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Why Healthy People Should Subsidize the Sick

An introduction to healthcare economics

Pictured: Healthcare spending, metaphorically. Credit: artisteer/iStock/Getty

If there’s one thing that we can all agree on, it’s that healthcare should be cheaper. It’s not that healthcare is overpriced — although if you live in the U.S. you’re probably paying double anyone else in the world — but that it’s a significant cost that takes up a huge portion of our budget and it would be really nice if it were less expensive.

Also, it’s extremely overpriced.

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Seriously though, America pays A LOT for healthcare.

So how do we lower healthcare costs? It’s a question that many people around the world have asked, in many different iterations. The Republican Party, in all their wisdom, have come up with an answer.

Because “let sick people die” doesn’t have the same ring to it.

The idea is simple: let the free market handle the healthcare economy. “What’s wrong with the U.S. system is that people are tied to providers and/or insurers,” they argue . “ What we really need is a completely open market, with more choice — this system would drive healthcare costs down!”

And, of course, healthy people shouldn’t have to pay for the sick. Because no one should be forced into being empathetic and humane. If I want to let sick people die, that’s my right as a human being.

But do you know the funny thing? Turns out it’s actually cheaper for healthy people to subsidize the sick.

People who have a lot to say but almost no knowledge of healthcare markets often claim that the main problem with health spending is a lack of choice. “Make the market more free,” they say, “and cheap healthcare will magically appear.”

I’m paraphrasing — but, seriously, this is what some people believe.

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Step 1: Free market. Step 2: … Step 3: Profit!

There are entire libraries of books devoted to why free markets don’t automatically lead to lower healthcare spending, but, as we’ve only got a few hundred words, let’s focus here on the three big reasons.

1. People Will Pay Anything to Not Die. Free markets rely on one all-important principle: that people will change their behavior based on price. Meaning, for example, if Apple doubled the cost of their Macbook Air, people would probably buy from another brand.

But what happens when your choice is to pay or to die?

To put it simply, people will pay anything. Epipen has famously jacked up their price in the U.S., but people will happily fork out $600 because the alternative is using an unfamiliar product and potentially dying. If you’ve got a life-saving treatment, the sky’s the limit; regardless of what you charge, people will pay it. Their behavior, then, is not dictated by cost; the healthcare realm does not abide by that crucial free-market principle.

2. Knowledge Is Scarce in the Healthcare Market. Free markets rely on the idea that everyone has enough knowledge to make informed choices. In healthcare markets, this would mean that patients know what they are buying and insurers know what they are insuring.

Let’s test this idea.

Think about your health insurance. Can you name every condition that it doesn’t cover? What about the circumstances in which you won’t be covered for common complaints? As a healthcare worker who knows quite a bit about the system, I can easily say that I have pretty much no idea what my insurance really covers, because it’s an impossible pigsty of contradictory information.

On the other hand, what about your insurer? Do they know all of your health problems? Do you? Can you honestly say that they have enough information to cover you faithfully?

Probably not.

Insurers and the insured are mutually uninformed about one another, which means that, in a free market, the costs just keep going up. Insurers have to charge more, because they don’t have great information on you, and you feel rorted because you are paying massively high costs without understanding why.

3. External (Non-market) Factors. A free market relies on costs being driven by the market. Does a company make good phones? Great! They can charge more.

But in the healthcare system, there are thousands of factors contributing to cost that have nothing to do with this market rule. Socioeconomic status is the best example: in a free market, poor people will have higher costs for health insurance, despite being significantly more at-risk for health problems just because of where they live.

So, the free market alone doesn’t work.

What does?

Well, there’s been quite a bit of research into this issue. It turns out that citizens of countries in which government control of healthcare systems is increased actually end up paying less.

Australia is a brilliant example. In many ways it’s similar to the U.S. — in demographics, legal systems, opinion on which game David Beckham plays (it’s soccer, dammit!) — but there’s one big difference: Australia has a universal health insurer that covers every citizen in the country, subsidized by a two percent levy on every taxpayer.

It’s literally the healthy paying for the sick.

Australia also has a lot more government regulation than the U.S. when it comes to healthcare; items such as drug prices and surgery costs are closely monitored.

And guess what?

Australia spends about half as much for what is universally considered to be a better healthcare system than the U.S.

It turns out that if healthy people pay just a bit more for their healthcare — sometimes as little as five percent — costs for the entire system decrease. This is due to a number of very complex reasons, but basically boils down to the fact that sick people, aside from often being incapacitated by illness, are also generally older and less wealthy than healthy people, so they find it harder to pay for their healthcare.

This means they put off getting treated, which means that when they finally do go and see a doctor, they are much sicker than they would otherwise be — and it costs way more. It also means these patients ignore important steps like preventative care, because if you’re old and poor the last thing you need is another burden on your limited budget.

What does this mean?

If we want to pay less for our healthcare, the best system is also the fairest system. When healthy people pay some of the health costs of sick people, everyone ends up paying less.

In case you’re skeptical, let’s take an example: the cost of a hip replacement in the U.S. is around $40,000; for the same procedure, Australians pay close to $20,000. In other words, Australians pay about half what Americans do.

With a single payer system, with the healthy subsidizing the sick, with government regulation far exceeding that of the U.S. — all solutions that the Republican Party has declared are driving healthcare costs up — Australians still pay half what Americans pay for their healthcare.

Ultimately, it’s pretty simple: if you want a healthcare system that costs less, you make sure that everyone is insured — and you make sure that that insurance is worth something.

And if it means healthy people have to pay a little bit more? It’s a small price to pay.

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