Imagine that you have all the ingredients to bake a twelve inch apple pie, including crust and filling. Imagine further that the baked pie is initially cut into ten slices. Under a new government program intended to ensure that everyone has access to quality pie, all citizens are required to buy pie insurance which, among other things, entitles each person to obtain one slice of pie each year at no out-of-pocket cost. The pie provider bills the insurance company for each slice of pie it supplies to an insured. Assuming a population of eight citizens, after each person obtains one slice of pie, two slices remain. These two slices might be provided, for example, at full cost or at least with a co-payment to two persons with special needs for additional pie. Of course, once these last two pie slices are consumed, no pie remains until (1) additional ingredients are found or diverted from other uses, and (2) another pie production cycle ensues.
But wait. There is a better solution to providing additional pie to everyone. Specifically, the government could simply pass a law mandating that all citizens are entitled not to just one, but two slices of pie each year at no out-of-pocket cost. Now each of the eight citizens can have two slices of pie each year. Everyone is better off!
Of course, this solution is absurd, as there is no actual additional real pie to distribute. There is still only one twelve inch pie cut into ten slices. If each of eight citizens is entitled to two slices, all but two citizens would have to be denied a second slice. In other words, there would be no pie left over to provide a second slice to six of the eight citizens. Even this outcome assumes that a citizen is not entitled to a second slice until everyone has obtained at least one slice. Without this rule, five citizens might consume all ten slices before three citizens consume any pie.
Alternatively, the pie might be cut into smaller slices so that there are sixteen. In this case, there are now enough slices for each citizen to consume two slices. No more total pie is being consumed, however, and the smaller slices may not adequately meet the needs of the insureds.
The point of this example is to illustrate that consumption must necessarily come out of real resources. The using up of real resources is the true cost of consumption, and it is impossible to increase consumption in the absence of obtaining additional resources, which are scarce or otherwise deployed in other production activities. It seems to me that this is not a complicated point, but it nonetheless appears to escape Hillary Clinton.
According to an article in today’s Wall Street Journal at A-4 (“Clinton Lays Out Plan to Cut Health Cost”), Mrs. Clinton, in her quest for the Democratic presidential nomination, has announced that, if elected, she will “improve” Obamacare by placing further limits on what insureds pay for healthcare. Her goal, she says, is to reduce costs. Her solution is to require insurance plans to permit three doctors’ visits a year before any deductible charges are made. As quoted in the Wall Street Journal, Mrs. Clinton declared, “With deductibles rising so much faster than income, we must act to reduce the out-of-pocket costs families face.”
It is a shame that no one is asking Mrs. Clinton how this plan reduces the true costs of healthcare, namely the required resources to produce it. She might also be asked where the additional resources are to be found or from what other productive activity they are to be diverted. If she favors more but shorter and less substantive doctors’ visits, she should explain how she has determined that such smaller but numerically more “slices” of the pie provide for superior quality healthcare. Unless Mrs. Clinton magically discovers a means to eliminate scarcity – in which case there would be no need for any healthcare insurance – one should be highly skeptical of her pronouncements.