Health Economics Rant

October 17, 2011 at 11:11 AM 1 comment

Healthcare costs for government employees and retirees have been bones of contention in contract negotiations across the nation. However, a perfect storm of rising costs, recession woes, and aging of the population could be offset by introducing the laws of economics to the supply side of healthcare.  

The supply of healthcare products and services has been subject to relatively unrestrained inflation and economic rents for decades despite policy initiatives to contain costs. Aside from some success with government as the payer, healthcare providers have been in a position to mandate rising payments for services. They have taken advantage of their position as controllers of supply and demand for products and services, and they have wielded this power to eliminate the law of diminishing returns with increased volume. Cost containment efforts have produced shadow-pricing in products and procedures; technological innovations have become the cornerstones for institutional expansion and growth for the bureaucracy. So why isn’t there more aggressive opposition?

Through tough economic times, healthcare stocks have offered the rare growth opportunity. Healthcare providers and suppliers have increased their contributions to employment. Facilities expansions have boosted new construction. Despite the fact that healthcare has crowded out other investments in our economy, especially the factors of real production, we have come to rely on these benefits, however short-sighted, as bright spots in a dismal economy. Costly therapies have spun out of control, and we cannot afford to get well. Still, no one wants to kill the goose that lays the golden eggs.

For a visionary, there is a way out of this mess. And it comes in the form of an opportunity that many prefer to see as the challenge that is going to sink us: the aging of the population. We merely have to begin to analyze the supply side of health care with an eye to diminishing returns that lower units cost of product/service provision. The resulting drop in unit price would be offset by growth in unit demand with population redistribution toward middle age and old age. If done right, employment would be stable and healthcare stocks would not have to crash.

We are not helpless in the face of rising healthcare costs, nor are we beholden to it for what remains of our wealth. Ideally, we could contain total healthcare expenditures to a stable percent of GDP while addressing healthcare needs in the private markets. The industry might grow a bit faster than the economy initially, but there would be an incentive for orderly transfer of investment out of healthcare and into emerging growth markets.

Twenty years ago I watched in dismay as we made key bad decisions that vilified the managed care industry and gave carte blanch to provider groups. The latter consolidated their power in local markets and eliminated the crucial role of health insurers as agents of purchasing power for the consumers. Key provider groups began to walk away from price negotiations, and insurers caved lest they lose all of their customers. Today, not even the largest state employee insurance pools have the power to bid down prices in healthcare. That suggests that healthcare providers function as monopolies in their local markets – a role that baffles them all the way to the bank.

Eventually, with the aging of the population and unrestrained healthcare inflation, there will be enough pain in the industry for politics to overrule on the supply side. In the meantime, we can use enlightened management of costs within these operations to reduce the redistribution of wealth from ourselves to healthcare providers and suppliers. Alternately, we can go broke watching the gradual erosion of healthcare provision and outcomes in that coming Perfect Storm.

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