The Economics of Healthcare

I suspect that I am like a lot of people who have boxes of old documents in storage. I recently began cleaning mine out and I came across some of the lecture notes that I used when I was teaching Economics back in the 1990s.

One particular set of notes originated from a panel discussion I was asked to join about healthcare reform in 1993 or 1994.  Not unlike today, there was a substantial and partisan discussion about healthcare reform in the early years of the Clinton Administration.

There were two main topics covered by the panel. The first was should the government follow the British model and simply provide healthcare to all citizens. The second was a general discussion on what could be done to reduce the cost of healthcare for everyone.

As to the first, I was and continue to be an advocate of free markets.  I thought that if government provided healthcare and paid the providers it would necessarily do so at the lowest common denominator of care.  I have to admit that I was wrong on this point.

In the interim years, I became a large consumer of healthcare. In 2011 I was diagnosed with a very deadly type of leukemia. I had 5 rounds of nasty chemotherapy, two stem cell transplants and spent a total of 148 nights in the hospital. I beat the cancer only because I got world class treatment at the University of California San Francisco Medical Center (UCSF).

Every one of the doctors, nurses, technicians, kitchen staff and parking attendants at UCSF is an employee of the State of California. This is government provided healthcare at its best and I am certain that it is the same at UCLA or UC Davis. I will not dwell on whether or not the government can provide high quality healthcare because I witnessed it firsthand.

A lot of the real problem with healthcare costs in the US can be laid at the feet of the insurance companies. Insurance companies are entitled to make a profit meaning that they will charge consumers as much for coverage as they can while at the same time negotiating the lowest price from the service provider.

During the course of my treatment, when I was not in the hospital I got my blood drawn and tested often.  If I did not want to drive to San Francisco, I could have my blood drawn at the county hospital nearer to my home.  The bill for the same blood test was several hundred dollars more at UC than at the county hospital. How much the insurance company paid either provider for the same test is a different matter. Still, a blood test is a blood test and the cost of one should not vary from location to location as much as it does.

The real focus should be on reducing the cost of providing medical care and services. Economics teaches that basic price theory applies. The cost of healthcare is largely determined by supply and demand, just like the price of anything else.

The supply of doctors and nurses has not kept pace with population growth. Just about everyone agrees that there is a significant shortage of both doctors and nurses.

There are roughly 1,250,000 licensed physicians in the US. Some do not practice or practice part time. Many specialize; some do research.  Overall it works out to about 400 licensed physicians per 100,000 people.  We add about 12,000 net new physicians every year (new graduates minus retirees).

We could add an additional 5000 new doctors per year if we wanted to do so. That comes out to an average of 100 more per state with perhaps 150 from New York and California and fewer from Montana and Alaska.

Medical school is very expensive but does not need to be as expensive as it is. Much of the first year curriculum (anatomy, immunology, genetics) are lecture courses that can be given on-line freeing up classroom space and faculty salaries.  Not that much more laboratory space is needed to accommodate an additional 100 students, especially if there was more than one medical school in the state. Clinical courses and research require patients and supervision and there are enough of both to go around.

Most medical students graduate with piles of debt. We could arrange to let them work that debt off after they become doctors by working part-time over a period of years at free or low cost clinics in rural or inner city areas where they are needed.  That way people without insurance could still get care and a lot of doctors would not have to be concerned about having to charge as much as they can to pay off their debt.

There has also been a shortage of nurses in the US since I first looked in the early 1990s. Current estimates seem to be between 250,000-500,000 unfilled nursing jobs by 2025.  These are good paying, middle class jobs in a rewarding albeit challenging profession. A shortage of this magnitude necessarily increases what nurses earn. If we want the cost of care to decrease, we need to train a lot more nurses.

The demand for healthcare is rising at the same time. More people are becoming insured with the Affordable Care Act and the population of baby-boomers is getting older. The best way to reduce the cost of healthcare might be to reduce the demand.

If we wanted the population to be healthier over all we could, for example, outlaw smoking and tobacco products altogether. We could make a first offense for drunk driving punishable by a permanent loss of driving privileges. Drunk drivers add significantly to healthcare costs every year.

We could reduce diabetes and obesity by imposing a hefty surtax on fried foods or sugared beverages. We could outlaw vending machines that sold potato chips and require that they sell fruit instead.  We could also require school children to spend part of their lunch hour walking around the block a few times. Healthcare costs will not come down in the long term if 30% of school age children are already obese.

I am not suggesting that any of this will happen. We did, however, get rid of asbestos, lead paint and DDT for health reasons and we require seat belts for the same reason. Each action reduced healthcare costs. Somehow sugary drinks and fried food seem a lot harder to regulate.

Perhaps health insurance companies could take a page from auto insurers who offer discounts for good drivers.  If you get a physical every year (which itself leads to early detection of many diseases and reduces the costs of treatment) and are not significantly over weight, you get a discount on your premium.  Economics teaches that incentives usually work better than penalties.

The one place you will never find a solution to the costs of healthcare is the US Congress.  The lobbyists who represent the industries that receive our healthcare dollars will see to that. As I said, Congress has been “fixing” healthcare since at least the early 1990s.  A market driven solution may be our best bet.