:: Health Care Economics – Why Prices ≠ Costs & Why That Matters
Prices are not costs. Prices are what pay for costs. Where the costs ar not covered by the prices that are allowed to be charged, the supply of the goods or services simply tends to decline in quantity or quality . . .
Thomas Sowell, “Basic Economics : A Common Sense Guide to the Economy” (3rd ed. 2007)
The nonpartisan Joint Committee on Taxation has revised estimates of the tax burden imposed by the Senate bill. According to the report, the bill would raise $121 billion in fees on drug companies, health insurers and the makers of medical devices, up from the $29 billion over the amount it reported last month.
Of course, only the very naive would fail to understand that these taxes will be passed on to consumers. At the same time, history is replete with examples of the deleterious effect of attempts to control prices through government control. (The economist Friedrich Hayek has provided several such examples in his classic work, The Constitution of Liberty, and observes that price controls must be combined with direct control of production, i.e., who is to perform what services for whom, to be effective.)
These basic economic axioms appear lost on the proponents of non-market-based health care delivery models. Yet, one only has to look to Massachusetts to see the inherent problems in health care legislation that does not realistically encounter the cost of entitlements.
To appreciate the Massachusetts model, a brief digression may be helpful.
Ideas for controlling health care costs have often taken the form of managed care models and of those there have been several iterations. One of the cardinal traits of the original managed care approach was the use of capitated fees, i.e., fixing a payment for a plan member’s treatment at a stipulated figure for a given plan year, as opposed to fee for service.
The Massachusetts universal health care plan employs a version of capitation. The preferred terminology is “global payments”. The operative economic notion remains the same.
A recent article in Health Affairs, “Mission Not Yet Accomplished? Massachusetts Contemplates Major Moves On Cost Containment“, by Martha Bebinger, Vol. 28, No. 5 1373 assesses the plight of the Bay State’s public health care initiative. The author notes a growing concern in Massachusetts that rising health care costs might derail the state’s move to universal health coverage.
Given the similarities in the state’s pay or play mandate and that proposed by congressional proponents of health care legislation, the state’s experience is worth noting and Bebinger’s observations are informative. On the current fiscal status of the Massachusetts’ program, Bebinger writes:
The reform, however, has one big Achilles’ heel: rapidly rising health care costs threaten to scuttle hundreds of other programs in the state budget; impair employers’ ability to offer coverage to workers; and undermine both the political support and the mechanics of the health reform itself.
The article then assesses various new ideas generated by a special panel of experts appointed earlier this year to figure out how to control costs. And, inevitably, the notion of price control enters into the debate with an antiseptic moniker, “global payments”, and sufficient window dressing to enable a specious distinction from capitation.
As an aside, in view of recent criticism of HR 3200, the House bill, it is ironic that one of the physicians quoted in the article suggests that advance directives may play a role in reducing the state’s costs:
An improved global payment system, Dr. Saal says, should even require patients in the system to have advance directives, in hopes of heading off much of the expensive, ineffective care that patients receive in the last six months of life.
In any event, it seems that Massachusetts’ universal health care plan is not controlling costs. This should not be surprising in the least, nor should anyone believe that “global payments”, i.e., government-dictated payments for services will escape adverse effects on patient care.
Thomas Sowell aptly notes that the cost of medical care is not reduced when he government imposes lower rates of pay for doctors or hospitals.
There are still just as many resources required as before to build and equip a hospital or to train a medical student to become a doctor. Whether the result is longer waiting time, less diagnostic tests, less modern equipment or medical students trained from abroad with inferior training, there is a consequence of reducing prices.
By enforcing a regime of lower payments, the government requires providers to lower costs and that effort ultimately affects consumers. Prices do not control costs, but controlled prices do alter the form of goods and services provided.
One of the many aspects of genius in our form of government is the concept of federalism. The health care debate appears to have lost sight of the fact that states and local governments are actively exploring alternatives to expanding health care services to their constituents.
As the value of the U.S. dollar continues to plummet, perhaps the political figures in this debate should give state and local government models more time to work or fail. As the saying goes, there is no education in the second kick of a mule.
