Original (economic) sin

John Cochrane in the WSJ:

Cross-subsidies are the original sin. The government wants to subsidize health care for poor people, chronically sick people, and people who have money but choose to spend less of it on health care than officials find sufficient. These are worthy goals, easily achieved in a completely free-market system by raising taxes and then subsidizing health care or insurance, at market prices, for people the government wishes to help.

But lawmakers do not want to be seen taxing and spending, so they hide transfers in cross-subsidies. They require emergency rooms to treat everyone who comes along, and then hospitals must overcharge everybody else. Medicare and Medicaid do not pay the full amount their services cost. Hospitals then overcharge private insurance and the few remaining cash customers.

Overcharging paying customers and providing free care in an emergency room is economically equivalent to a tax on emergency-room services that funds subsidies for others. But the effective tax and expenditure of a forced cross-subsidy do not show up on the federal budget.

Over the long term, cross-subsidies are far more inefficient than forthright taxing and spending. If the hospital is going to overcharge private insurance and paying customers to cross-subsidize the poor, the uninsured, Medicare, Medicaid and, increasingly, victims of limited exchange policies, then the hospital must be protected from competition. If competitors can come in and offer services to the paying customers, the scheme unravels.

No competition means no pressure to innovate for better service and lower costs.
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8 Responses to Original (economic) sin

  1. HGS

    ‘These are worthy goals’
    No they are not.

    ‘Over the long term, cross-subsidies are far more inefficient than forthright taxing and spending.’
    No they are not. They are equally inefficient.

    ‘No competition means no pressure to innovate for better service and lower costs.’
    This is correct.

  2. Aussieute

    Applies to the energy generation sector and all services that “we’re here to help you” with.

  3. PB

    Then again, perhaps the US Military pays well for using the Emergency rooms in Baltimore, Detroit and Chicago (as examples) to train medics in the basics of managing trauma/gunshot woulds (thank you Blackie for providing so many still-warm bodies to work with).

  4. Habib

    Or you could of course let punters look to their own affairs. I fail to see enforced altruism funded through theft as “a worthy goal”. Government should mind its own business and keep its hands to itself, and charities should get back to being charities rather than rent-seeking socialist multinational platforms for virtue-signalling twats living like Saudi royalty.

  5. Pyrmonter

    Times like these when the Cat needs response functions:

    Triple Like.

  6. Tel

    If the hospital is going to overcharge private insurance and paying customers to cross-subsidize the poor, the uninsured, Medicare, Medicaid and, increasingly, victims of limited exchange policies, then the hospital must be protected from competition. If competitors can come in and offer services to the paying customers, the scheme unravels.

    Private doctors are choosing to opt-out of the government regulated insurance system, with huge resulting cost savings. So the competition does exist, although possibly legislators will be looking for ways to shut them down soon, I guess it depends on what excuses they can give to destroy the competition.

    https://tomwoods.com/ep-481-how-capitalism-can-fix-health-care/

    … also this one …

    https://tomwoods.com/ep-1017-what-i-told-a-room-full-of-doctors/

    If you search on “josh umbehr” concierge medicine, there’s a lot of discussion about this concept.

  7. Buccaneer

    Health insurance in the US is often not tethered to the actual client receiving treatment. It is often provided by an employer, and in the litigious US this makes the Health Insurance scheme’s main selling point one of reducing liability for the employer, not one of providing effective and efficient care to the patient. It also means patients might receive more treatment and more expensive treatment than they need in the pursuit of removing risk of being sued. Could this analysis more accurately refer to an Australian context?

  8. Habib

    More over-servicing in Australia, the worst possible combination of a plague of tort lawyers, and bottomless, audit-free public funding. If they weren’t so incompetent and stupid I’d say it was planned, more likely yet another unintended consequence of policy imbecility. And never to be reformed, let alone repealed.

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