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.

 

 

 

 

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11 thoughts on “Why American Healthcare Requires Some Type Of Federal Intervention

  1. Matt says:

    I largely agree with you at a high level. But, the ACA is not really about that at all for the most part. as well, insurance didn't enter your synopsis which, in large part acts as a powerful intermediary between the patient and hospital. Kind of changes things. Anyways, as a canadian I hope the ACA turns out to be much better legilslation than I think it is.

    Matt

  2. says:

    Interesting idea. I have long thought that we need a single payer health care system, and your ideas are something that I might incorporate into that the next time I debate with my libertarian son.

    Some editorial comments. You have misspelled several words:

    "This necessity could allow electric companies to gauge [sic: gouge] consumers…"

    "you could say cyanora [sic: sayonara]…"

  3. says:

    This is a very complex issue that is difficult to summarize in one post. I think your basic point is right that somebody needs to establish some rules. But they have gone far beyond that.

    I think your example about water is off the mark. Private companies would likely do a better job. Why do people spend billions on bottled water and water coolers for a product that is already "free"? Because they don't have complete trust in the product.

    They are so many examples. Ten years ago the private IIHS tested cars for crash ratings. Some of the cars were deemed very safe while others were literally dangerous. Can you guess which ones failed the governments crash test? That's right, none.

    1. says:

      The reason so many people buy bottled water is because they have been bamboozled by marketing hype. Clearly private companies are doing a better job for their owners, but certainly not for consumers, who are fooled into spending way too much for a product that is (almost) freely available at their water tap.

  4. james says:

    I have to strongly disagree. I love your investment posts, but the federal government already caused the health care crisis:

    1)The pharmaceutical and medical device industries got federal laws and regulations passed to prohibit the transport of legally-owned drugs and devices across international borders and to restrain trade even within the United States. This is why a drug that may cost $100 in Mexico will cost $10,000 here in the U.S. Effectively, since the U.S. is the only country that allows these drugs companies to maintain a monopoly on price, the U.S. consumer is subsidizing the entire world for drug research and development costs, as many drugs would not exist because they're not profitable except for the fact that the U.S. consumer can be raped.

    2) The medical providers charge different prices depending on whether or not you have insurance, which is collusion with medical insurance providers, a violation of several anti-trust acts on the books, which are not enforced. This is a serious criminal offense in every other industry, but not punished in health care.

    3) The federal government subsidizes insurance via the tax deduction of health insurance premiums. This is the only reason why employers provide health insurance, because if they gave workers extra wages, they'd only see like 60% of them after taxes. This encourages everyone to be insured, which is the problem- overinsurance. Because it is susbsidized it creates incentive for maximum insurance without lowest deductibles which creates sytem-wide moral hazard.

    4) McCarran-Ferguson, 15 USC 1011-1015, specifically exempted insurance companies from anti-trust law so long as there is a state regulatory apparatus related to insurance is in place.

    5) EMTALA, a 1980s era law signed by Ronald Reagan, forced the provision of care to people who had no ability to pay for it at the closest facility where it could be reasonably provided.

    The federal government accounts for over 50% of health care spending, and the remaining 50% mostly is paid for by insurance, which the government indirectly controls because it subsidizes it via tax deduction. Effectively, the federal gov controls almost the entire market. They have intervened too much!!

    Insurance is the problem,it drives up the prices, and people feel like they need it because otherwise they experience price fixing (prices are often 10x higher without it)

    We need healthcare to be like buying a car, or TV, no third party. check out how cheap it can be with cash-only systems:

  5. says:

    The pre-ACA system is broken, and it clearly needs fixing. Business ethics, poor existing regulations, and poor consumer life style and priorities are part of the problem. While free market folks have their legitimate criticism, but I hate to break the news that too many people are stupid (to put something else before their health) and greedy. Stupid and greed are sadly not fixable.

    Rather then believe in free market fundamentalism, I prefer utilitarian solutions. Sadly this does mean some sort of state intervention is needed. I do agree with James, the solutions and fixes have to be sensible. In some sense, ACA does not go far enough – there are still way too much holes in the system (as the issues James point out). To fix those issues, government intervention as in repealing those silly rules.

    However, critics of ACA misses an important issue: their views are way too American centric. Most of Europe, Canada, and developed Asia (Japan, S Korea, Hong Kong, Australia) have some form of government-backed public health care system (most part of Asian and Canadian system derives from European one). The European/Asian/Canadian systems are far more efficient financially (healthcare cost per capita is less). The overall fiscal state of Europe/Canada/Asia is highly variable (from Japan with 200+% debt to GDP) to AAA debt ratings for most of Scandinavia, Hong Kong, Germany and Canada; it remains unclear if state-backed healthcare a problem for fiscal health to the state.

  6. says:

    Anyway, we are long way off. The system that is in place in other parts of developed world has been there for quite a long time.

    As a bit of outrageous idea: Couple of months ago, UK brought in Canadian to be the central banker for Bank of England. May be we should try to do something like that too? To appeal the conservatives, we can bring a healthcare boss from a nation that is good financial shape (Canadian, German, Australian, Hong Konger; I think a "socialist" Scandinavian one may be too scandalous for conservatives – laugh).

  7. says:

    Just one point I wish to add to the last:

    The problem is not the government (as President Reagan said), the problem is what is the government is doing. This applies to all institutions (from families and big companies).

    Doing the right thing is more relevant than who is doing it. If government is in best position to act, then the government should. In the end, what we only have means and goals. I try to avoid ideology, but may be I am ideological Utilitarian.

  8. Waterbuffalo says:

    Usually I agree with you Tim, but not here. Government screws up everything it touches. I would like to see a lot less government. If they intervene more than they do now or less then now, it wont make much difference. There will be winners and there will be losers. Hard to say what would happen to the price of specific procedures. But when it comes to healthcare, remember doctors do still swear an oath. To live up to that, they need to treat those patients – even if they are poor. When I swear an oath, it means something to me. I have faith that many doctors believe that way as well.

    And overall the argument is nearly irrelevant, they are the government, and very likely to do what they want anyway. Therefore, an individual's focus should be on becoming a winner regardless of the government's decisions. Being a long term shareholder in a company like JNJ will take you a long way toward that goal.

    1. Some Semblance of Vo says:

      What kind of answer is this? You made a broad sweeping claim that "government screws up everything it touches." From the way this is worded, you sound like you are at odds with "capitol G" Government, the institution of which nearly all recorded civilizations have created to help govern themselves. You are saying, and correct me if I am wrong here, that EVERYTHING a government touches is subsequently screwed up.

      Allow me, if I may, to point out the most ridiculous things about this claim and your post in general:

      – You provide not even one example of how it is even remotely possible that government can screw EVERYTHING up that it touches. This might seem like semantics to you. You might think I am being particular for being sensitive to the word everything. To me, however, I am inclined to believe you don't understand the weight of such a universal claim. For your sake then, let's soften your words to include MOST things as opposed to everything. You strike me, Waterbuffalo, as one that enjoys your security. You enjoy the freedom to take your money, invest it as you see fit, and allow that investment to (god willing and fingers crossed) increase your net worth someday. Without a trace of government, how do you expect your wealth to be protected? If I were to somehow steal your investment or property, how would you go about recovering your loss? Would you gather your family with pitchforks and firearms and hunt me down? Or pick up your phone and call the authorities? Or what happens if JNJ decides to no longer honor your stake in the company, no longer issuing you dividends and effectively wiping their asses with your proof of ownership? Would you blow your family horn and lay siege? Or say you forgot to blow out the candle one night and your house went up in flames. Would it be your family and friends that you wake in the middle of the night to start dumping buckets of water on the ashes?

      I am being theatrical because I do not know how else to respond to someone who lacks such a fundamental understanding of the benefits you enjoy and depend on daily to make your life sustainable. I don't know where you first read or conceived the idea that modern life on this planet is capable of thriving without being governed, but it's not even antiquated. It's precious that you think otherwise. But let's continue this thought experiment.

      – You enlist the bonafide efforts of doctors as your faith in the system continuing to work thereby eliminating the need for a Government. SERIOUSLY?!? Let me first ask, to what are they swearing on oath? In a court of law, you are to uphold your oath. If you do not, you will be prosecuted. Now what entity in our society prosecutes? These are basics and you throw them out flippantly. I am shocked that this is the heart of your argument.

      – Finally, the overall argument is not irrelevant. You just saying that does not make it so. I normally don't comment on sites like these. Hell, I am even conservative. But this sort of thought process is more dangerous than any liberal idea that can be conceived. Why? Because crazy ass liberal ideas still have to be voted into law. What people like you do is erode the faith in the institution of democracy.

      You see, what you fail to realize is that even if you shed the Government, you will have governing. It won't be a designed institution. It will be assumed power by force. I want dearly to keep going. I want dearly to address your probable retorts like privatizing everything in existence, to gold standards, to reversing the dying foothold of Christian conservative principles in our society. And if I need to go there, I will. But please, please do not perpetuate ignorance and take up votes if you do not believe in the voting process anymore or in the legitimacy of Government. And for the sake of the Lord and all of his blessed creation, learn how to respond to an argument you disagree with. You did not make a single cogent point. You dismissed the fundamental tenet of the original post, which was pretty damn accurate, and gave not one reason for your dissent other than Government is turrrrrribbbbllleeee. Government is responsible for a lot of the freedoms you enjoy everyday: roads, utilities, defense, a judicial system, etc. I am not saying all of these are without flaws. What I am saying is this: You have used your imagination to the point of exhaustion to get you to here, where you feel like the nature of a government is toxic. I only ask you to take it one step further and imagine what life without these fundamental sources of convenience or protection would be like. For example, are you ready and willing to fork out the toll for the troll every time you cross a bridge? Are you willing to form a militia every time foreign forces threaten our well being? Are you willing to buy water from a privatized company that possibly has a monopoly on water in your area because no anti-trust laws exist? And then wake up one day and find that rebels attacked and destroyed the water treatment facility thereby preventing you from having clean water even though you had no way of knowing it was clean before because regulatory agencies were a thing of the past? If you are ok with any of this, please do not respond.

  9. I really wish I hadn't seen this, Tim. Corruption and coercion in the free market is a symptom of government intervention. Government intervention is the cause of the problems we're seeing in a number of sectors. I think it's blatantly obvious in the healthcare industry.

    The alternative to MORE government intervention is a true free market in medicine, where the AMA hasn't created a cartel, insurance isn't tied to employment, insurance companies and lobbies like AARP don't own the politicians, and we see much cheaper healthcare costs (for example: RN's able to run low-cost clinics on the street corner for basic preventative care, colds, flus, etc.). These are all negative outcomes due to previous government intervention. But we'll never see any freedom in this sector with Democrats or Republicans dictating policy and politicizing medicine.

    I encourage you to read some of Ron Paul's works pertaining to healthcare. He was a practicing physician for decades. His writing is clear, concise, illuminating and untainted by the partisan

    I was just told my premiums are going up at work, and our company is working through the mess of regulations to deal with the changes. I also have a family member with a personal plan through BC/BS that just received a notice their premium is going up hundreds of dollars a month. Affordable? Yeah, right. But who didn't see this coming?

    I'm willing to bet the Affordable Care Act does nothing to curb current medical costs or medical cost inflation. A few years from now we'll talk about another healthcare cost crisis and then the government will announce that they will need to run the entire medical industry to combat this threat. Even though they caused the problem in the first place.

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