14 September 2009

What if we paid for soda the way we pay for healthcare?

As I've mentioned before, I vividly recall the day I took my first step toward embracing capitalism (well, capitalism lite, anyway, not laissez-faire):

I was in Germany on a military exercise. During the course of this exercise, my tank platoon were just outside a small German village. As frequently happened, some of the local boys (in the 12-14 year range) came out to check out my tank. While we were all standing on our tank talking, I pulled a soda out and started drinking. One of the boys offered me some money for one of my sodas (actually, the crew’s sodas; this is an important fact). Wanting to live up to the reputation of Americans as generous people, I let the kid have the soda for free. Suddenly, the demand for soda went from one-fifth of the German population present on that tank to one hundred percent of that population. What was I to do? Give one away for free and then start charging money? So I gave away five of our remaining sodas, leaving us with three.

[...]

Note the effect of price on both the supply of, and demand for, the sodas. When there was actually a price for the soda the...demand for soda amounted to...one.... This changed—drastically—when there was no price for the soda. This then led to a sharp drop in the supply of soda. If I were to have charged that single German child more than he was willing to pay, there would have been a change in the demand for soda, but no change in the supply. If I had simply accepted his price, the supply of soda would have gone down only by one soda; plus, we’d have a contribution to the next soda purchase. (It staggers the imagination: that German child knew more about free enterprise than I did.)
What if the kids who couldn't afford a can of Coke at my price had another option. What if they had soft drink insurance, allowing them to purchase a soft drink at 25% of the price I was charging (say, a dollar), with their soft drink insurance paying the rest? Sounds good, doesn't it? In actuality it's one of the worst possible things which can happen. Since these consumers can now -- sort of -- afford a good they could not afford before, and (at 25% of the price) a lot of it, their demand for the product will necessarily increase.

This is a law of nature, an economic law. To them, the price of a soda is no longer $1.00; it is $.25. Recall, before they could not afford a soda because it cost $1.00; now they can because it costs only $.25. They may not ever have had a spare dollar for a soda, but they did occasionally have a spare quarter. That spare quarter can now be used for a good like soda. But there were always others, who could occasionally afford, say, one soda per week at $1.00. Now, thanks to their soda insurance, they can afford four per week.

Still others, who could afford eight sodas per week, now can afford thirty-two. This artificially lower price has increased demand, which will soon begin to have a negative effect on supply. The (artificially) lower price to the consumer (but not to the insurer!) will lead to a spike in demand. The normal response to increased demand is to ensure against stock depletion by increasing the price of the good. But in our scheme the increased price is born not by the consumer of the good but by the insurer. If the soda-lover's co-pay does not increase, remains at 25% percent of the original price (i.e., $1.00) but the actual price goes up to, say, $2.00, in an effort to decrease demand (protecting supply), then the insurer is no longer paying 75% of the cost of soda; he's paying 87.5% (i.e., $1.75), while the consumer is now paying only 12.5%.

The price increase, intended to protect supply by decreasing demand, actually has no such effect, because the price paid by the consumer (the one actually wanting the soda) has not changed, while the price paid by the insurer has done. The soda producer, still trying to curb demand in order to ensure supply, raises the price yet again, to $2.50, a point at which the insurer pays $2.25, 90% of the price of a soda and the consumer still pays $.25, a mere 10%. Clearly, this can't go on, so the insurance company now raises the co-pay. And on and on it will go until the consumers, who clearly know next to nothing about how insurance works, begin to think they are the ones being abused.

I know what you're thinking. There is an important difference between soda and healthcare; one is an important need and the other is an unimportant want. Perhaps, but it is immaterial to economics whether a good (and healthcare and soda are both goods) is a "need" or a "want". To tell someone that some good he wants is not a need and then to legislate on the basis of that assertion is dictatorial. A good is a good and someone who wants it ought to decide for himself the reasons he wants it; it isn't for anyone to divide objects of his desire into needs and wants -- even if we are tempted to do so. Healthcare and soda are both goods; it is, therefore, legitimate to compare them in terms of each other simply as goods.

After all if we are really going to limit ourselves to needs, we could argue that no one really needs healthcare; they simply want it. They want it because they want to live, either for just another day (but they may not need, or deserve, to live another day) or at a certain standard of living (but they may not need, or deserve, that standard of living).

The woman, Florence Owens Thompson, and her children, below, probably have everything they need: clothing, just enough food, just enough water, and a roof (such as it is) over their heads:


You may be thinking that, no, they don't have everything they need. But that is only because you are thinking not in terms of life, but in terms of quality of life. You are thinking that they do not have everything they need to have a certain quality of life, a quality of life like mine, for example:


Dry wall in my garage -- I bet Florence Owens Thompson and her family would have loved to call my dry-walled garage home. Heck, I bet she'd have loved my garage even before the dry wall, possibly even before I insulated it.

So healthcare, like soda, is not something we need for life. It is something we want for a certain quality of life.

But the point really is that insurance is a silly way to pay for soda, especially since, like healthcare, it is uninsurable. And if it is a silly way to pay for soda, it is an even sillier way to pay our medical bills. This is especially the case since, like my present comparison, we still have not asked the most important question: Why did the cost get so high as to give someone the idea that insurance would be the best way to pay those bills? It is true that insurance itself is to blame for some of the rising costs by artificially increasing demand, which always results in price increase. But this is not the only thing that causes price increases.

It is no reform of the healthcare system simply to continue the practice of using "insurance" to pay the bills. One more insurance company -- even a public one -- isn't a solution. It's a variation on a theme.

Frankly, if anyone were really serious -- and I do mean really serious, not about "reforming" the "system", but in reducing costs, they should follow Hans Hoppe's advice, advice going all the way back to 1993, and summarized as follows:

1. Eliminate all licensing requirements for medical schools, hospitals, pharmacies, and medical doctors and other health care personnel. Their supply would almost instantly increase, prices would fall, and a greater variety of health care services would appear on the market.

[...]

2. Eliminate all government restrictions on the production and sale of pharmaceutical products and medical devices. This means no more Food and Drug Administration, which presently hinders innovation and increases costs.

[...]

3. Deregulate the health insurance industry. Private enterprise can offer insurance against events over whose outcome the insured possesses no control. One cannot insure oneself against suicide or bankruptcy, for example, because it is in one's own hands to bring these events about.

[...]

4. Eliminate all subsidies to the sick or unhealthy. Subsidies create more of whatever is being subsidized. Subsidies for the ill and diseased breed illness and disease, and promote carelessness, indigence, and dependency. If we eliminate them, we would strengthen the will to live healthy lives and to work for a living. In the first instance, that means abolishing Medicare and Medicaid....
There's a simple answer to the question why they don't follow this advice: Doing so means not being able to take credit (and assign blame) for our quality of life; it means surrendering control of something they enjoy controlling. I mean, the next thing they want is our food system.

Parenthetically, Glenn Beck doesn't think we should really be talking about healthcare reform when the real issue is corruption, at all levels and in both major parties, such as that captured by James O'Keefe. Frankly, I think we can multitask. Well, I know I can.

P.S.

The reason I posted nothing about 9/11, is that my state of mind is much like that once expressed by Abraham Lincoln regarding some other casualties of war, which I paraphrase thusly:

I can not dedicate, nor consecrate, nor hallow this day. I cannot adequately commemorate this day. The victims of the attacks have done so, and far above my own powers of expression, and none more so than those aboard United Flight 93, who gave the last full measure of devotion to their country. No one can care what I think or feel; no one can care where I was when I first heard the news -- but everyone should care and long remember what happened to them.
One of the few things our first constitutional dictator ever said with which I whole-heartedly agree. Mark it.

Of course, my favorite Lincoln quote of all time might just be this one, from a 4 July 1848 speech: "Any people whatsoever have the right to abolish the existing government, and form a new one that suits them better. This is a most valuable, a most sacred right."

Edited 15 September 2009 to correct local grammatical errors. -- JFS

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About Me

James Frank SolĂ­s
Former soldier (USA). Graduate-level educated. Married 26 years. Texas ex-patriate. Ruling elder in the Presbyterian Church in America.
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