Supply, Demand and Healthcare

Everyone understands the law of supply and demand, the most basic economic principle. If the demand for something increases at a greater rate than the supply, the price goes up. If supply increases faster than demand, the price goes down. Simple, right?

Then how come politicians keep acting like they don’t get it? Government keeps increasing the demand for things by spending more money on them. When, as the law predicts, the price goes up, Washington spends yet more money, pushing the price up more. And so the upward spiral continues.

Take healthcare. For as long as I can remember politicians have bemoaned the rising cost of healthcare. So what is their solution. More healthcare spending, including Medicare, Medicaid and pressure on employers, public and private, to provide ever more comprehensive health insurance. More money equals more demand. More demand leads to higher prices.

What is needed is to reduce the demand and increase the supply. Reduce demand by providing incentives for Health Savings Accounts (HSA) and eliminating tax subsidies for employer-provided insurance. Health savings Accounts work like an IRA. The money you put in is tax free. Whatever you don’t spend, you get to keep tax-free.

If workers were taxed on the value of their employer-paid insurance, could use tax-free money to pay for medical expenses not covered by insurance and could keep any unspent HSA money tax free, they would have an incentive to opt for less comprehensive policies and shop for healthcare just like they do for everything else. For example, in areas not covered by insurance, like cosmetic surgery and laser vision correction, prices have come down.

On the supply side, what is needed is more options for people to find care, that is, more competition. Allow nurse practitioners to perform more routine procedures and encourage creation of more walk-in clinics in drug stores, shopping centers and other retail stores. Provide tuition subsidies to medical students who agree to practice for ten years in underserved communities or specialties in which there is a shortage of doctors.

We can reverse the upward spiral of healthcare costs by conforming the solutions to the inviolable law of supply and demand. (Ditto for education, but that’s another article.)