I’m no economist, but I have been mulling what seems to me to be a principle of economics more widely honored in the ignoring than in the observing: If you disguise cost, you increase cost irrationally, because you enlarge the audience of buyers that does not understand the true price of something. Examples include the condominium and the derivative.
Condominium and derivative bubbles regularly collapse as reality breaks through. But in the biggest, the awfulest, the most pervasive example of a disguised price system, it looks like reality will never break through. I speak, of course, of the system by which health care gets paid for in the United States.
What might break the bubble? The ability to predict illness by analyzing people’s genes. And the fact that, in the United States, health care gets paid for by insurance, which is the business of putting a price on the odds of something happening.
Let’s look at this metaphorically. In horse-racing, odds makers rate the likelihood of a horse’s winning a given race. The odds typically range from 3- 2 (for a favorite) to 50-1 for a long shot. Suppose someone came up with a test for a “speed gene,” easily detected in pre-race saliva tests for doping. Suddenly horse racing would become far more predictable. Odds might range from the ridiculously short (11-10) to the hopelessly long (500-1).
Now suppose that the government stepped in and told bookies they couldn’t do that, that it was “discriminatory” to rate horses in so fine a fashion. The knowledge is still there. But the authorities say the bookies must ignore that knowledge in order to treat the bettors “fairly.”
The bettors would, of course, rapidly break the bookmakers — except that the bookmakers would recognize that hazard even more rapidly, and would simply close up shop.
In health care, with the decoding of the human genome, the “speed gene” has been discovered. Genetic testing makes possible ever-finer determinations of who is likely to get sick, and with what.
And how easily it works! Here is the blurb for a commercial software package sold to animal breeders, Breeder’s Assistant Package. “If you are a Burmese cat breeder with stud cats you might want to predict what colors you will get, and what colors will be carried, when you mate given cats…The same mechanism can of course be used for anything else for which genetic rules have been set up, e.g. congenital diseases.”
And the same kind of software can be used for people, too, hey presto.
The bookies in this game, health insurers, are being told by governments that they can’t quote proper odds — that is, they can’t deny coverage or charge higher premiums based on what they can certainly know — or at least know to a very high degree of probability, which is what underwriting is all about.
The bettors, all of us who consume health care in the United States to the tune of some $5,000 per person per year, are about to break the book.
An insurance company that is not allowed to make book becomes a financial holding company operating under government rule, a kind of “syndicate” in the 1930s political sense. Continue this way, and you have socialized medicine, simply by another name, maintained at what amounts to a luxurious level. Nobody really thought about it, nobody voted on it. It simply grew, like Topsy. Allowed to grow in that fashion, it will bust the government’s book, just the way it is just about to bust the insurance industry’s book.
There are two solutions, both draconian. In one, the entire medical establishment gets nationalized, and the health care establishment becomes a kind of Army, serving everyone at taxpayer expense. In the other — and Lord knows how this would work — the insurance-funding component of health care would be wiped out, leaving health care costs to be borne directly by the consumers, without subsidy.
In the first, some significant portion of our health care capacity would disappear as doctors, nurses, researchers, hospitals, and pharmaceutical companies decline to work for Uncle Sam. In the second, perhaps half the health care establishment would go out of business for lack of revenue.
In the first case, cost — being disguised, once again — would inevitably go up and quality of service would fall – it’s a government program, after all. In the second, prices would drop precipitously, then stabilize. And then providers would start to come back into the market.
We do not live in a dictatorship, however, and neither draconian course is possible. I will be the first to admit, I have no idea what the right thing to do is, or how it can possibly be accomplished.
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