America’s health care system is obviously f—‘ed up. Even politicians recognize it. Almost everyone I hear talking about health care (a) knows that our system is terrible, and (b) has some radical proposal that would make things much worse and would ignore all the main problems. I’m getting kind of tired of this situation, and I’m worried that when I get old and need more health care, I will have to leave the country in order to avoid being bankrupted. Of course, no one with power will listen to me, and the problem will probably continue worsening for decades, especially if politicians pass more “reforms”. But I’m going to say what I think anyway.

1. The Problem

What’s wrong with American health care? Is it

Its quality Its quantity Its cost Its distribution?

There are some quality issues (like people dying from medical errors), but overall America has high quality health care. The main problem is obviously (3). Costs are absurdly high, which in turn prevents many people from getting health care, so that affects (2) and (4) as well. Anecdotally, you can literally buy some drugs from Canada for less than a tenth the price you would pay in the U.S. If you take your cat to the vet, the cat can get health care for a fraction of the price you would pay for similar care for yourself. So we know that health care does not inherently have to cost this much. Now some statistics:

We spend over a sixth of the entire GDP on health care (18%), over $10,000 per person per year, much more than other developed nations. Costs have been skyrocketing for the past few decades, as shown in these graphs:

If this goes on, we’re all going to go bankrupt from medical costs.

We’re outspending the rest of the world, including other developed nations, but we’re not getting better health outcomes than other developed nations. This is a graph of deaths amenable to prevention by health care, per 100,000 population, in several developed countries:

Notice how the U.S. is doing worst (the red bars).

(Sources: https://en.wikipedia.org/wiki/Health_care_in_the_United_States, https://www.researchgate.net/publication/262881094)

Let’s keep this in mind. The main problem isn’t that we don’t have enough insurance, or that the costs are being borne by the wrong people, or any dumb thing like that. The main problem is the total costs are too high. If we can address that, all other problems are going to get easier. If we don’t address that, then nothing else can really be fixed. No matter how you shuffle around the costs or modify the method of paying, it really cannot produce a satisfactory outcome if you don’t do something to drastically reduce the total.

2. Why Is Health Care So Damned Expensive?

There are many factors. Here are a few big ones.

a. Insurance.

Note: the problem here is not that the greedy insurance companies are making excessive profits. Profit margins in health insurance are not out of line with profit margins for companies in the U.S. economy generally. Rather, the problem is:

Any time you add a middle man, you’re increasing costs. The middlemen have to be paid. If we all bought food using “food insurance”, then food costs would probably double. Insurance companies want to make sure that they don’t overpay or pay for unnecessary procedures. So they require paperwork to be filled out to convince them of this. There then have to be experts on all the complicated rules about what the insurance company pays for, how much, etc. This greatly increases costs. Because a third party is paying, patients ignore the prices. Because patients ignore the prices, providers jack up the prices. Since it’s being paid by a big, faceless corporation, no one feels bad about this.

This is part of why veterinary care is much cheaper than human care. It’s also why elective procedures (e.g., cosmetic surgery) are cheaper than “necessary” procedures — because insurance won’t pay for the former.

b. Shadow Prices.

If you go to a doctor or hospital, they never tell you the price of anything before you take it. You just have to take the medical care, whatever it is, and then wait to get a bill in the mail. For this reason, there is no question of going to a lower-cost provider, even if you wanted to.

c. Supply Restrictions.

Basic economics: the Law of Supply and Demand: for a given level of demand, if you restrict the supply of a good, the price goes up. Also, if you add very costly hurdles that suppliers have to jump over, you increase the prices.

In this case, to be allowed to practice medicine in the U.S., you have to:

Get an undergraduate degree (~4 years), Go to medical school (~4 years), Do an internship (1 year, possibly included in the following requirement), and Do a medical residency (~3-7 years).

All of this is extremely costly in both time and money. Therefore, prices of medical care have to go up, a lot, in order to make it worthwhile for people to enter the field. Health care providers have to be compensated for the enormous up-front costs, else there wouldn’t be any providers.

There also is a limited number of residencies available in various specialties, making it impossible to increase the supply of providers to meet demand. Residency Review Committees, staffed by doctors in a given specialty, have control over how many residencies are offered, and they use this power to restrict the supply and raise prices. (Source: Sean Nicholson, https://www.nber.org/papers/w9649.pdf.)

d. Because We Care.

Why is it so easy to get health care for your cat, and why can he get excellent care for a fraction of what it would cost to care for you? Because he’s just a cat.

Because he’s “just a cat”, people don’t freak out as much about giving him care. They don’t do as many unnecessary tests and procedures. If something goes wrong, you probably won’t sue the vet. If you do sue, you probably won’t be awarded millions of dollars. Therefore, the vet doesn’t have to practice defensive medicine, and doesn’t have to buy malpractice insurance. And because he’s just a cat, there is less regulation governing his care.

When your cat is terminally ill and in pain, the vet will offer euthanasia. When the same situation befalls you, in most states, your doctor will not be permitted to offer the same mercy. This may result in spending much more money on care in the last few months or weeks of life.

3. Bad Ideas that Ignore or Worsen the Problem

Here are some examples of the incredibly bad ideas people come up with to “reform” the system. I think these are products of ideology rather than serious reflection or even awareness of the basic problem:

a. Make everyone buy health insurance. (per Obamacare)

This ignores the main problem. The main problem was never a shortage of insurance policies. The main problem is the total cost. Buying insurance spreads the costs over the insurance pool, which of course might be worth doing, but it does nothing to reduce the total, which is the main thing we need.

In fact, insurance is one of the main reasons why health care costs are so high in the first place, so we should expect this idea to increase the total cost of health care. And indeed, health care costs have continued, utterly unsurprisingly, to rise since the ACA (Obamacare) was adopted (https://ldi.upenn.edu/brief/effects-aca-health-care-cost-containment).

(Note: I know there is more to the ACA than the individual mandate.)

b. Have the government subsidize health care.

On an individual level, this might seem like a solution: if you are facing high health care costs, your problem is solved by having the government pay for (part of) your health care. But this can’t be the solution for society if society as a whole is facing excessive health care costs. This just redistributes the cost; it doesn’t reduce the cost borne by society overall.

In fact, basic economics tells us that if a product is subsidized, then (a) more people will try to buy it, and (b) the prices will rise. So this idea increases total costs.

If the supply is fixed (per section 2c above), the result will be that suppliers raise their prices so that the same number of people receive the good as before. We just spend more money for the same amount of the good.

c. Have the government pay for all health care. (“Single payer”)

Another proposal to shuffle around who pays the cost or how it is paid. In fairness, there is an economic theory whereby a single payer can reduce prices. It’s just the reverse of a monopoly: if you have a monopoly (single seller), you can raise the prices above what would be the competitive market level. If you have a monopsony (single buyer), you can lower the prices below the competitive market level. Both, by the way, result in a lower total quantity of the good being consumed, and lower economic efficiency (monopoly benefits the seller but harms the buyers by more; monopsony benefits the buyer but harms the sellers by more).

However, this theoretical possibility does not mean that things would in fact work out that way, in the United States as it actually is, with the federal government as the single payer. The U.S. government, as it happens, is extremely subject to influence from rent-seeking special interest groups, and is not extremely good at reducing costs or balancing its budget. Another factor is that, when the government is paying for something, many Americans have a tendency to spend as much as they can. Thus, the following are all possible results of a single-payer American system:

Prices might be reduced, maybe by a lot, due to the state’s bargaining power. The number of health care providers might decrease because of (1). (When prices go down, fewer people want to enter the industry.) There would then be less health care available. There may be more rent-seeking lobbying from the medical industry, with unpredictable results. This could increase health care costs, as providers use political influence to get the government to cover things that private insurers would not have covered, or even to get the government to pay above market rates for procedures. Health care providers might start to recommend more, and more expensive forms of, medical care, and patients might agree, since the government is paying. The federal debt would of course explode, even more than it already has. Because there’s no way we’re going to raise taxes by trillions of dollars per year to pay for it.

. . .

Before proposing a reform, we should think about this: what is going wrong in the health care industry, as compared with normal industries?

In most industries, prices decrease relative to wages over time. Subjectively and anecdotally speaking, the products of most industries seem really affordable yet high-quality. (E.g., for $350, you can buy a machine that can literally perform a billion calculations a second, can store millions of pages of information, connects you effortlessly to a world-wide network so you can share your fake-nous thoughts, and other amazing things.) What is different in the health care industry, compared to the industries that are going well?

I’ve answered that in section 2. The answer is not “the industries where things are going well are run by the government” or “they have a single payer for all of their products” or “everyone has insurance”.

Notice how all of the reforms discussed in this section completely ignore all the points I raised about health care costs in section 2. It’s as if those were completely unknown or incomprehensible points. But they’re not; they’re totally obvious with a basic understanding of economics and basic facts about the American health care system.

4. Non-Stupid Ideas that at Least Acknowledge the Problem

What would a minimally smart person say who was trying to think about the problem, rather than trying to score points with know-nothing ideologues? You can doubtless find more developed and better answers than this, but the following is a start:

(a)

We should eliminate shadow prices. My proposed law: For any medical care accepted by a patient, the price of that care must be made available in advance, or else the patient is not legally obligated to pay. In the case of emergency care, for which there may not be time to discuss pricing information when the particular patient shows up, the information should still be published in a publicly available location.

(A legal rationale: you can’t claim that someone has implicitly agreed to pay some price, if there was no way for them to know what the price was. If patients have not agreed to pay the price, then they should not have to pay it.)

(b)

There should be less reliance on insurance. Insurance should only pay for large, unanticipated expenses, not routine medical care.

Also, insurance should be purchased by the individual, not the individual’s employer. (Take the money that employers are already spending on health insurance: they can just give that money to the employees, then employees can buy insurance themselves.) Then insurance plans could be expected to become better tailored to individuals’ desires. You also wouldn’t lose your insurance if you changed jobs.

(I don’t know exactly how these outcomes would be brought about.)

(c)

Remove the goddamned rent-seeking supply restrictions.

Supply restrictions, unfortunately, are among the most popular anti-libertarian laws. People love being fleeced by industries. Whenever you propose relaxing restrictions on the supply of some good, consumers immediately and indignantly start to repeat the rationalizations originally invented by the industry to serve the industry’s financial interests.

FYI, putting huge hurdles in the way of people providing a good does not generally result in higher quality. Many economic studies have been done of licensing requirements. To quote one review of the evidence, “most research does not find that licensing improves quality or public health and safety.” That’s not some libertarian propaganda piece; that’s a quotation from an Obama administration report on professional licensing laws (https://obamawhitehouse.archives.gov/sites/default/files/docs/licensing_report_final_nonembargo.pdf). Everyone who looks at it agrees, however, that these sorts of barriers definitely do increase prices.

The industries where things are going well — products are affordable, well-adapted to consumer needs, and there is frequent innovation — are not industries with large barriers to entry. They’re the opposite, areas where new entry is easy and frequent. And they do not have terrible quality. If anything, quality tends to be higher in the industries with lower barriers, because they are more competitive. Competition drives up quality. (The tech industry has little regulation and low barriers to entry; that’s why it has frequent innovation, high quality, and decreasing prices.)

(d)

We should reduce legal liability in medicine. Doctors should not fear multi-million-dollar lawsuits for honest mistakes.

. . .

None of suggestions (a)-(c) are even on the public radar screen. No political leader comes close to entertaining any of them. I assume the reason is either (1) that our leaders want prices to keep going up, because they’re in the pocket of the industry, or (2) that no leader (and hardly any citizens either) has given serious, informed, and non-ideological thought to the American health care problem — nor bothered to consult anyone who has.

As long as this continues to be the case, we’re just going to keep pouring more and more of our economy into this industry, without getting any more benefits in return.