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Before I dive into the meat and potatoes of this topic, I just want to take a moment to explain what I will be writing about and what I will not be writing about, leading off first with the latter.  This is not a contribution about the "whether we should have universal health care" debate.  Nor does it support or critique the prevailing health care policy positions of either the Democratic or Republican parties.  What it's about is an attempt to figure out how health care, as an industry, fits into the overall American economy, and how changes in the health care market may or may not impact the overall economy.  The truth is that we have moved far beyond the traditional "free market versus government-managed healthcare" debate.  But while recent contributions to the debate present provocative arguments for how to bring more effective free-market approaches to the health care industry, there seems scant interest in understanding or even analyzing this industry from an economic (and econometric) point of view.    

A recent issue of the New England Journal of Medicine (September 6, 2012) contains an article entitled, "A Systemic Approach to Containing Health Care Spending"  The authors, identified as "leading health-policy experts," published this article under the auspices of the Center for American Progress.  What is the Center for American Progress?  It's a left-leaning antidote to the Heritage Foundation, a progressive-liberal DC think-tank founded by John Podesta, who was Clinton's staff chief from 1998 to 2001.  The article begins by noting that health spending now represents 18% of the GDP, and if the current rate of growth continues, basically the Federal treasury will go broke, and private payers, employers and employees, will likewise be unable to afford medical care. What is needed, according to the Center, is to develop "bold and innovative" solutions.

Because the authors are a bunch of policy wonks, perhaps they can be forgiven for failing to differentiate between policy on the one hand, and economics on the other.  Because what is to them, as policymakers, health care spending, is to an economist, health care revenues.  And what's wrong with any industry that tries to maximize revenues and profits?  Isn't that what the free-market system's all about?

In a lengthy, detailed and serious article published in The New Yorker Magazine (August 13, 2012) this was explicitly recognized by the author, Atul Gawande, M.D., who happens to be a surgeon at Boston's Brigham & Women's Hospital, a Professor at Harvard's School of Public Health, and an author of three best-selling books about medical care, along with assorted blogs, New Yorker columns, after-dinner speaking engagements, and God knows what else. This article promotes the idea that hospitals can achieve significant cost-savings and hence higher revenues not by increasing prices, but by adopting innovative management techniques developed by a cutting-edge national restaurant chain, aka, The Cheesecake Factory.  

I'll spare you the details of how every restaurant in the chain makes sure that every piece of cheesecake is exactly the same size.  The point is that Doctor Gawande is simply taking the policy ideas of liberal think-tanks to their logical end; namely, introducing free-market efficiencies into the health care industry in order to achieve maxiumum results.  And don't think for one second that Gawande is some kind of right-wing, Rand Paul-type who just happens to have a M.D. degree.  Idiots like Rand Paul don't wind up on the Harvard faculty.  In fact, Doctor-Professor Gawande is a foremost supporter of Obama-care and other initiatives to expand health care coverage.  All the more reason why he wants to find new and innovative ways to curt costs and elevate management efficiency in his industry.

The debate over how to "reform" the health care industry reminds me somewhat of the debate that took place in 2008-2009 about whether to save the Amrican automobile industry, in particular, the looming collapse of GM.  The Republicans, true to form, came out against any government-mandated fix-it plan, preferring instead to let the "free market" solve the problem by itself.  The Democrats, on the other hand, were willing to offer government assistance, assuming that GM and the UAW would agree to various efficiencies, which is corporate shorthand for reducing the size of the workforce and paying the survivors a smaller wage.

And this is exactly what happened.  The workforce, including the ranks of middle managers, was significantly reduced, the UAW agreed to a two-tiered wage plan (newer workers get less wages and benefits than older workers,) and "underperforming" dealerships were closed down.  So what's the difference between this approach to the auto industry and the current argument about the health care industry?  The difference is this: At no time was GM told that it could only charge the consumer so much for its cars.  In fact, the whole point of the restructuring of GM was to make it more competitive by eliminating factors that would reduce profits.  

Meanwhile, turning the coin over, we have the health-care industry, whose revenues far exceed the revenues of the auto industry, which is being told that in order to become more competitive, efficiencies have to be instituted which not only cut costs but will also result in a decline of revenues.  Because the whole point of the health care debate is to figure out a way that government's share of expenditures for health care can be reduced.  And if the number of consumers wanting to purchase products from this industry continues to grow (thanks to the longevity of the Boomers,) then the only thing that will allow the Federal Government to avoid bankruptcy will be to reduce the amount of health payments by forcing the health industry to charge less for what it sells.

This is where the prescriptions of policymakers and the analysis of economists need to be joined.  Because unless and until ideas for health-care reform are tested against models for economic growth, then any attempt to devise a "plan" for containing health care spending simply will not work.  And that's because the free market is simply too strong, too flexible and too fundamental to be permanently altered by governmental designs.  It operates on a logic of its own, based on inputs and outputs, profits and losses, revenues and costs, and a myriad of other factors which need to be analyzed and understood, not just reduced to a simplistic ode to the virtues of innovation and efficiency.

Which is eaxcly the purpose of this blog.  In the next section we tackle a daunting task, namely, coming up with a definition of the health industry, beginning with understanding what constitutes an 'industry' itself.

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