Australian Federal Government Taking Over Healthcare

Before we get on to today’s non-property related edition of Money Morning a very brief follow-up to yesterday’s edition.

First of all, we’ve re-read it, and do you know what, it seems a little disjointed. After two weeks of a property famine, on reflection we think we tried to cram in too much – must do better next time.

But aside from that, we did receive a couple of lovely emails into the Money Morning inbox. First, this one from Steve:

“I just ran those house locations past my brother who lives in… Michigan and you managed to pick 3 houses in what’s known as ‘No cop, no stop’ zones. Still, I suppose for $499 USD, it makes a good investment.”

He could be right. What’s USD$499 after all. At that price you’ve got the potential to get small-cap gains from housing. But like the small-cap market there’s also a chance you could lose your entire investment, especially when you read headlines such as this from The Age: “Sales of existing US homes decrease, supply climbs.”

USD$499 may seem like a bargain price today, but how will you feel about it in 3 or 4 years time if it’s still the same price and you’ve forked out several thousand dollars of rates and maintenance costs?

Although we have read a couple of articles that US based companies are targeting Australians to invest in US real estate. Buyer beware of course, but I know something for a fact, I’d rather take a punt with a no mortgage USD$499 house in Detroit than punting on a $700,000 95% mortgage in Melbourne – but maybe that’s just me.

But then Money Morning reader Andy sent us this:

“I liked your link to house prices in Michigan. Here’s another one – and a nice comparison to Victoria.”

One is a four bedroom, two bathroom, 3,800 square foot home in what looks like a nice enough area – perhaps Steve can let us know if it’s also in a ‘no cop, no stop’ zone, we’ll let you know if Steve replies – the other is a mudbrick shack forty minutes from Ballarat, only a stone’s throw from Snake Valley.

By the way, 3,800 square feet is the equivalent of 353 square metres, or around 39 squares. You’d have to pay Metricon over $325,000 just to buy the house, not even taking into account the cost of the land.

Yet head off to Detroit and you can get yourself the whole deal for just under $100,000 – although judging from Steve’s comment you may want to take a handgun with you!

Still, can anyone still believe that Australian property isn’t overpriced!

Anyway, enough of that nonsense, on to today’s Money Morning. You knew it was coming didn’t you? Yep, after all the palaver over the Obama healthcare plan and the Fairy Ruddfather’s plan to ‘rescue’ healthcare from the States it was obvious we’d have to throw our hat in the ring to give the mainstream view a bit of a shake.

The disastrous Obama plan is a significant newsworthy event, but we’ll focus more on the Australian health story, that is of the federal government taking over healthcare.

Plus, we’ll also look at the other main problem with socialised healthcare. Although in fact you can apply the same argument to any form of government spending.

Let me start off with this as an example. Whenever one company takes over another company, you’ve probably heard statements such as this:

“We expect to achieve a lot of synergies from this deal… blah, blah… we can cut costs in our supply chain… blah, blah… customers will see benefits with lower prices, etc…”

Then you’ll hear this sort of thing from market analysts:

“The new merged entity will have greater purchasing power due to its size, this will be good news for shareholders as the greater purchasing power should see the cost of supplies fall, etc…”

But then shortly after you’ll often hear this from the Australian Competition & Consumer Commission (ACCC) or from so-called consumer groups:

“We’re worried about the merger because it will mean less competition in the industry which could drive up prices and lead to higher prices for consumers, etc…”

But for some reason, when the public sector is involved, we hear lots of the first about “synergies” and “reducing duplication of responsibilities”, perhaps a little of the third point – benefits to consumers – but we hear very little about the impact on suppliers.

Yet it’s the ‘suppliers’ to the public health system that are the most important. “What?” I hear you cry, “Surely the patients are the most important.”

From a medical perspective that’s true, but when I refer to suppliers I’ve got two different types of supplier in mind. The kind of supplier that voluntarily supplies goods, and the kind of supplier that is forced to supply ‘goods.’

It won’t surprise you to learn that the voluntary supplier will continue to earn a mint from the deal, while the forced, or coerced supplier will get even more ripped off than before.

As we understand it, the Fairy Ruddfather’s ingenious plan is to take over the running of Australia’s healthcare system from the individual states.

In the private sector world we’d look upon such a plan as a mega corporate takeover. It would be the equivalent of BHP Billiton acquiring every other mining outfit – including Rio Tinto – in Australia.

If such a thing occurred, let’s imagine what the reaction would be…

BHP would say the takeover “creates lots of synergies and will reduce costs, leading to lower prices for consumers.”

Analysts would say it “will add more dollars to the bottom line as it will increase revenues and profits, while creating synergies to cut costs.”

Consumer groups would say they “are concerned about the impact on competition of having a single monopoly controlling the market.”

While suppliers would say they “are concerned about the impact of only having one customer and how this could cause many suppliers to go out of business as their prices are forced down.”

We may have missed something there, but I think you’ll agree that would be the gist of the arguments. In fact, we’re pretty sure most of those comments were made concerning the failed takeover of Rio Tinto by BHP Billiton, and the subsequent joint venture deal between the two.

So, what’s all this got to do with the federal government’s takeover of state funded healthcare?

It’s simply this. Government’s are not the same as businesses. Businesses in general have to fight for customers. They have to respond to the demands of the market because if they don’t there’s the potential for the business to go broke.

In contrast, if a government needs to increase its revenues then it does so by forcing people to give it money. That’s called taxation. And if it’s worried about the political impact of taxation then it will just borrow money in the taxpayer’s name and force you or someone else to pay for it later.

Either way, the government gets the money it wants. If you’re a business owner I’m pretty sure you’d love to be in the position to force customers to buy your goods whether they wanted to or not.

In other words, the taxpayer is the forced supplier of ‘goods.’ It’s just that the ‘goods’ supplied by the taxpayer is cash rather than tangible materials or equipment.

And that’s the problem. You see, because government can get its hands on as much money as it wants, it throws out all the other supposed benefits that can be achieved by consolidating different businesses, except one. And that is, just as a private monopoly is bad for consumers, a public monopoly is also bad.

In fact a public monopoly is worse because it has a guaranteed funding stream through the tax system, whereas a private monopoly doesn’t. If a private monopoly tries to raise its prices, customers may have the opportunity to switch their purchases elsewhere, thus denying the private monopoly of revenues.

Or, the high prices from the monopoly could encourage new entrants that are attracted by the opportunity to make profits. Suddenly, you have a competitive market again.

Governments have no such fears about competing governments setting up shop in their back yard.

But what about the other type of supplier. The suppliers that provide tangible materials and equipment. You only have to look at the mega bucks to be made in healthcare to see how the likes of General Electric and Siemens will be in an even better position now. They know exactly how public sector healthcare works.

In the private market, suppliers would be fearful of having a single customer. You hear all the time the complaints from farmers about how the duopoly of Coles and Woolworth’s force down the prices of produce.

But in a single customer market, where the single customer is the government, it’s a whole different story. It creates a licence for suppliers to print profits.

They know that hospitals want the biggest and best machines available. They know what the political fallout will be if government’s scrimp and save by only buying the second rate machines, or no machines at all.

And the public hospitals know they just have to squeal that “people will die” if they aren’t allowed to buy the latest contraption, and sure enough the dollars soon flow into their wallets.

Centralising healthcare to federal government responsibility is taking a bad system and making it worse. It’s no different from Stalinist central planning – without the murdering bit of course. But the idea that a small bunch of bureaucrats at the top of the pile can somehow minutely plan and control an entire nation’s health system is false.

The problem is that from the consumers view, it has the appearance of being an improvement. The consumer sees half a dozen sets of hapless bureaucrats and politicians and automatically assumes that putting the power in just one bunch of hapless bureaucrats and politicians will lead to an improved system.

It won’t, all it does is consolidate the stupidity.

You see, when you have a guaranteed source of income (taxation) there is absolutely no incentive to reduce costs. Sure, there may be a short-term cost reduction, but the costs will soon rise again as the central planners create agencies and new departments to handle the increased workload.

Private businesses have a desire to cut costs because of competition, and because they know if they can cut costs quicker than they cut their prices there’s the opportunity to make short-term profit boosts.

Government departments have no need, ability or even a desire to make profits, therefore there’s no drive to cut costs.

But in reality, the real problem is much bigger than just government spending on health. The real problem is what you might call an inversion of the “achievement/reward” dynamic.

Look, we’ve just made that up, so let me try and explain what I mean…

In most cases you only receive your reward after you’ve accomplished something. If you’re good at school your parents will buy you a bag of sweets. If you’re doing well at work then your boss might give you a bonus at the end of the year.

If you work hard and make decent money then maybe you’ll reward yourself by taking a holiday or buying a new set of golf clubs.

What I’m saying is that typically you do the hard work first and then you get your reward.

The trouble is – and this isn’t unique to Australia – the hard work in most Western economies was done 20, 30 or 40 years ago. From then on, the expansion of credit markets and easy money has got people thinking they don’t have to wait for the reward, they can have it now and work hard later.

I mean, let’s get this straight, infrastructure spending, education spending and healthcare spending is the reward for doing the hard yards. It’s no coincidence that many major infrastructure projects, expansion of the education system, and improvements in healthcare came at a time during or after massive advancements in private sector innovation.

All those things – even if some were taxpayer funded – only happened thanks to the hard work and efforts of individuals and private businesses first.

But now, the whole idea of award and achievement has been switched around. Now you hear the argument that infrastructure spending, education spending and health spending will drive the economy to prosperity.

Sorry to be the bearer of bad news, but they won’t.

As we’ve mentioned before, it’s not spending that drives an economy, it’s production that drives it.

Economies grow and are driven by innovation and production. If Western nations truly want to see an improvement in infrastructure, education and healthcare the only genuine solution is to abolish taxation and abolish inflation causing central banks.

It’s a fallacy to assume that only a government can provide healthcare. Under a market based system without interference from government manipulation, health costs would be lower, there would be more competition and the quality of service would be superior.

Just take a look at the negative direct and indirect effects the government has on the current health system. Already billions of dollars is spent each year, and yet the argument is that more needs to be spent.

The fact is that less needs to be spent by the government and more money needs to be retained by individuals rather than taken as tax. Then individuals can decide how much they choose to spend on healthcare based on their own circumstances.

At that point, healthcare providers would need to offer incentives for individuals to take out insurance or use a particular doctor or hospital. The best incentive is for them to provide the best service at the lowest cost – funnily enough, exactly how every other market action works.

The only plus side to this is that soon enough the government will have so much control there will be nothing left to blame on the private sector. Perhaps then the central planners will realise that spending ever increasing amounts of someone else’s money is not the best way to achieve a decent healthcare system.

Cheers.
Kris.

Tagged as: Australian Competition & Consumer Commission, Australian property, bhp billiton, federal government, healthcare, kevin rudd, obama, rio tinto, taxation