Buying groceries, cars and the rising cost of health care

Many of the challenges we routinely face and certainly many of the significant problems our society is grappling with stem from institutions and systems that no longer work. Often, the failure of these systems results from their impeding behaviors that would enable people to act with economic rationale, thus creating a solution to the very problem the institutions are attempting to address. A good example of this is health care in the U.S. Health care now comprises in excess of 16% of GDP and it will likely comprise nearly 30% by 2020 unless things change and soon. The challenge in other parts of the world is equally daunting. While the U.S. system has its own unique problems, other developed countries are facing similar problems. The solution is to deconstruct the very institutions involved in allocating health “care”, as they are at the source of rising costs and inefficient allocations of resources. There dismantling will come at the hands of the revolution in how people understand, learn and purchase solution that meet their needs. The system of today greatly limits choice and impedes an economic system that supports rational behavior.

U.S. citizens, and those of other developed nations, pay extremely high health care costs for three reasons: how health care is purchased; the regulatory requirements that dictate how insurance is provided; and remuneration for care. It is simple economics. A core aspect of the revolution is removing institutions from the midst of the process, enabling markets to react rationally, thereby creating a solution. While the following parables are overly simplistic, they illustrate a point as to what is really happening with care and why.

With respect to how we purchase care, think about the way you buy groceries. Everything you put in the basket you pay for. The more you put in, the more you pay. This is what keeps you from putting everything in the basket and leaving some for others.

Imagine if we changed how you purchased your groceries. Let’s assume that you pay $250 to Wall Mart at the first of the month and you were allowed to shop as much as you liked, as often as you liked, and take whatever you wanted. Your shopping habits would certainly change. Facing no incremental costs due to increased consumption, you would take more and more. Take the good beef, no more hamburger meat. Take more steaks than you need. Why not raid the electronics section for a new personal computer or I-pod. Who cares? Once you pre-paid your $250 you can take whatever you want without incurring extra costs.

Well, at some point Wall Mart will care. They would quickly increase your flat monthly fee significantly. Of course you might start complaining about the high cost of food. National food insurance might be a necessary solution to the fact that you can’t receive as much as you would like for only $250 per month! While this scenario sounds far fetched, it is representative of how we buy health care. It’s why we don’t ask doctors “how much is that x-ray?” In the short run, it doesn’t matter. Nor does it matter if I go to the doctor once or ten times. The system encourages over-consumption until insurance companies have to raise premiums because of our shopping behavior.

Now imagine a country that makes everyone buy a Porsche for a car. It would be illegal to buy a Civic. People would have very nice cars. However, there would be fewer cars around. If everyone had to purchase a $60,000 Porsche, fewer people would own cars. This is how the government regulates health care. Our state legislature and our federal government create “mandates” in health care. The government requires that certain conditions be covered. As a result, health care plans cover just about everything. Like the Porsche, they become extremely expensive. A 28 year old female does not require the same coverage as a 60 year old male, but the government doesn’t allow alternatives. Facing the expense, people usually choose not to buy health care at all. While many want to use government intervention to make health care more affordable, they fail to understand that government is a major reason care costs so much! If government would relax mandates to allow private insurers to sell many types of care plans, just as Detroit sells many types of cars, we would all have health care just like we all have cars.

The last point is who pays. While there are many uninsured, everyone does receive health care but not everyone pays. Go to the hospital. If you arrive at a hospital with no insurance or money, you still get admitted. So, we have a system where 100% of the people consume health care but maybe 70% pay for it. This is a further disconnected between consumer and supplier and results in the cost of care being higher than what you actually used. Your bill must compensate for the bills that aren’t paid by others.