The Republican healthcare plan has a formidable foe: economics – The Guardian

Insurance works because not everybody gets sick at the same time. Photograph: Erik Mc G/PacificPress/Barcroft

Having sworn for six years to repeal and replace the Affordable Care Act, Senate Republicans, unable to pass a plan before their summer recess, recently got their first taste of how the folks at home feel about it. While many ducked those messy town-hall meetings, they couldnt avoid hearing the angry voices during Fourth of July parades, picnics and fireworks.

Why are regular people so angry, even in deep red states? Because voters instinctively understand the irreconcilable conflict between political rhetoric, conservative dogma and the hard reality of economics.

On one hand, the devotees of Ayn Rand (Paul Ryan, Rand Paul etc) are on the talk shows explaining that laissez faire capitalism and free-market competition are the answers for better care and lower costs plus tax cuts for the rich, of course.

On the other hand, Republican moderates recognize the disastrous impact of kicking tens of millions of Americans off their health insurance and rightly fear voters backlash. But both camps have chosen to ignore some pretty basic facts they should have learned in economics 101.

This is not a new problem. Were in this mess because politicians historically kick the can down the road. In 1986, Ronald Reagan signed the Emergency Medical Treatment and Labor Act (Emtala), mandating emergency services regardless of the ability to pay. Back then, Republicans and Democrats overwhelming agreed that nobody should be left to die because they couldnt afford to go to the doctor but unsurprisingly, no one ever dealt with how to pay for it.

Ever since there has been a bitter, ongoing political fight about who deserves what care and who pays. Progressives and Democrats think healthcare should be a basic human right. Republicans and Atlas Shrugged conservatives say everybody should pay their own way. We all want better care and lower prices. But the Republicans now controlling our entire government cant craft a workable plan because they ignore at least four immutable economic principles.

First, healthcare markets dont obey Adam Smiths invisible hand of supply and demand. As any economist will tell you, certain sectors of a capitalist economy, such as agriculture and healthcare, are price inelastic. Inelasticity is just a fancy term meaning the demand for a good or service does not go down when the price goes up.

Why is this so? Because everybody wants their sick child to get well, and they expect modern medicine to do whatever it takes and damn the expense. This price inelasticity of demand is what makes healthcare costs so hard to control.

To deal with the effects of price inelasticity in our everyday lives, we use health insurance. Insurance works because not everybody gets sick at the same time. So if everyone buys insurance policies, the risk and the costs are spread out over time, and the price is affordable for everybody.

Heres where Republicans ignore the concept of homo economicus, or economic man. By definition, homo economicus makes consistently rational and self-interested decisions. Millions of working families choose to pay for food, shelter, clothing, school and transportation before they pay for health insurance. They reason that the risk is worth the savings. For many young and healthy folks, this makes good economic sense.

Behavioral economists call this the free rider phenomenon, and its the third economic principal conservatives tend to misinterpret. But when free riders inevitably get sick or old, the law (and simple decency) demand we take care of them. So who gets stuck with their bills? You do. When hospitals and doctors cant collect from the free riders, they pass those costs along to the rest of us, and our insurance premiums go up.

Conservatives say its wrong to force people to pay for something they dont want, and thats a compelling argument. But the flip-side of that coin is: why should I have to pay for the free riders? Im homo economicus too!

Finally, healthcare isnt even a true free market. On the supply side there are huge barriers to entry exhaustive educational requirements and strict state and federal exams and license regulations, as there should be.

Who wants an ignorant, negligent doctor? On the demand side, most consumers dont have the medical knowledge or judgment to make the kind of free and informed decisions required in a truly free market. Besides, when you get sick, you dont really have a choice. Going to the hospital is not like deciding to buy a new smartphone, is it?

The ACA (aka Obamacare) was designed to deal with all these economic realities. The law addresses price inelasticity by paying doctors for making you feel better, not just for doing a lot of stuff. Thats called outcome-based pricing.

The ACA covers annual physicals and preventive care, so the need for exorbitantly expensive emergency room visits is dramatically reduced. The law requires that doctors and hospitals publish outcome statistics so consumers have quality-of-care information for comparison shopping.

Taking a carrot-and-stick approach to homo economicus, the law gives subsidies to working families who cant afford expensive individual premiums and levies penalties on free riders.

All these are pretty solid, conservative, market-based, Republican ideas. In fact, the plan which became the ACA was conceived by economists at the conservative Heritage Foundation. It was a free-market response to the Democrats proposals for a universal single-payer system, or Medicare for all.

Obama may have co-opted the plan, but its chock-full of traditional conservative dogma. The only reason I can think of that Republicans didnt embrace their own plan was because Obama proposed it.

But now, having campaigned for six years on repeal and replace, Republicans find themselves hoisted by their own petard. To disguise their lack of a workable plan, they willfully ignore the laws of economics and pontificate on the virtues of free market capitalism as the cure for all ills.

Paeans to American capitalism might sound great in political speeches, but 20 million-plus people will lose their health insurance in order to give the 1% another big tax cut. Real people will die. Homo economicus understands this all too well and thats why Republican lawmakers will continue getting an earful from the folks back home, including Republican base voters.

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The Republican healthcare plan has a formidable foe: economics - The Guardian