Ignorance of Economics in the Health Care Debate

http://4.bp.blogspot.com/_ZDWmi7HyofQ/RzuB4g_wmGI/AAAAAAAAAOY/OqCRZTtEGH8/s400/calvin-on-ignorance.gif

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.
http://farm4.static.flickr.com/3587/3634329707_7574093634.jpg

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.
http://3.bp.blogspot.com/_TCwccYkva8k/Sl2afq9RIdI/AAAAAAAAAF4/JCQcqCmPnGw/s320/hairdressers.jpg

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.
http://www.realussr.com/wp-content/uploads/2009/06/0000ywag-500x336.jpg
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.

  • Carol T

    Good read. The major problem with this reform is that it is only positively impacts a small piece ot he population, while the majority that has coverage now suffers.

  • Carol T

    Good read. The major problem with this reform is that it is only positively impacts a small piece ot he population, while the majority that has coverage now suffers.

  • Carol T

    Good read. The major problem with this reform is that it is only positively impacts a small piece ot he population, while the majority that has coverage now suffers.

  • Gonzo

    CBO has already said that Obamacare would save money right away. And with tweaks, it will save trillions in the long run. That’s a bipartisan opinion, not mine. How do you make money if you’re a private insurer? You deny coverage. And that’s what they do and that is immoral. We need something now. First to save us from being raped blind by the insurance companies and to do the right thing by our citizenry. Don’t let perfect stand in the way of the possible.

    BTW, the price of steak a simple commodity and complicated, multilevel health care plans is utterly incongrous.

  • Gonzo

    CBO has already said that Obamacare would save money right away. And with tweaks, it will save trillions in the long run. That’s a bipartisan opinion, not mine. How do you make money if you’re a private insurer? You deny coverage. And that’s what they do and that is immoral. We need something now. First to save us from being raped blind by the insurance companies and to do the right thing by our citizenry. Don’t let perfect stand in the way of the possible.

    BTW, the price of steak a simple commodity and complicated, multilevel health care plans is utterly incongrous.

  • Gonzo

    CBO has already said that Obamacare would save money right away. And with tweaks, it will save trillions in the long run. That’s a bipartisan opinion, not mine. How do you make money if you’re a private insurer? You deny coverage. And that’s what they do and that is immoral. We need something now. First to save us from being raped blind by the insurance companies and to do the right thing by our citizenry. Don’t let perfect stand in the way of the possible.

    BTW, the price of steak a simple commodity and complicated, multilevel health care plans is utterly incongrous.

  • gingermain

    Gonzo
    First CBO is not bipartisan (meaning people of both parties), it is non partisan. They are government employees operating without bias. Makes a difference. They are charged with evaluating the plan based on input from the House/Senate. In other words, if they say growth will be X they input that info and come up with a number. Garbage in, garbage out. Read the fine print on the CBO score and you will see that the following (h/t http://www.bloggernews.net/124019)

    1) CBO estimates deficits will increase under PPACA after the sixth year, thus claims of favorable effects on the deficit are temporary.

    2) 76% of the increased revenue contributing to the reduction in deficits comes from taxes, fees, and penalties that are ultimately paid by the consumer, thus supporting the contention that this is partly a tax bill in disguise.

    3) Gross incremental costs are projected at almost $1 trillion. Costs can usually be estimated with greater precision than can offsetting revenues and cost savings, as the CBO admits: “The range of uncertainty surrounding that assessment [of the net effect] is quite wide …”

    4) The much touted savings in Medicare comprises reduction in payment for most services and hospitalization, and “setting payment rates in the Medicare Advantage program [private Medicare plans]”. These speculative “savings” require more government activity in the market to reap a fuzzy $438 billion over ten years. As William F. Buckley, Jr. said, “When you raise taxes, you raise taxes. When you forecast spending decreases, you are engaged in necromancy.”
    some sources for your reading pleasure:
    http://www.cbo.gov/ftpdocs/108xx/doc10868/12-19-Reid_Letter_Managers_Correction_Noted.pdf
    http://www.cbo.gov/ftpdocs/78xx/doc7837/03-05-Uncertain.pdf
    http://www.cbo.gov/ftpdocs/89xx/doc8917/01-23-2008_BudgetOutlook.pdf
    http://www.cbo.gov/ftpdocs/110xx/doc11005/01-22-HI_Fund.pdf

    Finally, regarding the steak….you have missed the forest for the trees. Jeff was not talking about STEAK, he was talking about BEHAVIOR. Did I really need to point this out?

  • gingermain

    Gonzo
    First CBO is not bipartisan (meaning people of both parties), it is non partisan. They are government employees operating without bias. Makes a difference. They are charged with evaluating the plan based on input from the House/Senate. In other words, if they say growth will be X they input that info and come up with a number. Garbage in, garbage out. Read the fine print on the CBO score and you will see that the following (h/t http://www.bloggernews.net/124019)

    1) CBO estimates deficits will increase under PPACA after the sixth year, thus claims of favorable effects on the deficit are temporary.

    2) 76% of the increased revenue contributing to the reduction in deficits comes from taxes, fees, and penalties that are ultimately paid by the consumer, thus supporting the contention that this is partly a tax bill in disguise.

    3) Gross incremental costs are projected at almost $1 trillion. Costs can usually be estimated with greater precision than can offsetting revenues and cost savings, as the CBO admits: “The range of uncertainty surrounding that assessment [of the net effect] is quite wide …”

    4) The much touted savings in Medicare comprises reduction in payment for most services and hospitalization, and “setting payment rates in the Medicare Advantage program [private Medicare plans]”. These speculative “savings” require more government activity in the market to reap a fuzzy $438 billion over ten years. As William F. Buckley, Jr. said, “When you raise taxes, you raise taxes. When you forecast spending decreases, you are engaged in necromancy.”
    some sources for your reading pleasure:
    http://www.cbo.gov/ftpdocs/108xx/doc10868/12-19-Reid_Letter_Managers_Correction_Noted.pdf
    http://www.cbo.gov/ftpdocs/78xx/doc7837/03-05-Uncertain.pdf
    http://www.cbo.gov/ftpdocs/89xx/doc8917/01-23-2008_BudgetOutlook.pdf
    http://www.cbo.gov/ftpdocs/110xx/doc11005/01-22-HI_Fund.pdf

    Finally, regarding the steak….you have missed the forest for the trees. Jeff was not talking about STEAK, he was talking about BEHAVIOR. Did I really need to point this out?

  • gingermain

    Gonzo
    First CBO is not bipartisan (meaning people of both parties), it is non partisan. They are government employees operating without bias. Makes a difference. They are charged with evaluating the plan based on input from the House/Senate. In other words, if they say growth will be X they input that info and come up with a number. Garbage in, garbage out. Read the fine print on the CBO score and you will see that the following (h/t http://www.bloggernews.net/124019)

    1) CBO estimates deficits will increase under PPACA after the sixth year, thus claims of favorable effects on the deficit are temporary.

    2) 76% of the increased revenue contributing to the reduction in deficits comes from taxes, fees, and penalties that are ultimately paid by the consumer, thus supporting the contention that this is partly a tax bill in disguise.

    3) Gross incremental costs are projected at almost $1 trillion. Costs can usually be estimated with greater precision than can offsetting revenues and cost savings, as the CBO admits: “The range of uncertainty surrounding that assessment [of the net effect] is quite wide …”

    4) The much touted savings in Medicare comprises reduction in payment for most services and hospitalization, and “setting payment rates in the Medicare Advantage program [private Medicare plans]”. These speculative “savings” require more government activity in the market to reap a fuzzy $438 billion over ten years. As William F. Buckley, Jr. said, “When you raise taxes, you raise taxes. When you forecast spending decreases, you are engaged in necromancy.”
    some sources for your reading pleasure:
    http://www.cbo.gov/ftpdocs/108xx/doc10868/12-19-Reid_Letter_Managers_Correction_Noted.pdf
    http://www.cbo.gov/ftpdocs/78xx/doc7837/03-05-Uncertain.pdf
    http://www.cbo.gov/ftpdocs/89xx/doc8917/01-23-2008_BudgetOutlook.pdf
    http://www.cbo.gov/ftpdocs/110xx/doc11005/01-22-HI_Fund.pdf

    Finally, regarding the steak….you have missed the forest for the trees. Jeff was not talking about STEAK, he was talking about BEHAVIOR. Did I really need to point this out?

  • Thanks for the great write-up. A few things I should point out about health , Content is good. I would hope to be back tracking.

  • Thanks for the great write-up. A few things I should point out about health , Content is good. I would hope to be back tracking.

  • Thanks for the great write-up. A few things I should point out about health , Content is good. I would hope to be back tracking.

  • I normally roam all over the web because I have the tendancy to read too much (which isn’t always a great idea because many blogs just copy from each other) but I must say that yours contains some great substance! Thanks for stopping the trend of just being another copycat site! 😉

  • I normally roam all over the web because I have the tendancy to read too much (which isn’t always a great idea because many blogs just copy from each other) but I must say that yours contains some great substance! Thanks for stopping the trend of just being another copycat site! 😉

  • I normally roam all over the web because I have the tendancy to read too much (which isn’t always a great idea because many blogs just copy from each other) but I must say that yours contains some great substance! Thanks for stopping the trend of just being another copycat site! 😉

  • I stumbled onto your blog and read a few post. I like your style of writing.

  • I stumbled onto your blog and read a few post. I like your style of writing.

  • I stumbled onto your blog and read a few post. I like your style of writing.