There are few things in the world more frustrating than talking to average people about healthcare, but surely one of them is talking to fellow libertarians about the problems with our healthcare system.  This goes beyond frustration with the typical libertarian infighting.  Part of it is that there are so many things terribly wrong with our healthcare system, any libertarian can point to most any aspect of the system and find some legitimate confirmation that their favorite peeve is, in fact, a problem.  However, even though there are numerous contributing factors to our healthcare woes, there is one evil to rule them all—but very few libertarians seem to understand what that is.  The purpose of this analysis is to identify the ultimate cause of our problems, show why most libertarians’ favorite solution doesn’t really address it, and show why the Ryan plan is a hell of a lot better than most libertarians seem to appreciate.

What the Chart Does and Doesn’t Say

So, here is the ultimate source of the problem—Medicare and Medicaid only pay for a fraction of the cost of care.  Providers are left to gouge private insurers and out of pocket patients for all the money they lose treating Medicare and Medicaid patients.  According to the chart, hospitals are charging private pay patients about 150% of cost.

There are two major implications of this that people don’t generally appreciate.  More charts would probably only make things more confusing, just understand two things: 1) Medicare and Medicaid patients are more expensive than private pay patients, and 2) the unfunded costs of Medicaid aren’t evenly distributed across the country.

What the hell does that mean?

  • Medicare and Medicaid patients tend to cost more than private pay patients. People on Medicare are older and need more in the way of expensive treatments—heart surgeries, terminal illnesses, etc.  Poor people on Medicaid, likewise, tend to have more babies, more health problems, and may generally be more expensive to treat than private pay patients.

So, don’t be confused by the averages in the chart—Medicare and Medicaid are covering 85% of the costs (on average), but they’re also covering more expensive costs.  In other words, if the average private pay patient goes to the hospital once a year for an MRI scan, when the insurer pays 150% of that relatively small cost, they’re reimbursing that provider for the tens of thousands of dollars the provider lost performing heart surgery on someone with Medicaid or Medicare.

  • The unfunded costs of Medicaid are not evenly distributed, and that points to another problem caused by Medicare and Medicaid only reimbursing providers for a fraction of the cost of care. Medicaid is for poor people, and poor people aren’t evenly distributed in your city, much less your state.

Hospitals are like retailers in that they serve a local community and that community has a particular income level.  If the hospital is in an area with a disproportionate percentage of poor people, then there are few private pay patients in that community on insurance to make up for the shortfall.  That means where the chart says that the average private pay patient is paying 150% of cost vs. Medicare/Medicaid’s 85%, it assumes that the patient mix is the national average.

In other words, if the hospital is an area where the local population only has 10% private pay patients and 90% Medicare and Medicaid patients, then that 150% percent of cost figure for private pay patients is going to be much, much higher–and those kinds of patient mix numbers are not uncommon in urban poor areas.

Sensitivity Analysis

The part where you all get mad at me!

Usually, a sensitivity analysis would show how taking the Medicare and Medicaid reimbursement rate up higher would impact the local cost of care.  This sensitivity analysis is more about how the system would improve relative to various solutions.  How would doing x, y, or z improve the situation?

For instance, wouldn’t the system be better if individuals and insurers formed the market instead of getting insurance through employers? I suppose it would be better, but that solution doesn’t address the real cause of the problem.  Insurers would still be competing to sell you a policy that covers 150% of the cost of care (national average).

What about removing the “Cadillac” tax, getting the AMA to stop limiting class sizes of nurses and doctors, making pricing transparent, or making policies portable across state lines?  Without getting into too much detail, transparency and portability are extremely complicated because of Medicaid, and even if those things were possible—what would any of them do about the fact that insurers are still paying 150% of cost (national average)?


I suppose a lucid progressive might suggest taxing productive workers to take Medicaid’s and Medicare’s reimbursement rate up to 100%, but 1) raising people’s taxes so they can afford to buy insurance is just playing an especially stupid shell game with costs, 2) Medicare and Medicaid spending already make up almost a third of the federal budget, 3) the Medicare rolls are already set to increase as baby boomers continue to retire, and 4) that might be an extra $300 billion a year in real payouts—something like the size of our national interest payment.

The ultimate solution is to cut these programs.

Medicare is more politically sensitive, and Medicaid is especially responsible for driving up the cost of private insurance in economically distressed areas.  Certainly, rolling back the ObamaCare Medicaid expansion is a necessary step before we can cut back the rest of Medicaid—and did you know there is a plan being considered in Congress, right now, that gets rid of the ACA Medicaid expansion after 2019?

Whatever else the Ryan plan isn’t, it’s one of those rare situations in which the actual cause of the problem is actually being addressed.