Why is health care so expensive?

While conservatives say one thing about the health care debate and progressives say another, neither side is answering the obvious question: Why is health care so expensive? Why does the price continually rise?

TAMPA, Fl., March 29, 2012 — The nation waits with bated breath while the high priests of the federal government prepare to issue a pronouncement on the constitutionality of the Affordable Care Act, or Obamacare. The legislation purports to make health care more “affordable” by among other things, forcing every soul in the United States to purchase health insurance. It also mandates several other new government interventions into the health care market.

While conservatives are arguing that this represents some enormous crossroads between socialism and freedom and progressives are replying that it’s nothing more than “Medicare for all,” everyone has become distracted from the most important questions. Why is health care so expensive? Why does the price continually rise?

The proponents of Obamacare say that it’s capitalism; allowing health care to be delivered in a free market results in “putting profits before people” and other snappy alliterative slogans. In a word, the problem is the age old progressive boogeyman: greed.

That begs several questions. If capitalism is the problem, then why does the price of computers and cell phones continually go down? Aren’t the producers of these products greedy? Does anyone seriously believe that technology corporations “put people before profits?”

The answers are simpler than most people think. Unless they’ve completely left the mother ship, economists agree that the price of any good or service is determined by supply and demand. As the supply of something increases, the price will tend to decrease. Things are expensive generally because of their scarcity. As demand increases, then the price will tend to increase, as long as it outpaces supply.

Part of the confusion for most people is that they do not know the definition of demand. It is not merely the desire to purchase something. It is the desire and the ability to purchase something. I would like to have a Bentley, but I don’t represent demand for a Bentley. Why? I can’t afford it. For many products, this is the practical limit of demand.

Contrary to conservative rhetoric, there was no free market in health care even before Obamacare was proposed. Medicare and Medicaid alone account for one third of all health care spending in the United States. I haven’t done an exhaustive study of this, but if you add in the VA and all of the “free” care delivered by local departments of health and other government programs, it is a safe bet that about one half of all health care provided in the United States is paid for by government.

One must consider the effect this has on the fundamental price equation. For all of the consumers of that care, demand is virtually unlimited. With the taxing power of the state or federal government to back it, the only limit to demand is government bankruptcy. Take a look at the unfunded liabilities of Medicare or the proportion of any state budget consumed by Medicaid. We’re almost there.

However, for the past fifty years, the health care market has functioned under conditions of unlimited demand for larger and larger segments of its consumers. That this has had nothing to do with price increases defies logic.

Almost everyone else has their health care expenses paid for by their employer. This too represents an unnatural increase in demand. Employers can absorb much higher costs within their operating budgets than the average household can. While the limits here are lower than for the government, they are still much higher than would occur under natural market forces.

Don’t forget, employers offering health insurance as a benefit is also the result of government intervention. It all started with FDR’s wage and price controls. Employers started offering health insurance as a fringe benefit to attract employees who wouldn’t accept the wage ceiling dictated by the government. Many state governments began mandating that businesses of a certain size offer it. Obamacare will see that any firms left out will be similarly mandated.

Economic laws are like the physical laws of nature. They eventually overwhelm any attempt to suspend them. Supply and demand is one of those laws. Conservatives are right about one thing. Obamacare will not lower the price of health care. The price will continue to rise as long as governments continue to make demand unlimited. In order to avoid the inevitable bankruptcy, supply will eventually have to be limited. Is that the answer we are looking for?

This is not an inescapable problem. We have not lived within this model for so long that we can never get out. Markets adjust very quickly when artificial forces aren’t preventing that adjustment. Get governments at all levels out of the health care market and you will see a dramatic decrease in the cost of health care.

This will not leave some people without care. It didn’t before government got involved. What progressives don’t understand is that an un-served market represents an opportunity for capitalists. You don’t find people in welfare lines talking on cell phones because cell phone manufacturers are philanthropists. It is because there is an opportunity to make profits by delivering products to an un-served market at a price it can bear.

If you’re pleased with the results in education, then by all means allow the government to complete its takeover of the health care industry. If you’re ready to stop doing the same thing over and over again and expecting a different result, then why not try freedom?

Tom Mullen is the author of A Return to Common Sense: Reawakening Liberty in the Inhabitants of America.


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Thomas Mullen

Tom Mullen is the author of A Return to Common Sense: Reawakening Liberty in the Inhabitants of America. He writes weekly columns on his blog and has been featured on The Daily Caller, The Huffington Post, Daily Paul, LewRockwell.com, 321 Gold! and Peter Schiff’s EuroPac.net. Tom has been a guest on Fox’s Freedom Watch with Judge Andrew Napolitano, Adam Vs. the Man, Free Talk Live, and numerous other programs.

Tom is originally a native of Buffalo, NY and graduate of Canisius College. He earned a Master’s Degree in English from State University of New York College at Buffalo. He now resides with his family in Tampa, FL.

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