Free Markets VII – Subsidies and Health Care

Human nature being what it is, what would happen if each American were given a credit card that someone else subsidizes (ie - pays the bills on)? It’s not hard to imagine – we would all soon find that we need all sorts of expensive things that we have been doing without up to now. And whoever is paying the bills would soon find themselves over their head in debt.

We are back to price signals. For goods in scarce supply (which is most things), price is how we allocate the existing supply to those who need them most. If gas is dirt cheap, I don’t worry about how much I use. But if gas is in short supply and therefore costs $10 a gallon, lots of us will find that we can do with less driving and more walking or biking, leaving the available gas for those to whom it really matters and who are therefore willing to pay the high price.

Now think about Medicare. I pay a relatively low premium, and can then get almost unlimited use of the health care system – almost like my hypothetical American credit card. Not surprisingly, I want the very best medical care available, and am not loath to go into the doctor’s office even for minor complaints. The result – medical costs (to the government) soar and we have an acute shortage of doctors and nurses. (Sound like Britain? It should, because that is what has happened in their “free” health care system).

Now if I actually had to pay most or all of the costs of medical care, I would shop around a lot more, often settle for less than the most expensive treatment, take better care of myself, and not bother the doctor with many minor complaints. That would reduce my medical costs, and by the way free up doctors and nurses to see more people who really did have serious medical issues.

That, in a nutshell, is half of what is wrong with our current health care system, and putting more people under Medicare or other subsidized programs will just make it worse.

The other half is that Medicare “fixes” the prices it will pay hospitals and doctors, usually at a lower rate than they would be in a free market economy. What always happens when one imposes price controls? A scarcity develops, just as is happening in the medical profession. At the fixed price, it simply doesn’t pay to go through the difficult and expensive process of becoming a doctor (several studies predict a shortage of 100,000+ doctors in the next 20 years), and even existing doctors begin to find it not worth staying in the profession. Or at least they stop taking Medicare patients. Either way, the price fixing is reducing the supply even more.

The truth is, medical help is a scarce commodity (there is not enough of it to give everyone everything they want), and in a free market price signals would encourage consumers to seek medical help only when they really needed it. Some consumers will even choose to use their money in other ways rather than seek health care -- that may sometimes be an unwise decision, but in a free country people are free to make unwise decisions.

Despite the political rhetoric, our current Medicare system simply doesn’t make economic sense, and expanding it will only make the problem worse. Too bad more politicians (and the voters who elect them) don’t understand basic economics.