This commentary is by Fred Jagels, who operates Evergreen Economic Research in Cabot, Vt., specializing in those parts of the economy that economists ignore.
Like so many other knotty problems we face today, economists are on one planet while the planet we all actually occupy has evolved away from what economists learned in grad school.
And when the experts don’t get it right, the rest of us are also in the dark.
Economists are primarily trained to deal with the half of our economy involving production and sales. The other half — postindustrial and postmarket activities such as health care, higher education, government contracting, etc. — is well under their radar. Growth policy, the postwar revision of economics concerned with the growth of GDP, has put a veil over these activities, preventing clear-eyed reform
Economists are schooled in a two-sector world view consisting of the private sector (market) and the public sector (state). To them, health care is a privately conducted activity and hence a “market” activity.
What they overlook is that, for the most part, health care is collectively funded and indirectly paid. This means (like all other indirectly paid activities, which together comprise about 40% of total economic activity in the U.S.), health care long ago departed the market. It exhibits incentives, behaviors and outcomes that differ profoundly from those built into economists’ models.
It occupies a distinct third sector specifically defined and distinguished by indirect payment. (Fifty years ago, economists did acknowledge a third sector. Their distinction was “nonprofit,” a distinction that covered 7% of the economy. Indirect payment — which includes charities and nonprofits — covers 40%).
Because economists consider health care a “market” activity, they assume that payment to a doctor is no different from payment for a loaf of bread. What they ignore is that, when payment is indirect (the payer is a third party), the doctor and patient are actually on the same side of the transaction, with the payer (insurance company, government) on the other.
Instead of an “economizing” (direct) transaction, where the buyer seeks a low price and the seller seeks to cut costs in order to attract these buyers, indirect payment results in an “aggrandizing” transaction. Both doctor and patient (and all who do business in health care) have an incentive to seek the maximum benefit, or at the least not to worry about price.
In the absence of some applied discipline, these incentives, writ large, result in an uncontrolled expansion, together with an inflationary spiral that relentlessly feeds on itself — rising prices in one part boosting prices in another — without limit.
Economists address health care price inflation by seeking to control “costs,” not understanding that the “costs” are not themselves the cause of price increases, but are instead the result of indirect payment. Any expense that is paid for by a third party, whether it be military procurement of a toilet seat or “entertainment” on an expense account, will experience a dramatic rise in price unless some method is found to control them.
Before we jump to the conclusion that this implies that health care belongs back in the market, we need to know a few more facts. In terms of health, the human family does not present a uniform face. Some 80% to 90% of all claims expenditures in American health care serve the 10% to 15% who are chronically or congenitally ill or suffer a disability.
Then again, for the typically healthy individual, most expenditures occur at the very beginning and at the end of life. That means health care is not an expense that can be paid for at the time of need or by those who have the most need. To introduce equity and share the risk, funding must be pooled.
As an inherently collective activity, health care must be collectively funded. And if collectively funded, payment has to be indirect. The question is, how do we manage indirect payment to prevent it from getting so utterly out of control?
In most developed nations, health care is administered by government. When government is the sole payer, it pays out of a single budget. It is the existence of this single budget that provides the needed discipline. All parties, of necessity, have to keep their claims within the bounds of the overall budget or not qualify for payment.
Notice that the so-called “costs” that U.S. economists seek to control are also present where such budget limitations exist — places where advancing age and the latest technologies and drugs are no different from ours. The budget just acts as a way to filter out excess: from price-gouging, extensive duplication and fraud to the mountain of administrative and processing costs created by multiple payers.
We might recall that when Medicare and Medicaid were first enacted in 1965, for the next 11 years all claims were paid. There were no restrictions. This resulted in massive fraud and established an extractive culture of entitlement shared with gold miners who have found the mother lode. This culture, although tamed, is still with us.
Health care is the largest component of the half of our evolved economy that American economists have no incentive to understand. In its bloated and inflated form, health care generates gobs of GDP, the very measure that economists use to determine economic “health.”
That this so-called “health” also acts to perpetually deny access to care for millions, and it requires massive public subsidy, negatively burdens so many other areas of the economy, and so complicates and stresses the good people who try to deliver that care that burnout, medical error and delay have resulted in seriously degraded quality. None of this seems to matter.
Single-payer is not socialism. Single-payer does not interfere with private delivery. Rather, it is a fiscal necessity that the most conservative of businesses put into practice every day.
