Ignorance of Economics in the Health Care Debate

Posted by Jeff Carter
on March 11th, 2010

The health care debate is atomically charged with lots of emotion. If you don’t believe in Obama’s reform package you have been called, a racist, a curmudgeon, resistant to change, a luddite, not capable of compassion for your fellow man and a myriad of other catch phrases. What you haven’t been charged with is being an economist. The proponents of the package don’t want you to look at the true economics of the package. I am not talking about the mundane line items. We know that the accounting costs are screwed up. The taxes start early, the benefits late. Plenty of exceptions for those with lobbyists able to curry government favor, crony capitalism I think this is called.

The key thing to look at is the basic economics of the package. Ask yourself, What is the most important component of any market? Inputs? Supply? Demand? Elasticity? Outputs? Cost of production? Transparency? Buyers and Sellers? Monopoly? Oligopoly? Perfect Competition? If you answered any of these, you are incorrect.

The most important component of any market, even markets that don’t use some form of paper currency is PRICE.

Price is far different than COST. Cost is a number made up by number cruncher people. Accountants. They look at various inputs to producing a good or service and allocate costs to that good. Then they total them all up and come up with a cost. A different accountant might look at the exact same inputs and come up with a different cost. It’s all about judgement.

Price is what the actual market is willing to bear for that service. Price may be under the cost. If it’s above the cost, you make a profit and have incentive to produce more.

The way we utilize our health care in the US, we don’t know the true price. Virtually everyone utilizes a third party payer system. If you have insurance, your doctor submits a claim to your insurance company. The insurance company pays the doctor, and you pay the balance if there is one. If you are on a federally assisted program, you pay virtually nothing. The doctor gets paid by the government. Hence, there is no price discovery in the market place. So, price discipline can’t be administered to the forces of supply and demand. This results in you complaining about health care costs. In reality, it costs you more to go see your hairdresser than it does your doctor.

Obamacare also puts in price controls. Price controls inject what economists like to call “dead weight loss” into a market. It makes a market less efficient. What that means to you is that there will be massive demand for services and less ability to provide those services since the price that they can charge is set by the government, not the market. The result will be rationing, or infernal time wasting waits. Think about how the Soviets lined up for toilet paper and bread, only to find out when they got into the store there was none to be found. Obamacare will do the same thing to the medical industry.

This could be you at the doctor’s office or hospital under Obamacare.

In order to make this real for you, let’s try and formulate a real world example. Let’s say you want to buy a steak. There are costs of production to make that steak. Think about all the costs; cost of the animal, feed, transportation, butchering, distribution, packaging, legal costs. When you go to the store, you see that you have to pay $6 per pound for that steak. That $6 is the PRICE. The cost could be more or less than that depending on how the accountants allocate all the different costs. Now, the government decides that $6 is too much for steak. They put in a price ceiling of $4 per pound.

Will you want more steak? Will you eat more steak? Sure, at a lower price there is more demand. But what happens to supply?
There aren’t any more animals. Plus, at a lower price, the producer doesn’t have any incentive to produce more steak. They continue to supply some steak at $4, but not enough to satisfy demand-so lines form outside the butcher shop. People get mad.
They complain to their elected official that they can’t get steak. The elected official will make some statements, launch an investigation, send agents to the butcher shop.

In the back of the butcher shop, one butcher quietly is selling steak for $6 a pound. He only accepts cash, or even better, barters for other services. He probably slips a few free steaks to the government agents that are checking on him. This is the black market and one will surely ensue under Obamacare. The already wealthy, or politically connected will get enough steak. They can afford the price, or taken care of by the bureaucrats. The rest of us will wait in line.

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