To be sustainable, Universal Health Care requires rationing

Critics of the Patient Protection and Affordable Care Act (ACA) claim that it does not do enough to control costs, particularly costs of government health care entitlements. This criticism is not entirely justified. The Affordable Care Act includes several provisions for controlling health care costs. Those provisions to control costs will probably not be fully implemented because of a fundamental contradiction between the healthcare system many Americans want and economic reality.

One of the most important steps taken to control costs was the inclusion of a plan to create an Independent Payment Advisory Board (IPAB), which is to consist of fifteen full-time members appointed for staggered six-year terms. The IPAB must provide a report to Congress about how to hold Medicare spending within legislated limits. Congress is given a strict timetable within which it must consider the board’s recommendations and vote on them or come up with alternatives that achieve comparable savings.

If all low and moderate income Americans are going to enjoy access to subsidized health care as envisioned by the ACA, then the government needs an organization like the IPAB to control costs. Without such an organization or if Congress does not give it enough power, Medicare costs will continue to rise to unsustainable levels. A similar approach is needed to control Medicaid costs.

It is doubtful that politicians would give the IPAB enough power to control costs like many of its proponents intended. Politicians in both parties are calling for repealing or weakening the IPAB. This is because to be successful the board must make some tough choices to limit the most costly and least effective kinds of care. Most likely, this would require some method of rationing health care, although officially the IPAB is forbidden to make recommendations that would result in “rationing”, raise premiums or increase the share of health care costs borne by patients. Few Americans would tolerate having their freedom to consume as much health care as they want restricted by rationing.

Those who support “universal health care” without also recognizing the need to use some method to ration health care are living in a dream world. In practice, universal health care requires that no one is denied access to basic health care because he or she cannot afford to pay the cost of that care. This means that prices will not be used to ration care. Because health care is a scarce good, some other rationing criterion must be used instead of prices. In some countries, such as the United Kingdom, health care is rationed by having people wait their turns, with the result that some illnesses become untreatable before the patient can get the necessary treatment. For example, because of delays for colon cancer treatment in Britain, twenty percent of the cases considered curable at the time of diagnosis become incurable by the time of treatment.

Many Americans want the benefits of a free market system and the benefits of government subsidized “universal” health care at the same time. In a free market, anyone can consume as much health care as he or she is willing to pay for. When it subsidizes health care, government enables people to consume more health care than they are willing to pay for. Hence, health care costs continue to rise until government can no longer afford to pay it share. Even without health care reform, the cost of government health care entitlements including Medicare, Medicaid, and the Children’s Health Insurance Program are rising to unsustainable levels.

If the federal and state governments are going to continue to be able to meet their financial obligations, government spending must be brought under control. If current trends continue, the Congressional Budget Office estimates that by the middle of this century, spending for health care entitlements will be more than half of all spending by the federal government. Thus controlling government spending requires reducing government spending on health care. This means that politicians must either abandon the attempt to guarantee universal access to health care for Americans as exemplified by the ACA or grant an organization like the IPAB the powers necessary to control health care costs. This would most likely involve some method of rationing health care. Expanding access to health care without cost control will hasten the bankruptcy of the US government. If that happens, many fewer people will have access to health care than was the case even before Congress passed the ACA.

Unfortunately, Americans value their freedom too much too permit a government agency to have the power necessary to control health care costs. Thus if the ACA’s provisions to expand access to health care survive, the US government will likely face a sovereign debt crisis making it difficult for the government to afford providing even basic services without tax increases that would severely hinder incentives to invest and hire people.

There ain’t no such thing as a free lunch (or free healthcare)!

A few days ago, I received an email from the daughter of our Congresswoman. In the email she explained that because of Health Care Reform, which her mother supported, she no longer had to pay a $25 co pay for each prenatal appointment. This will save a family “that lives paycheck to paycheck” over $500 per year. Such savings makes healthcare reform sound like a wonderful gift until you stop to reflect- who pays the $25 that the consumer no longer has to pay each time she visits the doctor? The answer: for those who have health insurance, the elimination of copayments will mean higher premiums. In other words, paychecks will become smaller as insurance rates rise to cover this new government mandate.

Proponents of this new rule emphasize that if people do not have to pay for preventative care, they are less likely to require more expensive hospitalization or treatment in the future. Thus, mandating no copayments on preventative care may reduce health care expenditures in the long run. This line of argument is fundamentally flawed. It assumes that the government knows or can find out how much preventative health care each person needs and mandate insurance companies to pay for the required number of visits. How many doctor visits are covered as preventative will be a political decision, and self-interested medical professionals will undoubtedly play an important role in that decision. Thus we should not be surprised if the government mandates more free preventative care than would be cost effective for most patients.

We live in a world of scarcity. Money spent on health care cannot be spent on something else. If the insurance company provides a certain number of free doctor visits, each person covered by insurance will pay for the number of times the average person visits the doctor, regardless of how often he visits the doctor. One person’s visit to the doctor has an imperceptible impact on the per capita cost of health care borne by a large insurance company. Thus the monetary cost to each patient of a visit to the doctor for “preventative care” is effectively zero. The quantity of health care demanded will be greater at a zero price than at a $25 price. Since almost everyone will demand more health care at the zero price, insurance premiums will rise for everyone, and because more health care is being consumed, the total cost of health care will be greater than if everyone had to pay a $25 (or higher) copayment.

If you are covered by a typical health insurance plan which requires you to pay part of the cost of each doctor visit, Congress has not saved you money by passing health care reform. Instead they have mandated that you spend more than you might choose to spend on so-called preventative health care. If you don’t pay for it up front with a copayment, you will pay for it through higher premiums. The only way to keep people’s premiums from rising is if the “free” care is taxpayer funded, and then someone still pays for it.

Instead of Obama Care, which takes away our freedom, what we need is health care reform that gives the consumer more freedom to decide how much health care to purchase with his own money.