Sunday, August 16, 2009

The questions "Why is healthcare so expensive?" and "Why does healthcare need reformed?" are related, but not as closely as Obama would have us believe. Heathcare reform is essential to government obligations, not to the health of Americans.

To illustrate the principles, consider two businesses, say landscaping companies, operating in a community. Let us call the first NSLS for "Non subsidizied Landscaping." This is a very well managed business that uses the the latest technology, hires the best landscape architects and technicians, manages its finances, is responsive to customers and achieves good results. NSLS's customers are very happy with the service and are willing to pay for it, even though the costs go up as the company tries to stay on the cutting edge.

Let's call the other company SLS, for "Subsidized Landscaping." This company was started by a billionaire for his son to run. Father has deep pockets, and son is not the most astute businessman, but the company has access to father's support. The business plan for SLS was to sell pre-paid landscaping service, providing future service in exchange for small upfront payments in an attempt to secure market share. To keep customers happy, SLS has to buy services from NSLS, and because the latter's fees are increasing in response to customer demands, SLS has no choice but to pay more to provide service to customers than it collected from them in upfront fees. SLS operates at a widening loss. Son keeps hitting up moneybags father for more support until father realizes that SLS is a losing proposition. Bankruptcy is out of the question; family pride and all that.

Father decides that what he must do to control SLS's costs, and keep it from bleeding him pale, is to control the costs that SLS pays to NSLS for the services that people actually want. He cannot compete directly with NSLS on quality or efficiency, so he does the logical thing: tries to take over NSLS, so that he can control landscaping costs for the entire community by limiting the expensive services that NSLS's willing customers pay for. Finally, in order to boost the balance sheet while costs are being brought under control, Father decides to have all of SLS's and NSLS customers pay a surcharge to subsidize services for new customers, in hopes that they will provide revenue for SLS's current obligations and eventually provide revenue for future operations.

There is no time to worry about what people's yards will look like.

Not a perfect analogy of course, but it illustrates the principle: the government has to reform private healthcare because 1.) It buys services from the private system, 2.) the fees for those services are set by what people are willing to pay for service that they are satisfied with, and 3.) the government assumed obligations that it is incapable of servicing because frankly, it is not very good at delivering healthcare.

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