There are two major reformations under way simultaneously in our federal government: health care and financial regulation. Both were launched with the power and energy of presidential urgency. And both promise sweeping changes in American life and the U.S. economy.
With any luck, though, Congress might take a moment to catch its breath — and then redress an imbalance in these reforms. Less sweeping; more thinking.
In the case of health care, what we need to think about are the costs — and not simply the awesome cost of the proposed plan for universal coverage. The system is a maze of interacting costs — private, personal, hospitals (private, public, local, federal), clinics, employer-borne, insurance companies and others too numerous to list. Unless we sort out these costs, the odds of a successful health care reform — free of side effects and unintended consequences — are pretty remote.
The relationship between public and private costs is a particular challenge to economists. Consider a community that has publicly funded fire stations, for example, and let’s assume that they are optimally located for effectiveness. In our example community, as in the real world, most homes and business purchase private fire insurance based on the risk of fire damage in that efficient environment.
If the recession forces the closure of one of these stations, the risk of fire damage goes up. In an efficient market, this increased risk will be reflected in the increased premiums that the insurance companies have to charge to offset the increased probability of losses.
What has happened, then, is that the public cost of the fire station has been privatized — in this case distributed to homeowners. The cost didn’t disappear. It is just being paid in a different, less visible way.
It is also important to remember that the cost remains the same whether or not insurance is in the picture. The only difference is that if there were no insurance, the cost would be absorbed by any homeowners whose houses burned down rather than distributed among all insured homeowners.
In complex systems like health care, public and private costs exist side by side, and there is no real barrier between them. Costs are shifted back and forth as the result not only of conscious decisions by regulators or Congress but also by technology.
Federal subsidies for medical treatment, for example, almost never compensate hospitals or doctors for the total actual cost. It is always some fraction of that amount. What happens, then, is that the unpaid portion of the public cost is actually dished off into the private sector through higher procedure and medication charges for unsubsidized care. These, in turn, show up as higher health insurance premiums for most people — and devastating hospital bills for those unfortunate individuals who pay their own way.
The “shhh … we don’t talk about it” shift of public costs to private costs allows hospitals to keep their emergency rooms — including uncompensated care — functioning in the face of Medicare and Medicaid cost-cutting. It is a daily exercise in surrealism from an accounting and economics standpoint, but it keeps the lights on.
It also explains a lot about how 50 million people in the U.S. can still be running around leading more or less normal lives without health insurance. Their health care is being paid for now, but not in a highly visible way.
This cost issue should not be raised as an argument against reform. Quite the contrary: It highlights the need for change. It does, however, raise some interesting questions for Congress. If the health-care costs of the 50 million uninsured are already being paid, why will it cost more than a trillion dollars for this new plan to cover them? And what will happen when we dump that huge amount of money into an accounting system that is already detached from reality?
Costs are also at the heart of financial system reform. There is no law of economics that says behemoth banks are necessarily more cost-efficient than smaller, but substantial banks. And there is no evidence that huge agglomerations of banking and non-banking functions can be managed at all, let alone efficiently.
In considering our financial system reform options, we should not forget that federal banking regulators and the anti-trust bureaucrats approved every single one of the mergers and acquisitions that produced the “too big to fail” institutions in the first place. When placed in that light, giving more authority to regulators should be viewed with some skepticism.
It took nearly seven years for Congress to respond to the financial panic of 1907 and produce the Federal Reserve System, which has served us very well for nearly a century. Of course, a lot of thought went into it.
James McCusker is a Bothell economist, educator and consultant.
Talk to us
> Give us your news tips.
> Send us a letter to the editor.
> More Herald contact information.
