Watching the Democrats campaign for their presidential nomination, I keep thinking – perhaps oddly – about open bars and the Law of Demand. While the candidates aren’t talking about giving away drinks (which makes this Wisconsin boy sad), most of them talk a whole lot about giving away healthcare, education and much more.
A Seemingly Obvious Concept Goes to Work
Now, we’ve all seen an open bar; we know offering something for free dramatically increases the amount of that thing people consume. It’s an extreme example of the Law of Demand in economics which says, “As the price of a good increases, quantity demanded decreases. Conversely, as the price of a good decreases, quantity demanded increases.”
Even to the economically uninitiated, I think that makes sense… as the price of something goes down, people consume more of it. When the price hits zero, people consume a lot more. Heck, I have a friend who will take anything, even if he’d prefer not to have it… as long as it’s free. (How’s that cooler bag treating you Jim?)
Listen, if you don’t see the immediate allure of things like healthcare and education being free, you might be a bit weird. It’s nice not paying for things you want and it’s great for people to live long, healthy lives and be well educated. And that actually holds true for both those people and for society.
And yet… we shouldn’t do it.
So, About that Bar Tab…
When you’re at that wedding, those open bar drinks may be “free” to you – but trust me here – when Mom and Dad get that bill, there’s a cost. In fact, the total bar tab is much higher when there’s an open bar than it is when people pay for their own drinks. (Duh… right?). We intuitively understand that when we think of the bar, but it doesn’t necessarily spring to mind as naturally when we think about healthcare and education. Even so, the impact on cost is exactly the same except massively bigger.
Whether we’re talking cosmos, college or colonoscopies, when you eliminate the immediate link between consuming a thing and paying for that thing, you remove the pressure forcing buyers to shop wisely and for sellers to find ways to cut costs and price.
OK, then What Should We Do?
Ask yourself, why have the costs for healthcare and college risen so much more quickly than the costs of other “necessities” like food and transportation? I am confident it’s because of policies that weaken the link between how and when people “consume” healthcare and education and how and when they pay for them.
If we truly favor high quality, affordable and widely-available healthcare and education, it means (in seeming contradiction to many people) allowing those services to be delivered using the same free-market system that delivers shampoo, groceries and cars so affordably and effectively. The fact that healthcare and education are even more critical services only makes the point more important.
As I said to my husband when he took five ‘free’ Brewer magnets from a marketing rep last week…..”this is why we should never have free universal healthcare!” American’s are consumers. If you have any doubt go to State Fair and watch people come out of the demonstration buildings with bags full of ‘free’ crap. Anything of value must have a price. The best approach is to first reduce to cost of healthcare thru price transparency, payment bundling and population health programs. Then expand HSAs and put the majority of minor medical payment into the hands of consumers. Fund HSAs for those receiving state insurance so they, too, will have an incentive to limit themselves to necessary care. Insurance should cover major expenses and preventive care, not every strep throat and sprained ankle. Imagine how much a toaster would cost if homeowners insurance paid for broken appliances. That’s how we have set up health insurance and as a result the cost of healthcare is skyrocketing.
Hi Adam, thanks for the comment!
The entire goal of this blog is to elevate our discussions about critical topics like healthcare. Additionally, I want to see all Americans with access to high quality, affordable healthcare; but I believe we’re doing exactly the wrong things to achieve that goal.
With that in mind…
Your colonoscopy and cancer examples are really strawman arguments, that misrepresent my point to make it easier to attack. For instance… like you, I won’t be seeking out any extra colonoscopies. But I’ve heard far too many doctors tell me stories of patients coming to the emergency room – the most expensive form of care – for issues that are both minor and lacking in urgency. Skipping a middle of the night ER visit to have someone look at your itchy hands (a real story) and waiting until your own doctor is available the next morning – far more cost-effective care – is the kind of change I expect we’d see by attaching the consumer to the costs of the services they purchase.
You also allude to the possible existence of Medicare data showing something you don’t specify. If you’ve got compelling information, I am quite literally always up to learn more about these topics! What I do know is Medicare’s current unfunded liabilities exceed $37 trillion (with a “T”), so it would take pretty compelling evidence to demonstrate the system is somehow functioning or sustainable.
As for preventative care, I suspect it, along with other healthy habits, would seem far more attractive to us all when we were on the hook for the costs associated with neglecting such things. And while I think more preventative care makes sense, I actually don’t want to see anything overused, just used in the right amount.
Finally, you essentially use high healthcare costs – which I’ve just argued exist because of the structure of our healthcare system – as the reason to expand that very system. Healthcare costs are out of control because there is too much distance between the use of the service and the payment for the service. And you are arguing for more distance… why? How will that not add to the problem and to the $37 trillion hole?
There is evidence all around us that a market system is the undisputed heavyweight champion of cost reduction. Cosmetic surgery… which operates in an open market has seen price increases below the level of inflation over the past 20 years. It is actually getting cheaper! Normal healthcare costs are skyrocketing! To not work towards a market system with something as important as healthcare strikes me as incredibly short-sighted.