Capitalism and Helicopter Ambulances

Having just noted what a better job the private sector does in providing insurance than even the State of Vermont, I felt it was important to note the fundamental flaw in for-profit healthcare.

If you are one of the six people who reads this blog regularly, you probably remember me stating the basic economic principle that fair trade requires a willing buyer and a willing seller. People who are purchasing health care are not willing buyers, because their options of walking away from the deal are rather limited. You can buy the new heart valve, whatever it costs, or you can die. Your choice.

Well, here's a clear illustration of the bizarre effect this has. Quick quiz: what happens if the supply of a product outstrips the demand? If you said, the price goes down, you are correct! If there are 24 widgets on the market, and only 6 widget buyers, a lot of widget makers won't get to sell any at all. The widget maker with the best capital backing will sell at a loss for awhile, until most of the others go out of business, then the market will stabilize.

I heard a funny story on the radio about Air Ambulance service. Apparently, the actual cost of helicopter delivery to an emergency room is a staggering $6,000. But that's only if the helicopters are being used efficiently. There's a substantial overhead to maintaining the possibility of an air ambulance. NPR told the story of a man who was billed a ruinous $56,000 for an air ambulance, of which insurance would only pay the reasonable charge of $12,000, leaving the victim to pick up the tab. Now, why did it cost $56,000? One factor was certainly that no one could tell the patient what the price was. He had to agree to the ride, in the ER, on substantial amounts of narcotic painkillers, with the promise that if he said "No," he would have his arm amputated. Nobody knew what the price was.

Certainly, that situation can raise the price. Imagine the price of used cars if you had to buy them, and drive them home, before you found out the price. But there was another factor at work. Apparently, a lot of investors, of the sort that likes to buy up lots of whatever looks like its earning money, invested in a lot of Air Ambulances. To the point that there is a gross oversupply. So the price should go down.

But ambulance riders aren't willing buyers. They can't freely walk away from the deal. And the oversupply means that the for-profit company needs to maintain the helicopter fleet with fewer rides. So, basically, the cost of each ride has to go up. If you spend a million dollars delivering 100 rides, they each cost you $10,000. But if you spend a million dollars on 20 rides, they each cost you $50,000.

Now, if the companies were selling widgets, buyers would laugh their asses off at those prices, most of the air ambulances would go belly up, and the market would stabilize. But they're selling life-or-death services. So when the market is oversupplied, the impact is the opposite of the "Invisible Hand of the Marketplace." The price goes up. None of them can really afford to charge less, and the buyers will pay it, because they can't walk away from the deal.

So to recap: in for-profit healthcare, when the supply outstrips the demand, the price goes up. But of course, if the demand outstrips the supply, the price goes up. And people wonder why healthcare costs in America keep skyrocketing.