Short and Sweet Blog

The future of Obamacare looms large in the upcoming off year elections.  Should it be repealed?  Can it be repealed or otherwise stopped with a majority but not a two thirds majority in each house prepared to override vetoes?  If the Democrats retain both houses will a public option be included, as was proposed this month by Rep. Lynn Woolsey (D – Cal.) head of the house Progressive Caucus?  With premiums still rising in the wake of Obamacare’s passage who will get the blame?  Will the blame have any political effects?

Rep. Lynn Woolsey

I’d like to talk about what happens if Obamacare is not stopped and we are all left to feel its effects in the middle of the next decade and beyond.  In fact, it seems inescapable to me that if Obamacare survives the next round of elections that the public option will inevitably come to pass.  This must happen because Obamacare mandates that all are covered and that there be no limitations on that coverage for those who have only recently become insured.  This must drive  up premiums with the effect of pushing most private employers out of the health insurance market. 

This being the case, it is important to examine what happens when a governmentally dictated program controls prices.  When prices are controlled how are total costs affected?  Is the Medicare program a model for how Obamacare will work or are there going to have to be fundamental changes?

Why did the government so vastly miscalculate the projected total cost of Medicare even while it had control of the prices which it paid to providers? Well, in the first place the life expectancy for people aged 65 and older grew significantly subsequent to the enactment of Medicare.  There are therefore lots more patients than was actuarially anticipated. Was this increase in longjevity a coincidence? It appears to me that this outcome resulted from the fact that an enormous market of retired people created who could now pay for all of the medical services which could be defined as being medically necessary.  In other words the existence of Medicare fundamentally changed medical outcomes for the elderly which in turn fundamentally affected the financial aspects of the program. This occurred because the medical industry, knowing it had a large and well financed group of customers, developed lots of ways to extend the useful and comfortable lives of those customers.  These new treatments then became, nearly by definition, medically necessary and therefore were paid for by Medicare. In this way the Medicare entitlement spurred medical innovation and progress and led to generally better health outcomes for the elderly.  This improvement in overall health care included the rest of us who benefitted through a trickle down process from this medical innovation.

Was this a bad thing since it ballooned costs tremendously? This analysis depends, of course, upon one’s point of view. Clearly, extending and adding comfort to the retired leisure years of people who, by and large, were no longer economic producers, was a very good idea from the standpoint of those benefitting. As the politicians constantly remind us, Medicare was and is wildly popular with the public nearly all of whom are  on it or hope to be on it someday. Duh!!!

As a result, the elderly, became very politically active in defense of this entitlement as well as in defense of Social Security, understandably fighting every attempt to limit them. They became a politically powerful voting block. Whether good or bad, however, Medicare’s success and its creation of a voting block with older citizens clearly sewed the seeds of its own financial difficulties.

How will Obamacare work it’s magic? Will it subsidize medical innovation and better health outcomes like Medicare did? Will these medical innovations, which will be available to all, reduce prices because of economies of scale?  Will Obamacare force enough ‘efficiencies’ in the system so that it can remain viable without substantial amounts of financial pain? Can Obamacare or, for that matter, the entire country financially survive if Obamacare follows the Medicare model of ever expanding innovation and better outcomes?

The government, using the tools provided by Obamacare, promises a reduction or at least a freeze on the overall cost of health services and an actual increase in availability of those services. Is 16% of the economy enough? Can we afford more? How can we get more for less? Can we get more for less by capping overall costs or reducing prices as was done with Medicare even though the mix of beneficiaries of Obamacare are annually becoming actuarially older and therefore sicker? Can we logically expect to get the same quantity of high quality services for less money? Perhaps if you believe in the tooth fairy you will believe that you can have more for less but didn’t you grow out of that idea by the time you were ten? Am I being overly pessimistic?  Do economies of scale work effectively in a business which is delivered on the basis of a one on one (doctor-patient) business model?  For the unbelievers amongst us how will overall costs and costs per beneficiary be lowered absent fundamental changes in that doctor-patient relationship?

If the law of supply and demand tells us anything about the relationship between prices and supply there is no doubt what is going to happen. When you artificially cap prices, over a period of time you will get less supply, it’s that simple and it’s also absolutely immutable. Therefore demand will have to be reduced in order that demand and supply stay in equilibrium at the capped price. How can the government reduce demand for medical services, oh let’s think? Obamacare must, of course, become a giant rationing system in order to reduce real demand or shift the demand to other goods and services than those which have been available to date. Despite indignant denials, the government, hard pressed on all economic fronts, could even decide to reduce costs by reducing the availability of life saving treatment for older people. Remember that Obama himself said that he is in favor of trading off expensive life extending pacemakers in favor of palliative pain medication for older Medicare recipients. Oh and wait, reducing the life spans of seniors would have the double benefit of supporting the solvency of Social Security. Of course, this association would never occur to the government would it?

How can Obamacare not become a political rationing scheme? When something is politically rationed it is, by definition, taken from the politically less powerful and given to those more powerful. That, in my opinion, is a simple and immutable result of politics. Political rationing will prefer some demographic groups to others and even some “popular” diseases to other less “popular” ones. You may remember the competition in the 1980’s and 1990’s for government research dollars between cancer and AIDS research groups and, not surprisingly, therefore between the sufferers of those two diseases. Who will be on the winning and losing side of that equation? Congress spoke about the political power relationship when it exempted its current and retired members from Obamacare. Members of Congress were clearly winners. Who will be the losers?

This entry was posted on August 1, 2010 at 7:52 pm and is filed under Political Economy. You can subscribe via RSS 2.0 feed to this post's comments. Both comments and pings are currently closed.