Monday, 20 October 2014

Friedman & Health Care: A Modern Look

By Sarah Becker 

Milton Friedman
Milton Friedman
In 1996, when Milton Friedman wrote an article for the Wall Street Journal entitled "A Way Out of Soviet-Style Health Care," Milton very well describes America's current state of affairs when it comes to health care. How did he perform this feat? Did Milton know that recent legislation such as "Obamacare" would be passed or that we'd currently be facing a shortage of physicians? Probably not, but it seems that Milton saw America walking down a healthcare path that we have only continued on.

In this article, Milton argues that employers should no longer provide health insurance plans of the type that are currently being offered. In the current model, resources from the employer, or part of an employee's salary, is used to pay for a health insurance plan. Because a worker is enrolled in the plan through their employer, taxes on this money are able to be avoided. Americans, myself included, always want to evade the notorious and always-prowling tax man!

When someone goes to the doctor, they pay a small co-pay, perhaps in cash or a check, and the insurance covers the rest. In the patient's mind, this lowers the opportunity cost of going to the doctor. Because patients pay less out of pocket, the quantity demanded for health care goes up tremendously. For those who are receiving this supposedly free care, they'll demand an even greater supply of healthcare! Americans, myself included, always want to take advantage of a supposedly free good!

On the supply end, however, this demand is not always able to be met. An increased quantity demanded means that--for the most part--the same amount of doctors have to do the same amount of work. The quantity supplied is lacking. When the supply of doctors is low (low compared to the greater quantity of patients demanding services), care quality decreases. Furthermore, doctors now use their limited resource of human capital to focus not on patients--the new focus is not only on the insurance--whether a doctor will get money from a patient's insurance company and the process of figuring out insurance bureaucracy. In order to be competitive and receive the greatest possible wage for one's labor, in the healthcare market, insurance has to be a huge consideration for a physician.

So what's Milton's normative statement on health care? Allow Americans to evade the tax man on the money they spend on health care (through a new law), but reconsider these healthcare plans that drive up demand and sap doctor's resources so heavily. Personally, I think that this is a great idea. Health care can sometimes be a necessity (that shouldn't be taxed, just like food and clothing), but Americans often drive up healthcare consumption just because they can. They go beyond their true level of necessity. Implementing Milton's theory, we will provide an incentive to and reward those who are willing to be frugal with their money. Want to spend less on unnecessary health care services and visits? More money in your pocket. Americans love having more money in their pockets!

While it's certainly not true that physicians are only focused on money and insurance policies, re-thinking our current healthcare insurance system would be beneficial. Patients won't waste their money on treatment they don't need, doctors won't be recommending more treatment than is necessary (providing them with increased income at little or no expense to the patient, but someone's paying for it), and doctors can focus more on the patients that actually need help. And if we can bypass part of the insurance system, we won't be worrying so much about which services are covered and which ones aren't. This system will increase healthcare efficiency, especially on the administrative level. We won't have to choose a hospital or doctor based on whether or not they'll accept our service. We can return to that fantastic, old-fashioned cash. If you want a medical service badly enough, you'll pay for it because an investment in your health and your personal human capital is of value to you.

Some might argue that the poor aren't factored into this equation, but if we can ease the workload of our doctors by decreasing the overall quantity demanded, maybe they'll have more time to do something positive by offer free or reduced services to those who can't pay the full price.

When he wrote his article back in 1996, Friedman probably didn't know the specifics of Obamacare, how the supply curve and demand curve of healthcare would shift from 1996 to the present, what the equilibrium price of a doctor's visit would be, or what the current labor market situation would be for physicians. What he did know, though, is that resources are limited and free goods in the healthcare system are nonexistent. Money isn't endless, and an individual's cash reserves and savings only go so far. Everyone loves free health care, but we need to make sure that people are going to the doctor when they really should be going to the doctor. As we've demanded more health care from the same amount of doctors supplied, our care gets worse and worse. America demands expansion in the amount of health care supplied but really can't shift the production possibilities curve without more doctors. We need to put the burden back on the consumer: make a choice at the margin and then directly, from your own pocket, invest your own resources in your own healthcare. Ceteris paribus, at least we'll hopefully become just a little bit smarter with our money on the microeconomic level, too.


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