Problems with US Healthcare

September 21, 2023

"There is no art which one government sooner learns of another than that of draining money from the pockets of the people."

- Adam Smith, The Wealth of Nations

An Economic Problem

Regulation benefits the incumbent.

The fact that medicine relates to the essential needs of people does not, in any way, make economic laws not apply. In fact, peoples' belief that medicine should be more heavily regulated results in lower quality, higher priced healthcare.

The areas which we see the most rampant inflation like medicine, textbooks, or tuition are, by no coincidence, the most regulated.

Let's look at medicine specifically:

Supply of Doctors

Everyone knows how hard it is to get into medical school. By severely limiting medical school admissions, we limit the future supply of doctors. This isn't to say that we shouldn't have standards- it's just a tradeoff between Type I and Type II errors.

By limiting admissions of qualified candidates, medical schools get the benefit of prestige, higher salaries for doctors, and limiting Type I errors. By only taking the best of the best, it's "less likely" that errors will occur in practice. However, this vastly increases the number of untreated patients due to higher costs and less doctors.

Type II errors are mostly invisible and always more costly than Type I errors. Despite the large artificial barriers of entry to becoming a doctor, malpractice is still endemic in the world of medicine. Lowering the barriers to entry would increase the supply of doctors which would increase competition between doctors which would lower prices and increase quality.

"Yeah, but cui bono? Who benefits?"

- Alec Baldwin, The Departed

Who benefits from medical regulation more than doctors? Regulation benefits the incumbent.

Limited medical school admissions are only the tip of the iceberg. Residency programs are required to become a doctor. This is a massive barrier to entry. I'm sure you've heard stories of the nightmarish hours- seen as a right of passage for doctors- speaking of Type I errors.

Residencies are required to become a doctor. Residency programs are largely funded through Medicare, which has capped funding since the Balanced Budget Act of 1997. This puts severe limitations on the number of federally-funded residency slots and therefore the supply of doctors. This is a very clear example of policy artificially increasing barriers to entry. This isn't to suggest that we should spend more, instead we should lower the barriers to entry by reducing the residency requirements.

Medical associations like the AMA or LCME have direct incentive to lobby to lower the supply of new doctors. The LCME specifically is the accrediting body for medical education programs and can decide accreditation based on things like facilities & equipment, the relationship between the medical school and its parent university, etc. Of course, doctors' associations are filled with doctors with direct control over their potential competition. It is in their best interest to severely restrict the supply of new doctors in the name of reducing Type I errors.

These associations use their influence as authorities on medicine to keep standards artificially high and supply of doctors low. They may not even realize they're doing this and truly want to help people by reducing Type I errors but they completely overlook the invisible Type II errors which are of much, much greater cost.

Increasing supply lowers prices, ceteris paribus.

Supply of Medicine

Decreasing supply raises prices, ceteris paribus.

Have you ever looked into medical penny stocks? They're a bunch of very small companies that are worth virtually nothing working in hopes to get FDA approval on a new drug and have their share prices skyrocket.

FDA approval is a lengthy, expensive process that requires multiple phases of clinical trials. This can take years and cost hundreds of millions of dollars. These costs are transferred to consumers. This barrier to entry is another example of perceived Type I errors being the policy focus while ignoring Type II errors.

Intellectual property rights give drug manufacturers monopolies on new medicines- typically for 20 years with possible extensions. Companies then engage in what's called "evergreening" where they will make minor modifications to existing drugs and getting new patents on them- extending their monopoly power ad infinitum.

People respond to incentives. Clearly its good to incentivize medical research but it comes at the cost of giving artificial monopoly pricing power to private firms for an extended- or indefinite- period.

Health Insurance

Incentives for individuals and health insurance providers are misaligned. Health insurance aims at paying out as little as possible whereas people want the best care they can get, and therefore higher insurance payouts. This is the price of doing business and not something that is easily changed, nor something that necessarily should be changed.

Tying health insurance to the employer creates job lock and coverage gaps. People may avoid changing jobs, launching new businesses, or pursuing better opportunities due to fear of losing their healthcare coverage. This increases employment switching costs.

Networks in health insurance are pitched as a cost-containment strategy and a quality assurance mechanism. In reality, they limit patient choice and decrease competition, raising overall prices. In theory, they "enable insurance companies to negotiate lower rates with providers and standardize care", but they result in increased out-of-pocket expenses for out-of-network care, prevent patients from seeking the most appropriate medical treatment, and remove competition between healthcare providers.

Pricing Transparency

When I set gas prices, if you only had the price of unleaded on the sign, you could always increase your spreads between unleaded and midgrade or premium without losing volume. Instead of, let's say:

$3.009 UNL - $3.309 MID - $3.609 PRE

You might instead make it:

$3.009 UNL - $3.409 MID - $3.809 PRE

When people don't know the price, they end up paying more.

This is endemic in medicine. Nothing has a price. You don't even get the bill for weeks or months. When you do get the bill, you have to figure out what's yours to pay versus insurance. There is as little transparency as possible, which is very intentional.

Policy Suggestions

This list is obviously not exhaustive. However, if the following changes were made, medicine would be much cheaper, better quality, and more readily available:

I realize, on the surface, removing official standards for medicine sounds asinine. Understanding the full issue requires consideration of the incentive problems and Type II errors. If you're still with me this far, you may be asking yourself about some other government-mandated standards:

- Why can the government refuse to renew your registration and take away your ability to drive if you can't afford an expensive repair, even though the car works?

- Why is public education so bad even though it meets the government standards?

- Why does a hairdresser need a license when the Type I error is a bad haircut?

"Business corporations in general are not defenders of free enterprise. On the contrary, they are one of the chief sources of danger....Every businessman is in favor of freedom for everybody else, but when it comes to himself that's a different question. We have to have that tariff to protect us against competition from abroad. We have to have that special provision in the tax code. We have to have that subsidy"

- Milton Friedman