Category: Policy and Economics

Overview

Healthcare in the United States is classified as a consumer product and not a universal constitutional or legal right. The system is a hybrid model that incorporates an uneven balance between the elements of privatised and public networks. The burden of responsibility for government supervision the is divided into primarily the federal and state level with minimal involvement from local authorities. However, the main point of separation exists in the marketplace for insurance. The private sector utilises an ‘employer-facing’ scheme that provides a substantial amount of purchasing power to privatised entities such as pharmaceutical companies, private hospital providers, commercialised ‘extras’ options and managed care organisation. Whereas the government sphere funds various welfare schemes for disadvantaged consumers with pre-existing conditions and primitive access to jobs, and proportionally distributes federal and state taxpayer money into public infrastructure. Both realms of the system significantly limit the options, opportunities, affordability and coverage for consumers. The introduction of the colloquially coined term, ObamaCare, in 2014 introduced measures to alleviate these limitations. However, further micro-economic reforms are required to increase the competitiveness of the public sector, increase the power of middle-class consumers in the private insurance market and curb the influence of private firms in the industry.

Structure

The healthcare infrastructure is an amalgamation of taxpayer bureaucratic funding and privatised investment.  The private infrastructure is funded through venture capitalists, charitable donations, shareholders and private insurance. Hospitals, mental institutions, dentists and other ‘extras’ options are all included in this sphere. The access to these services is limited to paying customers, either through an insurance plan or direct cash basis. The shortfall between the amount covered by insurance and the total price levied by the private entity is called the ‘out-of-pocket’ sum for consumers. Traditionally, those in the upper middle-class or elitist societal classes can afford this form of healthcare through their employers or direct purchase in some cases. The inelastic nature of medicine allows providers to charge relatively high prices without the fear of deadweight loss. This profitability is a key contributor to the expansion of the private market into a commercialised force that induces incredibly elevated prices that often do not match the true market-clearling equilibrium. Therefore, the producer surplus significantly exceeds the consumer surplus in the healthcare market. This represents a fundamental problem for an industry that is designed to altruistically create positive externalities for consumers rather than producers. Hence, it is lucid that the capitalistic framework of the private sector has lead to the unfair distribution of healthcare in the country.

Inefficiencies of the Public System

Moreover, the public infrastructure acts as a ‘safety net’ for those that cannot afford access into privatised services. Public entities cannot refuse entry to uninsured or impoverished members of society. Thenceforth, the lack of privatised pricing models such as hospital and ambulances fees prevent public administrators from developing their infrastructure, thus resulting in poor and limited services for consumers. Therefore, since the majority of healthcare providers are unanimously members of the private sector, the public sector is slowly degrading due to the lack of a comparative advantage with private sector entities. Hence, this represents a need for substantial government intervention in order to curb the negative externalities of limited access of important medical products for disadvantaged people. However, the need for this intervention is often nixed by the libertarian elements of the population due to the values of civil liberty, individual property rights and capitalist notions. As a result, the market has become an oligopoly through the carterlisation of pharmaceutical companies that leverage the ‘lobbying’ of government bodies to ensure prices remain high. The academic idea of the Nash Equilibrium in the economic subsect of Game Theory supports this strategy as a sound profit-maximising expedition that can only further escalate the profits of these private firms. The absence of sufficient anti-trust laws is a significant obstacle to reduce the control of corporate entities in the market. Therefore, it can be seen that private lobbying, inefficient government structures and internal bureaucracy has disallowed the government from efficiently implementing policy to maximise healthcare coverage for the population.

The Role of the Private Market

Clearly, the financial backbone of the healthcare system is the privatised insurance market. This derivative industry provides more than half of the American population with insurancethat can be used in hospitals, mental institutions, dentists and other non-emergency entities. The salient consumer in the primary market for private healthcare is employers. Firms that hire labour throughout the nation purchase various forms of insurance policies in bulk due to the benefits of tax deductibility. Employees are then permitted to provide these healthcare plans as part of their renumeration package for joining the employer’s company. As a result, consumers do not have full visibility of their purchase and possess limited options for alternatives as it is unlikely for an employee to work simultaneously at two firms. Therefore, since substitute goods are not available, prices for these insurance options are relatively high with lower quality. Alternatively, the federal government through its progressive income taxation system funds various ‘welfare’ programs that are designed to provide cover for those that are considered classified as a disadvantaged. Henceforth, the public option is limited to those that are arbitrarily ‘at-risk’, which includes the proportion of the population that possess ‘pre-existing conditions’ that diminish the ability to access private insurance and/or eligible for military or public service schemes (such as CHIPS). Medicare, Medicaid and Veterans Schemes are the most notable of these public services. However, these services have strict eligibility requirements that are sometimes annually reviewed by the relevant federal (primarily the Department of Health and Human Services) government departments. Consequently, a substantial percentage of the population is left uninsured as they are freezed out of the private insurance market due unemployment or voluntary labour force omission and the inability to place themselves into a category that is eligible for welfare benefits. Ergo, unlike the majority of erstwhile developed countries, the fact that healthcare is fundamentally not considered a right, means that the government is not liable to cover for the healthcare of the residual Americans that are left uninsured in this two-paced system.

Does ObamaCare work?

The progressive coalition of the Obama administration sought to rectify the universality issues of the healthcare system. The legislative and executive branches identified that the fundamental vacuum of responsibility from the federal government to cover the majority of Americans ought to be resolved. Hence, the Affordable Care Act 2010, ACA) passed Congress, colloquially known as ObamaCare, aimed to reduce the numbers of uninsured due to pre-existing conditions. The core feature that symbolically represented an incremental shift towards the universality of healthcare rights was the introduction of the ‘individual mandate’. Despite being later removed under the Trump administration in its populist revolt against progressivism, it ensured that individuals would choose an insurance scheme, or otherwise face a monetary penalty. On a macro-economic level, the creation of a Healthcare Marketplace (or exchange) that attempted to remove barriers for consumers to enter the private healthcare market. This market essentially allowed employees to bypass the ‘employer-facing’ market that dominated the system since the 1920s. The simple idea that the increase in the numbers of consumers in the market would result in a positive shift in the supply of insurance, would decrease the price for insurance providers as the unsystematic risk is divided over a larger population of insured members. However, the state-based exchanges are regulated by federal government bodies including the Centres for Medicaid and Medicare Services through interventionist market forces (price controls, subsidies, quotas etc). These policies act as cost constraints to reduce the prices for lower-income families and individuals with pre-existing conditions. The ‘red tape’ has the unintentional of premium increases as the ‘cost controls’ through price ceilings (such as capping providers rates for those on Medicare and Medicaid, and fixed negotiated medicinal prices) decrease the revenue for private providers and insurance firms. Therefore, it can be seen that whilst the marketplace initiative is quintessentially a solid strategic plan in expanding the coverage of healthcare, it is also only a primitive solution in creating provider flexibility, choice, affordability and competition in the primary markets.

How can it be improved?

Whilst ObamaCare is not the perfect solution to the coverage and pricing issues in the system, it is a solid stepping stone for future reform. The core problem with the current setup of ObamaCare is the centralised exchange (marketplace) mechanism that attempts to consummate government schemes such as MediCare with an open market instrument. The exchange should retain its integrity as an alternative option for consumers to purchase insurance, rather than relying on employers to provide such healthcare. However, pricing controls such as subsidies, negotiated medicinal prices and caps on ‘out-of-pocket’ expenses should be removed from its boundaries. The sole purpose of this marketplace is to provide an alternative for consumers that are forced into purchasing sub-prime insurance from employers. This marketplace should provide options and opportunity to obtain cheaper insurance through real market competition, rather than manufactured price. Therefore, the federal government should focus on the development of an alternative public sector marketplace that will contain the aforementioned government programs like Medicaid, CHIPS and alternative Veteran services. The creation and implementation of state-based healthcare policies that are relatively cheaper than private options for superior public healthcare services would provide the unparalleled market competition. As a result, displaced consumers can access this market with minimal monetary barries. This will essentially disrupt the cartel formation in the provider market as the government becomes an additional competitor. Since the ‘visible hand’ or ‘social benefactor’ has the advantage of tax-payer funds (equivalent to private donorship for private insurance and infrastructure). These ‘public option’ programs will be exchanged in an independent ACA exchange that all Americans can access directly. Henceforth, this market would compromise of a bucketload of substitute products that can compete with the excessive prices in the private sector. State governments would then have the leverage to negotiate medicinal prices with providers and re-direct the additional revenue to the development of public hospitals and infrastructure. In order to maintain the ‘checks and balances’, the federal government would become the independent regulator of both exchanges through the implementation of neutral bodies that provide oversight to avoid conflict of interests. Resultantly, the formation of this ‘two-fold exchange’ system is the optimal step into the harmonisation of the public and private systems.

What now?

In summary, the current state of the United States healthcare system is a convoluted leviathan of capitalistic private privileges and defunctive public options. The primitive options for consumers (employees) in the private insurance market is astounding, carterlisation of basic medical products and elitist segregation of private healthcare infrastructure are notable symptoms of a greedy system. The public option fails to provide a sufficient ‘safety net’ for residual members of society due to funding constraints, limited government welfare programs and the inability to centralise the offerings into a succinct marketplace. Whilst ObamaCare has made positive steps into expanding coverage, the integrated cost controls and public options into the private market is inefficient and causing market failure. The optimal microeconomic reform is the introduction of an exclusive public marketplace for existing welfare programs and additional ‘out-of-pocket’ policies that can rival the incumbent plans in the private market. This would provide competition to the over-priced healthcare plans and allow state governments greater power to negotiate with providers in the long-term.

By Daniel Dell’Armi

What did the Prime Minister say?

As the economic shockwaves from the Covid-19 pandemic continues to permeate throughout the globe, Australia looks ahead to the future. A determined Scott Morrison delivered a patriotic speech at the National Press Club on Tuesday, 26 May. The message was clear: Australia is on the mend, but we must pull through together. 

The Prime Minister used a collaboration of populist and patriotic expression to quell fears of uncertainty for the future. The speech riddled with nationalistic undertones praised Australians for their grit, courage and resilience through a turbulent year. Whilst many will view this rhetoric as necessary in order to bring the nation together to combat the biggest economic challenge since the Great Depression. A small minority can view this as ‘papering over the cracks’ and a whimsical plea to maintain harmony until a concrete plan for economic action is implemented.

What are the goals?

Nonetheless, the Prime Minister did outline his ambitious objectives for the short-medium term. Drawing upon the unanimous support from key influential figures in federal politics including the Treasurer, Deputy PM and leader of the Senate. The PM revealed that his government’s focus would be on industrial relations; as the key to rebuilding the fragile economy. He will chair five working groups for discussions to produce a ‘JobMaker’ package. On the list of discussions include award simplification, fundamental enterprise agreement-making, Fair Work Commission reviews on casual and fixed term employees, compliance and research into ‘greenfield’ agreements for new enterprises.

Why the focus onAustralian jobs and industrial reform? Is it to increase employment and helps the millions (circa 2 million) of Australians out of a job to curb the surging unemployment rate? Is ScoMo genuinely trying to give “a go for those who have a go”? Whilst all these reasons will be publicly promoted as the main reasons for the creation of JobKeeper and JobSeeker. The opposition will argue the government is glorifying its achievements. However, as is often the case in national politics, there is a simple economic reason for the salience of labour market reform and business cash splashes from the government.

Stabilisation or liberalisation?

To understand the agenda of the government, it is important to analyse the economic and political tools at the executive’s disposal during these uncertain times. As clearly demonstrated by his national speeches, the PM has utilised patriotic sentiment and nationalist wordage (this is most evident in his over-used platitude` “how good are Australians?”) to stabilise the population. Majority of political pundits will agree that this has worked effectively, despite the ‘mass buying’ hysteria during the initial phases of the pandemic. Certainly, compared to highly liberalised nations like the U.S, Australia has been quite passive with little organised movements against lockdowns and quarantine. We can mark this as a win for the government.  

Since the Australian public is stable and social institutions are still operating relatively well despite abnormal societal conditions. The Federal Government can begin to dig deeper into its bag of tricks to commence the long and argues economic turnaround.

The Economic Options: The Centre-Right Playbook

The government has two macroeconomic policy tools, fiscal and monetary, that are commonly used in the event of a systemic shock, just like Covid-19. These tools are ‘stabilisers’ that are aimed to prevent the economy of ‘overheating’ in booms or underperforming in periods of decline. The right-wing Liberal party is founded on the ideals of ‘small government’ and market-based solutions. Henceforth, the government has utilised ‘fiscal consolidation’, in other words, minimalised discretionary spending in order to produce a budget surplus. As seen in the pandemic, welfare-state policies such as JobSeeker and JobKeeper are often seen as a last resort and primarily used to keep businesses afloat. This can be seen by the design of JobKeeper, which is primarily provided to businesses that have experienced a significant drop in revenues.

Due to the costs of such large fiscal policies, the right-wing politics of the current cabinet is unlikely to pursue similar programs such as a JobSeeker for the foreseeable future. (In fact, it is expected to expire without renewal in September). The reluctance to utilise the excess $60 billion from the accounting error in late May is only further proof of the right-wing ‘debt hawk’ stance. Therefore, we can expect large social programs such as JobSeeker to remain an exception to the rule.

Why not interest rates?

Since fiscal policy is an unlikely source of economic stabilisation, one may turn to interest rates (or monetary policy for those who like economic jargon). Interest rates are a great macroeconomic tool that aims to control inflation, credit supply and stabilise unemployment. The basic theory is that it is a transmission mechanism, managed by the RBA as an independent actor from the federal government. The RBA will use the purchase/sale of government securities to shift the cash rate. However, the cash rate has reached historical lows at 0.75% prior to the pandemic. In response to the crisis, it was lowered to 0.25% in a counter-cyclical effort to promote consumer expenditure, reliable credit and business/investor confidence.

This may be effective in the short-term, but what will the RBA do in the medium term? The rates cannot go any lower as we have hit the proverbial ‘zero low bound’. Whilst the ECB (European Central Bank) has experimented with negative interest rates, the norm certainty suggests this is an outlier. Hence, the RBA will employ extreme caution and avoid lowering rates any further, which has been indicated by Phillip Lowe. The same can be predicted for financial institutions, whom rely on a healthy interest rates spread for profit. Therefore, the mystical powers of interest rates are far less appealing in the eyes of a cautious government. 

Why Industrial Reform?

As a result, the PM has limited options in the federal economic arsenal. Where does the government turn to vitalise the expected and needed economic revival? The answer is simple and easy to promote to the public. Microeconomic reform. Or more simply… cut industry tape and create jobs.

Microeconomic reform transcends a range of domains in the economy. It is mostly associated with the reduction of ‘red tape’ in the production process through the division of labour. Workers (labour) specialise in their most efficient activity, theoretically each worker becomes more productive and thus engenders greater output. This is reflected by a higher wage as the worker becomes more valuable. The Prime Minister plans to implement this basic economic ideology on multiple fronts, condensed into the proclaimed ‘JobMaker’ package.

What can we expect?

The expectation is the government will invest in vocational training that provide skills that are required for specific jobs in the ‘new’ digital economy. TAFE courses will become cheaper and more abundant, as Australians will be encouraged to become more productive. Flexible workplace options will become the norm such as ‘working from home’ and ‘flexi hours’ that effectively reduce the burdens of travel and brick & mortar that erode productivity. Universities will also benefit from an influx of domestic students to offset the loss of international students.

On the state government level, firm-specific leakages such as the payroll tax will most likely be abolished as a means to alleviate the financial distress of the small-medium enterprises. The expectation that rational owners and entrepreneurs redistribute these savings to improve the efficiency of their businesses.

The Final Verdict

The opposition will argue that the microeconomic policy approach very approach is not conservative for a ‘small government’ that the Liberal party embody. However, the Liberal party understand that microeconomic policy is underpinned by the Keynesian belief that such reform will increase the long-term supply capacity of the economy. As such, the intertemporal benefits outweigh the numerical investment. Therefore, those with a keen political eye may view the approach as a ‘pseduo-fiscal’ policy designed to improve confidence of the working class to spur consumerism. Either way, the incumbent government has an uphill political battle on its hands. These policies are a long-term play in a word of myopic ideologies. So this begs the question… will Scott Morrison survive the upcoming ideological war without a strong economy to stand upon? 

Daniel Dell’Armi