I’m a staunch capitalist. I mean, I run a website called “Pragmatic Capitalism”. But here’s the thing – I know that capitalism isn’t a cure-all. It has to be implemented pragmatically. And while it works well most of the time there are times when capitalism isn’t the right answer. For instance, capitalism and national defense don’t work so great because producing things, blowing them up and losing your workforce in the process is a pretty bad way to generate a profit.
Anyhow, with this week’s healthcare fiasco I wanted to circle back to healthcare. This is a great big complex issue and I am going to do it a disservice by oversimplifying it, but I think there’s a simple story here for why competition and capitalism can’t fix healthcare and why there’s a legitimate argument for the government to be involved. Hear me out.
Let’s say we have two pools of people – the Healthcare Heads and the Healthy Heads. The Healthcare Heads are mostly older people and they need the healthcare system a lot. The Healthy Heads are mostly young people who need routine check-ups and basic coverage. Then we have two healthcare providers called Healthy McHealth Provider and McDonalds (not to be confused with the hamburger company) who offer two plans for these pools to compete over. The first plan is called the Hennessey Healthcare Plan and the second plan is called the Honda Healthcare Plan. As its name implies, the Hennessey Plan, named after one of the most awesome (and expensive) cars ever made, has all the best bells and whistles. The Honda plan is just, well, like a Honda. It’s nice, but you’re gonna have to pay extra if you want that CAT scan.
Now, Healthy McHealth and McDonalds are public companies and they like to make money. In order to do that they need to sell their plans to people who can actually afford them. The problem is, the Healthcare Heads are a pool of 17% of the country with little to no savings a median household income of $39,000 and heavy healthcare needs.¹ These people actually need the Hennessey Plan and can’t afford it.
At the other end of the spectrum you have the Healthy Heads. This pool is much larger and has MUCH higher incomes. They can afford the Hennessey Plan, but they don’t need it so they buy the Honda Plan. Naturally, Healthy McHealth Provider and McDonalds focus on the Healthy Heads because they’re like the anorexic person who buys the All-You-Can-Eat Buffet – they pay as much as everyone else, but don’t actually consume as much. This is perfect for the healthcare provider, but it closes off the buffet to the people who actually need to eat the most because those are the people who make it hard for the buffet to remain profitable.
So, the Healthcare Heads need the Hennessey Plan, but can only afford the Honda Plan. And the Healthy Heads can afford the Hennessey Plan, but don’t need it and so they only buy the Honda Plan. And Healthy McHealth Provider and McDonalds literally can’t afford to sell the Hennessey Plan to the Healthcare Heads because these people will detract from the bottom line. Sure, they can compete over the Hennessey Plan’s costs, but they can’t make the Healthcare Heads earn more money and use less healthcare. Said differently, no matter how much competition there is producing sports cars, there is always going to be a huge group of people who can’t afford sports cars.
Unfortunately, the math on this is very difficult. If we’re going to have private companies offer these plans then someone has to subsidize the Healthcare Heads or accept the reality that they don’t have access to healthcare. And that means taxing the Healthy Heads more OR forcing the Healthy Heads to buy a more expensive plan than they need so they are indirectly subsidizing the Healthcare Heads. Otherwise, we just have to accept the fact that the Healthcare Heads can’t afford the plan they actually need.²
Capitalism, unfortunately, isn’t designed to fix this problem because it’s not designed to cater to people who eat like a whale at an All-You-Can-Eat Buffet.³
¹ – See, PensionRights.org
² – When thinking about this, remember that while you might be a Healthy Head today you will become a Healthcare Head later.
³ – This is probably not an appropriate analogy. Sorry, not sorry.
TLDR – The healthcare system can’t be a purely for-profit system because of an inherent conflict of interest in which corporations can make the most money off of people with low incomes and high health needs (read, old people), but mostly want to service younger wealthier people who can afford to actually buy their goods and services. Forcing the younger wealthier people into the pool actually makes the system workable and reduces the corporate power over those who can’t afford the system and need it the most.
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.