One of the joys of being the father of a teenager is when your discussions move to really interesting topics.  A few years ago, my oldest and I read 'To Kill a Mockingbird' together for her school.  Discussing the character of Atticus Finch in standing up for what is right gave me a glimpse of the fun that was coming.  Helping with geometry is not a discussion as much as a rummage through the attic of my mind, trying to remember what happens to the hypotenuse  when you bisect the opposite angle.  But I digress.

Recently, she came home wanting to talk about the economy.  That was pretty cool, especially since she really wanted to talk about the economy and it was not a code word for, 'Dad, can you help stimulate the economy by giving me $20 to go shopping?'

You start with supply and demand, right?

So I offered a great explanation, tailor made to the 16 year old female mind, using iTunes as my market of choice.  Her questions and responses indicated she was really getting it.  I was so proud.

'So, Dad, does this supply and demand thing work all the time?'

See, she is brilliant.  What a penetrating question.

'Generally,' I replied, and then talked about the exceptions being when someone starts fiddling with the market, not letting the law operate as it should.  Rent control, manipulative restrictions on a precious commodity, price fixing.  A quiet voice inside my head warns that we are dangerously close to one of those moments where I overshoot and kill the teachable moment.

'Well, give me an example,' she asks.  'When does it not work.'

Good, I am not a total dork just yet.

I had to find an example that came from her world, and I think I settled on something tied to Apple's decision to give AT&T the exclusive on the network for the iPhone, but my mind went elsewhere.  It went to the world where I live every business day.  It went to healthcare.

Granted, there are plenty of examples in the healthcare industry where the law of supply and demand is alive and well, working as it should.  But I believe that a large part of the problem is that, at the core, someone is jacking with the law, screwing up the natural mechanisms.

Let's take a hypothetical.

Let's say that in a little town, there are about 15 plumbers.  Now the town is growing and new houses are being built every day, so the demand for plumbing work is going up.  Now let's add to the fact that six of the plumbers are going to soon retire, but the local technical school has only one new plumber-to-be in the pipeline (that pun was just too easy to pass up).  What do you think will happen to the price paid to plumbers?  Of course.  Supply is down, demand is up, prices are up.

Well, here we sit with the baby boomer generation now at the front door of that period of life where your doctor becomes a more important person in your life.  Things are starting to wear down and need to be fixed.  Chronic diseases are more prevalent and need more managing.  Demand, across most clinical specialties, is naturally rising.

Supply, in the meantime, at least for many specialties, is not keeping up.  Primary care, as we all know, is really falling behind fast. Only about 5% of new medical school grads are going to be practicing PCPs, though today about 50% of all physicians are primaries.  The retirement/replacement equation just does not work.  But it is not just primary care physicians.  Have you tried to hire a neurosurgeon or hand specialist lately?

So class, demand is up and growing.  Supply is short and shrinking.  What will happen to the price?

Wrong. 

The law does not apply and it has not applied for a long time.  Someone is monkeying with the system.  Normally, we use derisive terms for those who do this, calling them things like 'cartels' or 'monopolies.'   

Physician reimbursement and income, on a per unit of service basis, is flat at best over the past ten years and sharply down over the past decade.  I am not sure what scientists call it when something defies a natural law, but whatever it is, we're doing it.  We're breaking the law of supply and demand every day.  Prices are not responding as they should because there is an outside force at play.

About now, some readers are mustering an uproarious objection, pointing out to this dunderhead writer, who is obviously living under a rock,  that our healthcare system is suffering from costs that are too high, not too low.  Allowing physician compensation to respond to demand would make the problem worse, they are now yelling.

Before I am accused of shameless schlepping on behalf of our physician clients, let me say that I fully agree that our healthcare system is not working, economically, as it should.  We should be able to deliver what we deliver for a lot less than two dimes out of every national dollar. 

But, and this is a big but, there is a difference between the unit price and the overall cost of the industry.  In fact, I would argue, though I am only an economist in the eyes of my daughter, that the very act of artificially restricting the natural movement of market prices adds to the overall cost, and isn't that the big problem Washington is trying to solve?

It is inevitable that my personal biases will come out in these writings over time, so I just as well get a big one on the table now. 

I am a market guy. 

When asked if I am politically conservative or politically liberal, I argue that characterization distorts the underlying better question.  Instead, ask whether one believes the market or the government is best suited to solve a particular problem.  For some issues, clearly a governmentally driven solution makes sense.  Take armies, for example.  For others, the mechanisms of the market provide a best answer.

And that is, at the most fundamental level, the essence of the debate about healthcare reform.

Those who lean to a governmental answer point to the failures of the healthcare market to control spending and provide coverage for all Americans.  The market approach has failed, they argue, and it is time for more central control if we are to solve this problem.  I understand this point of view, which is held by many people I respect.  I just happen to disagree.

Here is the irony.  Of the two trillion and change that we spend on healthcare in the US, government of one form or another pays about 50% of that tab.  It is just about smack in the middle.  Those that say the market has failed argue that in order to solve the problem, the government needs more sway.  They say that paying 50% is enough to bankrupt the country but it is not enough to really assert the control necessary to fix the problem. 

Market types like me argue just the opposite, using the exact same data point.  50% being paid and controlled by the government, we agree, can and will bankrupt the country.  But, that much control has so fundamentally altered free market principles that it is all discombobulated.  In a December 9 editorial piece from the Wall Street Journal, Ivan Seidenberg, the Chairman and CEO of Verizon, is quoted as saying, 'The problem with the health care market in this country is that it really doesn't function as a market -- leaving major consumer needs unmet, costs unchecked by competition, and basic practices untouched by the productivity revolution that has transformed every other sector of the economy.'

So, I tell my daughter story after story about how this market system we have has worked for two centuries to drive innovation and cost reduction and higher levels of customer satisfaction and improved quality. 

And then I imagine what would happen if we really turned it loose on healthcare.