Health Care Economic Model Without Government - Cheaper than Fee-For-Service!

First, a lesson in economics. A short one.

Microeconomics is good. Macroeconomics is bad.

Microeconomics is the study of competitive forces and their consequences in an unregulated economy. It has a good foundation in reality and can lead to useful cosequences as people make invrestment and other money decisions.

Macroeconomics is the study of how the economy as a whole participates in and reacts to changes in total employment, money supply, etc. It is based on false assumptions and can neither explain the Great Depression of 1929 nor predict business cycles.

The distinction between goods and servces is misleading. See the continuum in this example? Where can you make the distinction?

You hire a taxi to take you from place to place. This is a service.
You rent a car and drive it yourself.
You lease a car for a year, no right to assign the lease but you can cancel it for a specified penalty.
You lease the car for a year, no cancellation rights but you can assign the lease to someone else.
You lease a car for five years and retain the right to buy it at the end of the lease.
You buy a car outright. This is a good.

Also, it is wrong to look at activity; wht we really want to know is the wealth of the consumers. For example, we used to have iceboxes with daily ice delivery. That kept the ice harvesters and the delivery wagon dirvers busy. Then we got refrigerators, which kept the food cold but were cheaper because the ice wagons were no longer needed. Still later, refrigerators became more reliable and didn't need to be repaired or replaced as often. The economic activity needed to keep household food cold is less and less with time, but the outcome is essentially unchanged: cold food in the kitchens. But if you look only at the total revenue of refrigerator manufacturers and retail sellers, refrigerator repair peple, ice-house operators, and ice wagon drivers during the past century, then you will think the economy is getting poorer and poorer.

Same error with cars and collisions. Suppose you are driving and swerve to miss a child. You crash into a parked car and insurance covers damage to your car and the parked car. Various people will report economic activity, but obviously prosperity overall would be better if no damage had occurred: the damage was repaired, but someone had to pay for the repairs and the money so spent cannot be spent on something else.

Measure economic activty, if you must, by looking at results. Measure income as assets at the end of the accounting period, minus assets at the beginning ot the economic period, plus meaningful consumption during the period. This formula has nothing to do with activity intended to produce assets. This omission is deliberate; if activity does not bring about increased value, then it is a waste and probably derives from government pork.

We should look at gradations, not between goods and services, but between low-overhead consumer assets and high-overhead consumer assets. Low-overhead assets do not cost very much in overhead. Domestic servtude is one example. The maid shows up and is given simple instructions. If training time is neglected, the overhead (fixed cost) is approximately zero. High overhead consmuer assets require great effort to enable their production, but once the overhead is in place the additional cost per unit sold to the consumer is pretty near zero. A ticket to a stadium seat is an example; a fortune was spent to build the stadium but the additional cost to admit one sports fan is trivial.

But back to health care. Hospitals and medical equipment cost money and are high-overhead items. Same for a medical education. In the short run, it seems possible to tell those who have irreversibly spent the high-overhead money that, in return for medical services, only the variable cost, the additional cost per patient encounter, will be paid. With enough bargaining power, that can be done--until the existing supply of doctors retires and the existing supply of hospitals close. Scare college students and commerical-building construction companies by threatening a cutback in medical reimbursement, and there will be a shortage of health care facilities and people that will take years to correct--a lifetime, if you are ill.

How to pay doctors and hospitals but not overpay them? Let's look at a story, one that takes place in the ideal world of no government and no medical insurance.

You just finished a residency. After several years of schooling and several large loans to pay back, you are looking for medical work. A telephone call comes in. It is from the supervisor at a local factory. Would you be willing to take care of the factory workers and their families, on a fee-for-service basis? Sorry, all or none and if no one needs medical care then you get paid nothing. But you can't accept that offer and another one also because if you get too busy then you will be unable to keep your word and treat the factory families.

The telephone rings again. This time, it's an investor who runs a health maintenance organization or a similar program. You would get paid to manage medical care for the families at a second factory, getting paid a fixed fee monthly whether or not any health care is needed. Great if no one gets sick, but you know that you cannot accept this ofer and another one because if there is great demand then you can't keep your promise if you have accepted another offer too.

So what do you do?

If you're smart enough to go to medical school, then you are smart enough to figure out the right thing. You call your buddy from the residency, who was also a classmate at your medical school. You explain the situation and decide to form a partnership. You accept both offers, each doing half the work and receiving half the money.

This way, you get a predictable payment for overhead and are paid on average a low fee per patient seen. Sure, some patients pay the full amount and some pay none, but on average there is a reduced fee.

The lesson: to eliminate financial risk to the doctors and hospitals, there should be a plan in which the doctors and hospitals receive a fixed fee in return for promising a finite amount of health care at a greatly reduced price. This reduced price should be set so that there is no economic incentive to give or to withhold care, so that the doctors and hspitals have no financial pressure to depart from their medical judgment.

The health care that they are to provide should be transferable. The doctors and hospitals are economically indifferent regarding whether or not they offer the services,so they don't mind if someone unexpected shows up and cashes in on a low-cost physician visit or hospital admission. But whoever first acquires the right to a doctor visit or hospital admission may make a profit by selling it. Or he may sell it at a loss or let it expire unused.

Providing health care is one thing. Making guesses, gambling, speculating, by whatever name, on the future need for health care services is another. Different mindsets are needed for these two activities. It is plausible and intuitively correct to allow for the possibility that such tasks are done by people different from each other. Remember rebel economist Julian Simon? He's the one who suggested that airlines pay overbooked passengers a penalty that may exceed the cost of the airline tickets, giving the bumped-off passengers a profit. Leftists want the businesses to hang on irreversibly to any money obtained from the consumer, regardless of the circumstances. But if there is an economic relationship between producer and consumer, then we creative people allow for the possibility that under unusual circumstances the consumer will receive money from the producer.

Risk is best removed from health care (doctors, hospitals, etc.) providers if there are fixed-price contracts that can be assigned and not canceled, lasting as long as the resources to which they are attached. Promsie to pay a monthly fee for thirty years (the lifetime of a hospital) in exchange for low-cost hospital admissions during that period, and investors can build a hospital without risk. Same for medical education. Investors/speculators will receive the rights to purchase health care at deep discounts and can re-sell them to consumres through direct fee-for-service or through any insurance plan that they like.

A consumer who makes fixed payments (overhead) in eaxchange for such low-cost per-visit and per-admission health care services will, on average, get health care for less than the fee-for-serivce cost by absorbing the financial risk that would otherwise be borne by the doctor or hospital. Meanwhile, the rights to such low-cost doctor visits and hospital admissions can be bought and sold freely.

Incidentally, there is nothing in this analysis that is unique to health care. Suppose the mayor of a small town wants to improve its main street. He can offer property tax (if it still exists) rebates or outright grants in return for a specified amount of heavy discounts for goods and services, said discounts being finite in amount (not the right to purchase unlimited amounts) and capable of being sold freely. The townspeople get the discounts so obtained. The discounts will generally be bigger than the tax breaks or grants, so the townspeople benefit. And with a relief of financial risk, so do the main-stret stores.

Apportioning fixed cost to fixed payments and variable cost to variable payments removes financial risk from health care providers and, merchants in general. Macroeconomics has missed this analysis completely and should be discarded.