will cause prices to rise for the same reasons as they did following the enactment of Medicare and Medicaid.
5. Sharply rising costs of health care will cause any plan to lose political support and founder.

You can’t cap the supply and increase the demand without seeing costs rise.