You can’t get very far in a discussion of politics without stumbling upon the topic of healthcare. That’s not surprising; every major democratic candidate vying for the opportunity to challenge Donald Trump in 2020 has made health policy a part of their platforms.

Progressives argue that healthcare is a right that should be at least subsidized by the government. Conservatives argue that it is up to the individual to cover their healthcare costs. But these arguments didn’t just surface on their own. They formed in response to the outrageously high cost of healthcare in the US.

Healthcare costs, by the numbers:

To say that the cost of healthcare is expensive would be an understatement. It’s pretty clear to me that addressing these healthcare costs is the low-hanging fruit of American politics. What better way to become popular than to reduce the financial and health burdens of the American public?

Get to the Root of the Problem

Getting healthcare costs down to more affordable levels is a worthy policy goal, but I am skeptical that simply adopting Medicare for All or something similar will work in the long-run. Underlying medical service and administrative costs — not just health insurance prices — need to be trimmed so that taxpayers do not foot an evergrowing bill.

My view is that we should incrementally address very specific issues in the market for healthcare.

Are administrative costs too high because of outdated processes? Upgrade the processes. Does competition fail to lower prices because insurance networks limit the supply of available doctors? Create a national network to include all healthcare providers. Does patent law increase the price of life-saving prescription drugs? Shorten the duration of drug patents.

In other words, address the causes — not just the symptoms.

What About Insurance?

Even if we can cut costs with incremental changes to the healthcare market, it seems likely that public insurance will remain a central part of the debate. Single-payer or socialized healthcare will exist to cover the medical expenses of the disabled, the elderly, the unemployed, or perhaps everyone.

At least on a moral level, I think we should provide public insurance to support those people who cannot otherwise afford medical services. However, we also need to consider the unintended consequences of insurance availability.

It could be that using insurance to pay for healthcare actually increases the total cost of medical bills. How could this happen? Well, it’s actually quite intuitive if you put yourself in the shoes of a healthcare provider trying to turn a profit (gotta pay off those student loans somehow!).

Imagine you set the price of a life-improving surgery at $5,000. Because of insurance, your patient pays almost none of that $5,000. Later on, you perform another surgery, but you set the price at $10,000. Again, the insurance company — not the patient — foots most of the bill. You can keep increasing the surgery price to increase revenue as long as the insurance company agrees to keep you in its network. In any case, the patient pays a tiny percent of the total bill.

[note: I chose to use a “life-improving” surgery over a “life-saving” surgery for a specific reason. Life-saving surgeries often have inelastic demand, meaning consumers will pay any price for them. By instead using the example of a “life-improving” surgery, I show how insurance has a similar effect on demand as inelasticity.]

In the above scenario, patients do not respond to the increasing price of the surgery. For a regular commodity, a high price would cause the consumer to look for alternatives — decreasing demand. However, for a surgery, price changes are absorbed by the insurance company and demand remains about the same.

Insurance Coverage Vs. The Price of Medical Care

We can use the above scenario to make a hypothesis: an increase in health insurance coverage increases the underlying price of healthcare services.

This relationship is best explored from a data perspective. Both insurance enrollment and the price of medical care should be increasing over time if the hypothesis is even remotely correct. Let’s see if that happens in the data.

Price of Medical Care

fredgraph (3)
St. Louis Federal Reserve
  • As we see in the graph above, the medical care service index (a component of CPI) has grown a lot since 1980.
  • In other words, the price of medical care services increased as expected.

Insurance Coverage

Graph - Healthcare Coverage
Data collected from: Current Population Survey, 1980 – 2017
  • Health insurance coverage has expanded since at least 1980.
  • It is likely that this expansion is being driven by the growing US population and availability of insurance programs (both public and private)

As we can see in the above data, both insurance coverage and the price of medical care increased between 1980 and today. We cannot just declare that increased coverage caused higher prices, but the two variables do appear to be correlated.

[note, 5/22/19: I’ll update this post after running some tests to find correlation coefficients and building a better model.]

Recap

Providing healthcare at low costs is a noble goal, but it is a complex issue that is best solved with incremental fixes to specific, known problems. It is also possible that paying for medical services with health insurance causes the underlying costs to increase.