Wednesday, July 10, 2019

Profit isn't the problem with US healthcare costs

(Note: the following is an informal Op-Ed I wrote for America's Future Foundation)

Healthcare was a major focus in last week’s Democratic primary debate, and for good reason: U.S. per-capita healthcare spending is highest in the world, and roughly double the OECD average.  Regrettably, several candidates misdiagnosed this problem as the fault of a favorite scapegoat.  Controlling healthcare costs successfully will require more serious accounting for what makes them high to begin with.

To hear Democrats in the debate tell it, the problem is simple greed.  Senator Cory Booker alleged “[t]here are too many people profiteering off of the pain of people in America, from pharmaceutical companies to insurers.”  Senator Elizabeth Warren lamented how insurance companies sucked $23 billion in profits out of the health care system” last year.  And Senator Bernie Sanders summed up the logic behind his plan’s ambitions to lower cost: “We will substantially lower the cost of healthcare because we stop the greed of the insurance companies.”

This is a familiar refrain from the progressive left: US healthcare is broken because it puts “
profits before people.”  By juxtaposing financial success with suffering, they imply the former causes the latter, and convert sympathy for the sick into anger at the affluent.

This doesn’t fit the facts, and it doesn’t make intuitive sense.

The $23 billion in insurance company profit that so dismays Senator Warren amounts to just 0.6% of the $3.65 trillion Americans spent on healthcare last year – hardly the driving factor.  And greed cannot explain why healthcare is so uniquely expensive in a broadly capitalist economy.  All corporations seek to maximize profit; surely pharmaceutical executives are no greedier than those at Nike or Amazon.  Indeed, the facts suggest they are not.  Biopharma’s profit margin is 16%, “significantly lower than Computer Sciences (31.6%), Beverages (27.4%), Aerospace/Defense (23.0%), and Trucking (19.1%)”.

Some argue sick people “can’t say no” to life-saving products, but most patients’ circumstances are not so dire.  Besides, this is not unique to healthcare either. Americans can hardly do without shoes, clothing, or food, and yet most are able to afford these things in abundance.

So why can’t they afford healthcare?  The answer may not fit in debate-stage soundbites, but it ultimately boils down to two factors: competition, and cost consciousness.  In a healthy market, these factors limit how high and quickly prices can climb.  But in the U.S. healthcare system, decades of piecemeal regulation have gradually eroded those limits, permitting healthcare suppliers to
charge almost whatever they like.

Patent law provides de jure monopoly to pharmaceutical giants for decades at a time.  Once that expires, the FDA maintains enormous barriers to market entry, ensuring only the wealthiest and best-connected firms are able to participate.  Asinine prohibitions against importing drugs from overseas further shield these companies from any need to price their products competitively.  Meanwhile, antiquated restrictions on medical licensure and Med School accreditation artificially narrow the supply of doctors, giving each more leverage to charge inflated fees.

Patients rarely mind, though, because they’re usually not the ones paying for their care (at least, not at the point of service).  Through Medicare, Medicaid, and Veterans Affairs, fully 65% of healthcare spending is taxpayer funded.  And thanks to minimum coverage requirements and decades of tax exemption for health benefits, even private health “insurance” has morphed from peace of mind for unlikely misfortune into camouflaged prepayment for likely expenses.  In both cases, Americans have little incentive to economize on what they’ve already paid for.  Consequently, roughly a third of healthcare spending is wasteful or medically unnecessary.

Such frivolous spending may increase profits, but it’s not caused by the profits – it’s caused by the government distorting market incentives.  This is why most studies indicate Medicare for All would increase healthcare costs even further.  By offering more people access to more services at other people’s expense, Senator Sanders’ would greatly exacerbate the cost-consciousness problem.

Of course, the merits of healthcare reforms pertain to more than just overall cost.  Values questions of who should bear the cost also warrant careful reflection.  But blaming the profit boogeyman only mires such discussions with misaimed vitriol and disingenuous demagoguery.  Americans deciding whether government should manage more healthcare payments deserve to know it was government – not profit motive – which made the payments so high.

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