Tag Archives: Supply and Demand

Thomas Sowell explains the economics of cutting health care costs

The Democrats are talking a lot of about their plan to reduce the costs of health care. And they think that the way to do that is by having government take a bigger role in health care provision. Well, Thomas Sowell doesn’t like the idea that the government can reduce health care costs by using govenrment, and he’s written a four part series on it.

Here’s a quote from the first part about how Democrats attack the suppliers of health care products and services:

Despite all the demonizing of insurance companies, pharmaceutical companies or doctors for what they charge, the fundamental costs of goods and services are the costs of producing them.

If highly paid chief executives of insurance companies or pharmaceutical companies agreed to work free of charge, it would make very little difference in the cost of insurance or medications. If doctors’ incomes were cut in half, that would not lower the cost of producing doctors through years of expensive training in medical schools and hospitals, nor the overhead costs of running doctors’ offices.

What it would do is reduce the number of very able people who are willing to take on the high costs of a medical education when the return on that investment is greatly reduced and the aggravations of dealing with government bureaucrats are added to the burdens of the work.

Britain has had a government-run medical system for more than half a century and it has to import doctors, including some from Third World countries where the medical training may not be the best.

And a quote from the second part about how reducing costs means rationing:

There is no question that you can reduce the payments for medical care by having either a lower quantity or a lower quality of medical care. That has already been done in countries with government-run medical systems.

In the United States, the government has already reduced payments for patients on Medicare and Medicaid, with the result that some doctors no longer accept new patients with Medicare or Medicaid. That has not reduced the cost of medical care. It has reduced the availability of medical care, just as buying a pint of milk reduces the payment below what a quart of milk would cost.

Letting old people die instead of saving their lives will undoubtedly reduce medical payments considerably. But old people have that option already— and seldom choose to exercise it, despite clever people who talk about a “duty to die.”

A government-run system will take that decision out of the hands of the elderly or their families, and thereby “bring down the cost of medical care.” A stranger’s death is much easier to take, especially if you are a bureaucrat making that decision in Washington.

[…]You can even save money by cutting down on medications to relieve pain, as is already being done in Britain’s government-run medical system.

You can save money by not having as many high-tech medical devices like CAT scans or MRIs, and not using the latest medications. Countries with government-run medical systems have less of all these things than the United States has.But reducing these things is not “bringing down the cost of medical care.” It is simply refusing to pay those costs— and taking the consequences.

And a quote from the third part talks about free markets versus government price controls:

If you think the government can lower medical costs by eliminating “waste, fraud and abuse,” as some Washington politicians claim, the logical question is: Why haven’t they done that already?

Over the years, scandal after scandal has shown waste, fraud and abuse to be rampant in Medicare and Medicaid. Why would anyone imagine that a new government medical program will do what existing government medical programs have clearly failed to do?

If we cannot afford to pay for doctors, hospitals and pharmaceutical drugs now, how can we afford to pay for doctors, hospitals and pharmaceutical drugs, in addition to a new federal bureaucracy to administer a government-run medical system?

And a quote from the fourth part talks about equality versus liberty in health care:

What about insurance companies denying reimbursements for treatments? Does anyone imagine that a government bureaucracy will not do that?

Moreover, the worst that an insurance company can do is refuse to pay for medication or treatment. In some countries with government-run medical systems, the government can prevent you from spending your own money to get the medication or treatment that their bureaucracy has denied you. Your choice is to leave the country or smuggle in what you need.

However appalling such a situation may be, it is perfectly consistent with elites wanting to control your life. As far as those elites are concerned, it would not be “social justice” to allow some people to get medical care that others are denied, just because some people “happen to have money.”

But very few people just “happen to have money.” Most people have earned money by producing something that other people wanted. But getting what you want by what you have earned, rather than by what elites will deign to allow you to have, is completely incompatible with the vision of an elite-controlled world, which they call “social justice” or other politically attractive phrases.

What’s frustrating to me is how quickly people think of growing government as the solution to their problems. They don’t want to deal with paying for health care themselves. But what the government does to solve the high prices is fix prices and regulate the producers of health care, like doctors and medical device manufacturers. They make the supply smaller. But when the cost apparently goes down, people are signaled to use more health care. That makes the demand larger. And this is why there is a shortage of health care in countries that have health care provisioning highly regulated by the government.

You can even save money by cutting down on medications to relieve pain, as is already being done in Britain’s government-run medical system.

You can save money by not having as many high-tech medical devices like CAT scans or MRIs, and not using the latest medications. Countries with government-run medical systems have less of all these things than the United States has.But reducing these things is not “bringing down the cost of medical care.” It is simply refusing to pay those costs— and taking the consequences.

MUST-READ: Why Obama’s health care plan is just wealth redistribution

Story from the Wall Street Journal.

Excerpt:

President Obama proposes to require insurers to sell policies to everyone no matter what their health status. By itself this requirement, called “guaranteed issue,” would just mean that insurers would charge predictably sick people the extremely high insurance premiums that reflect their future expected costs. But if Congress adds another requirement, called “community rating,” insurers’ ability to charge higher premiums for higher risks will be sharply limited.

Like the homeowner who waits until his house is on fire to buy insurance, younger, poorer, healthier workers will rationally choose to avoid paying high premiums now to subsidize insurance for someone else. After all, they can always get a policy if they get sick.

To avoid this outcome, most congressional Democrats and some Republicans would combine guaranteed issue and community rating with the requirement that all workers buy health insurance—that is, an “individual mandate.” This solves the incentive problem, and guarantees that both the healthy poor 25-year-old and the sick higher-income 55-year-old have heath insurance.

But the combination of a guaranteed issue, community rating and an individual mandate means that younger, healthier, lower-income earners would be forced to subsidize older, sicker, higher-income earners. And because these subsidies are buried within health-insurance premiums, the massive income redistribution is hidden from public view and not debated.

If Congress goes down this road, health insurance premiums will increase dramatically for the overwhelming majority of people.

This is the best explanation of what is really at stake if Obama’s socialized medicine plan passes. Please read it.

What no one realizes is that when one group is funding the lifestyle choices of another group, they stop producing wealth. Maybe they just retire, or maybe they move to another country. But the result is the same: economic growth is stifled and unemployment goes through the roof. These are the unintended consequences of the policies of well-meaning but naive socialists.

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How changing prices signal buyers and sellers in a free market economy

Here’s a lesson in capitalism from the New York Times. (H/T ECM)

Excerpt:

The oil industry has been on a hot streak this year, thanks to a series of major discoveries that have rekindled a sense of excitement across the petroleum sector, despite falling prices and a tough economy.

These discoveries, spanning five continents, are the result of hefty investments that began earlier in the decade when oil prices rose, and of new technologies that allow explorers to drill at greater depths and break tougher rocks.

“That’s the wonderful thing about price signals in a free market — it puts people in a better position to take more exploration risk,” said James T. Hackett, chairman and chief executive of Anadarko Petroleum.

And what do we learn from this? Do oil prices go up because of greed? No.

When supply is low or uncertain, but demand is high, then prices must rise. Rising oil prices signal consumers to curtail their consumption, and they signal producers to invest more and take more risks to find more oil.

The government must not interfere to set prices lower when prices rise due to a shortage. Lower prices means that producers will not invest or take risks in order to find more oil for consumers. We have to let producers have their profits in order to for them to invest and take risks to find more oil. And when more oil is found, the price of oil will go down naturally, without the government having to get involved. The more government gets involved, the more opportunity there is for corruption.

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