Of Headphones and Healthcare: Musings on scarcity
N.B. This essay is cross-posted at my regular site, The Joy of Reason.
When I was a child, I wanted to be a concert pianist when I grew up. Or a writer. Or, truth be told, Luke Skywalker. This goes to show that I wasn’t nearly as bright as my mother claimed, since no one in his right mind would rather be Luke than Han.
Since then, my ability to play the piano has declined with each year, but my love for music has not, and a few years ago, I got a pair of high fidelity, professional Shure earbuds for my MP3 player (The MP3 player wasn’t a very good investment, and it broke pretty quickly; it was not an iPod). I got the Shure earphones because they were sounded great and blocked out external noise. Sound isolation provides a significant, palpable benefit once one has joined the ranks of the parenting class. Basically they were earplugs with wires that delivered music, and I had read wonderful things about them.
In time, they broke, and I got another pair. In time, those broke too, and I went through a few pairs of off-brand earbuds before, finally, getting the deluxe Apple in-ear headphones. They are very nice and sound even better than the Shures, which were considerably more expensive.
Now, one of the frustrating things about the Apple earphones is that finding replacement tips is pretty difficult (They’re these little silicone doohickies that fit perfectly into one’s ear, and I have not seen them at the Apple store). Getting replacement tips for the Shures was simple; I could order a whole box of them pretty cheaply from amazon.com and always had some on hand.
As a consequence, I didn’t pay too much attention to my old earphones. If I lost a tip, that was fine. I’d just get another. When I lose one to the Apples these days, however, I fret and search around to find it. This is pretty irritating, as they pop off with relative ease. One fell off at Caribou Coffee this morning, and I had to retrace my steps to find the missing piece. I found it before going on my merry way, because I needed it, or the earphone would be pretty useless.
Quick aside: This old Sesame Street cartoon about getting lost and retracing one’s steps warped me pretty badly as a child.
Gratuitous 70s flashback:
Anyway, back to my story. My attitude toward the different earphones represents a reasonable response to varying degrees of scarcity. Shures: very little scarcity. I always had some replacement tips on hand. Apples: quite a bit of scarcity. I have no replacement tips and would have to go to some trouble to get them. Consequently, I value the Apple earphones more than the Shures (even though, ironically, the Apple ones cost less).
There’s a point to this, of course. Economics is the allocation of scare resources with alternative uses. I allocate more time when I lose an Apple piece than I did with my Shures because replacing them is very costly in terms of time spent finding the parts and the physical expense of ear discomfort (without these, I am forced to use the hard ones that came with my iPhone, and I really don’t like the way that they hurt my ears); losing a Shure tip cost virtually nothing because I always had a replacement.
In other words, when an individual has an unlimited supply of something (or something that is, for practical purposes, very easy to obtain with little expense), s/he is much more likely to be cavalier about it to the point of being wasteful or foolish. When an individual has a limited supply of something, however, s/he is forced to rank it alongside every other way that s/he could spend money, time, etc.
To take this idea a step further, when a group of individuals has unlimited (or significantly unrestricted) access to something, each of them is more likely to use that something excessively than if there were a measurable cost (time, dollars, etc) associated with it. When the demand (via unrestricted access) outstrips the supply, there are shortages. If I had been even more cavalier about my old earbud tips, to go back to that, then there’s a strong possibility that I could have run out of replacements before ordering my next box.
Now, if the supply is limited by external constraints (by, say, fixing prices at such a low level that fewer people manufacture it), then shortages are even more likely. Such shortages lead to longer wait times to get the product, potentially lower quality (if, say, a manufacturer cranks them out more shoddily to compensate for the lower fixed price), and other unwanted outcomes.
Natural market prevent (or, at least, significantly reduce) this effect, because prices of items make each individual make a value judgment: Is this worth the money, time, etc? When people want something, its purveyors charge more, and prices increase until they reach a pivot point at which fewer people are willing to pay. At that point, they decrease until demand picks up. Eventually they reach a relatively steady equilibrium point where they meet demand without excessive extra inventory. The seller and buyer both benefit, because they come to a point of agreement where both are satisfied.
Now, let’s think about how we pay for healthcare. Today’s healthcare crisis has been a long time coming. We (individuals and our employers) pay a huge amount of money up front to a third party (insurance companies and, in the case of taxpayer-funded healthcare, Medicaid and Medicare). The incremental cost–i.e. that which is felt at the point of receiving care–is so low that most of us don’t think twice about seeing the doctor when we believe that it would be prudent. As a consequence (like the Shure earpieces), we don’t think of medicine as a scare resource. When one encounters excessive wait times, or when his/her insurance company refuses to pay for an essential procedure, s/he feels cheated.
In other words, we use third-party payment while expecting first-party service. The patient is shielded from the cost of his/her procedures and, consequently, often over-uses the system.
In the middle of everything is the insurance industry, which is demonized because of claim denials, revoking people’s insurance, refusing to cover high-risk individuals, etc (We all know why people dislike insurance companies). In the end, what we dislike is the nature of actuarial tables. Insurance companies collect premiums, run their businesses (making a very moderate profit), and pay doctors (at heavily discounted rates). It’s not magic, and if an insurance company pays more than it earns, it goes bankrupt. They serve the function of spreading risk and, essentially, hiding the cost of medicine.
ObamaCare, as the Patient Protection and Affordable Care Act is commonly known, does not fix the structural problems at the heart of the healthcare crisis. In fact, it probably exacerbates them. Rather than reducing the monies spent on healthcare through the insurance companies, it will increase them. (For the record, the most common Republican solutions do not address the fundamental problem of third-party payment, although they are less harmful than ObamaCare.)
We are not past the point of no return (since ObamaCare can still be defunded, repealed, and replaced), but fixing America’s healthcare system will require significant changes in the structure of prices and payment.
This essay is already probably over-long, and so I will offer a very (very) high-level idea and end with a passage from Milton Friedman.
Imagine that health insurance is like homeowners’ or car insurance. That is to say, imagine that it’s relatively low cost and has a fixed benefit, to be used in the case of emergencies. Imagine, further, that we have a system that mandates health savings accounts. That is to say, let’s say that an individual is required to pay a certain percentage of his/her income into a personal health savings account (I believe that this is how the system works in Singapore).
There would be, of course, a government safety net for those who are too young (or too disadvantaged) to afford basic care.
Doctor visits, surgery, hospital stays, and the like would be paid out of this account. According to the Kaiser Family Foundation, in 2009, the average family health insurance policy cost ~$13K. That’s a significant percentage of average household earnings at virtually every level of pre-tax income. Imagine the impact to your healthcare spending habits if you spent, say, $3K or $5K on an annual catastrophic insurance plan and had the other $8K or $10K to spend on all of your medical bills. Would this change the way that you use the healthcare system? If a doctor visit cost $50 or $75, one can see how much would be left in the savings account (which would roll over throughout an individual’s lifetime) to deal with emergencies before using catastrophic insurance.
One of the biggest tricks of our system is that doctors bill at one rate, and insurance companies pay a contracted fraction of that rate (Read the next statement of benefits from your insurance company, and you’ll see what I mean). Uninsured people are screwed because they pay the full, billed price.
So let’s imagine that price parity is controlled. That is to say, the government doesn’t set any prices for any doctors, but if a person opts to pay through insurance (They could still get a traditional insurance plan if they chose), then the insurance company pays the same that an individual would pay (or within a 10% variance or something to allow for moderate collective bargaining). We get rid of a pricing system that is tiered based on the power of the insurance companies In effect, this would bring the price up (very slightly) for insurance companies and bring it down (significantly) for people who pay their own way. This seems like a perfectly reasonable use of governmental authority.
Able to set their own rates (without negotiating with insurance companies), doctors could charge what they like. Because there would be less overhead (billing departments, collections, etc), the profit margin of the medical fields would increase, and so the field would grow. The increased supply would lead to increased competition and, eventually, to lower prices.
I call this the Wal-Martification of medicine (or the Targetization, if you prefer). Wal Mart almost revolutionized medicine when they started selling four dollar prescriptions a few years ago. Other drugstores got into the game, and prices began dropping everywhere. If this trend had continued in primary care (and specialties, hospitals, etc), then eventually we would have higher quality and lower prices because of significantly increased supply, investment, innovation, etc.
However, we went the other way, and it is likely that we will have unwanted outcomes: increases in the price of insurance (i.e. medicine), a decline in quality of care, and a net increase of suffering for individuals who will be unable to get necessary procedures due to inevitable shortages. To call this unfortunate is an understatement of epic proportions.
Dr. Friedman, from Capitalism & Freedom:
Suppose that anyone had been free to practice medicine without restriction except for legal and financial responsibility for any harm done to others through fraud and negligence. I conjecture that the whole development of medicine would have been different. The present market for medical care, hampered as it has been, gives some hints of what the difference would have been. Group practice in conjunction with hospitals would have grown enormously. Instead of individual practice plus large institutional hospitals conducted by governments or eleemosynary institutions, there might have developed medical partnerships or corporations—medical teams. These would have provided central diagnostic and treatment facilities, including hospital facilities. Some presumably would have been prepaid, combining in one package present hospital insurance, health insurance, and group medical practice. Others would have charged separate fees for separate services. And of course, most might have used both methods of payment.
These medical teams—department stores of medicine, if you will—would be intermediaries between the patients and the physician. Being long-lived and immobile, they would have a great interest in establishing a reputation for reliability and quality. For the same reason, consumers would get to know their reputation. They would have the specialized skill to judge the quality of physicians; indeed, they would be the agent of the consumer in doing so, as the department store is now for many a product. In addition, they could organize medical care efficiently, combining medical men of different degrees of skill and training, using technicians with limited training for tasks for which they were suited, and reserving highly skilled and competent specialists for the tasks they alone could perform. The reader can add further flourishes for himself, drawing in part, as I have done, on what now goes on at the leading medical clinics.
Of course, not all medical practice would be done through such teams. Individual private practice would continue, just as the small store with a limited clientele exists alongside the department store, the individual lawyer alongside the great many-partnered firm. Men would establish individual reputations and some patients would prefer the privacy and intimacy of the individual practitioner. Some areas would be too small to be served by medical teams. And so on.
I would not even want to maintain that the medical teams would dominate the field. My aim is only to show by example that there are many alternatives to the present organization of practice.