This is a bit off-topic as far as an immediate forex trade is concerned, but there’s a very relevant economic lesson to be learned regarding the debate over health care reform.

The cost of delivering health care is bound to go up no matter what the politicians decide to do vis a vis a government run program or any other solution they may decide to come up with, and the reason is because there’s no way to improve health care productivity. Let me explain.

Productivity has to do with the efficiency with which a business or other enterprise can deliver goods and/or services to the market place. Productivity is a measure of output (for goods and/or services) per worker or worker hour. Obviously, the more output that can be gotten per worker, the cheaper is the cost to deliver a good or service, making that good or service more competitive in the markeplace. Rising productivity helps keep inflation down.

In general, improved technology allows a business to produce goods or services at a faster rate (i.e. more can be produced per worker or worker hour). Technology therefore is the key to increasing productivity.

For example, early in the 20th century, Henry Ford and other carmakers were producing cars by hand, an expensive process which made the cost of purchasing a car too high for the average consumer. Ford’s big contribution to the automobile industry was the creation of the assembly line, which allowed more cars to be produced per worker hour at a cheaper cost of production. Eventually, the retail cost of a car was reduced to about $600, making them affordable to a large base of consumers.

In other words, a new technology (the assembly line) allowed for increased productivity.

The same thing happened throughout the 1990’s when the use of computers in business became more widespread. Businesses were able to produce more goods and services per worker hour because the improved technology allowed workers to do more per hour. More efficient computer use raised the rate of productivity.

The delivery of healthcare to consumers however is a totally opposite story, because there’s no way to increase productivity by creating new technologies. In fact, the use of new technologies in general only serves to drive the cost of healthcare delivery ever higher.

Up until about 1995, x-rays were the main form of diagnostic imaging. When doctors were looking for disease or injury, x-rays where the tool of choice. The cost of the average x-ray was low-typically about $100 for a standard chest x-ray. But then, a new technology called Magnetic Resonance Imaging (MRI) became available, and doctors began to use it because it provided a superior diagnostic image. Disease and injury were seen more clearly and doctors could look into parts of the body that x-rays could not.

All that was fine except for one thing. The cost of a typical MRI was (and remains) about 10 times the cost of a typical x-ray. In other words, the implementation of a new or improved technology did not result in an increase in the productivity of delivering health care to the marketplace place. In fact, it only served to drive the cost higher meaning that improved technology resulted in a decrease in productivity.

There’s another factor which relates to the productivity of healthcare delivery. Because of potential litigation issues, doctors tend to order expensive MRI’s for every little ache and pain whereas before, they might have just ordered an x-ray. Doctors have to do this now because if they don’t order an MRI (or other expensive test), they run the risk of being sued for malpractice should it turn out that the patient has a serious problem which the MRI would have picked up.

Of course, in general the more services a doctor can provide, the more his or her income will go up. And if the doctor owns the MRI machine (or other technology), every test ordered is more money in his pocket. So, the incentive for the doctor is of course to order more and more expensive tests because by doing so, they decrease their exposure to potentially damaging litigation while increasing their incomes.

What all this means of course is that as far as healthcare is concerned, new technology tends to decrease productivity i.e. drive up the cost of delivering goods and/or services to the end-user, the healthcare consumer. In fact, there’s only one way to actually decrease the cost of healthcare.

In California, a study of the Blue Cross/Blue Shield insurance coverage’s revealed something interesting; approximately 20% of requested services were actually denied for coverage, meaning that the insurer refused to pay for the services requested. That drove down the cost of healthcare allright-California’s healthcare insurers turned about $10 billion in profits in 2008, helped in no small part by denying about 20% of the requested services. So, denying coverage is about the only way to reduce the costs of healthcare, at least for the insurer. For the purchasers of coverage, the costs only go up.

So, for those of you who are worried that government-run insurance coverage will result in the use of so-called “death squads,” that facts are that such things already exist in private health care.