Health Care Will be Expensive as Long as Someone Else is Paying for It

Sep 1, 2008

The fundamental problem with the health care system in this country is the cost. We spend 17% of our gross domestic product, or nearly $2.2 trillion, on health care each year in the United States. Most proposals to reform health care delivery offer a way to control these expenses through the use of more regulations, “better” medicine, and ultimately, a government managed system.

There is an economic principle at work here, that like gravity, cannot be ignored or dismissed. The principle is that costs will continue to increase as long as someone else pays for our health care. Whether it is a government agency or an employer, a third party is now paying for over 87% of the health care in this country, even as individual co-pays and deductibles are increasing. As long as someone else is picking up the tab, demand and utilization will far outstrip the supply. This is an economic law and it must be addressed before any reform will work.

Let’s say you were going to build a new airplane, but didn’t worry about the law of gravity. Regardless of how you designed the plane, or how much technology you put into the aircraft, or how large you made the engine, if you neglected to consider that the plane must overcome gravity, the project will fail.

This is exactly what health care reformers are doing when they propose plans that ignore the economic law that states an individual will demand many more health services as long as someone else is paying the bill.

Obviously, employers mean well when their goal is a healthy work force, and they feel obligated to provide health care benefits for their employees to remain competitive. Similarly, the politicians who support government-run health care undoubtedly believe that a centrally planned system is the best and most efficient. Yet imagine what would happen if the government or our employer paid for our food, shelter, and clothing, which like health care, are other necessities of life. Demand would far outstrip supply and some form of rationing would need to take place. Of course, the payer would then make the rationing decisions, and the individual recipient would be totally dependant on the payer for the amount and quality of food, clothing, and shelter he or she would receive.  

Only when individuals can direct their own medical spending through a market will costs become transparent and likewise come under control. Critics have said that health care is too important and too complex to be left to individuals. Yet health care is simply an economic activity, and because of its complex nature, can only be managed through the unregulated interaction of providers and patients. We have learned over the past century that government central planning is doomed to fail (witness the Soviet Union and Eastern Europe) and only leads to supply and demand mismatches, lack of goods and services, and ultimately rationing.

Americans are the smartest shoppers in the world. We are extremely knowledgeable when it comes to buying virtually every service or product offered in our economy – except for health care. There is absolutely no reason to believe we would not become savvy purchasers of health related services if we were spending our own dollars. Through the use of the internet, consumer reports, and word of mouth, Americans can obtain the proper type and amount of health care that they need, without interference from employers or the government.

When anyone proposes health care reform, the first and most important question to ask is who is the payer for this health care. If it is not the patient, the reform is doomed to fail, and will lead to over utilization, uncontrolled spending, and ultimately to some form of rationing.