the economics of free healthcare or why the president is wrong

economic transactions can be broken down into four different categories (i saw this first described in milton and rose friedman's seminal work "free to choose"). i call them Laissez-faire, Gift, Insurance and Government.

Laissez-faire is a system where you spend your money on goods and services for yourself.

Gift is a system where you spend your money on goods and services for someone else.

Insurance is a system where you spend someone else's money on goods and services for yourself.

Government is where a someone spends someone else's money on goods and services for a third party.

these systems are listed in order of most efficient to least efficient.

Laissez-faire tops the efficiency chart because noone else better understands the cost of a dollar to you (i.e. what you had to do to earn it) and noone else truly understands the value of of the good or service to you (i.e. what benefit you receive from it).

Gift is second in efficiency because it maintains the cost understanding of a dollar to you, but loses efficiency when the value of the good or service provided to the second party is misunderstood.

Insurance introduces mass inefficiency because the cost of other people's money to you is ignored in the face of getting a good or service virtually free. if the good or service has any perceived value at all, you will take it no matter the cost. so both the cost and value are somewhat skewed.

Government is the least efficient of all because not only is cost ignored(or misunderstood), but the value of the good or service can also be completely ignored(or misunderstood). this is why the effectiveness of government programs are often measured by how much money was spent on a problem instead of how much of the said problem was resolved.

today, our healthcare system is run off the Insurance (in)efficiency model. the receiver of the service (healthcare) doesn't really care how much the service being offered costs because "insurance has it covered". as an example, for those of you who have (or have had in the past) a full coverage insurance plan, think about what your answer is in the pharmacy when asked if you want to try the less expensive generic drug. the name-brand drugs can cost up to 5 times the price of generics, but when you have full coverage you don't care.

another example, i remember a time when i looked at a hospital bill for one of our baby deliveries and noticed a $10 charge for two over-the-counter ibuprofen. at first i was incensed until my wife pointed out that the insurance had it covered so why should i make a fuss? i didn't want to sully a good day, so i just let it slide.

the current healthcare proposal being offered in congress and pushed by president obama is one that will move us from the second least efficient economic model to the least efficient economic model. the predictions of us being able to save money by moving toward a government system are simply wishful thinking. you can safely ignore the projected costs of government programs (except, perhaps, to establish a floor to the cost), because they rarely only costs what was projected.

some will likely point out that other countries, with their socialized medicine (or socialized insurance), don't cost as much as our healthcare here in America, but they are comparing apples and crabapples and ignoring a serious economic problem.

first, the serious economic problem. we've all heard of how you can get prescription drugs cheaper in canada than you can in the US. this is true and it indeed means that overall prescription drug cost in canada is cheaper than in the US. this is a direct apples-to-apples comparison because they are the same drugs but simply cost less in canada.

the obvious (and simplistic) solution is to nationalize our own drug industry and force the "big pharma" companies to sell their goods at a lower cost. this would, however, destroy the innovation we see in the pharma industry for both the US and canada because canada is a beneficiary of what is known in economic circles as the "free rider problem".

basically, since canada gets most of it's medicines from the united states, the high cost of drugs in the US is subsidizing the lower price the canadian government is willing to pay. without the US paying for the research costs of "Big Pharma", the medicines would not be developed and would be unavailable everywhere. but since the US pays more than it's share of the development of these drugs, canada can slip in with offering a lower price and receive maximum benefit.

second, the apples to crabapples comparison. if we moved to a socialized healthcare (or health insurance) system and it actually did cost less than what we currently have today, then basic economics tells us that we would not be getting the same level of service than what we were getting. you can't move from an inefficient system to a less efficient system and get the same goods for a cheaper price.

one comparison statistic we can look at is cancer survival rates by country. "Most Cancer Survival Rates in USA Better Than Europe and Canada" blares the headline, even with our less healthy lifestyles.

so what's the proper solution to our inefficient healthcare system if not government? clearly, based on the economic (in)efficiency models i described, we need to get back to a more laissez-faire system. we need people to have a more vested interest in picking both the healthcare they need and the cost they are willing to pay for said healthcare.

one way to do this is to advocate a high deductible healthcare plan. people will be protected from catastrophic and unexpected medical costs while paying for a good portion of their healthcare themselves.

the government has started to promote this kind of system by creating the tax-advantaged Health Savings Account that is attached to a high deductible health insurance policy.

i believe enough in this solution that i participate myself and we have started to see some of the inefficiencies in the current system ironed out in our own transactions.

example: my wife is currently in her first trimester of pregnancy. this is the time when morning sickness reigns supreme and, at least in my wife's case, reigns all day (not just in the morning). she has taken a brand name anti-nausea medication in the past to help through this period and inquired of her doctor about the cost.

the cost for one round of prescription for the medicine is $300 which we would have to pay fully out of our Health Savings Account. under the insurance model, my wife never would have asked about a generic because she didn't have to incur the $300 cost. under the new model, she asked and found a generic that was $220.

now she had a choice to make. was spending $220 (knowing full well the cost, in labor and opportunity, of $220 to our family) worth the benefit of the good (the value of not feeling as sick during this period).

she decided it wasn't worth the benefit... yet, but did as good consumers are supposed to do and kept looking around. after a few more phone calls and questions to the right people, she found a local pharmacy that would mix their own version of the medicine (instead of getting it from a "Big Pharma" company) and it only cost $90.

she found the right cost for the proper value, made the economic transaction and maximum efficiency was achieved.

maybe someday i'll expand on the importance of efficiency to economic history and prosperity.