Charles Rowley's Blog

The health care legislation has not yet been finalized through the reconciliation process, nor has it been tested in the courts. For the purpose of this column, I am going to assume that the reconciliation process succeeds and that the final legislation withstands judicial challenges. I am going to make some stylized assumptions about the nature of the outcome for the health care mixed economy in the United States over the coming decade.

First, I assume that some additional 32 million Americans will participate as health care  ‘customers’, through medicaid expansion and the subsidized health care exchanges. Second, I assume that changes in incentives will lead to some 9 million Americans to lose employment health coverage and to enter  the subsidized exchanges. Third, I assume that some 10 million Americans will pay fines rather than submit to political coercion to consume health care at the point of a government gun. Fourth, I assume that the legislation’s tax impositions on the rich, for the time being, exhaust its taxation capacity. Fifth, I assume that The People’s Republic of China will reduce its appetite for American debt, forcing the United States to fund 70 per cent of its additional debt domestically (up from 55 per cent in the mid-2000s and up from 62 per cent in 2010). Fifth, I assume that the private savings rate will not increase from its present elevated rate of 4.6 per cent of private disposable income, even should real interest rates on government notes rise significantly.  Sixth, I assume that the 10 year deficit arising from the health care reforms in fact will be approximately double that projected by the false accounting of the CBO (i.e., $2 trillion). Sixth, I assume that supply elasticities of physicians and nurses are near zero within the decade under consideration, in the absence of significant increases in incomes.  Seventh, I assume that such income increases will not occur because of government subsidy constraints and constrained private sector budgets.

With these assumptions in mind, let us now take an observant walk through the health care commons.  The first observation is that medical reimbursement rates will differ significantly across the commons. The highest reimbursement rates will emanate from the Cadillac employer plans, followed, on a sliding scale, by the regular employment plans, followed by Medicare, followed by the private exchanges, and finally wound up  by the hapless Medicaid programs. The second observation is that, with an increase in quantity demanded against a fixed quantity supplied, there will be potential congestion on the commons.

How will this congestion be resolved?  Well, even under socialism, markets do not disappear. The Cadillacs and the better-endowed employer programs will skim the cream and largely self-protect against the erosion of service. Medicare will operate with significantly lowered access, lengthening queues and access to second tier medical practitioners, who will work for reduced returns. The private exchanges will operate at spartan access levels, with long access queues, providing minimalist coverage. Medicaid patients will be the lepers of the system, squeezed by the private exchanges and suffocated by the expansion in their numbers. Their ‘custom’ will be dreaded rather than welcomed by  overwhelmed suppliers. Hospitals that take them in in siginificant numbers will be quickly bankrupted (20 per cent of all United States  hospital capacity, if the projected  Medicare cuts also hold).

Of course, some of the individuals on the commons have the opportunity to vote (i.e., have access to the political commons). Children and felons, do not have such access, so we know what will happen to them, should they fall under Medicaid. The poor typically do not vote as frequently as the better off.  And the oldies vote most frequently of all, even if some of them are less than fully aware of what levers they are pulling, or what chads they are or are not puncturing.  So the prediction is that the Medicare contingent will bat above its numerical strength. The implication of that prediction  is that the Medicare cuts required in the legislation will not be upheld.  If the fiscal constraints traced out above apply, this means that subsidies to the private exchanges will decline in real terms;  and that Medicaid patients will be right back into the emergency wards.

Our walk through the commons does not seem to have detected much in the way of observed change, does it?  Certainly no reason to suppose that this legislation will be revered down the road, as the United States returns to stagflation under an unsustainable burden of public debt, and an enervating burden of progressive socialism. Of course, the commons will clear a little, as the more enterprising US citizens migrate to more welcoming shores.  But that exodus will simply drain the commons of its most productive inhabitants.

Tags: economics of health care reform, plus ca change plus c'est la meme chose, public choice insights

This entry was posted on March 25, 2010 at 10:02 am and is filed under budget deficits, economics and public choice, health care legislation, weakening of the dollar. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.