Your Health - Who Pays for It?

The American health care system has been in need of an overhaul for years, but in the last decade the acceleration of health care inflation has been truly astounding. Everyone knows the system is broken, which is why it has become such a political issue. There are generally speaking two schools of thought on health care: a private system or a government system.

President Obama, and quite possibly a majority of Americans, seem to be favoring a more government run model. It is important that we understand the implications of such a system. First, the government must pay for the health care services it is to provide. The simple fact of the matter is that there are only three ways for the government to pay for health care. The government can raise taxes, ration care, or reduce payments to health care providers. All three options have serious consequences. Rationing care on a large scale or in an overt manner would simply be unacceptable to the American public (as it is strongly against American ideals). Not to mention it would have a devastating effect on the quality of health care in America and on medical innovation. Cutting payments to medical providers would certainly cut costs, but in all the wrong ways. It would discourage the brightest young minds from pursuing a career in medicine and would deprive medical technology firms and researchers of the funding they need to make additional discoveries. America has been the engine of medical advance for years mostly because our government does not set prices for medical care. Raising taxes will be difficult for some time with the economy in a deep rut and the recovery expected to be slow. Politically Obama may find sufficient support to raise taxes specifically on the rich. This kind of redistribution of wealth will have profound long-term impacts on economic growth. The wealthiest individuals are the ones that invest their money in our capital markets and provide the grease that keeps our economy moving. If we divert those funds to other purposes we may grind our economy to a halt. There is simply not a method of funding government based health care that does not have severe repercussions.

It has been suggested that the government could wring sufficient cost savings out of the system to cover the tab with minimal need to raise funds to pay for it. There are two major problems with this idea. One, while there are significant cost savings to be had they simply do not come anywhere near covering the increased government expenditures that would be required, logically it just doesn't make sense. Second, this idea relies on the belief that the government can run the system far more efficiently than private enterprise - this is a very dubious assumption (just try to think of an example of this happening).

Second, can we truly expect the government to be a good steward of our health care industry? The government already has its hands in the health care pot through the FDA, Medicare, and Medicaid. The FDA has proven to be somewhat inept at allowing safe drugs to reach the market with a minimal cost. The bureaucracy is astounding. Medicare and Medicaid are among the costliest programs run by our government. By 2050 Medicare alone will consume over half the federal budget! If the government has failed to manage these areas effectively why should we fork over more? I doubt that this argument would sway you if your attorney, financial advisor, or doctor asked the same of you, so why is this different? I would only expect more of the same from our government.

Third, earlier I stated that there are only two options for health care while many have advocated a mixed system (including President Obama). Over time a mixed system tends to evolve into a government only system. The current discussions about expanding government's role is the fruit of adding Medicare to the equation. Insurance requires a pooling of risk to function, this pooling requires scale. Insurance exhibits very large economies of scale (cost decline as the number insured rise). Health insurance in particular requires getting young and healthy people to find benefit in purchasing insurance to reduce the average risk of the pool - lowering all premiums. A private market left untampered with does just that - it is the same price mechanism at work in all other sectors of the economy. The government has an advantage though - it can subsidize premiums with tax dollars or rationing of care and prices. The result is that the government sets below market prices drawing people away from the private insurers and raising their costs at the same time. Over time this shift gains momentum until the only insurer left is the government. Of course the major problem is that the government's subsidies create an enormous deficit that in the end is unsustainable and they are forced to take actions that affect the quality and availability of health care.

There are pros and cons to the private market as well. The rising cost of health care is a con, but it is not inherent to a private system only the result of this private/public mix. When you consider the proposals of our President do so well informed and consider the long-term impacts on your children and grandchildren.