The root cause of our current health care affordability crisis is a broken market structure on the supply side resulting in out-of-control costs. The (apparently) core public policy issues: insurance, pre-existing conditions, employment linkage, lack of portability, the extent of coverage, denials, out of pocket costs, and deductibles would all become non-issues if health care was a normal expense that people could afford out of their income.
The public has come to think that health care must be obtained through a third party. These third parties are incorrectly called “insurance.” As the term “insurance” has morphed from a smoothing of long tail events into an intermediary in routine care, the cost crisis of medical care is now a cost crisis of “insurance.” Where formerly a family might not be able to afford a large bill resulting from a medical emergency, they now can not afford a policy that threatens to eat up their entire income.
My assertions, above, require proof, which I will not provide in this article. What I will show is that a “free” and “universal” system is not a solution to a crisis rooted in excessive costs. To create the appearance of a “free” system only makes costs more indirect and opaque.
Are free or universal systems superior to a market-based system? If so, it is not because they are truly “free.” The lack of a cash payment to the service provider does not mean that the service was in fact free. Nothing is “free” in the sense that valuable goods and services can not be created without costs. The lack of direct payments means only that costs are less transparent.
Government provision of a service is not an escape hatch from reality. Scarcity requires choice. The inputs used to create medical goods and services have alternative uses. If we assume, for the moment, that the government will provide health care, without charging formal prices, the care is not “free.” The state which provides medical care is funded by taxation. Taxpayers and consumers are mostly the same people. A favorable article Countries with Free Health Care admits that “’free’ doesn’t mean it comes at no cost” and “The country’s healthcare budget may come directly from their taxes,” which the author admits “affect a citizen’s take-home pay.” The cost of higher taxes is less income to afford other purchases.
Tax-funded goods are not free in another sense. Any government has a finite capacity to fund basic services such as roads, water, parks, and police. In many jurisdictions, the level of taxation is not tied to the public’s preferred level of public services. Taxes will be as high as the public will tolerate. Political battles will divide the revenues. Then there’s all the free stuff that progressives really like: education, child care, and housing. Even surveilling social media for mean tweets incurs some costs. More of one service means less of another. Costs consist of unrealized alternatives. The poor person who consumes government services and pays no tax at all still bears the costs of unrealized alternatives.
Making care universal does not solve things either, Obamacare was sold as a fix for the well-known problems with our employment-linked system, such as lack of portability, difficulty in obtaining insurance for workers outside of the corporate world, and coverage for pre-existing conditions.
Did Obamacare work? A blog post on Obama white house archives states that “every day, President Obama hears from hundreds or thousands of folks who are newly covered thanks to the ACA.” Obama.org offers heartwarming stories about some of these people. such as “ a woman in Ohio who could no longer afford coverage due to a pre-existing condition. [Obama] …. kept her letter hanging outside the Oval Office.”
If we apply Hazlitt’s one lesson: “economics consists in looking not merely at the immediate but at the longer effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group but for all groups,.” then not so much.
The mandate that insurance plans must be offered to all and the ability to obtain affordable care are not the same thing. Obamacare solves none of the same structural problems as the prior system, and is more expensive. “Universal” access is not universal because it is not affordable.
The Obama administration’s sepia-toned retrospective fails to mention plans affordable only with a subsidy. Unsubsidized Obamacare premiums are shockingly high. A family of four in St Louis earning the average $55,000 (the average income for that city) would pay an unsubsidized rate of $1,182 monthly, which is $14,184 per year. Due to unequal tax treatment of employee benefits, if the family wage earners were self-employed, this amount would come out of after-tax dollars. That works out to more than 25 percent of after tax income. Premiums reportedly will increase by 26 percent in 2026.
The threshold of eligibility for subsidy is set at a multiple of the poverty line, using national average income statistics. In some states that is a reasonable proxy. But in the higher-cost and higher income coastal states, the average regional income is already over the subsidy cutoff. For example, the median household income in the San Francisco Bay area is $128,000. A family earning this total wage and paying progressive federal and state rates, could be looking at insurance and deductibles reaching 40 percent of their after-tax in a one-year period. This author is aware of Silicon Valley middle class professional families (some with two incomes) who do not purchase health insurance by choice.
The Obamacare rules define income differently than does the US income tax code, which taxes capital gains at a lower rate than wages. If there is an intuition behind this, affordability is defined relation to wages, which are stable and recurring income. Capital gains, such as the sale of a house or a business, are often one-time events. Thaler’s theory of mental accounting suggests that capital gains typically take place within a mental “savings” account, distinct from the mental “income” account.
Under Obamacare, each dollar of capital gains and wages counts equally. An older couple who sells their family house in order to downsize could easily find that one transaction pushes them out of subsidy range. A common complaint among progressives is that Americans are forced to sell their home to pay a large medical bill. The current reality has advanced to the point where you can sell your home to pay insurance premiums without receiving any care at all – or even being sick.
The problems with Obamacare result from trying to fix access without addressing the root cause of high prices. The result only pushes the jello around the plate. Costs do not vanish. They are only shifted. High costs emerge as premiums, and high premiums are shifted to subsidies. The cost of funding the subsidies has become an enormous political and financial deadweight. If a subsidy is granted to low-income families, then the cost is shifted to higher income taxpayers. The Trump administration may be considering changing the rules so that everyone who needs a subsidy will receive one. If everyone is subsidized, then who is left to pay – other than – everyone?
What funding does go to medical care, scarcity constrains the allocation of funds within health care. If the state can only provide a finite amount of health care, how should that be allocated? Medical care is not a single uniform good. It consists of thousands of different products, services, capital goods, real estate, and specialized forms of labor. All forms of medical services can not be provided in unlimited quantities.
Does more care mean more pediatric clinics but fewer emergency rooms? More pharmaceutical products but fewer MRI machines? Medical skilled labor requires years of training. Medical goods have large R&D costs and complex supply chains. Which is better: more doctors and fewer nurses? More specialists and fewer family doctors?
How do planners choose among alternatives? This difficulty they face was identified by Ludwig von Mises in his seminal article about the problem of making these types of decisions in a centrally controlled system. In the free market, tradeoffs are made using economic calculation based on market prices. Without prices, the administrator is guessing whether more economic value is created or destroyed by any particular set of choices.
By defining the problem as ensuring some mix of universal and free coverage, we only make the problem worse. We are back to “free” care that is not free but paid for through an opaque system of taxation and spending. Chasing the tail of coverage and premiums will never address the cost issue.
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