Monday, August 3, 2009

Meddling in politics

Normally I only offer my opinions on apologetical, theological and philosophical matters here: not because I have any great measure of competence in them, but because that's what I prefer this blog's topic to be.

This post is an exception. Here is what I wrote on the "health care crisis" in combox at Syzygus:

Since medical care is a scarce resource, it is subject to the law of supply and demand. The President and his advisors favor a rationing scheme for apportioning medical care among those who want it, but this a terrible substitute for allowing the free market to apportion it: its effects will be to create shortages (because government will set price controls on medical care), demolish the quality of care that is generally available (because the quality of legally available goods always suffer under a price control regime), and restrict the availability of genuinely good medical care to an ever smaller elite (because they possess the necessary resources to obtain it). I do not see how any good long term outcome is possible. We have all the evidence we need – in the last century – to unequivocally demonstrate that centralized economic planning does not work. But that is what Obama’s plan is all about.

Furthermore, I suppose it's time to buy stock in printing presses, because the only way that they're going to be able to "afford" to add yet another multi-trillion dollar boondoggle to the federal budget is going to be by creating the money out of thin air. The consequences for our economy will be dire as money is sucked out of every other activity for the sake of funding this monstrosity…unless, of course, they prefer to avoid that abyss by simply price-controlling the problem away (in which case, go back to my first paragraph and repeat the whole process).

This catastrophe in the making is an inevitable consequence of the refusal to accept the iron law of supply and demand: if they reduce the price of medical care, demand will increase.

The way to deal with the problem is not by reducing the price of medical care. The way to deal with it is to increase the supply of available medical care: we need more doctors and nurses. With a greater supply of good medical care available, prices necessarily will go down (in the absence of either guild or governmental meddling, anyway).

If this option isn’t feasible, then we’re going to be forced to deal with the high cost of medical care – or shoddy care. There just aren’t any other alternatives.


Martin said...

Since medical care is a scarce resource, it is subject to the law of supply and demand. Since we pay insurance this is an artificial wedge between the cost and demand.

I'm a veterinarian. If I tell a client we need to do "blood tests" most (embarrassedly) ask, “how much”. Almost no one, at least no one with insurance, asks a doctor, “how much”. How often do people ask a radiologist for a price quote on an MRI before its done or ever, ever call around for a cheaper one. Never. (BTW: If they have pet insurance the chance of them oking more tests and surgery increases greatly.)

I see my son’s (notable) medical bills as they run through the insurance company. From my perspective the doctors and nurses are getting squeezed. It’s the hospitals and the referral centers that make the money that’s to be made. Oh yeah, and Pharmaceutical companies.

Note that medical costs have escalated well beyond inflationary rates for years (I’ve seen that graph often enough). What isn’t clear to me is where the money is going. Is this actually Doctors and Nurses and suppliers making a feast or (I think more likely) increasing expectations of our people. If you go to a Doctor with a headache there’s a good chance he will send you for a MRI or CT-scan. Twenty years ago that would only happen with people who actually had a good chance of having a brain tumor.

Reginald de Piperno said...

Hi Martin,

I'm afraid you may have misunderstood me, mostly because I wasn't trying to be comprehensive. I apologize.

I don't consider our present system of medical care to be much of an example of a free market at work. In the first place, the government meddles in it and distorts pricing. In the second place, the monopoly that doctors enjoy does the same thing.

I must stand by my statement that you quoted and rejected. It is undeniable that medical care is a scarce resource: no one can have as much of it as he he would want at zero cost. There are only so many doctors and nurses, and they can't provide all the medical care that everybody would want if they didn't have to pay for it. It is a scarce resource. Insurance has an influence on pricing, and it certainly has an influence on demand, but it doesn't change the fact that there are a limited number of doctors. There are other factors at work in the pricing of medical care, of course, but the fundamental thing is that there is not an unlimited supply of it…and consequently it is subject to the law of supply and demand.



Martin said...

I'm sure I still don't understand you. You seem to suggest if we had more doctors then the cost of medical care would decrease. I think availability would increase but I don't see (in this market) the numbers of doctors as a driving force in cost. Be as it may. Thanks for the thoughts. I read a little bit of your Trent posts but flit from blog to blog like the fruitfly that I am, rarely stopping to truely study any one subject.

Reginald de Piperno said...

Perhaps some additional thoughts about insurance would help clarify my view.

I'm not an expert on this by any means, but it seems to me that the purpose of insurance is to mitigate risk by distributing the costs of dealing with them across a wider population. It depends upon statistics for its success: "how many people will take advantage of this coverage, how much will they consume, and how much do we have to charge the entire group in order to make sure that their costs are covered, our costs are covered, and we make some measure of profit?"

One of the primary effects of medical insurance is to reduce the cost of medical care for the individual (obviously), and one of the main effects of that (generally) is to induce the individual to pursue more medical care – to "consume" more of it – precisely because it is less expensive for him, thanks to his insurance (which spreads his costs around among everyone who obtains insurance from the same insurer). This means that the demand for medical care increases, but if the supply of it does not increase at a rate sufficient to meet the increasing demand, then the price of medical care necessarily increases.

Of course, this has negative effects for the planning of the insurers, in the sense that they plan to pay out "this much" for covered expenses, but they wind up paying out more. In order to keep up with both the rising prices of medical care (caused by the increased demand that insurance generates) and the fact that yesterday's premiums are insufficient to keep up with tomorrow's payouts (even if we allow for a reasonable amount of foresight on the part of the insurers), the consequence is that premiums have to go up.

This would be so, even in an economy where the government does not tamper. Unfortunately, it does tamper.

You seem to suggest if we had more doctors then the cost of medical care would decrease. I think availability would increase but I don't see (in this market) the numbers of doctors as a driving force in cost.

My claim was that the price of medical care would go down with a sufficient supply of doctors and a reduction or elimination of market meddling by the guild and the government. Both the government and the government-granted monopoly power held by the AMA have the power to influence the cost of medical care in the USA, and rarely do they do so in ways that are beneficial for consumers of medical goods.

So much for this armchair theorist's view. You can take it and $0.60 and get yourself a soda :-)



Reginald de Piperno said...

Oh, and one other thing:

Thanks very much for your visits to my blog. I appreciate it! :-)


Agellius said...

Between the two of you (Martin and Reginald) I feel I have a better grasp on the causes of rising healthcare prices than I did before.

I already suspected that the main culprit was insurance insulating the consumer from the cost of the services he seeks, thus causing him to seek more, and more expensive, care. But I see Reginald's point as well, that if there were a greater supply of medical care providers then costs might not have to go up so much.

However I still wonder: Even if there were more providers, I don't see how that would cause prices to go down unless there were an element of competition. Competition is how supply-and-demand works, right? Competitors undercut each other's prices to attract each other's customers, causing overall prices to go down.

But again, since the consumer is insulted from the true cost of his care, how can the providers attract customers through undercutting each other's prices? The consumer's co-payment is the same no matter who he gets his care from. He doesn't care about the total cost of the care since that's far beyond the amount that he pays in any case.

Reginald de Piperno said...

Hi Agellius,

You've reminded me of a couple things.

One thing is that there is (or would be, in the absence of the wrong sort of government regulation or collusion among insurers) competition among insurance companies for your business. This would work to keep the cost of insurance as low as possible.

A second thing is that there must be a fair amount of pressure on doctors from insurance companies to keep costs down.

But there are other factors too. The government sets caps on how much doctors can charge for Medicare stuff; I would expect that price controls like this would produce a shortage of doctors willing to handle Medicare patients, and/or that those doctors would end up providing lower-quality services.

Also, the fact that doctors hold a monopoly tends to drive prices up. You have to go to certified schools and have a license in order to be a doctor, and this monopoly artificially keeps prices higher. Yes, there are a lot of members in the class holding the monopoly, but think how things might be different if you didn't have to have the same sort of certification in order to do various things. We customers might like the fact that they have a monopoly, but in that case we have no right to complain about the extent to which the monopoly keeps prices higher.

Another thing that keeps prices high is the cost of education to become a doctor: these people end up massively in debt in order to become certified, and they just have to be able to pay those debts off (or at least service the debts).

Lastly (for this post anyway – obviously much much more could be said than someone like me could ever cram into a comment box!), government regulation requires doctors to keep staff to perform bureaucratic tasks that they might not otherwise need done; this too causes prices to rise/stay high.

In the end, though, there's this: the Mona Lisa is valuable because it's one of a kind. If da Vinci had painted a thousand of them, they'd be much less precious. In the same way, increasing the supply of doctors necessarily brings prices down…as long as someone's not artificially keeping them up :-) Any government scheme to force prices down that involves pricing limits rather than encouraging lots more people to become doctors is going to be a bad thing, though.



Martin said...

Laser Eye surgery. Insurance doesn't pay for it and as there are more providers and people are paying out of pocket the prices drop.

Reginald de Piperno said...

Good example, Martin. Thanks.