QandO

July 14, 2004

The Cost of Socialized Medicine
Posted by Jon Henke

Dale makes an important point about the health care “solution” that socialized medicine purports to offer.

Dr. Robert Cihak writes that Canada's health care system is working just fine. Unless you get, you know, sick, or anything.
[...]
On average, a patient in Canada must wait 17.7 weeks before receiving hospital treatment. In 1999, that meant that, in a single year, 192 patients who needed heart bypass operations either dies, or became too sick to have the surgery--which, of course, means they died in due course as well--by the time their spot on the waiting list rolled around.

Pay close attention here: When they promise their plan will “reduce costs”, they really mean their plan will “reduce prices”.

There is a difference.

Prices and costs are interrelated, but they are not the same thing. Price is the mechanism that is used to equalize supply and demand. For example, if demand for a product rises, while the supply remains steady, the price of that
product will rise.

Costs, on the other hand, include not only prices, but a variety of other things, as well. For example, going to college has a price (called tuition) that runs about $10,000 per year. But because you are going to school instead of working full-time, you forgo some income for four years. So in addition to the $10,000 price of an education, there is also an “opportunity cost” of an additional $15,000 a year or so. That makes the true cost of a college education $25,000 per year. The price of tuition is only a fraction of the true cost of an education.

Now, note what John Kerry promises his health care plan will deliver...

“John Kerry takes on the number one issue facing America's families--the spiraling cost of health care. Kerry's health care plan will cut premiums, cut waste, cut greed, and cut Americans a break.”

It would simply force you--the consumer--to bear that cost in one of two ways.

Option 1 is that you'll get sick, stay sick, then die...but for only $1! (imagine the savings!) Since that level of premium will make it impossible to hire doctors and nurses, build hospitals, and buy any medical equipment, you'll get exactly the amount of health care your $1 premium payment buys: none at all.

Option 2 is that the government will subsidize health care, requiring an increase in taxes. Your premium--or price--will still be just $1, but the actual cost will include not only the premium payment, but also the additional taxes extracted from you to pay for your health care. You might get more or less decent health care--although Dale's example of Canada might make you want to question that--but you'll pay far more than a dollar for it.

As for “greed” and “a break”, those are simply ways to avoid saying “I don't like the balance between supply and demand that the price reflects, so I want to change it by fiat”. Of course, if that were possible, those price and wage controls in the 70s would have worked out marvelously.

You do remember the 70s, right? Disco, long lines at the gas stations, and
double digit inflation? Fortunately, disco is dead. Unfortunately, the ghost of Richard Nixon is still wandering the halls of DC assuring politicians that, “hey, we're still Keynesians now, right?”

Question: why is “waste” a problem in the health care industry, but not in, say, the agricultural industry where we actually subsidize waste? More to the point, why is waste not a significant problem in any free market industry? If it could exist for long, I'd be mowing yards for a living, and doing that living in a mansion on the lake. Sure, it would be expensive, but I could just pass that expense on to my customers, who won't mind paying me upwards of $1000 to subsidize my waste, right?

Wrong. Until we repeal human nature, the natural competition in a free market simply won't allow waste to exist to a significant degree for very long. Which brings me to "greed".....

“Greed” could possibly be defined as “prices that are higher than needed to reach equilibrium” (i.e., strike a balance between supply and demand with no shortage or surplus). But if that exists, why would it be able to continue? After all, if Acme HC is making a whopping 20% net profit on their product/service, wouldn't somebody else, equally greedy, move in to undercut them and make a whopping 19% profit? To which Acme would respond by lowering their prices to achieve a 18% profit. (And, human nature being what it is, we can reasonably assume this will continue until profits are at a level below which there is no further incentive to enter the market)

Well, that's how it works for burritos, camping supplies, computers, and virtually every other product you can imagine. Why not the very heavily regulated industry of........

Oh.

Say…do you suppose the high prices in health care could have something to do with the barriers that regulation puts up to prevent other producers from entering the health care market? Well, perhaps. And, since these regulatory barriers have been driving up the cost of health care for so long, is the solution to just....er, throw up an entire wall?

Well, apparently so. At least, that's what John Kerry is telling us when he says his socialized medical plan will lower the costs of health care.

To conclude, let's put this in simple terms: (with some assumptions with which you may feel free to take issue if you disagree)

• Assume you have 100 units of health care available at any given time. The demand, of course, is essentially infinite--or, at least, indefinite...but always larger than the supply. The supply is infinitely--or, at least indefinitely--expandable.

• Assume that any reduction in supply/increase in demand which does not result in a corresponding change in price will serve to either lower the quality or quantity of the supply of health care.

• Assume that we want the supply of health care priced at the market equilibrium point - neither above, causing surpluses of unused health care despite existing demand….or below, creating a shortage of health care.

• Assume that we would rather increase the supply of health care, rather than decrease the demand by rationing, which would involve some rather unsavory, shall we say, “forced medical decisions”. (think: Logan's Run)

Now, to increase that supply as quickly as possible, should we:

a) Legislate price/regulatory controls on the supply, and lower price barriers on demand: both of which reduce the incentive to create additional units of health care, and increase the demand for those units...

Or

b) Deregulate--i.e., “increase”---the supply, and let the market determine the quantity--and quality--of health care units it is willing to
accept.

Further questions:

• In what other industries have we ever instituted answer a) successfully?

• If we are unhappy with the quantity or quality of health care being delivered, and price is no longer a useful mechanism for increasing/decreasing it, how will we effect a change?

It strikes me that, before we go further down this road, these questions need to be asked of, and answered by, proponents of socialized medicine.

Note: Dale Franks deserves credit for a great deal of this, either directly--in our conversation about the concepts--or indirectly, through his book--Slackernomics: Basic Economics for People Who Think Economics is Boring--which gives a very good, readable, even funny, look at basic economic concepts....
.....and which you should really go buy right now.

TrackBack