Friday, June 29, 2012

Repeal and Replace

My brother emailed me to say, basically, maybe this Obamacare thing isn't so bad. Maybe it's the best of a bunch of shitty solutions to a serious problem... what do you think?

Well here's what I think... buckle up.

(NOTE: Katy is a friend of my brother's who has a baby with severe health issues. Bob is my brother. George is me. All names are fake.) ===========================================================
OK so here’s my thoughts on Obamacare. By the way, you don’t need to be an expert on healthcare to understand this stuff. You’re a businessman so you already know everything you need to know.

The first thing we have to agree on is that Healthcare is a valuable commodity and that its price is elastic. In other words, if someone needs life-saving heart surgery, they don’t care if it costs 10 dollars or a million dollars… they still want it. Given this fact, why does Katy’s insurance company cap her child’s expenses at 2 million dollars? It’s not because they’re evil, it’s because they have looked at actuarial tables and discovered that some percentage of their customers will require more than 2 million dollars of care. And that if ALL (or even MOST) of those customers actually USE more than 2 million dollars of care, then the company will no longer be able to stay profitable.

So is the profit motive evil? Maybe, we can debate that (I would say no) but it doesn’t really matter because the Government faces the exact same limitation, just in a slightly different way.

Government does not need to be profitable, but they still cannot spend more money than they take in. Or at least not for long. So while it’s possible that the Government can afford to pay 3 million instead of 2, there is still a limit to what Government can afford to pay for this valuable commodity without going bankrupt. So the biggest factor in any discussion of Healthcare must be cost. And the first question that must be asked of any Healthcare solution is “does this solution drive down the cost of Healthcare”?

It’s pretty easy to see that Obamacare does not drive costs down. And there are several reasons why.

THE SUBSIDY EFFECT

One of the things Obamacare does is use Government subsidies to offset the cost of private Healthcare plans. In other words, if a family is spending $10,000 a year for a plan and can’t afford it, the Government will step in and subsidize that cost. I think the subsidy number right now is something like 50%, but you can be sure that number will rise.

So what happens when Government subsidizes the cost of a valuable commodity? We have lots of example to choose from, but let’s just take one… a college degree. Almost no one goes to college without the cost being subsidized in some way by Government. Colleges love this because what it does is hide the actual cost of a degree. It also allows them to raise prices without anyone noticing, or caring much. Government just continues to write checks, they don’t look at the bottom line, and as long as the students and their families continue to get the subsidies, a minor increase in cost doesn’t matter much because the perceived value of a college degree is so high.

So what has been the result of 30 years of subsidies? College costs have risen off the charts. Harvard has a multi-billion dollar endowment sitting in bank accounts accruing interest. Enough to pay the tuition of every single incoming freshman for decades. And yet they continue to charge 50,000 dollars a year to attend their college. Why? Because they can. And they can because the cost of that 50K is guaranteed, in part, by Government.

Remember when you were in college and mom and dad offered to give you 300 dollars to buy a bike? What did you do… did you buy a 300 dollar bike? No, you spent 700 dollars thinking hey, I can get a much better bike now, and it will only cost 400 bucks, instead of 700. Did you do that because you’re a bad guy? No, you did it because you’re human and smart and you were looking to get the best available bike for the money you could afford to spend. You could only afford a 400 dollar bike, but you got a 700 dollar one.

But someone paid the 300 dollar difference.

The same will happen to Healthcare. The Government subsidy will reduce the effective cost of care for every American. In many cases it will reduce the cost to zero. And what do people do when the price of a valuable commodity is drastically reduced? Do they use more of it, or less? Of course they use more of it (especially if they don’t have to endure the increased costs of getting more). And more Healthcare costs more money. Costs go up.

THE TORT EFFECT

Why does it costs 500 bucks for your doctor to treat a sprained ankle? 30 years ago, the doctor would say “it’s a sprain, go home and keep your weight off it.” What happens now? Your doctor prescribes an MRI to make sure. Why does he do that? He knows it’s a sprain. He does it because there is a trillion-to-one shot that it’s not a sprain, that it’s something potentially life-threatening. And if he misses it, he’s on the hook for a massive malpractice award that will increase his malpractice insurance payment beyond what he can afford to pay (by the way, it certainly doesn’t hurt that he stands to make a couple thousand dollars performing the procedure, so the doctor is not 100% blameless here).

Now it just so happens that trial lawyers spend millions and millions of dollars every year to elect Democrats specifically because Democrats have opposed tort reform for medical malpractice cases. Those same trial lawyers have also consistently supported Obamacare… why? One reason is that Governments don’t go to court. In Los Angeles, if you sue a private corporation for malpractice, you’re going to get a face-full of high-priced lawyers. But if you sue the Government, you get a settlement. Almost every single time. And guess what… Corporations have deep pockets, but nothing even close to what Government has. It’s a great racket. And by the way, in Los Angeles, the city sometimes puts gag orders on these settlements so the taxpayers can never find out how much they just got hosed for.

Does Obamacare do anything to reduce the cost of medical malpractice suits, or medical malpractice insurance? No it does not. Doesn’t even address the issue (and with so much trial lawyer money flowing into Obama’s coffers, it’s no wonder why not). What it does do, on the other hand, is give potential litigants access to the massively deep pockets of the Federal Government. And those pockets are in the pants of politicians who have to face elections where sick kids put up in front of cameras could end their re-election hopes with a single press conference. They will pay every time. And they will pay huge.

THE RATIONING EFFECT

This is the scariest element of Obamacare in my opinion, and it’s something Sarah Palin touched on, and got torched for, when she started using the term “death panels.” But the truth is she wasn’t far off. Many of us believe that the costs of Obamacare are unsustainable and that in fact, this is the whole point. It has long been a holy grail of progressive politics that one day The US would have a “single payer” healthcare system. That is, a government funded and run healthcare system like the one in place in Canada. I’m going to leave the details of how that would work out of this discussion because they’re not really relevant right now. I’m going to stick to the basic economics.

Here’s what I believe is going to happen. I believe costs will continue to go up and up and at some point, the subsidies Government is providing to insurance companies will not be enough and some (eventually all) of those companies will decide that Healthcare insurance doesn’t make any sense as a business model. And those companies will simply stop selling insurance. When that happens, Government will have to step in. At some point in the not too distant future, government will be the only provider of Healthcare left and Obama (or his successor) will finally have the single payer system they’ve always wanted.

Then what?

This next sentence is the most important thing to take away from this essay… having a Single Payer system does not absolve the Government of economic reality. Healthcare will still be a valuable commodity that people will always want more of, not less. And costs will continue to rise. At some point costs will rise so high that Government will be paying out a multiple of what takes in. Right now our deficit is 16 trillion dollars. By the end of a second Obama term it could be 20 or even 30 trillion dollars. Think about that. A trillion is a number so big that some countries don’t even agree on how many zeroes are in it (this is true, I looked it up). There will be very little margin for error when the really big programs like Obamacare start to overrun their costs.

In fact, here’s a dirty little secret about Obamacare. Obama promised he would not sign the bill unless it was revenue neutral. He signed the bill, so it must be that the program is revenue neutral, right? Maybe it is, and maybe it isn’t but let’s assume that it is. How did he achieve this miracle? Well, he did it in a very clever (some would say dishonest) way. Taxes were immediately raised to pay for it the very second the bill was signed in 2010, but the law does not go into effect until 2014. So over the first decade of the bill, from 2010 to 2020, Obama care will spend for only 6 years (2014-2020) even though it will have been funded for the full 10 years.

That’s great for the first decade, but what happens in decade number 2?

Let’s say that in 2025 Obamacare is massively underfunded. More and more people are living longer and longer and using more and more healthcare and the Government has simply run out of other people’s money to pay for it… what will they do? I don’t see any other solution than to begin rationing care.

Which brings us back to your problem about the screws in your knee. Your insurance company calls those screws “experimental” because they need to control costs and they can’t have everyone going out and getting screws or they’d go out of business. Well Government is going to have essentially the same problem. I’ve already showed you how and why I think costs will continue to rise, so those screws won’t be any cheaper 10 years from now than they are today. How will Government deal with that? I can see two possibilities.

1) They could simply deny you the screws, or they could force you to wait for them… schedule the surgery so far out that it becomes unnecessary (some percentage of people who need them will die, others will just say “forget it, I’ll make do without the damned screws”). That’s rationing, and it’s one thing to ration knee screws, quite another to ration heart surgery or chemotherapy.

2) They could try to regulate the behavior that “caused” you to need those screws in the first place. You know what? When men over the age of 35 play aggressive contact sports like soccer, it results in injuries. This guy Bob has been to the hospital for multiple concussions, a broken collarbone, and knee surgery. His brother George broke a finger and needed a tetanus shot for a cut on his leg. Soccer injuries cost the system too much money. By law, men over the age of 30 are no longer allowed to play team contact sports that might result in injuries. Sound crazy? Any crazier than making cigarettes or alcohol or motorcycles illegal because of the increased costs of healthcare they cause? I don’t think so.

And if they choose rationing, that eventually gets us back to those “Death Panels” Sarah Palin talked about. We all know that the vast majority of Healthcare costs occur in the last few years of our lives. If Obamacare is sinking under exploding costs and a 90 year old woman is looking for a procedure that might give her another 6 months of life but costs a million bucks… what are the chances she’s going to get it? I say slim and getting slimmer every day. And who will decide whether she gets it? Lucky for us, the answer is already in the bill. A panel of Government bureaucrats who will help with “end of life” counseling. Sarah Palin may not have been a good VP candidate, but she was right about death panels.

THE VALUE OF CHOICE

Choice, also defined as competition, drives costs down. In any industry where there is robust competition, you would expect prices to be controlled by the fact that some companies will try to attract more customers by offering that product or service at a lower price. This is why monopolies are frowned upon by Governments… because they restrict access to goods and services and cause prices to rise. You see it in almost any business where competition is restricted… prices go up. More choice equals more competition which equals lower prices.

How does Obamacare effect choice? Well when it goes into effect, people who go out into the marketplace to get insurance will have to buy one of a few policies approved by the Government (and you can bet the companies who will be “approved” have contributed HEAVILY to Democrats the last 4 years). The number of approved policies will, by definition, be smaller than the number of policies currently available… and less choice equals higher prices.

Also, I’ve already argued that the economics of Obamacare will tend to drive Insurance companies out of the market. If I’m right, that will reduce choice even further. And less choice equals higher prices.

THE PROFIT MOTIVE AND INNOVATION

Forgetting for a minute about all of the vast structural problems with the American Healthcare system as it currently exists, I don’t think anyone would disagree that we have the best system in the world in terms of quality of care.

If you have a serious medical problem, the chances are that a solution exists in the US. And if it doesn’t, the chances are that when it’s found, it will be created here first and/or be available here first.

So what drives that reality? In short, that reality is driven by the free market and the profit motive. Why would a company like Pfizer spend a billion dollars on R&D for a cure for AIDS? Well they do it in part because they want to save lives, but at the end of the day, they do it because they know that a billion dollars spent now, will net them 10 or 100 billion dollars later, when they start to sell the cure. If they can’t make money on the R&D, they won’t do it. It’s a simple as that.

And now we’re back to your 2,000 dollar “experimental” knee screw. What if it was a 2,000 dollar pill that would cure Alzheimer’s or Cancer? Well everyone would want it of course but not everyone would be able to afford it… Government will have to step in and write a check. And if Government is going to pay for it, they’re going to have to limit the amount of money Pfizer can make selling it or they will quickly exceed Obamacare’s budget. They may decree that Pfizer can only sell the pill for 500 bucks instead of 2,000. So Pfizer will take a look at their P&L predictions and say “oh great, we spent a billion bringing this thing to market and the Government now says we can only make 900 million selling it. We might as well get out of the R&D business because it’s simply no longer profitable.”

See what happened there? The decision your Insurance company had to make to limit the cost of people wanting knee screws (their solution was to call it experimental and not cover it) is the EXACT SAME decision the government had to make. We just don’t call Government evil because somehow they’re not looking to “profit” off the cure.

So that’s the way I see it.

Right problem, wrong solution.

I’m with Mitt Romney. “Repeal and Replace.”