Why American Healthcare Requires Some Type Of Federal Intervention

With the very big exception of oil stocks, the healthcare industry comprises the largest share of my personal investments. In particular, Johnson & Johnson is my far and away my largest personal investment (I honestly believe the company has such an enduring built-in moat that, absent gross product liability negligence on the order of tens and tens of billions of dollars, it will still be a profitable enterprise when it’s time for me to rock on towards the next world, which will, God willing, be many decades from now).

Because I’m naturally curious about the topic, and because Johnson & Johnson, Becton Dickinson, and GlaxoSmithKline have been/are three of my largest personal investments, I’ve been following with great interest the pending changes to our healthcare system as the Affordable Care Act is on its way to becoming the prevailing law of the land.

And because I haven’t read the Affordable Care Act, and because I do not currently have any insights about the effects of the bill that I feel confident predicting publicly, I instead want to discuss two reasons why some kind of federal intervention is warranted in the health care industry.

Generally, we have this (correct) notion that free markets are the best mechanism for creating long-term wealth and efficiency in the long-run because business people are motivated by the profit motive—life costs money, and when we can do things to make more of it, life gets easier (unless you accompany it with lifestyle inflation and gold-diggers, in which case you’d enter the “Mo Money Mo Problems” territory that Notorious B.I.G. posthumously rapped about in 1997).

But free markets become meaningless when you introduce elements of coercion or corruption into the system in a significant way. For instance, it is entirely fair to criticize executive compensation at major S&P 500 companies because it is a corruption of the free market labor system. Executive salaries are often determined by “compensation committees”, and businessmen can quickly develop reputations for “voting” to give senior management and CEOs lavish bonuses. Once you get that reputation, you get asked to be on compensation committees throughout the industry. This vestige of the good-old-boy networking system allows executives to receive million-dollar bonuses for growing profits 5%, just a percentage point or two above the inflation rate.

In the healthcare system, there are two dominant factors that lead to huge asymmetries between the healthcare providers and we, the consumer.

First, we do not have much control to live our lives without the product. Generally, when it is a product that we cannot effectively live without, special rules apply to discourage suffering at the hands of monopolistic practices. For instance, if we turned the water industry over entirely to private citizen-investors, the result would be disastrous: they literally control a product we would die without. They could raise water prices indiscriminately, and we would be somewhat helpless—unless you’re okay with letting weekly showers and drinking lake water become your thing.

The same thing applies to electricity. Unless you want to abandon doing anything between 7 PM and 7 AM that requires light, you’re probably going to need electricity if you want to be a part of the Western Civilization. This necessity could allow electric companies to gauge consumers, but there are limits placed on this power by regulatory boards to prevent your electric bill from going up 10,000%.

Free-market capitalism only means something when you have some meaningful ability to say “no”, otherwise the power asymmetry would allow the other company to effectively grab your wallet and take what it wants. If Mars company decided to raise the price of M&M’s to $5 per pack, you could say cyanora and grab a $1 Hershey’s bar to get your chocolate fix that way. If you are thinking of getting a set of golf clubs and see that a store is selling them for $5,000, you can pick up a $50 tennis racket and make that your country club sport of choice instead.

When you are dealing with goods/services that you can live without, or goods/services that are easy to substitute, you’re living in a world of free-market fairness because you actually have some bargaining power. When you mishandle a saw and lose part of your thumb, you don’t have much of a choice except to visit a hospital. When you have no real choice, you enter a Scrooge McDuck world where the owner of the asset wields a disproportionate amount of power—when you have no alternatives, you have no bargaining power, which can quickly strip away any infrastructure that would promote fairness in the system.

And secondly, shopping around is severely limited within the arena of catastrophic injuries or unexpected ailments. When I buy a book, I can go to half.com, amazon.com, the student resale market at school, or even the school bookstore. Growing up, there was a grocery store by my house that charged 30-40% more than Wal-Mart, Target, and so on. Guess which of the three businesses is no longer there. When we have realistic alternatives, then competition exists, and then it makes sense to pursue free-market policies. But when I’m in a car accident, I’m going to the local hospital regardless of its price—I can’t ship myself to Wyoming where the costs might be 80% lower for the same treatment.

That fact allows the entire healthcare industry to take advantage of us as patients. When you can’t effectively bargain—due to the necessity of the care, or the immediacy of the necessary assistance to ensure survival/the removal of significant pain—you usually establish a regulatory board that can create a balance of power between we the patients and the medical industry that could otherwise gouge us in response to our lack of autonomy. That’s why you need it. Meanwhile, the companies that I own—such as Johnson & Johnson, Becton Dickinson, and GlaxoSmithKline—will stand a realistic chance of growing profits by 10% annually because of the power they wield in healthcare systems both in the U.S. and throughout the world.