Sep 15, 2009

Supply side inflation

The health care economy has a fundamental flaw on the demand side, but it also behaves differently on the supply side. With a typical commodity, advances lower costs. Goods become cheaper to manufacture, more durable, more efficient, and the consumer gets better value for their dollar. This happens in medicine as well, but there is another dynamic at play. Researchers cure diseases.
Obviously this is a good thing, but economically it makes spending hard to predict over a person's lifetime. For insurance companies, this is a serious problem. It costs little or nothing to treat someone for an incurable disease since there is no treatment beyond perhaps minimizing pain and discomfort, but if a brilliant scientist invents a cure, people will want it, and it will likely be expensive.
This puts insurance companies in the uncomfortable position of either raising every customer's premium to compensate for the new expense or refusing to allow a customer to receive the new treatment. Because medical technology has advanced so rapidly in recent decades, this dilemma has become an epidemic unto itself, with rising deductibles, denial of care, termination of coverage and exclusion of customers with pre-existing conditions now common. Medical expenses have become a leading cause of bankruptcies, even among the insured.
Premiums that seemed reasonable decades ago have proven inadequate to fund treatments available today, and inflating costs have forced insurers to take drastic cost-cutting measures. Unfortunately, this has set up a nasty feedback cycle where expenses get sloughed off onto hospitals, which respond by charging insured patients more to cover the costs of uninsured patients. Insurers then need to resort to ever more dubious tactics to control their expenses.
Medicine today is radically different than it was 100 years ago. We are unquestionably in an expansionary technological phase. Eventually this will change. The number of untreatable afflictions will diminish, and advances will bring cost savings rather than cost inflations, but it is difficult to know when that will occur. For now we must assume that the universe of what can be treated will continue to grow. This means it is especially important to eliminate feedback loops that magnify the problem.

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