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 http://goo.gl/y7uSJK)

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: http://goo.gl/YrWu0E)
Staff member and patient in a hospital (source: http://goo.gl/YrWu0E)

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: http://goo.gl/YclQpk)

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: http://goo.gl/K3XQIu)
Faceplam (Source: http://goo.gl/K3XQIu)

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: http://goo.gl/7GfAYa)
Our Lady of the Lake Regional Medical Center, Baton Rouge -LA. (source: http://goo.gl/7GfAYa)

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)

3 thoughts on “Some economic and philosophical problems of socialized healthcare

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