Yesterday, I talked about how most Americans – and in particular politicians – view health care, and how mistaken that vantage point was. Today, this part will delve into how this led to the status quo ante Democare.
The discussion begins with Medicare, sold to the Congress and the public by the Johnson Administration as a medical version of Social Security: workers pay into the system, than take out what they put it at retirement. Only instead of cash payments, the funds in Medicare would insure the recipient’s health.
It didn’t take long for this to lead to higher government spending on health care, as elderly Americans now had less financial incentive to avoid the doctor. Because it was so relatively new (health insurance itself was not widely held even at that time), no one could see at the time that Medicare was becoming, essentially, America’s first and largest HMO.
As Medicare grew, and Medicaid (essentially the same thing for America’s poor, only it was clearly funded by the rest of the public) joined it, the government grew into what economists call a monopsony – a rather unusual situtation in general, and almost unheard of in a product or service market. While a monopolist is one seller dealing with multiple buyers, a monopsonist is one buyer dealing with multiple sellers. This happens frequently in resource markets, where a monopolist selling a product is also the only firm hiring workers or buying materials to build the product, and it usually leads to artificially lower resource prices. In this case, we had artificially lowered health care prices.
This created two distortions in the private health care market: 1) patients that could not get in under the monopsony blanket got pushed into a market with less care (and thus, higher prices) and (2) doctors and hospitals taking Medicare/Medicaid patients had to charge higher rates for non-M/M patients to maintain profits. Thus, prices outside Medicare and Medicaid were distorted upward.
One other effect not realized at the time (and hardly noticed since, either) was the effect on younger Americans. To see what I mean, take a look at life insurance in America. There are largely two types: term and whole. Whole life insurance is permanent, and will pay out survivors whenever the client dies. Thus it is more expensive than term life insurance, which is effectively a bet between the client and the insurer as to when the former will pass. If the client dies within the term, the insurer pays; if not, the insurer doesn’t, but the client did get some peace of mind for ten or twenty years – and if that didn’t hold any value, there’d be no market for term life insurance.
The same concept can apply to health insurance, but for one problem: the would-be insured has already won the “bet” thanks to Medicare. Without assurances of government health insurance at age 65, twentysomethings might (and thirtysomethings almost certainly would) decide it would be prudent to consider a lifetime health insurance plan to make sure they’re covered in old age. Insurance companies, by contrast, would balance future losses against immediate gains, and via the concept of present value, find a rate acceptable to younger Americans.
In the current situation, however, younger Americans have no incentive to acquire health insurance, unless it comes with their employment (in which case, the true cost is hidden from view), they have children, or have pre-existing conditions. In the case of the first option, an insurer has already inked a deal with a firm, and in the last, the firm knows it will likely “lose” the “bet,” and responds by refusing to cover.
So what we had in the ear before Democare were distorted health markets, a government monopsony so pervasive even Ron Paul succumbed to it, and an insurance market that bureaucrats made smaller, less profitable, and less efficient . . . and millions of Americans who had no incentive to buy insurance until the point where the insurers had no incentive to offer it to them.
The Democrats were absolutely right to call this a mess (in fact, most Republicans agreed with them), but what they enacted will make things much worse. I’ll explain how in part 3.