Subjecting health to market forces

The debates on health care and most public policy issues, both in Nevada and the nation, revolve around a few basic economic laws. If we accept the basic premise that production and consumption must follow the laws of supply and demand, two subsidiary laws follow.

The first is that in a free market economy, the consumer is king. That means that the ultimate decider of price and quantity is the consumer of the product. Consumer willingness to purchase a product or service determines its success or failure.

The second economic law is called Say’s Law, which, simply put, says that production creates demand. As in the movie Field of Dreams, “If you build it, they will come.” This law means that even though the consumer is courted and has the final say, economic production and innovation are primarily the functions of investors and entrepreneurs who constantly strive to improve our quality of life under the profit motive incentive.

When the government cries “market failure” and intervenes in the process of supply and demand, they almost always do so by restricting supply and stimulating demand. Government restricts health care supply with taxes, regulations, occupational licensing, zoning, certificates of need, expensive and slow approvals for new drugs and other trade restrictions. When you decrease or slow down the supply, you get higher prices. You also simply do not have access to new innovation and products get caught up in endless red tape.

Even though the government has put up roadblocks to supply, when it intervenes in markets, it invariably stimulates demand as well. This is a double whammy to the production process. Less supply means demand leads to higher prices. Now, you also have more people enrolled and ready to demand services. Under the Affordable Care Act (ACA), the largest number of new enrollees was in expanded Medicare, a notorious underpayer. This means the new demand does not pay market rates needed to stimulate production and increase the supply, but is paying below market government rates. With both the supply and the demand for health care distorted by counterproductive government interventions, the “death spiral” of the ACA began. Rural Nevada will not be covered by the ACA next year, as insurance companies have pulled out.

The current debate is centered on the large expansion of Medicaid in the states. In the Supreme Court case National Federation of Independent Business v. Sebelius, the Supreme Court ruled that the federal government cannot force this expansion on the states by threatening to withhold funding. The federal government then promised to subsidize the first years of the expansion. Nevada’s Gov. Sandoval was the first Republican governor to approve Medicaid expansion. Thirty-one states accepted the federal offer, 19 did not.

The Republican health care bill would lower the Medicaid eligibility downward toward the actual poverty level. This approach turns on stimulating the health care supply through deregulation so that these new enrollees who are above the poverty line will be able to afford a deregulated plan, or through health savings accounts be able to afford services that will better meet their needs than Medicaid. Insurance, after all, is not health care, but only a means of payment.

Sen. Rand Paul and the congressional “Freedom Caucus” are opposed to the health care bills almost in their entirety as “Obamacare Lite.” Paul, a Kentucky Republican, wants to see the ACA repealed outright and then work on a supply side approach to health care from scratch. That would also bring the pre-ACA government interventions under review. Every time Congress fails to pass a comprehensive reform bill, this option becomes more viable.