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Wednesday, July 22, 2009

Healthcare Reform: What happens when the price is not right?

The big news is sticker shock. We are talking about trillions of dollars. I am sorry. I do not think there is a human being on the planet that can fully comprehend the magnitude of trillions of dollars. The real tragedy is we have no concept of what these inconceivable sums of money will actually buy for us!

We are told that we have a right to health care so we are going to expand the federal entitlement to health insurance. One might think that giving us the former will automatically give us unbridled access to the latter. That is not the case. There are a number of arguments to support this position but I believe the most compelling argument is one that focuses on pricing of actual services.

As I stated above, the bills going through Congress create a huge entitlement for health insurance. Ultimately, we do not receive services from insurers. We receive services from a host of other people and entities which deliver some discrete service or bundle of services which in some way shape or form attend to some want or need. Why those specific individuals are available at a given time and place and have the particular set of skills required to attend to our needs is the product of a cascade of events extending well into the past. Their activities are not planned as part of some grand scheme and their individual decisions to be available with a particular expertise or service is more likely driven by the fact they are paid to do so rather than a more noble motivation.

If specific services are priced too cheaply, there will be demand but little supply. This applies to widgets and medical services alike. If widgets are too cheap, producers stop making them creating a shortage and prices will increase. In medical services, prices are administratively set and if set too low, they remain too low and shortages develop and persist. If prices are set too high on widgets, buyers withdraw or suppliers expand. In the medical world, prices for services which are arbitrarily set too high, remain high. While high prices in the rest of the world defer buyers, the presence of medical insurance insulates sufficient numbers of people from inflated prices. Prices do not correct and lucrative services tend to be over utilized.

Self correcting mechanisms in the world of administrative prices in medicine work slowly if at all. In the vast sea of non-market based prices, health care providers tend to find and exploit high margin services well before any administrative entity can respond. Because there are so many prices to set and the variables which define value of those services are in constant flux, there will always be countless prices set wrong. Many prices will be set to low and shortages will ensue as providers avoid those money losers. Many prices will be set too high and you can be assured that these opportunities will be discovered promptly and exploited fully with the assurance that the bureaucracy charged with correcting this will be paralyzed for years if not decades.

How such luminaries in medicine, health policy, and economics can miss this point baffles me. When faced with this problem it is generally dismissed with a simple statement such as "The market can not be trusted with something as important as health care." If market pricing cannot be trusted in health care, why not impose administrative pricing upon the rest of the economy. History tells us why this is a very bad idea.

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