Healthcare: Price Controls and Shortages
As the final healthcare debate ramps up and certain moderate Democrats (and Joe Lieberman) become the last best hope for a bill that is something slightly less than a complete disaster, it is worth noting that underlying the scrambled mess that reform has become are some basic economic fallacies. The primary underlying problem is the purported view that rising healthcare costs have something to do with either the greed of the healthcare industry or some failure in the market. In this view, increased prices are a sign of moral failure rather than a signal that more economic resources are needed in the healthcare industry. Unfortunately, the rise in costs is not fundamentally a function of lawsuit abuse leading to higher malpractice insurance costs or a flood of illegal aliens crashing our healthcare system. While reforms in these areas would lead to some cost saving and are certainly worth pursuing, the primary drivers of increasing costs are increasingly effective technology and an aging population. All efforts at reform are bumping up against the reality that the population is aging at a faster rate than doctors are being produced (it takes years to produce a doctor or a new drug or a piece of innovative medical technology). This means that healthcare costs would be increasing in the absence of high medical malpractice insurance premiums and illegal immigration, and there is no reason to suppose that the same voices would not be calling for healthcare reform anyway.
Another problem that is being ignored is the effect of price controls, which is effectively what the healthcare bill is attempting to impose when everything is stripped away. While a purely market healthcare system would result in seniors paying a significant fraction of their income and assets to the healthcare industry as they aged (with the accompanying descent into old age poverty which makes this undesirable), government involvement that uses a system of effective price controls (even if it is in the form of a “public option” that artificially drives down prices) simply creates shortages. A staple of basic economics is that lower prices cause producers to produce less of a product. Setting prices artificially low results in less product being produced, but it also results in more of the product being demanded as well. While a government subsidy of healthcare bills for certain segments of the population (senior’s and the indigent) would lead to increased taxes (along with the associated economic cost), such a program would ultimately be less damaging in that it would lessen the political pressure for price control style reform, while allowing healthcare producers to obtain higher prices thereby leading to more healthcare being available.
In the current healthcare reform plan, it appears that we may end up with the worst of both worlds: an effective price control that produces shortages and a government plan that costs the taxpayers money to an extent that they can’t afford. A simple price control that was mandated by law would cause a shortage, but would not cost the taxpayer much. On the other hand, a subsidy of certain healthcare costs would cost the taxpayer money, but would have less of a shortage inducing effect. Unfortunately for the country, Obama has to have a bill and the Democrats control Congress. Even if the moderate Democrats can eliminate the worst aspects of any bill, the final product is going to be one that fundamentally ignores basic economic laws. As with ignoring the law of gravity, the outcome of ignoring economic laws is rarely pretty.
Another problem that is being ignored is the effect of price controls, which is effectively what the healthcare bill is attempting to impose when everything is stripped away. While a purely market healthcare system would result in seniors paying a significant fraction of their income and assets to the healthcare industry as they aged (with the accompanying descent into old age poverty which makes this undesirable), government involvement that uses a system of effective price controls (even if it is in the form of a “public option” that artificially drives down prices) simply creates shortages. A staple of basic economics is that lower prices cause producers to produce less of a product. Setting prices artificially low results in less product being produced, but it also results in more of the product being demanded as well. While a government subsidy of healthcare bills for certain segments of the population (senior’s and the indigent) would lead to increased taxes (along with the associated economic cost), such a program would ultimately be less damaging in that it would lessen the political pressure for price control style reform, while allowing healthcare producers to obtain higher prices thereby leading to more healthcare being available.
In the current healthcare reform plan, it appears that we may end up with the worst of both worlds: an effective price control that produces shortages and a government plan that costs the taxpayers money to an extent that they can’t afford. A simple price control that was mandated by law would cause a shortage, but would not cost the taxpayer much. On the other hand, a subsidy of certain healthcare costs would cost the taxpayer money, but would have less of a shortage inducing effect. Unfortunately for the country, Obama has to have a bill and the Democrats control Congress. Even if the moderate Democrats can eliminate the worst aspects of any bill, the final product is going to be one that fundamentally ignores basic economic laws. As with ignoring the law of gravity, the outcome of ignoring economic laws is rarely pretty.
