An initial discussion about healthcare prices

Price Tag

Price Tag

For a while, I’ve been thinking about writing about healthcare prices and why I do think they are not the problem, but a symptom of what is happening in the healthcare systems around the world – it is not only the US that have problems! In order to do so, I will first talk about some aspects related to pricing and then analyze few aspects related to healthcare system itself. Other post will follow this discussion, in order to try to cover some important aspects that will only be mentioned here.

Let’s start our discussion with two different – and unrelated – situations:

  1. How much does a new iPhone cost? Usually, in the basic configuration and with a contract, it costs $199.00. What is the iPhone price? Someone can say the exactly same amount: $199.00. But, I would claim that, for the person who waits in line for days, the price is way higher, even though he/she will be paying only that given value.
  2. Second situation: is it paying $1.00 for a bottle of water cheap or expensive? Someone living in Los Angeles on September 17, 2014 and searching using Google can say that it is expensive because of the price listed in this website where a 28 bottles package is sold by less than $6.00. However, someone in the middle of the Sahara desert might say that $1.00 is a ridiculously low price and it is extremely cheap.

From these examples, it is possible to see that prices establish an exchange relationship between things: iPhone or water for money and/or time. Furthermore, it is possible to see that prices are not necessarily the same for a given product, even for two different people at the exactly same location. The main question is: why?

When I was studying Econ 101, my college professor and my father presented me the definition of prices as feedback mechanisms of the market. In simple terms, prices are ways to understand the desire for something, how that product or service is available in the market, and how to allocate the scarce resources in a given period of time. Furthermore, since prices are not only given by monetary value – currency is also a product in the market that is used to facilitate exchanges and is affected by supply and demand (see inflation) – as they can be expressed especially in time or effort (energy expended) to obtain something, it is also necessary to evaluate other indicators when analyzing a market.

For simplicity, my discussion here will focus on two aspects: prices are not given only by monetary values; and prices are dependent on the scarcity of a given good or service in a given area (city, state, country, continent, even planet). I think these are the key points to start addressing the analysis about the healthcare market and why the monetary values seem so high in the US compared to other locations. In following posts, I will talk about regulations and politics, which are also extremely important to understand the current market status and its problems.

Before starting my analysis, it is important to stress that deeper and detailed studies on healthcare prices should also analyze the amount of taxes charged by government, the relationship between various production factors (costs), the labor costs – also related to scarcity and to regulations -, the subjective value of different products in a given time (someone is willing to pay more for a cancer treatment when he is sick than in a healthy situation, or when gramma is ill than when an unknown homeless is facing the same disease), the moral hazard, the controlling mechanisms imposed by bargaining agents such as governments and unions, etc. Some excellent economists have analysis on this topics, I recommend reading the articles on the George Mason University Mercatus CenterJohn Goodman’s and the Apothecary‘s blogs at Forbes, and the healthcare posts from the Economics 21 at the Manhattan Institute web site.

First fact: prices are not necessary monetary!

Everyone has a story about a person who stayed in line for a long time waiting before a significant promotion took place in a store (or before the tickets of a show/sports event went on sale), kept refreshing the web browser to buy a product with discount, or waited for a healthcare service (surgery, appointment with a specialist, starting of a treatment). This time spent in the sole purpose of waiting is a type of non-monetary price that is paid for a service or good, directly related to rationing. And why is that?

Because this time could be used in other more productive activities like working or studying, or it will increase some of the final costs of the process like in the case of a disease that evolves with time and requires a longer and more difficult treatment after waiting to start the treatment. There is always a trade-off, an opportunity cost associated with the purchase of a good or service, and this cost is not necessarily paid with currency!

DMV Line (source:

DMV Line (source:

Consider the example of someone receiving the minimum wage in California, which currently is $9.00/hour. For every hour this person spends in a line at the DMV, he/she is losing the chance to make $9.00 working. Of course the time spent in the line can be worth and usually the result of the waiting process is considered more valuable than the amount of money the person would make. However, it is still an associated price even when the person believes he/she is having a profit with the outcome of the waiting. The same analogy is valid for someone who is waiting to purchase the new iPhone and, instead of going to work, stays in the line for days. In this case, it is not necessarily the iPhone that is worth the hours waiting, but the chance of being the first among friends and family to have the new gadget.

In the case of healthcare systems, the price is increased when people have to wait hours or even years for a given treatment. The monetary value of the service or good might be fixed (by a regulator, an insurance company or a contract), however the time/distance/effort values are not, and they sum up to the total final price being paid.

Second fact: prices are related to scarcity

The golden rule is given by: the scarcer the item, the pricier it will be. Items are scarcer when they are difficult or costly to obtain and/or produce, regardless of their importance. Diamonds and platinum are scarce, therefore they are pricy. Air and sunlight are abundant (available almost everywhere), therefore they are extremely cheap or non-priceable at al.

Scarce items are difficult to produce or obtain because they are associated to exploration of a very specific regions (the case of diamonds), to time consuming processes (e.g. formation of a microvascular neurosurgeon), to a highly selective number of people (e.g. lectures of Nobel Prize laureates), to once in an year events (e.g. Super Bowl tickets), etc. Thus, their prices in monetary and/or non-monetary values will be high enough to equilibrate supply and demand (market clearing prices).

In the healthcare system, every single item is scarce due to natural limitations of their production or to governmental imposed regulations (more on this later). In a given city, we only have a limited number of physicians, nurses, dentists, hence, the prices associated to the services of these professionals are higher than in a hypothetical situation where every single resident of a town is a healthcare provider equally trained and capable of providing every single aspect of care. The same is valid to the number of hospitals and clinics that exist in a limited number and may require a certificate of need in order to open.

Furthermore, scarcity can be a temporary or almost permanent. For example, the scarcity of  food due to a flood is temporary and increases the prices of perishable items (like price gouging) until the supply is reestablished. But the scarcity of tropical trees in Alaska is extremely difficult to solve, and would require a really long time to be dealt with. Each situation will present a different implication in the market logic and the price dynamics.

Waiting lines in Haiti during a cholera epidemic. (Source AFP)

Waiting lines in Haiti during a cholera epidemic. (Source AFP)

This idea is also valid for healthcare systems. Consider a city where there is only one hospital providing emergency care. The medical prices might be higher in this location than in another place where there are multiple health centers, in order to accommodate the demand – the non-monetary component might be present with long waiting times -, especially in cases of epidemics. But if another hospital can open at any time – such as a military field hospital -, the prices tend to go down because of the increase in supply.

My comments about the healthcare prices

As I said before, the prices are not the problem, they are symptoms. If the price is too high, we should identify what is driving that amount up. Some people might even find interesting things about the phenomenon high prices, like Dr. David Belk in his criticisms of pharmaceutical industries, but their proposed solution of price control using bargain agents attacks only the symptom not the cause!

I will talk more about Dr. Belk’s example later and explain what I think he gets right and why his proposed solution is completely wrong. The same thing happens with Dr. Aaron Carroll videos on the excellent Youtube channel called Healthcare Triage and his videos about the different healthcare systems in the world. They both focus on the prices and forget to consider what prices represent: a feedback. The American prices can be higher that the European or Australian ones, however this does not necessarily mean anything regarding quality or fairness.

The same logic also applies to medical technology companies, hospitals, clinics, etc. We should not pay attention only to the monetary price and we should not be those jealous people looking at someone else’s garden and complaining about ours. If the prices in the US are higher and they do not reflect quality of the services and goods, the problem exists not because the European prices are lower, but because there is something artificially driving our prices up.

Yes, indeed the monetary values in the US are higher that what they could be and we should focus on the variables that are supposed to lower them down, not capping them. It is the same idea when a patient enters the hospital after a car crash: we do not focus on reducing the scars and doing cosmetic procedures, we try to find if there is internal bleeding, what is the extent of the damage, and later we take care of the appearance – which is probably getting better as we fix the other problems.

However, the president Obama only looked at the external part when proposing the “Affordable” Care Act (aka Obamacare – one of the worst pieces of legislation that I have had contact with, even worse than the Brazilian “Draconian” Labor Regulations), he and other liberal analysts like Paul Krugman did not pay attention to what was driving the prices up and in the process proposed solutions that will increase even more the non-monetary prices – after having increased the monetary prices during the last few years, imposing a cap only on government spending. As result, Dr. John Goodman in a recent articles shows problematic statistics that with the increase of third party payments, especially government payments, the non-monetary prices to see doctors are increasing a lot – reaching Canadian-like levels.

When one understands that prices are both not only monetary and extremely related to scarcity, the person realizes that the only way to really reduce prices is increasing the supply of the services and innovating to create alternative services that will compete with the pre-existing ones. Healthcare is not an exception to this rule! Nevertheless, increasing the supply might take time and is not politically compelling as it is writing a gigantic law that is based only on claims and demagoguery, not on real data and strong economic models. In the eagerness of satisfying every interest group, one usually ignores what is the problem and attacks only the visible symptom.

We should foster competition among health insurance companies and healthcare providers in the same fashion as we have with non-insured treatments such as LASIK surgery and medical tourism, this will drive prices down and quality up. We should reform the FDA to reduce the time needed to approve new drugs and treatments, therefore downgrading regulatory costs in the market and driving down both the monetary and the non-monetary prices. We should get rid of the certificates of need that act only in the interest of already established business and protect those with influence in the government, not the patients. We should let the market act freely, not control prices, because one can only control the monetary prices for a limited amount of time before black markets appear and the non-monetary prices skyrocket.

My the take home lesson is: prices are way to complex to control, since they are not only paid with cash, and reflect various indicators, especially the scarcity of the good or service. If one desires lower prices, this person should foster competition and learn with other markets that the greater the supply, the lower the prices. Furthermore, we cannot ignore what happened in other countries, since it is impossible to determine a “fair price” without violating the market rules and paying the consequences in the future, as Canada, UK, Sweden, Denmark and Brazil – to name only a few – are paying now.

Healthcare economics: not that easy, Dr. Krugman…

In my last post, I used a simple economics approach to describe an intrinsic problem of socialized healthcare. I focused on three principal aspects: the first was explaining that so-called measurable outcomes of healthcare are wrong, because they do not measure standard of care. The second was using a well known economics law (supply and demand) to explain why socialized healthcare systems will end up with shortages and rationing. The third was to list some moral and philosophical choices that may arise from selecting a socialized approach to healthcare. I know it was a superficial approach, but it is effective to start the further investigation of some problems that lay behind healthcare costs.

In another article, I also discussed some trade-offs that are necessary to make when choosing the healthcare system that some government will adopt. It is important to note that there is no perfect system. The resources are always scarce, however, we can optimize their use by allowing market forces to allocate them properly – as it happens in a huge variety of areas. Another important point is that there are no different markets that work completely equal. Supply and demand are always there, prices can reach an equilibrium, however the agents of these markets impose different actions that will change elasticity of the curves, the responses to regulations, etc. Therefore, it is simplistic (if not completely wrong) to say that because the markets are different, we should regulate one more than the other. However, it is correct to assume that there is no one-fits all magic solution for the problems we see, being either market or socialized approach.

In this text, the idea is debunking Paul Krugman’s article called Faith-based Freaks. There, he tries to prove that a free market approach to healthcare is ineffective and costly, however his arguments are poor and his conclusion is a direct result of his weak approach. Dr. Krugman was motivated by Dr. Noah Smith’s article on the Steven Levitt‘s comments to Prime Minister David Cameron about the NHS problems and the solution Levitt proposes.

First, let’s describe the original discussion. In his first article on the topic, Dr. Smith asks about the lack of comments on adverse selection, moral hazard, principal-agent problems, etc in Levitt’s approach (present in his book Think Like a Freak). However, he forgets that other markets present those same characteristics and we do not keep complaining about the lack of comments on them. In addition, he also chooses to ignore that socialized healthcare still presents the same problems of adverse selection and moral hazard, the system even intensifies them. He further chooses to ignore that the physician has more information about the procedures, but he does not have the full picture of the patient’s condition that is only with the patient – characterizing a principal-agent problem, only, in the reverse perspective of Dr. Smith’s concern.

Nonetheless, I agree with Dr. Smith when he says that Dr. Levitt does not present a model of the problem per se, but a solution that is based on the current status of the problem (socialized healthcare imposing its high costs, rationing and lack of effectiveness). I also agree with Smith’s argument that the solution is problematic especially because it is still based on welfare, just the government would be setting the full payment bar higher. However, his suggestion that Americans pay lot more and it does not reflect in quality is mistaken. More on this topic coming in next posts.

Now, let’s debunk Paul Krugman’s article…

Dr. Paul Krugman (source:

Dr. Paul Krugman (source:

The Nobel Prize Laureate in 2008 and Neo-Keynesian economist tries to complain about free markets in healthcare using arguments that are as mistaken as his conclusion: the European prices are lower (because their “cost” is lower) and their outcome is better than the US, this means that the market is wrong and we should regulate it.

As I discussed previously, the American system has various problems. However, they do not reside on the outcomes, which are usually far better than in any other developed country. Using raw life expectancy, child mortality rate, obesity or other incomplete (or more complex) indicators does not give us a result of the system. Nevertheless, when we control the variables for these measurements we start seeing the impact of healthcare industries. Using this kind of raw data is a result of laziness, lack of knowledge on the topic, or desire to misinform people. I am almost sure that Dr. Krugman lies on the second category, even though he probably bases his assumptions on people who are in the third…

Dr. Krugman starts his article on the right track when he says that there is no perfect solution that solves all the problems. We should analyze them carefully, and sometimes a person who is very knowledgeable in an area ends up misunderstanding another due to his/her bias. It is necessary to consult works of other people who studied the topic, even better when you try to assess different approaches, understanding their pros and cons. Sometimes it is hard to be humble and do that, as it is hard to read articles from a different ideological point of view (especially when they are wrong from the beginning), but it is necessary to have a broader perspective on the topic – what I think lacks for both Levitt and Krugman.

Krugman attacks the resurgence of free market ideas in opposition to his controlled market approaches (Keynesian economics). When he says:

“(…) I’m seeing on multiple fronts signs of an attempt to wave away everything that happened to the world these past seven years and go back to the notion that the market always knows best. Hey, it’s always about allocating scarce resources (never mind all those unemployed workers and zero interest rates), and why would you ever imagine that market prices are wrong (don’t mention the bubble).” (Krugman, P. NYT, 2014/05/16)

he is the one choosing to ignore the facts. The bubbles were result of Keynesian “solutions” similar to what he suggested to fix the Nasdaq crisis, they are not results of free market actions. An analogy would be a person playing with a lion, knowing that the lion will bite in the case of a menace, and complaining when the lion bites after the person punches the animal in the face. The fault is not on the lion, but on the person who punched it… Similar to what happened in 2008, when the government stimulated the house market by demanding reduced criteria on loans and using government funded agencies (Fannie May and Freddie Mac) to finance house for low-income and low-credit score people – Keynesian approach of stimulating the aggregate demand. The result was a crash of the other elements that bought dirty house titles, which ended up without liquidity (Lehman Brothers).

Following this comment, he tries to mock Dr. Milton Friedman’s opinion on models: even though they are based on some untrue (or, more correctly saying, not completely true or not fully measurable) assumptions, they are useful if can give us good predictions. The purpose of a model is trying to describe a complex system. Models will always simplify the reality, therefore, they rely on assumptions that are not necessarily general (which means, they are not always true or, in Krugman’s words, they are untrue). Of course we should try to find the best model. Of course we should rely on completely true (or measurable) assumptions. Of course this is not always possible, for example Dr. Krugman’s line of economics relies on a some huge untrue assumptions… However, a good model still can be used to describe the system and try to predict its behavior, even though it is impossible to guarantee that the results will be the same as the predictions.

In this case, the free market models are good enough because their results are consistent with empirical data – what is not true with Keynesian models, for example. In addition, even though the free market system is based on maximization of profit through mutual cooperation and voluntary exchanges – facts that are not always true -, it says that the equilibrium price is lower than the currently observed and shows that more competition would drive the prices to lower levels (nothing wrong here, Dr. Krugman). The main problem of the free market assumption in this case does not rely on the agents (patients and healthcare providers), but in the government interventions that reduce competition (certificates of need, controlled number of medical schools, reduced sizes of classes), reduce services and goods available (regulations on healthcare professions and drugs), fix prices (Medicare and Medicaid that obliges other prices to raise in order to compensate financial damage) and affect the especially the supply. This governmental elements are key pieces to drive the prices up – not the free market.

Then, Paul Krugman compares different healthcare markets that are far from free – Europeans, Canadian and American -, without labeling his chart, to prove his point that free market does not work. However, he forgets to mention that European and Canadian prices are almost completely controlled by government, therefore they are artificially reduced (which means that comparisons based on the price are not good since this indicator is contaminated). He purposely confuses private sector participation on spending with free market to misguide the interpretation of the data. He forgets to mention the interference that Medicare and Medicaid have on the prices – or, probably, he does not have idea of that. Therefore, his claims are further beyond my concept of what is true.

Finally, he ends saying that private sector spending leads to overcosts and no measurable quality benefits. Meaning that he concludes his mistaken explanation, with a farther “comic” argument. He did not show that the quality is worse (for those with access to the services, it is essentially way better). He did not show that the American case is a free market (only presents a chart – without giving the source of his data – that shows more private spending). He did not prove that the free market increased the costs. However, he concludes saying that those who defend free market are selling pure faith.

My opinion: go back to your office and study a little more, Dr. Krugman. After understanding the scenario, after identifying correctly the players, after understanding what a free market is (hint: it is not only a market with high private spending), and after making strong propositions that hold on to your data, then you can try again. For now, stay on your field trying to defend the anti-alien protection system to foster demand and generate economic growth by consumption, not innovation.

Some economic and philosophical problems of socialized healthcare

The high price of healthcare in the United States is a common complaint. In addition, some experts and users relate that the extremely high cost does not necessarily reflects in quality of care. However, this quality is sometimes wrongly assessed, and a misleading data interpretation might conduct to other distortions in this evaluation. Usually, the quality of care can be measured by health outcomes, such as life expectancy and child mortality rates. Nevertheless, these indexes are subject to factors other than healthcare systems outputs such as lifestyle, criminality rates, drug use, car accidents, and education of a given population. Bearing this in mind, if we consider only Americans who do not die in car accidents, the US population outlive any other Western countries. Therefore, it is necessary to re-evaluate if these measurements are reliable elements to determine the crude quality of the health care.

Car accident (source: Wikipedia)

Car accident (source: Wikipedia)

In addition, other countries with allegedly better health outcomes with lower costs impose price controls for the healthcare services, do not adopt technology, and do not innovate. Therefore, is their quality really better than American one? Alternatively, are their cost true? In this reflection, I follow an approach similar to Thomas Di Lorenzo and evaluate some healthcare problems using economic laws, focusing on the socialized and single payer cases, and lately the discussion on whether healthcare is right or not. This is a simplistic approach, since various problems arise due to medical delivery and not only economic incentives of the system, nonetheless it can give an interesting perspective over the problem.

Healthcare, as all services and goods, is a scarce resource. Therefore, it is impossible to guarantee full access at maximum quality possible forever – even though it is possible to fix lots of the problems that the current setup presents. Unfortunately, sooner or later, in the universal coverage systems, there will be shortages (demand is not satisfied due to lack of supply), price controls will be needed to cut or freeze spending, long lines will appear, and the system itself will break down. The Canadian, Swedish and British healthcare systems are good examples of this. And the question is: why?


1. A simple economic analysis of healthcare

Going back to principles of economics, the inexorable law of supply and demand gives us a little information about resources allocation. The price is the mechanism to allocate goods and services, giving the feedback if there is a surplus or shortage. When the price of something is “free” for the user/beneficiary the quantity demanded will be the maximum possible (properly it will tend to infinity). However, the supply will only be that big if the price itself tends to infinite (see the figure 1). Therefore, I guess here lies the biggest problem of universal “free” healthcare: it tries to violate the law of supply and demand by offering an unlimited amount of services without pricing them correctly to both users and suppliers, and without observing the limitations of supply.

Example of supply and demand curve

Figure 1: example of supply and demand curves for a given good or service (from

Sometimes the price for a good will be in a different position than the equilibrium due to external factors. However, in the long term, the market tends to accommodate these problems by shifting the curves. For example, in the case of surpluses, it can act lowering the prices with sales or physicians offering community and not for profit services in different areas. For case of shortages, two simple phenomena can happen: rationing mechanisms will appear or the price will naturally increase reducing the demand.

Another change in the market happens when the government or an insurance company selects price that is above the equilibrium for some area, we see a surplus in supply – for example, more physicians will be in the market than needed in a given specialty or region because people think they can profit in this situation. On the other hand, if the selected price is below the equilibrium the quantity demanded would be higher than the one supplied, generating a shortage: more people wanting a given service and more exams being requested than market’s capability to offer them. This second scenario is the more common, since it reflects the nature of price controlling.

In socialized systems, government regulates the prices that will be paid for goods like pharmaceuticals, medical equipment, and services such as surgeries, nurse care. With these measures, the bureaucrats are able to control spending usually by paying prices below the equilibrium. The outcome is a changing in incentives and feedback mechanisms for both professionals and companies related to healthcare industry, resulting in shortages and the implementation of artificial rationing mechanisms such as long waiting lines, discrimination of whom receives healthcare.

Staff and patient in a hospital (source:

Staff member and patient in a hospital (source:

Shortages are ultimately consequences of an in increase of demand due to lower apparent price for the user, and flaws of supply that cannot follow the demand and allocate resources properly. This allocation problem result from lack of economic incentives – usually lower salaries or profit margins -, and loss of feedback – prices.

In a free market environment, when a service has a high price, more people will enter in that sector because it is profitable. This increases competition on the supply side and reduces prices by shifting the supply curve towards the right – phenomena we see with software, cell phones and automobiles, or with engineers, professors, architects. On the other side, when a price is too low, people have incentives to look for a new and profitable market. The supply will shift towards the left, generating an increase in prices due to reduce number of units supplied, an example is what happened when physicians changed from family medicine to more specialized fields in early 90s. In the case without the feedback of the price because it is controlled, the market does not know how and when to allocate the scarce resources.

It is possible to see that there are problems even when a universal coverage is established with prices above the equilibrium. This scenario is a situation that originally produces a temporary surplus. Despite that, two situations happen in the long run: the fixed prices lose their “value” due to inflation, and the demand increases because of population growth, discovery of new diseases, ageing. Since the feedback is not present, we will end up with some kind of scarcity because supply did not have follow the demand.

Although, it is worth noting that, the price control might work for a while, because the cost of opportunity of changing supply levels to the new fixed price can be low enough to guarantee profit. In addition, the quantity demanded can be high enough to generate a good revenue and an acceptable profit (for private providers), and political gains can be interesting enough to motivate hiring more professionals to state facilities in the case of fully socialized medicine. Nonetheless, inflation and other substitute options in the market (more rewarding careers or professions) will reduce the supply (or keep it at constant levels) and generate the deficiencies.

Finally, the American system, even without all the price controls by the socialized medicine, presents a variety of problems that lead to overspending. Medicare and Medicaid impose large price controls demanding that profit comes from another area. There is lack of competition in the supply side due to restriction on the number of hospitals, medical schools, and, especially, huge regulations on insurance market. Combining these factors with malpractice, defensive medicine, higher prices of drugs and medical equipment, we have the enormous spending – bigger than my birth country’s GDP.


2. Philosophical and moral choices on healthcare systems

With this economic viewpoint in mind, we can also discuss about other areas that are usually so called moral choices in healthcare. Usually people defend the idea of the universal coverage because it aims to protect those who cannot originally access health treatments. However, they choose to ignore that defending this kind of system they are proposing a solution that is temporary and not sustainable in the long run. They are also ignoring principles related to what is coverable by an insurance or what is individuals’ responsibility, and how the economics of the system will affect its outcomes in the long run.

In addition, a healthcare system funded solely by the government has a limited budget that is not proportional to the number of individuals who use it, coming from taxation of a previous year or estimated taxation of the current one. Hence, with lower costs for the users, the demand will increase but the economic gains will be constant implying in less money to spend per user, aggravating the results of wrong governmental choices.

We saw that the loss of the price as a feedback mechanism and the lack of incentives in a controlled market would result in shortages. They imply in the implementation of some rationing mechanism – because it is easier to change demand than supply for a regulated market. This usually will happened in two ways: long lines and discrimination of whom will receive care or not. I consider these topics as another set of philosophical/moral choices along with the existence of universal healthcare.

Older patients wait in a line

Older patients wait in a line (source:

The simplest rationing mechanism is generating lines: no matter what is the condition of your illness, you will have to wait for the treatment based on when you discovered it. These lines can be as short as waiting to see a specialist the next day or waiting two years for a consultation, depending on how big is the shortage of the system. Someone can argue that the good point is the rich and poor wait the same time in the line. However, usually the ones who wait are the poor, because those with money can travel to abroad in order to do what is called health tourism. Hence, a system that is designed to be egalitarian still lacks of egalitarianism and imposes two-tier healthcare.

Another form of rationing is making the discrimination of who receives care and who does not. Usually this decision is based on some criteria like who are more likely to recover from disease, who will be paying taxes for longer period of time, who is more socially valuable, etc. These decisions are also questionable, especially because they create multiple tiers for the healthcare receivers – and it also affects the quality of care. In addition, a system like this without complementary private agents will end up selecting who lives and who dies in a manner worse than the current American standard, where the biggest problem is not the lack of care, but the ultimate cost that result from it.

Furthermore, the cost control due to socialization usually affects innovation by reducing its incentives. It happens because in order to fund the current established system there will be lack or delay in the adoption of new technologies, little or no money is dedicated for research, controlled profits for medical or technological companies, loss of intellectual property rights. Without the innovation, the scarce resources will almost always be the same and we could not see something like the green revolution that enabled the production of food and generated enough amount of goods to feed more than the current world’s population. Therefore, forbidding people to benefit indirectly from the system like those who are young now and will have better technologies in the future, or those who are poor and are protected because people are taking vaccines and avoiding that hazardous diseases spread.

With this in mind, one realizes that when a Newsweek article claims that universal healthcare is a moral choice, the authors choose to ignore these economics principles behind this choice. Even though I tend to agree with them that is morally important to have some kind of universal coverage – the choice on which and who will provide healthcare being more political than anything else -, it is impossible to maintain a universal system in the long run without significant problems. Canada, the Scandinavian countries, and the United Kingdom are in most advanced stage of these problems and one see various discussions on what to do to fix their systems.

One the other hand, it is clear that keeping this kind of socialized system will be good for some time – before shortages start happening -, even though we can go around this without mandatory universal coverage. Moreover, this model is good especially for those who do not have money right now or who are not willing to cut spending in other areas to pay for their healthcare. However, we are putting the burden of paying the bill on somebody else’s shoulders.

Faceplam (Source:

Faceplam (Source:

This is the third moral choice that I consider: selecting who pays the bill, which is usually higher in universal systems when evaluating for the quality of care. I also think that the answer to this question is as important as who we are covering. The choice is not necessarily related to imposing the riches high taxes to “redistribute” the wealth, but making the healthier pay for the sicker (even though these might have had preventable diseases and opted to not take care of themselves). Another possibility is making the next generations suffer because of years with non-sustainable spending, similar to what is happening with other social security and welfare measures that are asking for their prices in Europe.

In this sense, the reminder by the physician and former member of the US House of Representatives from Texas, Dr. Ron Paul, that healthcare is not a right, but a good is important. He presents and interesting perspective and goes against the view of Senator Bernie Sanders from Vermont or Dr. Ezekiel Emanuel, who consistently choose to ignore the problems of socialized medicine. According to Dr. Paul, we can have the right of accessing to healthcare (hospital availability, physicians, nurses, and other care professionals in the market), as we have to food, electricity, water, housing. However, if we admit that healthcare itself is a right, someone becomes obliged to offer it regardless of the price and our condition – reducing individual’s liberties.

Senator Rand Paul, a physician from Kentucky, goes further on the topic of making and defends that it might ultimately result in a kind of slavery for the professionals, because law enforcement agents can be used to make physicians provide the services whenever someone wants it. Even though Senator Paul is talking about an extreme case in the current American reality, it is not an impossible situation as the Cuban example shows us. In the island, physicians are obliged by the government to live in their primary care facilities and to treat everyone even without good conditions to perform their duty. In addition to the Cuban situation, Senator Paul’s concern can be justified with the Swedish example that shows how laws can modify moral principles of a society in just two generations even in a developed country.

Again, the use of law enforcement agents to provide the care would too create multiple tiers of the systems quality. Physicians would not work as motivated under the use of force, and those with access to better lawyers could get more expensive and faster treatments than the others. The egalitarian principle would reside only in the paper that it was written.


3. Conclusion

It is necessary to note that the socialized approaches have their merits, even though they also have many problems. They increase at least the theoretical coverage and allow more people to use the system. They also can reduce costs for a while based on monopsony and monopoly, and promote a faster adoption of good practices like as the EMR or treatment control – because of reduced organizational complexity.

On the other hand, the problems start by disrespecting the economic law of supply and demand, and range in a variety of areas very related to things that we do not clearly see in the beginning, as some fallacies studied by Frèderic Bastiat. These socialized models reduce the liberty of physicians and other healthcare professionals as they impose forms of treatment as a result of controlled costs, not necessarily the best outcome. They may also increase some kind of society control on diets, routines and especially on immigration, in order to reduce further the costs.

Moreover, the bureaucrats are the ones with the power to control what is considered a reasonable or a wrong discrimination, for example obliging insurances to cover everyone regardless of pre-existing conditions, or selecting which treatments are covered or not. However, they try not to be accountable for their actions and the outcomes of them, usually transferring the blames to political adversaries or healthcare professionals. Finally and most importantly, the systems do not give incentives to innovation on both technological, pharmacological and procedural sides, which reduces its impact for a larger population.

Our Lady of the Lake Regional Medical Center, Baton Rouge -LA. (source:

Our Lady of the Lake Regional Medical Center, Baton Rouge -LA. (source:

Bearing this in mind, the idea of increasing coverage, having more people with access to medical treatment is noble and valuable. However, to have it sustainable and with reduced costs, the only possibility is via innovation and competition of multiple providers. The technologies that we have nowadays result of innovative and creative thinking and research, and are responsible for saving more people in the last 20 years than the medical knowledge that existed when Dr. Ron Paul graduated from Duke or Dr. Emanuel graduated from Harvard. They also saved more people than those who died in line because they did not have health insurance. Thus, building a system that would ultimately lead to stop innovation will never be a good or wise choice.

To reduce the costs of healthcare, multiple targets must be aimed. However, concentration of provision and payment in a socialized system is far from a good strategy. If we recover the true meaning of an insurance, if we make people accountable for their healthcare outcomes, if we promote health education and consciousness, if we increase competition among providers and eliminate some regulations, we can effectively reduce the costs and have a system that will be truly robust.

(This article was written as an assignment for the Class BME 566b)

Swedish healthcare myths

In less than two minutes (starting at 4:16 in this video), Johan Norberg, senior fellow of the Cato Institute in Washington DC, destroys the “perfect healthcare” Swedish system:



One can always choose not to innovate, but this person or population should know that in the long run it will ask the price, unless someone is innovating for you. Of course, the American system that he defends has problems, especially related to the skyrocketing costs and excess of regulations in a big number of areas. Nevertheless, as he points, this model is much better in promoting health, and is the one responsible for spreading, researching and developing the cure and treatments for various diseases around the world.

In an article for the Cato Institute, he claims that economic relief given by welfare States does not generate value for its population, therefore, it does not avoid social problems, as recent riots in Stockholm have shown. Finally, in his personal blog, he comments about the Cuban myths in healthcare, education and prosperity and discusses about other areas where free market (or at least more competitive infrastructures) can benefit everyone.

Trade-offs in healthcare systems

Los Angeles, April 24th, by Davi Marco Lyra Leite

My favorite economist, Dr. Thomas Sowell, defends that everything in life – and especially in public policies – is based on trade-offs. Usually, we have a number of different options and we weight them using certain standards, to evaluate which one is the best before we implement the result. With healthcare systems, this could not be different. However, sometimes it is trickier to evaluate which is the best option, because of political impacts and also since, often, other models that are applied in completely different conditions seem to give good results – but they would totally fail in our context. We must remember that healthcare is a scarce resource, as it presents limitations in viable and available technology, a finite number of professionals, limited infrastructure, among other things. In this text, I will discuss a little about some economics behind the different types of systems and of the choices, focusing on hidden aspects that arise when selecting a model.

Los Angeles County Hospital (source: LA Times)

Los Angeles County Hospital (source: LA Times)

From medical offered by churches in mid-1800’s to socialized medicine in Cuba, and the health insurance industry in the United States, every country has its own healthcare system and its idiosyncrasies. In addition, the US cannot adopt the same model as the UK or Sweden or Singapore because of a simple fact: they are different countries. The same is valid if Brazil is thinking about switching from the current failed socialized medicine to the American system. However, are there any points that can be used to evaluate which system is more consistent or presents better results? This is a topic for multiple studies – and tons of thesis in public health and economics -, and I talk about some trade-offs usually done in the different models. Nevertheless, an important point is that everything will always rely in cultural aspects, opportunity cost and desirable outcomes.

Starting with the complete socialized medicine system, similar to the Cuban or the Soviet. It is a model where both areas are concentrated in the State: payment and service provision. In addition, private entities cannot participate in the “market”, which is the biggest difference to the British, Scandinavian and Brazilian systems. In this case, we usually see the goal to offer the same standards of healthcare to everyone regardless of economic power, social status – a noble objective, in which people are willingly to pay more in taxes (or have reduced income) in order to allow others to have access to the healthcare. The government defines which services it will provide, hires the professionals, buys the supplies, builds the hospitals, pays for medicine, etc. The public administration also concentrates all information from medical services in a centralized system, and tries to estimate what is necessary for a given area based on the statistics. Theoretically, this is an interesting model due to the presumption that the government will have all the data to foresee what is in need for a population, and the centralized single buyer will have strong economic power to reduce the associated costs of care. However, when this kind of system was put in practice, the standard of healthcare usually degraded along the years, since it was not able to follow the technological advances that were happening outside. Additionally, this kind of healthcare provision usually generates long waiting times, corruption and high selection of which patients are treatable and which should not enter in the system. Furthermore, it only affects a small population – and has little to none global implication -, and usually implicated in more interference of the government in someone’s life – since everyone is paying for “your health”, the State is entitle to decide few things you should do to reduce the social costs.

Another point worth noting is that the standardized care is not a reality, and the politicians and friends of the powerful people have access to better hospitals, equipment and professionals than the rest of the people – also, corruption is usually widespread with people “buying” their spots in line with food or money. One way to see the phenomenon of care degradation is comparing the Cuban health indexes before and after the complete socialization of the medicine – a country that was among the top 15 in the child mortality rate dropped to the 33rd position. In addition, Cuba relies on masking the statistics to pretend to be offering good services (abortion/number of newborn children rates are among the highest in the world and children who die after 6 months of age are not computed in the statistics of child mortality). Lastly, there is the fallacy that the model is free: when you pay high taxes – or in the Cuban case, when the government decides your payment -, citizens are already paying for the healthcare, even though you are not seeing it (and usually the price is more expensive than the market alternative with a similar output).

NHS Hospital (from Getty Images)

NHS Hospital (from Getty Images)

A different kind of socialized medicine system is seen in Europe, with its biggest exponents in the UK (the National Health Service – NHS), and the Scandinavian Countries. The biggest difference to the Cuban model relies on the fact that these European models allow the existence of a complementary private medical centers and services. Some particularities worth noting are the decentralized characteristic of the Swedish and Danish healthcare models and the British pride of the NHS. The decentralized administration of the Scandinavian healthcare organs, where the counties have more decision power, enables a better understanding of the communities in which the medical centers are inserted and a more effective evaluation of the need in that area. The British NHS is usually praised by the population, even being promoted during the London Olympics, however, it receives some bad criticisms by the press and has experienced some reforms. One interesting point is that almost all successful experiences with socialized healthcare happened in countries with small population (Denmark, Sweden and Norway combined have less that 21 million people, and Cuba has almost 12 million). Moreover, in bigger countries the decline of care is faster, for example, the UK has dropped the number of beds and physicians per group people after the implementation of the NHS, and is using the private sector to operate more contracts in order to reduce system’s cost.

Toronto General Hospital (source: University of Toronto website)

Toronto General Hospital (source: University of Toronto website)

The second kind of system is similar to the Canadian, Australian and New Zealander: single payer, multiple providers for a number of specialties, and complementary private care. This is based on a monopsonistic assumption, where the single payer can dictate the terms to its suppliers, and therefore reduces the costs of services. It is something similar to price control by central government, therefore tends to present the same kinds of problems. This model has the advantage of enabling multiple kinds of care, which implies in better treatments for the patients, with the use of state-of-art technology and procedures. In addition, the hospitals – which are non-necessarily public – can compete for the economic resources, while innovating to offer better treatments and standards. Furthermore, since not everything is publicly funded, the costs to the population are lower than in the full-socialized model. This kind of healthcare model is more cost-effective than the full-socialized medicine, presenting as its biggest advantage the opportunity of innovation by means of competition and research, adding also the possibility of private agents to participate complementing the services. For a relatively small and urban population (Canada has less that 36 million people, with more than 80% living in urban areas), this system can work really well, offering good standards of treatments. In addition, it is able to deal until some point with the cost of opportunity of not allowing the market to work.

On the other hand, it still has the same problem as the Cuban system where a central government has to decide which procedures are payable with taxpayers money, therefore presenting a lag between some innovation and its full implementation/coverage. In addition, due to its monopsonistic nature, the model goes against the market rules for supply and demand, which, in the long run, creates a shortage in the number of physicians, long waiting times for procedures, consultations and even in the emergency room. The comparison with a price-controlled economy makes sense, because the agents do not have the right incentives to promote change, since they are not well rewarded for it. Hence, even though this system can promote good care, it still relies on criteria that are not necessarily “fair” to decide who should get a treatment and when – generating long lines for waiting a simple exam like an MRI. Finally, it can also impose burdens on immigration (restricting people to immigrate), and freedom to people decide what is the best option for their health and lifestyle.

The third system is comprised by a number of private insurance companies and private/public hospitals competing for clients (patients), offering different standards of care depending on the payment, combined with tax-exemptions and some sort of government financing. This is the core of the current American healthcare system, after the implementation of Medicare and Medicaid (1965), and the regulation of employer-based health insurance (1946), as described by Milton Friedman. The Affordable Care Act (Obamacare) does not change intrinsically this model, however it regulates even more the medical services and increases the mandatory coverage of health insurances, resulting in increased premiums in more than half of the States. This model presented a skyrocketing increase of costs in the last 70 years, surpassing all counterparts at OECD. One of the advantages of the US model is the fast implementation of innovative measures. Even with all FDA regulations, it is possible to work with health insurance companies and guarantee that a given new technology is covered. However, sometimes it will take a while before it is also covered by government, due to bureaucracy and lack of incentives for improving the system.

Medical bill (source: Georgia watch)

Medical bill (source: Georgia watch)

The American system, as described by Sanjit Mahanti in his presentation, is based on a cost-plus ineffective model, where many bureaucrats are present to negotiate prices (increasing the complexity and the costs). There is always a lag between modifications in healthcare facilities and the coverage by government, and lack of incentives to make it more effective. On the other hand, it enables physicians to have a fulfilling career where they can be rewarded financially according to their efforts, and it also promotes great innovation in the technological and pharmacological fields – usually the countries with socialized medicine rely on American discoveries to keep pushing forward their quality of treatment. Additionally, the profits of the companies are sometimes reversed in community and low cost medicine, foreign aid (donations of medicine for poor countries and humanitarian actions by physicians abroad). Furthermore, there is a network of entities offering medical care to those who cannot afford it – even though the coverage is theoretically reduced compared to socialized medicine systems, it still exists. Therefore, in some sense, the high costs are compensated with a wider row of services that does not need government to run.

All systems presents interesting and favorable aspects, and drawbacks. As a scarce resource, healthcare cannot be totally universal without some loss in quality, increase in waiting time, or lack of innovation. There is no model able to address all the problems at the same time. Nevertheless, they can be more effective than they currently are in the US and around the globe – especially without the problems of corruption and mismanagement. Therefore, it is a matter of the population to choose what they want, but understanding that there is no perfect option, and we always need to evaluate the cost of opportunity of choosing a system before adopting it.

Personally, I agree with Dr. Friedman and his fellows from the Chicago School who advocate that healthcare should not be considered a special market good, and that people know better what they need than a bureaucrat seating in a desk thousands of miles away. I am extremely skeptical with someone being able to control a reality far from his/hers, especially because I come from a country with a socialized medicine system, but everyone wants to get a health insurance to stop relying on public hospitals – therefore, the population pays twice for healthcare: with high taxes and private insurances. Even with the best and noblest intentions, an economic agent does not have all the information (it is impossible to do so) and cannot work properly to foresee everything in the market.

I believe that only some sort of universal catastrophic insurance could be provided, considering that other aspects related to health are already part of the government realm like sanitation, pollution control, healthcare regulations. However, people should be able to freely choose their healthcare agents (hospitals, physicians, insurances) – knowing that sometimes they will not be able to get everything they want -, and negotiate the prices without having someone deciding what is fair or not. They can buy other sort of insurances in order to spread the costs among all payers, but this should not be mandatory. With these measurements in practice, the system can probably be as effective as the other markets – and better suited to the American reality than the socialized versions seen in Europe and Canada. In this reality, innovation would be rapidly absorbed, people would see reduced costs of care. In addition, constant incentives of paying attention to the quality of treatment would be present – not only by suing bad professionals, but with providing variable outputs depending on the excellence of care. Finally, people would care for people without relying on an oneiric institution called State to do so – as the founding fathers of US envisioned happening.

(This article was written as an assignment for the Class BME 566b)