Lost in the Health Care Debate: Why Prices Keep Going Up
As the debate rages on Capital Hill and on Main Street as to how to reform health care, it seems that everyone on both sides of the aisle have forgotten why prices go up. by Walt Thiessen
(libertarian)
Wednesday, August 12, 2009
Why do health care prices keep going up? Why is it that, over time, the cost of health care has exceeded the ability of almost everybody to pay for it out-of-pocket? Ask this question of 10 different people, and you'll likely get 10 different answers, with blame dropped on HMOs, burgeoning technology, greedy doctors, malpractice insurance, socialized medicine, and a whole list of other bad guys. It seems that practically no one from Obama to Limbaugh can remember what causes prices to go up, and up, and up.
Let's review basic economic theory. The law of supply and demand tells us that when demand for a product or service increases while supply remains unchanged, the price will go up. When supply increases and demand remains the same, the price will go down. When supply decreases and demand remains the same, the price will go up. When demand decreases and supply remains the same, the price will go down. Given enough time for market influences to play themselves out, these patterns will always produce these results.
Okay, now I think we can all agree that health care prices have gone up, and up, and up. They've been doing so for more than 50 years. So the question is: why? What's changing in the supply/demand equation?
Well, certainly part of it is that there are more people alive today than there were 50 years ago. On the other hand, there are more doctors, nurses, and hospitals than there were 50 years ago. There is also more new technology than there was 50 years ago. But there's also another factor that has changed, one which gets very little attention. Before I tell you what it is, consider this question: why has the cost of health care so dramatically outpaced the rate of inflation over the past 50 years?
Give up? The other factor is the supply of money. If you increase the amount of money available for the product or service in question, the price will always go up. No exceptions. This is the price of monetary inflation. But it's not the only way that the supply of money affects prices. Prices will also go up if you force money to be spent on that product or service. Every time, without exception. It doesn't matter where the money comes from. It doesn't matter whether the money is a tax dollar or an insurance dollar or a personal dollar. The mere act of forcing someone (or even inducing someone) to spend it on health care must always contribute to the rising cost of health care. Period.
This is the major cause of the rise in prices of anything where government chooses to involve itself. Even if there were no change in the number of buyers and no change in the number of sellers, and no change in the products or services, if you shovel more money to the buyers or force them to spend more of their own money for a particular product or service, the price of that product or service will go up, every time over time, without exception.
This is exactly what happens every time government tries to solve a problem like health care. If they allocate tax dollars to spend on some aspect of health care, the price of health care will always go up over time. If they pass a regulation which forces people (or insurance companies) to spend money on some aspect of health care, the cost of health care will go up. If they give a tax deduction to taxpayers for spending money on some aspect of health care, the cost of health care will go up. This includes employer tax deductions for health insurance, Medicare, Medicaid, federal and state regulations of health care and health insurance, HMO formation, HMO reform, malpractice insurance, new drug testing, etc., etc.
It happens every time, without exception.
Since Barrack Obama is the new President, he gets the current blame. But he's not the only one. Every President in modern history over the past 50+ years is guilty of the same conduct...using government to increase the cost of health care. Nor is Obama the first to claim that his particular plan will not drive the cost of health care up. The same claims apply to Presidents named Bush, Clinton, Reagan, Carter, Ford, Nixon, Johnson, Kennedy.... The list goes on and on.
Nor does it apply to just Presidents. Congresses have done the same thing over and over. Republicans and Democrats throughout the years have claimed repeatedly that their plan would keep costs down, that it was the other guy's play that would increase the cost of health care.
Every one of them, every President, every Senator, every Congressman who made such a claim, was lying. We know that they were lying because every government requirement in health care, every tax dollar spent, every regulation, every control, every... everything the government does drives the cost up.
Period. No exceptions.
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I agree with you but I think there is also another factor which drives prices up. It is the lack of competition in health care. If you want to buy other goods or services the prices are usually easy to find, so you can do comparison shopping. If you want a new car you can see the prices in newspaper ads or on the vehicles, so you can shop for the best deals. The same is true for food, clothing tools and just about any consumer product. If you want new shingles on your house you probably would get quotes from 2 or 3 contractors and pick the most favorable one. But that generally doesn't happen with regard to medical care. Doctors and hospitals don't advertise their prices. And if the patient has health care insurance he may have little reason to shop because the insurance is paying the bill.
One area of medical treatment which still operates as a competitive free market is vision correction surgery. About 20-30 years ago when that procedure was new it cost about $3000 per eye. But today it is frequently advertised for $1000 per eye or less. So the cost has come down greatly while other medical costs have gone up greatly. Why is that? Well this procedure is usually considered elective so it is not covered by insurance or Medicare/ Medicaid. The patient has to pay out of pocket and that causes him to shop for the best prices. Providers of this service know that and they know they have to keep their prices down if they want to attract customers.
In my opinion we need to get to a competitive free market in health care. Following are my suggestions for getting there:
1) Doctors, hospitals and other health care providers should be required to provide a menu of basic services showing costs. This should be posted online and at the place of business. Medical providers should also give the patient a written estimate of cost before undertaking any procedure. These changes would allow people to make informed decisions. I don't normally like legislating but in this case we have drifted so far from a competitive free market that we need a little help to get back to one.
2) People should buy catastrophic health care insurance to cover the unexpected big ticket items that would be financially ruinous if we had to pay them out of pocket. Other expenses should be paid out of pocket. Health care insurance should not be provided by employers.
and, the ongoing debate is not "how to fix health care" or the struggle between government control and the so called market, the debate is whether we should change the subsidy or keep the prevailing subsidies in place. some benefit one way, some benefit the other. The patient or the market is of no real concern.
Posted By: Walt Thiessen
Date: 2009-08-12 08:34:17
Thanks Gene.
David S.: I agree about the need for competition. I think a better way to encourage the kinds of "menus" you describe is not through government requirement, but rather by removing government programs and regulations. Take away the huge flow of dollars into the industry, and you'll see such menus popping up faster than you can say, "Save money!"
I think you are right in saying the "menus" would happen automatically if we removed government from the picture. But I think it would take a long time. People in that profession aren't accustomed to thinking that way. So I would suggest legislation to accelerate the process. It would probably be a 1 or 2 page bill. Compare that with the 1000? page Obamacare plan.
Posted By: Walt Thiessen
Date: 2009-08-12 13:26:16
David,
I think your estimate regarding rate of change is far too pessimistic. When the medical industry sees its revenues falling (something they haven't experienced in decades), they'll have tremendous incentive to change the way they do business. Smaller operations like clinics and doctors offices will probably do it first, but I'd be very surprised if hospitals didn't follow soon afterward.
As a comparison, if there were something similar to your menus that the real estate industry could offer right now to spur their business, everyone from Century 21 down to your local independent realtor would be offering it, because their business has dropped so much over the past two years that they'll do anything to improve it.
Posted By: Jahfre Fire Eater
Date: 2009-08-13 10:01:09
Hi Walt,
Spot on, as usual, but I think the picture is much bigger than your analysis. Therefore I question the relative impact of inflation versus other kinds of force that the government has applied.
For instance, initially offering "employee benefits" was a competitive advantage in the marketplace for labor. This has evolved into a government mandate. No longer a contributor to the proper functioning of the markets, now employee benefits are merely a forced cost of doing business.
This changes the entire incentive structure. Instead of employers continuously seeking out better plans to offer to lure new workers into the company and to retain valuable existing employees, they now seek out the lowest cost plan the workers will accept. As jobs become scarce the market quits working all together because workers cannot simply take employment elsewhere. Instead, they suck it up and accept less coverage. This is the same path socialized medicine will take only now there will be no choice for the herd, I mean citizens.
Without the government's meddling, business would be free to offer increase salary in lieu of less benefits and the individual could shop around for better benefits. The force in the situation is always the government as you pointed out. It just takes many forms besides monetary inflation. All subsidies, including the minimum wage, contribute to the increased costs of every good and service related to the subsidy.
The progressive trend is to always remove or otherwise nullify competitive advantages and to continuously increase the dependence of citizens on federal hand-outs. The inevitable result is to create citizens who are no longer contributors to the prosperity of the nation but who are forever liabilities on the State's growth. So, over time the State begins to treat the citizens as a necessary evil rather than as a vital asset.
This is where Obama hopes to take us. Healthcare is only one skirmish in the overall battle. The primary outcome of government meddling in markets is moral hazard. All those who opt to accept the bait and risk the hazard become unwitting advocates of the continued growth of government meddling. They become dependent on it and therefore supportive of it. We are very close to having 50% of voting age workers being employed by the state. The Obama people know that we're nearly at a tipping point and they intend to force the issue on every front.
Posted By: Walt Thiessen
Date: 2009-08-13 13:14:54
Hi Jahfre,
Thanks for your positive feedback.
I think you may have misunderstood my point. I wasn't saying that inflation is the main impact on prices. To the contrary, I emphasized that it's the entire picture of government force which impacts the price.
Specifically, I wrote: "This is the price of monetary inflation. But it's not the only way that the supply of money affects prices. Prices will also go up if you force money to be spent on that product or service."
In other words, regardless of whether there was an incentive or a required expenditure or a tax dollar or...whatever...that forcibly puts health care dollars into peoples' hands, the price goes up. This is not general monetary inflation that applies to the entire economy. Rather, it is specific monetary inflation, meaning that it is specific to a particular product, service or (in this case) realm of services.
Nor was I in any way criticizing what employers do to offer health care options to their employees. Rather, I was criticizing the idea of tax credits and deductions for employers to pay for such offerings. The government should not be in the business of either encouraging or discouraging such behavior from employers, and they shouldn't reward it financially, because that reward always leads to higher prices.
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