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Wednesday, February 16, 2005

Invisible Hand Job 
From a cantankerous economics newsletter writer named Richard Daughty -- also known as "The Mogambo Guru."

"When the government requires the provision of free health care, the explosion in demand makes prices go up, although apparently this is never mentioned in any of the economics books that anybody in government has ever read."


http://www.dailyreckoning.com/Writers/Mogambo/DREssays/SnotandSodaStains.html

(No I can't provide a link. These antiquated computers my employer has me work with can't handle the blogging script. They're THAT BAD!)

Makes sense to me. And this is at the heart of the perverse nature of government entitlements, except for a very few of the neediest: Every time you increase benefits, you increase demand while doing nothing to increase supply - and necessarily drive up prices.

With most traditional insurance programs, the larger the pool becomes, the more efficient the program is. Actuarial data becomes more accurate, and economies of scale are realized.

But without a healthy deductible, or a copay large enough to get people to truly wince, any benefits are quickly undercut by rapid price inflation, which - in a diabolical tautology - will almost by definition race ahead of benefit increases.

How bad is the problem?

National health care expenditures rose 9.3% in 2002, to $1.6 trillion.
Health insurance premiums for employer-sponsored plans rose 13.9% in 2003.* That's several TIMES the rate of inflation (Currently 3.26%, but it was lower last year) and even higher than the devastating inflationary years of the late Carter years (inflation peaked at 13% in 1979,** and the problem was deemed severe enough for the Volcker Fed to forcefully plunge our head under the monetary waterline until we gave up our inflationary ways. For now.)

To make matters worse, the availability of free or cut-rate subsidized health care may well cause people in good risk categories to self-insure. Meaning they DON'T insure - they'll go suck on the taxpayer's teat.

Don't believe me?

There's a whole subindustry within the financial planning field devoted to HELPING people suck at the government teat, called "Medicaid planning."

Indeed, the very ability of medicaid is a powerful incentive for the middle class NOT to buy long-term care insurance. Advisors are advising the middle class NOT to buy LTC insurance precisely BECAUSE Medicaid will kick in.

It's the silliest incentive I've ever seen.

There are people who legitimately need assistance with health care. Those with long-term disabilities, for instance. My suggestion: Push to have employers offer long-term care insurance as part of their standard benefits package, along with major medical and disability. Make the package fully portable, and charge extra for it. So much extra, in fact, that the premium is fully paid up by the time a worker reaches retirement age at 65.

This is a lot more important than dental plans, anyway.

.

* Opiela, Nancy. Health Care Costs a Nightmare for Retirement Dreams. Journal of Financial Planning, February, 2005 (You can find it on www.fpanet.org)

**www.inflationdata.com

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