Thursday, March 23, 2017

Healthcare and Other People's Money

Drawn into the stream
Of undefined illusion
Those diamond dreams
They can't disguise the truth
--Level 42

Current debate about government's role in healthcare once again took me back to my industry days, when a grandiose healthcare plan developed by a corporate quality improvement team was presented to one of our VPs. "It won't work," the VP told me.

The plan subsidized nearly all employee expenditures related to healthcare. As long as someone else was picking up the tab, he argued, buyers would not be motivated to shop for value, and our ultimate goal of curbing costs would not be realized.

This memory jogged another, more recent lesson learned. Milton Friedman posited that there are four ways to spend money. You can spend your own money on yourself. You can spend your own money on someone else. You can spend someone else's money on yourself. You can spend someone else's money on someone else.

Spending your own money on yourself is the condition that promotes the most economizing (conservation of resources) while attaining highest value (maximizing utility of the purchase). This is what the VP was seeking. Get consumers to do what they do best and costs will go down while utility is maximized.

All third party payer plans, corporate run as well as government run, operate in the bottom two quadrants. Consumers whose behavior is insured by someone else are spending someone else's money. They will care little about the price paid for healthcare services while trying to consume as much healthcare as they can. Plan administrators essentially spend other people's money on someone else. Not only do they have little incentive to economize, but they are likely to arrange services that do not provide high value for the insured. Higher costs, lower quality, and shortages are certain.

While Trumpcare in its current form may move the needle a bit away from the 'other people's money' conditions, it still subsidizes a great deal of consumer healthcare spending. Unless it is considerably revised, Trumpcare looks too much like its Obamacare predecessor that it seeks to repeal-and-replace.

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