Health Care Costs and the Price of Care

In all the hubub of the health care financing bill, there has come to be a very massive misunderstanding of the nature of cost of health care versus the price of health care. Betsy Newmark links to a great piece by Thomas Sowell who talks about the nature of cost. Actually, last week Sowell had a series of four columns discussing the costs of medical care.

There is a fundamental difference between reducing costs and simply shifting costs around, like a pea in a shell game at a carnival. Costs are not reduced simply because you pay less at a doctor's office and more in taxes-- or more in insurance premiums, or more in higher prices for other goods and services that you buy, because the government has put the costs on businesses that pass those costs on to you.

Costs are not reduced simply because you don't pay them. It would undoubtedly be cheaper for me to do without the medications that keep me alive and more vigorous in my old age than people of a similar age were in generations past.

Letting old people die would undoubtedly be cheaper than keeping them alive-- but that does not mean that the costs have gone down. It just means that we refuse to pay the costs. Instead, we pay the consequences. There is no free lunch.

Therein lies the problem, people looking for a free lunch.

Simply put, in health/medical care, or indeed in anything, there ain't no such thing as a free lunch ("Tanstaafl")(note--I didn't create the acronym-see Robert Heinlein's The Moon is a Harsh Mistress.) That is what Sowell is trying to show, TANSTAAFL, means that the costs of medical treatment will not be magically reduced by eliminating waste, fraud and abuse, or setting prices at a certain point for certain services--those costs still exists.

Basic economics teaches us early on that price is largely a function of supply and demand. The more demand you have or the less supply you have, the priced tends to go up. If you have high supply and/or low demand, you get lower prices. Pretty simple right.

However, the provision of goods and services, any good or service, carries with it certain inherent costs which tends to dictate where the price range will begin. Thus if it costs $100.00 to manufacture, market, sell and deliver your widget or service, the seller cannot set a price below $100.00 and expect to make a profit. Indeed, such short selling might be a short term loss leader, but at some point either the seller will have to raise prices or get out of the business of selling that good or service.

It doesn't matter if the govnerment sets the price of the widget or service at $88.00, it still cots the seller $100 to make the widget or provide the service. Thus, while the price has been set, it has not reduced the costs of the product at all.

Medical care is chocked full of costs. It is expensive to educate doctors in this country. It is expensive to use all those wonderful machines that make diagnosis and treatment better and more efficient, like CAT scanners, MRI devices, heart rate monitors, even the simpler thermometer and stethescope. Each of those devices also carry costs to make, from patent costs for certain machinery or software that makes the machine so useful, to the cost of the metal and plastic used to make the physical shell of the machine. While the costs of these machines can be spread out among many patients, there is still a cost that is passed on to the patient, a costs that cannot be ignored. A hospital has to have power, water, and redundant systems for those utilities in case the power goes out, as well as specialized systems for the disposal of medical wastes. Again costs that are spread out but still real.

While doctors and medical providers can negotiate a price for their service--which negotiations are largely outside the hands of the actual consumer of the service, but that is another issue--they cannot simply ignore the costs of the service. To do so for long means that they will not be in business for long.

Getting back to TANSTAAFL, even a free lunch has costs.

What the health care bill says is that the Democrats believe that they can provide the proverbial free lunch. Simply waving a magic wand or setting a price for a good or service does not eliminate the costs. The worst thing is that these supposed smart people on Capitol Hill think they can reduce those costs.