Nationalized healthcare: The economics behind the politics

In light of the current economic crisis it has become necessary for the President and congress to make some tough decisions on a wide-range of fiscal and social policies. One issue that is coming to the forefront is whether the government should subsidize the cost of healthcare for those who cannot afford it. It seems like a great idea: give all citizens access to healthcare on Uncle Sam’s tab. However a simple economic analysis suggests that it would seriously jeopardize the quality of healthcare for all Americans.

Here’s how it works…nationalizing healthcare would make medical procedures appear “free” which would lead to an overwhelming demand for these services. The supply (doctors, hospitals, drugs) for these services is very inelastic so suppliers would be forced to make a compromise: quantity or quality. The first option is to ration care to the current capacity, placing other patients on a waitlist. This is downright scary considering the urgent nature of most medical procedures. The other option is to lower the quality of service in order to see a higher volume of patients. In my opinion, this is an unacceptable compromise. Our neighbors in Canada use this system and the results are disastrous. Evidence of this can be seen by the thousands of Canadians who come to America and pay for their own medical treatments.

While the service would appear to be “free” to individuals it would be extremely expensive for taxpayers. Nationalized health care would require higher taxes and a diversion of resources from other areas of government.

Under a nationalized healthcare system there would be a significant fall-off in the research and development of new drugs. Drug companies will be hindered by government regulation and price controls which would ultimately take away any incentive for them to invest in R&D.

It is no coincidence that 12 of the 20 largest drug companies are currently headquartered in the US. The pharmaceutical industry is one of the most profitable sectors of business, returning an average of 17% on revenue. What do these companies do with all this cash? They spend the majority of it on the research and development of new drugs. And they don’t spend it because they feel obligated to research diseases and find cures…they do it because developing a life-saving drug will make them lots of MONEY! Many people are outraged at the high profits these companies make but I believe they deserve even higher returns. It takes a lot of invested capital to put a drug through the process for FDA approval. Even if it gets to this point, the success rate is quite low. So while many companies make a lot of money from a few major drugs, a large amount of this profit is used to fund the development of new projects and cover the expenses of other failed ones.

This will hurt large drug companies, destroy smaller ones and ultimately threaten the quality of healthcare in America. Taking away this opportunity to trade in a free market and placing a cap on their profits will destroy all medical innovation.

A simple economic analysis of the supply/demand of patients and doctors, the effect of price controls on drug companies and the increased tax burden on all Americans is enough to show that government run healthcare would be an incredibly destructive entity.

Not to mention the government has a pretty lousy record when it comes to running private sector industries. We saw what happened when we handed our mortgages over to Fannie and Freddie…do we really want the government running our healthcare system? Ask any Canadian, they will tell you.