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Henryk A. Kowalczyk

Henryk A. Kowalczyk

Posted: August 21, 2009 12:25 PM

The Debate About Health Care Reform Is Not About Health Care

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In the report that the President received from his Council of Economic Advisers, beginning on page 13 and following, we can read:

At a fundamental level, the inefficiencies stem from the fact that health care is very different from conventional goods and services. The markets for health insurance and medical care are classic examples of markets in which asymmetric information is important -- that is, where one party to a transaction is likely to have more information than another. In health insurance markets, asymmetric information can lead to adverse selection, whereby individuals who know they are likely to have high health care costs are more likely to seek health insurance. Information asymmetries also lead to moral hazard, where insurance coverage may insulate patients from cost consciousness and promote unnecessary care.

For those who did not catch the ideological meaning behind this statement, let me explain that scientists noticed that the free markets are never perfectly free. Usually one party of a transaction has better information then the other one. For instance, a used car dealer can hide information about known defects. Car mechanics, plumbers, or physicians usually know better than their clients or patients what the best solution is. However, they might use this information for their financial benefit by recommending repairs or treatments more expensive than necessary. Similarly, a person buying health insurance may withhold information about existing illnesses. In extreme instances, there always will be people selling the Brooklyn Bridge, and they will find buyers. (Bernard Madoff almost literally sold the Brooklyn Bridge many times).

One can calmly look at this scientific observation, understanding that nothing is perfect on Earth. Ultimate perfection is in heaven, but aside from suicide bombers, no one is eager to go there voluntarily. Furthermore, one can see that in a small community the asymmetry of information is a lesser burden, as people learn fast about their dishonest neighbors. In a big city, one can endlessly prey on under-informed clients or patients. For this reason, we have many consumer protection laws. However, even the best legislation cannot protect people from their own negligence regarding getting information before entering into a contract. In the extreme, even if the government would take excessive measures to protect us from buying the Brooklyn Bridge, the con artists would prosper selling the Statue of Liberty.

One may notice as well, that with the internet, the customer or patient can easily find information about car mechanics, plumbers, or doctors. There is always a risk that in an emergency, we may have no chance to verify the information they feed us. However, this is only a small fraction of all consumer contracts, which include medical services as well. Nevertheless, we can complain afterwards, forming community pressure to discourage dishonest car mechanics, plumbers, or physicians from taking advantage of our misfortune.

There are people who do not believe in the free market. Some of them cling desperately to the information asymmetry that always exist in real life free market transactions, and consider this as an evidence of the systematic inefficiency of the free market system. For them it is scientific proof that the free market does not work and government involvement is necessary. At best, this is just a hypothesis that still needs to be verified in practice.

In practice, so far, the wealth and strength of America has been built on the concept of the free market. Hence, if someone wants to reform the U.S. on the opposite concept, that the free market does not work, that person has a lot of explaining to do. This seems not be of any concern of the Council of Economic Advisers. Without hesitation, they write:

In considerable part because of these market failures, government programs and policies play a large role in health care. This means that in many cases incentives are not determined by market forces.

This report is not about what is wrong with our health care system and how to reform it. It is about using our health care crisis as an opportunity for promoting increased government regulation that would replace the free market, or whatever is still left of it.

There is a whole chapter (beginning page 16) stating that market failures lead to high numbers of uninsured. We know the names of the members of the Council of Economic Advisers. However, none of them put her or his name on the report. None of them wanted their academic credentials tarnished with ignoring the big elephant in the room, by dismissing the opposite view that the free market in health care failed not because of some of its innate shortcomings, but because of immense government interventions. The free market in health care failed not due to information asymmetry or adverse selections but because - for all practical reasons - it does not exist.

Our health care is heavily regulated, because our government cares about us. After all, health care is important. As a result, the health care industry became a quasi-monopoly, entangled with the government. Simultaneously, they enjoy both, the power of the wealth of private industry and the political strength of the government, as government is the largest client, paying for 46% of all health care in the country.

When complaining about the excessive profits of health insurance companies, about their greed, about denying service or dropping for pre-existing conditions, President Obama conveniently forgets that they do it because they can, as they have no competition offering better service. They do all these evil things because their lobbyists paid heavily for regulations allowing them to do so, free from competition. As government is the largest payer, the lion's share of the money that lobbyists spend comes from overcharging the government at the first place. Just in the second quarter of this year, they spent $133,271,660.00 for lobbying. I did not spend a dime. How much did you spend? Our interests in Washington are represented according to these numbers. We can have our interests protected only by the free market, as the fewer government regulations we have, the less influence lobbyists can buy.

Alternatively to an increased government role in the health care industry, we may select the path similar to what we started in telecommunication in 1983 by breaking the monopoly of AT&T, and the deregulation of the industry that followed. With very limited government regulations, prices went down, quality improved, and affordability reached every nook of society. Should we at least consider using the same approach in addressing our health care crisis?

Just by reading the opinions presented at Huffington Post, one sees that many Americans distrust the free market and prefer more government intervention in the economy. In the health care reform debate, so-called liberals or progressives are for more government regulations, when the so-called conservatives are against it. However, in lingering around corner immigration reform, the many of the same conservatives are for more government involvement in controlling the labor market, which is clearly socialistic, when liberals are for less government control. This observation alone can raise suspicion that people voice their opinion for or against more government regulation not based on the good understanding how the free market operates, but based on ideological prejudices.

Observing people's behavior, one can see that greed is a basic human trait. Most political systems around the world are built around a noble concept that greed of an individual should be circumvented for the good of the society as a whole. The American political system is an exception; it is built on the concept that the good of the society as a whole would be achieved the best when individuals have the freedom to pursue profits. This is how America became America. This is why our ancestors built such a powerful and rich country.

The debate about health care reform sometimes becomes so much irrational because it is not about health care at all. (Similarly, as the debate about immigration reform is not about immigration.) It is about the underlying concepts of our political system. Do we want to stick to the concepts that made America strong and rich? Or, do we want abandon them, and experiment with new political concepts? Do we want more of the free market or less of it? To the best of my reading of opinion polls, Americans are split half-and-half between these two options. This is our most important problem.

President Obama is right that the health care crisis can lead our nation to financial collapse. The bad news is that this is not the worst dilemma we face. Even worse is that no one is addressing our main problem directly.