By Robert Nelson, MD
The assumptions on which our modern era healthcare third-party payer systems are based, including Medicaid/Medicare, ignore the economic disincentives that plague its continued use. It creates a wide-spread Public Choice Theory dilemma on the demand side and way too much rent seeking behavior on the supply side. The result being an ever-increasing cost curve.
Public spending for healthcare flooded the market after 1965 and was FOLLOWED by precipitous increase in consumption, utilization and the unit costs (as supply did not keep up) and then rapid fall off of the percentage of out-of-pocket payments as % of expenditures. Public spending came first, and was a major cause (not a reaction) in accelerating healthcare inflation.
Third-party financing drives up utilization and drives up unit costs. Ironically, this creates even more dependency on a system that by its nature pushes costs further out of reach of many Americans.
Third-party financing mechanisms have become both arsonist and fireman, and we are having trouble distinguishing who is who.