On Health Care And The Relative Merits Of Payment Options

Pat and I have had a little bit of an e-mail back-and-forth regarding the sundry forms of provision of health care, and I decided to make a post out of it.

He, as a supporter of a single-payer system in which the government is the single payer, points out the people who can’t get insurance and that this can result in death or financial hardship. In addition, you have cases like the recent one, with Cigna initially not approving an experimental liver transfer surgery on a young woman in time.

On the other hand, as I pointed out, you have the same types of problems in government-paid health care systems. Can’t get experimental surgeries? In Canada, if you’re a “burden on the system,” you can’t get any health care at all. In Oregon, you can’t get a certain lung cancer medicine if you’re on their government-paid program. When you are able to get treatment, the wait times are longer than in the US and in Canada, they’ve been trending toward the worse. If you need heart surgery, hopefully you don’t live in New Zealand, which is roughly 3 1/2 weeks worse than Canada, itself worse than the US (not a free article, but you can read the abstract).

From the last article above, there is a free version of the editorial comment that went with that article, and the author writes, “Indeed, these queues are so long that a substantial number of Canadians cross the border to have their bypass surgery on a more timely basis within the U.S. private payer system.” He also notes that “none of the U.S. hospitals reported waiting times >3 months for elective coronary arteriography, whereas in Canada 16.1%, Sweden 15.4% and the United Kingdom 22.8% of cases were reported to have >3-month waiting times and in some cases >6 months. For urgent coronary angiography, both systems within the United States obtained studies within 2 weeks, but in Sweden and the United Kingdom, >50% of the urgent studies required a wait of >2 weeks. In Canada, this pertained to 14% of such cases.”

On top of that, there are long-term problems related to government (under-)funding of hospitals. I wanted to find the article at Dr. Crippen’s blog talking about how under New Labour, NHS hospitals have become a breeding ground for disease, but all I could find was one of his many critiques of nurse practitioners (i.e., wholly underqualified people) replacing General Practitioners (i.e., real doctors). If you prefer student humor, there’s also this.
Okay, so I’ve laid out a lot of links describing problems in the UK, Canada, and New Zealand (which are three good comparisons for how a US single-payer system would probably look), but what we need is a little bit of theory to tie this together. Why would single-payer systems cause so many problems? Why does it take longer to get important surgeries and tests done in single-payer systems rather than in a somewhat-free market? Why are British hospitals more disease-ridden than American hospitals (this isn’t the article I was talking about above, but it does get closer to what I’m talking about)? The answer is all about our two friends, Supply and Demand.

Everything in life is determined by scarcity. There are only so many trained physicians who can only work so many hours and cure so many people. Running a hospital requires resources, and people can produce only so many resources. What people do produce, in a market situation, is determined by the amount of demand for a particular resource and the supply available. The market for health care works no differently than any other market—you have a supply of services and a demand for services. People will consume health care services (by getting surgery, going to the doctor for a checkup, getting prescriptions, and so on) whenever the marginal value of that service is greater than the cost of that service.

But what happens when the government takes over? Here, you have a two-part squeeze. On the one hand, because individuals do not need to pay anything (or pay a relatively small fee) to see a doctor, people who otherwise would have stayed home instead book appointments. If you have a cold and it’s relatively more expensive to see a doctor, you will be more inclined to wait it out and only go to a doctor if things get bad enough that you can justify the expense. On the other hand, if there is no cost, what’s the problem with going to the doctor just in case? After all, there’s a small percentage chance that it’s something serious and better safe than sorry, eh?

That is how consumer thinking shifts between when you pay for something out of your own pocket and when you get some nameless, faceless entity to buy it for you. Even if you know, deep down, that you’re still the one footing the bill, you tend to realize that the amount you’ll pay in taxes is a sunk cost. In a full government-payer system, you’d have to pay the same amount if you see the doctor zero times as if you see him dozens of times, so the amount you pay in taxes has no bearing on your demand.

The two above paragraphs lead to the point that demand increases when the consumer-paid price of a good goes down (which makes perfect sense: demand curves are downward-sloping, after all). But here’s the thing: the actual price of the good isn’t going down! Instead, the government is subsidizing consumption of health care. Take a look at the ugly, ugly graph below for a pictoral representation of my point:

Point A is our simple, partial equilibrium point in which supply and demand for health care match up. The services whose marginal value is greater than the price of health care (the demand curve to to the left of point A) will be paid for, whereas those which provide a lesser marginal value than the cost (the right of point A) will not be. Point B is the new amount of demand after single-payer health care is instituted.  Individuals treat the supply curve at point B (darker red) as though it were the real one and thus wish consume the quantity at point B. Some demand simply will not be met—if I have a slight cough, I won’t book an appointment to see a doctor, take time off work, spend time in the lobby waiting for my appointment, and get checked out.

When you look at it from that angle, it’s a great idea. This way, people will be healthier and we don’t have to worry about those nasty companies trying to make money, so people will get all of the health care they deserve. Naturally, you’re missing the other half of the story: the bill.

How much does the government actually pay in this case? Draw a straight line up from point B (our single-payer “equilibrium”) all the way up to where it meets the red supply curve. In order to have enough physicians, hospitals, prescriptions, pharmacologists, etc. to satisfy the health care needs of our happy society, we need to pay health care professionals enough so that they will supply the quantity demanded at the single-payer rate—that’s all the way up at point C. We’ll need thousands (hundreds of thousands? Millions?) more physicians to cater to the newfound “needs” of our populace, and the only way to do that is to pay people who otherwise would not be inclined to join this field (or pay the ones who are already in it to stay/work more hours/retire later). The total payment that the government will have to bear is the box which has a northeastern point at C and which goes over to each axis. In our free market example, the total amount of health care purchased would be a rectangle going from A left toward the price (vertical) axis and down to the quantity (horizontal) axis. So the costs of health care will skyrocket as people get services that they don’t really value at the true market rate but do value at a price higher than 0.

Now hang on a second…that’s not what we see with single-payer systems at all! Does that mean that the theory’s wrong? Well, not exactly… Instead, the theory is quite apt at telling the story if we assume one thing: that the government will pull out all of the stops in order to meet consumer demand. In fact, however, we see something quite different. Governments have tax and financing constraints, meaning that even if they wanted to, health officials couldn’t afford all of that cost. Instead, what they end up doing is either trying to price at or near the market level (the old Soviet strategy of taking the prices of free countries as a best estimate of how much they should cost in the USSR) or even attempting to price _below_ the market level, using their monopoly power to force hospitals and physicians into submission. So instead of massively increasing finances to pay for all of the newly-desired consumption, governments will try to throttle the providers of services and make them perform more services for less money. The end result of this is that the quantity supplied is less (possibly significantly less) than the quantity demanded, which means that we have a shortfall and rationing. There are a few popular forms of rationing in government-paid health systems. The primary method is the waiting list, which all such systems use. As noted in one of the articles above, wait times for procedures are longer in government-paid systems than in the US. But that alone isn’t enough, especially when there are public outcries at the terrible job hospitals and physicians are doing (note that it’s always the hospitals and physicians who are at fault here, not the bureaucrats who created perverted incentives and caused the shortage in the first place). In the UK, the next step up has been to replace real doctors and real nurses with “nurse practitioners,” who study for a short time, know very little about medicine, are much easier to train than practitioners who need to spend a 8 years in college, and (most importantly) are much cheaper. In that way, the UK is attempting to reduce prices by reducing quality rather than lengthening the waiting period. And in countries like Canada and New Zealand, you are seeing the next phase: reducing demand by eliminating the relevance of “social burdens,” such as the obese (in New Zealand) and terminally ill (in Canada).

In other words, in a real single-payer system, the quantity demanded will never be met. And in fact, we cannot even guarantee that the quantity provided will actually be greater than Qa (the free-market equilibrium quantity), once you take into account the rationing techniques that governments use as well as inherent government waste. This is an important consideration to make because it also undercuts the idea that government-paid health care clients will receive a greater quantity of health care than clients who pay using their own means (be it out of pocket, out of a health savings account that they fund, or via insurance to smooth out the payments). Once you throw in all of the factors listed above, the moral argument for government-paid health care becomes very questionable, whereas the cost (which includes the actual costs for services as well as the services which people would have paid extra for but were unable to receive) increases over the market solution, meaning that people are forced to mis-allocate resources.

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