No Free Lunch? Correct. Here’s why.

One of the things to understand when we talk about Medicaid is that everything costs.  The cost is often not in dollars, but that doesn’t mean that the cost disappears.  At BYU, for instance, student tickets to sporting events cost money, but not very much.  If you get an all-sports pass, which is a screaming deal, you attend any game you like from that point on, as many as you want to.  So the internal pool of all-sports students gets its tickets for “free”.  But the tickets are not free, not even after the initial price is paid.  If you want to go see Jimmer play, you better get in line, and get in line early.  By the end of this season, you had better have been willing to camp out, or you weren’t getting in.  And those tickets cannot be re-sold.  They let you directly into the Marriott Center, and you go sit.  A couple hours before the game starts.  That’s a cost, in time and effort.

Now, for BYU that has one spectacular benefit, and that is that the fans that get into the game are the ones that are the most committed to the team and the game, otherwise they wouldn’t be willing to spend the time to get in to see it.  This generates rabid fans and ratchets up the intensity of the experience.  So the team plays better and the entertainment level is higher and everyone wins.  Since BYU wants craziness from its fanbase, what BYU is doing is good because it selects for those qualities that BYU values most.

Unfortunately, most programs that operate on a similar basis select for exactly the wrong thing.  Free goods – those things that have no obvious price tag on them – get overconsumed.  Imagine for a moment if a grocery store gave meat away for free.  How much steak would you get?  You’d get a lot of it, that is, if you could get it at all.  I saw this in communist Hungary.  People had money to buy things, but there was often not that much to buy.  When the goods showed up, the lines began.

There’s another, less obvious downside.  That is the impact of the free good on the seller.  What incentive does a seller have to keep the good in stock?  Or to provide service to go with it?  He’s not being paid for selling it.  The demand is gigantic, no matter how crappy the quality.  So the seller doesn’t innovate, improve the good, or go out of his way to provide good service in its delivery.  Why would he?

Medicare has both of these problems.  For the consumer – the injured or sick person – Medicare is effectively free.  I say “effectively” because it isn’t free at all, but the cost of it is unrelated to the use of it.  The tax is taken whether anyone uses the program or not.  This is the BYU situation.  Might as well go to the game, because you already paid for the ticket.  And in some situations, where an emergency room is seriously overcrowded, it is true that the cost in time you have to wait means that only really, really sick people are willing to stay there long enough to get seen, which self-selects for the genuinely sick and weeds out the hypochondriacs.  But very rarely is the emergency room that crowded.  Stories of people waiting three hours to see a doctor are common, but the actual incidence of that is rare, even in large inner-city hospitals that have huge populations of Medicare users.

The result of the “free” nature of Medicare is that it gets overconsumed.  People use it that aren’t terribly sick.  Worse, people use it to go to the emergency room instead of to the doctor, because emergency rooms have to see you, and doctors don’t.  People show up in emergency rooms when they have earaches.  The lack of a pricing mechanism for the care means that the patients take all they can.  Heck, they’re not paying.  At least, they’re paying the same amount no matter how much care they consume.

And for hospitals, it’s even worse.  Medicare is a bizarre, complicated system that requires a lot of administrative staff to figure out.  It is also spectacularly unprofitable to accept.  Many services are compensated to the hospital below the actual cost (let’s forget for a moment that the hospital doesn’t know what anything actually costs) of providing the service.  Hospitals lose money accepting Medicare, which means that they have to make it up somewhere.  Guess where?  Want to know why medical insurance costs are spiraling upward?

So Medicare is bad for patients, in that it encourages behavior that increases consumption of the most expensive care, and bad for hospitals, because it pays so much less than the cost of the care.  It is a system that exists only because politicians believe – and we probably do, too – that if it didn’t, lots of truly sick people would die in painful ways, not having access to medical care.  Personally, I think this is nonsense.  But it’s a little hard to prove.

Next time, though, I’ll try to explain why Medicare is not insurance, what insurance actually is, and why it’s kind of unlikely that you have any, even if you think you do.

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