Universal Healthcare, the Citizen, and Nomenklatura

by Jeffrey Braddock

Among the many goals of President Obama is the pursuit of "universal healthcare." In the following, I shall show the concerned citizen the impracticality of universal healthcare coverage as proposed by Mr. Obama by highlighting its cost and quality inconsistencies. I shall then highlight an alternative approach. Let us begin with a definition. The definition of universal healthcare is "the government funding of complete expenditure coverage for all Americans, including medical, dental, and mental healthcare."

Let us now briefly examine the current system. If an uninsured patient is to receive non-emergency medical attention, the patient first must provide proof of insurance or pay a fee associated with healthcare. If the patient lacks either insurance or the funds, the doctor must make a decision to administer healthcare without guarantee of monetary reimbursement, or, refuse to care for the patient. In choosing the latter, the doctor repudiates the tenants of the Hippocratic Oath, "to keep the good of the patient as the highest priority." We may note that the doctor himself does not make a decision to refuse care -- often the process is "sterilized" by a formal or informal policy, administered by the non-medical staff of the medical facility.[1] Those lacking sufficient funds or medical insurance find their medical needs ignored. The current system, rightly so, provokes outcry as being unethical and immoral. In response to this outcry, President Obama has proposed plan to equitably distribute the costs and benefits of the healthcare system for the American people.

The Obama-Biden plan claims to overhaul the healthcare system within the framework of the existing healthcare system -- the details of which are condensed into allowing those who pay for health insurance to continue paying into their existing plans, while those who do not have healthcare find other extremely affordable options -- others benefit from subsidies and tax credits in order to offset the costs of healthcare. The plan is extremely vague and amorphous, much like all ideologically based policies, but is concrete on three details: Americans save $2500 in healthcare-related expenditures, healthcare facilities must report healthcare data and quality control to a federal government oversight body, and Mr. Obama pays for the US$50-65 healthcare reforms by rolling back tax breaks on Americans earning over USD $250,000 per year.


Now, consider Mr. Obama's plan in economic terms. In order to do this, let us draw a common price/quantity graph, with supply and demand curves. Let us assume that the demand for healthcare insurance is generally elastic (that is to say, demand reacts strongly to price). I assume this because healthcare premiums play an extremely large role in determining whether or not Americans purchase a policy. Let us then assume that supply is generally inelastic. I assume the supply curve is generally inelastic as insurers would supply policies to the entire healthy population of the United States, regardless of price. According to the assumptions of Mr Obama's economists, the healthcare subsidy reacts much as any basic economic textbook predicts, with the supply curve shifting from S^0 to S^1, lowering the equilibrium price to the intersections of the demand curve (D^0) and S^1. The quantity supplied is equal to the horizontal distance traveled by the supply curve. The total cost of the subsidy is the shaded area, which Mr Obama estimates at US$50-65 billion. To simplify this, I have prepared the graph below.

Below I have prepared a graph which I feel more accurately depicts Mr. Obama's plan. Recall that S^1 shifts to the right, leading Mr. Obama to assume a significant price decrease. However, at the same time as the supply curve shifts to the right, the demand curve undergoes a radical shift to the right to account for the increased coverage[2], expectations of individuals for healthcare services, and the price of the subsidized healthcare compared to the price of unsubsidized healthcare. The demand curve becomes more inelastic, based on the assumption that the citizens' preference for healthcare policies is less responsive to policy premiums, given the expectation of a subsidy. The amount of the government subsidy, far from the relatively modest expectations of Mr. Obama and his economists, is now the shaded area plus the entire crosshatched area. I have drawn the graph below to assist you.


Now, let us assume that the National Healthcare Bureau (hereafter NHB), created by executive order, has exclusive authority to allocate healthcare subsidies and ensure healthcare quality. The director of the NHB, in conjunction with healthcare industry insiders and economists set the level of subsidies at Mr. Obama's estimated level. However, the preliminary estimate is so unrealistic that soon thereafter the director of the NHB must request subsidies in excess of the current price of insurance.[3] The political prominence of the program and the need for success at any price compels Mr. Obama and the Congress to grant an emergency allocation to the NHB. The NHB, much like other federal programs in the long run, is prone to extreme fiscal incompetence, and grow in size beyond the estimates of even the harshest critics. As the size of the NHB grows, the healthcare insurers under Mr. Obama's plan have no incentive to control the burgeoning costs of healthcare (because there is no drop in consumer demand despite the increases in price), but rather, apt to inflate the cost in order to improve corporate profits.[4] As the subsidies continue to increase, they far exceed the marginal costs imposed on the health insurers. The monies allocated for health insurance then become a direct government subsidy to the insurance companies from the taxpayers. Since there is no independent pricing mechanism (or, a consumer willingness to pay) to curb healthcare provider enthusiasm for price increases, and no political willpower to see the program fail on the part of the President or the Congress, the profits of the healthcare industry can increase infinitely. It follows then that any claim by Mr. Obama to provide comprehensive coverage in the range of US$ 50-65 billion is at best a grave misrepresentation of reality.

At this point, I feel that the cost-minimizing claims have been sufficiently disproven. I feel it necessary to add some further considerations, however. Under Mr. Obama's plan, there is no incentive for private businesses to maintain comprehensive healthcare coverage for the private citizen. Mr Obama's attempt to force equitable distribution of healthcare costs on large employers is impossible, since these companies must conduct restructuring operations in order to qualify for Mr. Obama's benefits.[5] Indeed, businesses might improve profitability by shifting the costs of healthcare coverage from their balance sheets to the federal government.[6] In light of the restructuring of businesses following the change in healthcare policy, we must consider Mr Obama's plan to be a de facto nationalization of healthcare insurance providers.

In the wake of this revelation, the question of quality is greatly simplified. Healthcare facilities become dependent on federal recognition for their existence. Thus, in accordance with Mr. Obama's plan, healthcare facilities must report healthcare data and quality control to a federal government oversight body, the aforementioned (and fictional) NHB. I do not doubt for an instant that healthcare data and quality control will be reported, lest facilities loose access to federal funds. However, control and compliance oversight of thousands of healthcare facilities is largely impracticable.[7] Facilities will compete for federal funds based on patient turnover -- the falsification of patient quotas and medical reports becomes a near certainty. Thus we run into the familiar problem of shortage and oversupply.

We pause here to define quality as the amount of personable knowledge and personable interaction between the provider and patient. That is to say, the total amount of time a healthcare provider spends on each individual patient. To better understand how quality decreases under Mr. Obama's plan, we examine the economic equation of the marginal product of labor. The marginal product of labor equals the change in quantity divided by the change in labor. Let us assume that 40 million Americans are added by Mr Obama's plan, the change in quantity demanded. However, there is a significantly smaller increase in the number of healthcare professionals (and subsequently hours) available to administer such services. Thus, the ratio of quantity demanded to labor available sees a dramatic increase resulting in a substantial decrease in the quality of service. Why precisely is this so? A federal decree may allocate a mobile factor of production (money), but it cannot readily allocate an immobile factor of production (i.e. change a plumber into a trained doctor). Overall quality declines because the change in the number of available hours per healthcare professional per patient shrinks considerably.[8]

In the wake of the reduction in quality, a new, unforeseen issue arises -- that of nomenklatura. Nomenklatura is a Russian word describing the variance in quality of person, place, or object. Contrary to its equitable intentions, Mr. Obama's plan succeeds in creating healthcare nomenklatura. Healthcare facilities that succeed in advocating for its patients to the NHB succeed in receiving federal allocations. Thus, we may see that a hospital in inner-city Detroit receives substantially less attention from the federal government than a similar facility in Arlington, Virginia, in part due to the differences in expectations of the two populations. Many of the inner-city Detroit dwellers lack access to healthcare providers and believe that any access, regardless of the quality, is a major advance, whereas the population of Arlington, Virginia, with access to cutting edge healthcare, finds their expectations are not met and complain. The NHB bureaucrat organizes extensive databases extolling the equity of the system. Indeed, the resident of inner-city Detroit, satisfied by ignorance, cannot receive an appointment with a doctor, nor can he/she access a machine to save his/her life. To placate the influx of complaints, the NHB bureaucrat allocates a disproportionate amount of funds relative to population for the salaries of healthcare professionals and medical equipment in Arlington. Equitable distribution comes to rely on the preconceptions of the risk-adverse, unelected bureaucrat armed with a few reports and a blanket policy. Mr. Obama's policy does not succeed in equitably redistributing healthcare; rather, in rewarding certain interests and not others, it succeeds in exacerbating ethnic, social, and economic tensions already present in the United States. The policy is rewritten to account for other interests, but nomenklatura is not eradicated -- precisely because any government allocation granted to one group necessitates the exclusion of another.[9]

In this critical analysis of our current healthcare system, I have been largely critical of Mr Obama's plan without presenting an alternative. My alternative is simple: revert to the free market. Consider this example: Instead of using the insurance or government as a middleman to negotiate on my behalf, I call a doctor's office and request the rates for primary care. The doctor's administrative assistant would state the individual fee, or he might suggest a monthly pricing plan similar to a spa membership. If the price exceeds my expectations, I can call another doctor, or I can attempt to negotiate directly with the doctor, explaining my exceptional needs. The doctor might either accept my offer, or refer me to another doctor who is within my budget. Healthcare would never exceed my cost because there is always a doctor willing to accept my transaction. In the event of healthcare needs beyond primary care, citizens might consider purchasing health insurance. I would suggest a system modeled on Health-Status Insurance as proposed by John H. Cochrane, the Myron S. Scholes Professor of Finance at the University of Chicago Booth School of Business. Dr. Cochrane's health status insurance allows the citizen to obtain health insurance at any time, at a price determined by market-based risk assessment.[10] The free market, lacking intervention, provides a solution which provides healthcare for all, in that it imposes no barriers to ending the distasteful and unethical practices associated with the current healthcare insurance system, while avoiding the crippling debt burdens associated with Mr Obama's plan.

I applaud Mr. Obama's initiative. Mr. Obama's plan is an extremely well-intentioned, altruistic attempt at the equitable distribution of healthcare costs. It is most unfortunate, then, that the implementation of his plan fails to meet his broadly outlined goals. According to Mr Obama's plan, the cost shifts from a primary actor (the independent citizen or business) to a third party (the taxpayer at large). While this may minimize the costs to some actors, the real economic effect of Mr. Obama's plan represents a transfer of wealth from the taxpayer to a special-interest group, the insurance providers. The level of planning and money required to execute Mr. Obama's plan necessitates a high degree of oversight at the federal level. Oversight, the failures of federal fiscal planning, and business flight from private insurance policies, fosters a de facto nationalization of the health insurance companies. Nationalization ushers in the advent of nomenklatura and decreased quality overall. In the end, Mr. Obama spends political capital and taxpayer wealth for a healthcare policy whose very means provide ends contrary to his altruistic expectations. Yet there is another way. Free, unrestricted markets can provide for all of America's healthcare needs. To work, free markets do not need government intervention -- they only require Americans take back the freedom of choice, and its counterpart, responsibility. It requires that doctors exercise moral and ethical judgment in their treatment of patients. It requires patients to exercise good judgment. Outstanding judgment must override the idealistic impulse. Mr Obama and his healthcare allies would do well to heed the adage of the great F.A. Hayek, the Nobel prizewinning economist, "That no single purpose must be allowed in peace to have absolute preference over all others applies even to the one aim which everybody now agrees comes in the front rank -- [the creation of universal healthcare]. There can be no doubt that this must be the goal of our greatest endeavor, even so, it does not mean that such an aim should be allowed to dominate us to the exclusion of everything else, that, as the glib phrase runs, it must be accomplished at any price. It is, in fact, in this field that the fascination of vague but popular phrases like ['universal healthcare'] may well lead to extremely shortsighted measures, and where the categorical and irresponsible "it must be done at all cost" of the single-minded idealist is likely to do the greatest harm."[11]

[1] A well known case of this is seen in Micheal Moore's film, Sicko, in which doctors, aided by taxi drivers and an administrative policy, refused service to homeless patients.
[2] A relatively large amount, whether based upon a conservative estimate (in the tens or twenties of millions) to the highest estimates of 40-60 million.
[3] For this assumption I rely both on F.A. Hayek's "The Road to Serfdom", and a historical observation on the incompetence of government planners in fiscal policy. I encourage the concerned citizen to consider Social Security, Medicare, and Medicaid, and their respective budgetary overruns.
[4] If one needs further evidence of this, I encourage the concerned citizen to consider educational costs and the costs imposed by the prison system.
[5] Few, if any large corporations will accept an additional healthcare burden. Corporations are profit-seeking; they will exploit any loophole to minimize costs. This is seen both in terms of taxes as well as in labor costs.
[6] While this may temporarily benefit businesses, these benefits will be offset by the increase in taxes to support the healthcare system.
[7] I encourage the citizen to consider oversight as evidenced in the No Child Left Behind Act.
[8] Marginal product of labor=change in quantity/change in labor=change in the number of patients/change in the number of doctors=change in the number of patients/change in the number of billable hours.
[9] An assumption which stems from the premise of resource scarcity.
[10] A link to Dr. Cochrane's work is available online.
[11] F.A. Hayek, The Road to Serfdom

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