Monday, December 14, 2009

Medicare (and higher taxes) For All

A major component in the debate over healthcare has been the size and scope of the public option. Some on the left have argued for a national single-payer health system, in essence Medicare for all. While the goal of universal access to health care is a noble one, achieving it through Medicare for all without also raising taxes is not possible.

Medicare reimbursement rates are widely regarded as being lower than the actual total costs of treating Medicare patients. There is some debate about just how much the underpayment is, but everyone seems to agree that Medicare payments to providers do not cover all of the costs of treating Medicare patients.

Liberal blogger Matthew Yglesias even declares that this is a feature, not a bug, of the system. So, the argument goes, if Medicare has shown an ability to pay less for care why not open it up to everyone. That way we could achieve universal coverage and bend the cost curve! Unfortunately, this can only happen after congress repeals the basic laws of supply and demand.

Moving to a single-payer system that as a rule pays less than the cost of medical care is in essence the government setting a price ceiling in the market for medical services. The consequences of such a policy can be seen in this graph of a price ceiling (don't panic):

The blue line is the supply of medical services and the red line is demand. Point E is the equilibrium (where supply equals demand). The green dashed line is the price ceiling, which you can see is less than the equilibrium price.

What, exactly, does that mean? If you follow the green dashed line moving left to right, the point where it crosses the blue line is the quantity of healthcare that will be supplied at the Medicare price. Now keep moving to the right, the point where the green dashed line crosses the red line is the quantity of healthcare demanded at the Medicare price. The important thing here is that the green line crosses the blue line first, then the red line.

In other words, the distance that the dashed green line travels after crossing the blue line, but before it hits the red line, is the shortage of medical services in our system with a price ceiling. This area is one in which people still want medical services and they are willing to pay the set price. The only problem is that there are no suppliers willing to meet that demand because the price, form their perspective, is too low.

This is not to say that a hospital or doctor would turn away someone who needed medical attention at the door. This shortage will mean some doctors and hospitals will never even exist. Those people who considered medical school will find some other profession and the capital that could have built a hospital will go to build something else entirely.

So the question then becomes how to eliminate the shortage. The graph shows how this can be done. Namely, by raising the price to the level where supply equals demand. Raising the price that Medicare pays has two consequences. The shortage disappears, but so does Medicare's ability to keep costs down by paying less than the full cost of care.

Since Medicare (or any government run single payer system) is financed by taxes, paying higher prices to eliminate the shortage will mean that taxes have to rise as well. I suppose we could borrow the money rather than raise taxes, but this is a short term strategy, not a long term response to increased medical spending.

Arguing for healthcare for all without any means of accomplishing it is largely meaningless. Arguing for Medicare for all without any means of paying for it may be worse.

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