The Homa Files

I often harp to my students that it’s a cardinal sin to confuse revenue with profits, or to confuse price with cost.  Here’s an example of the latter — in the context of the current healthcare debate.

Excerpted fron IBD: Misconceptions That Mar Medical Care, 11/06/2009
From the book “Applied Economics” by Thomas Sowell.

A number of confusions plague discussions of the economics of medical care.

A confusion between prices and costs has allowed politicians to claim to be able to bring down the cost of health care, when in fact they only bring down the individual patient’s out-of-pocket costs paid to doctors, hospitals, and pharmacies.

The costs themselves are not reduced in the slightest when additional money to pay for these costs is collected in taxes or insurance premiums and routed through either government or private bureaucracies.

Most proposals to “bring down the cost” of medical care pay little or no attention to the actual cost of creating pharmaceutical drugs, training medical students, or building and equipping hospitals.

To the extent that the government imposes some form of price control by refusing to pay doctors, hospitals or pharmaceutical companies as much as they would receive through supply and demand in a free market, that does not lower the costs either.

It simply means that the government refuses to pay all those costs — and such refusals to pay costs have a centuries-old track record of leading to a reduction in the amount supplied, whether what has been subject to price controls has been housing, gasoline, food or other goods and services.

Medical treatment has been no exception. The reduction in the supply of doctors, hospitals or pharmaceutical drugs may be quantitative, qualitative or both.

In Britain, with one of the oldest government-run health systems and therefore one which has long since gone past stage one, there have been such difficulties in getting enough British doctors that there have been large and chronic importations of foreign doctors, many from Third World countries whose qualifications standards are not always up to those in more affluent countries.

As for pharmaceutical drugs, countries which have succumbed to the politically attractive policy of keeping drug prices low by fiat, or by ineffective patent protection, have had much lower rates of discovery of major new medications than does the United States, which has been left to supply a disproportionate share of the world’s major new medications.

Various organized groups in a position to bargain for lower medical charges or lower drug prices — government agencies, health insurers or large health maintenance organizations, for example — may receive preferential prices, but the total costs do not go away and have to be paid by somebody.

One consequence is a multitiered set of prices for the same medical treatment or the same medication, with the highest prices of all being paid by patients who do not have health insurance, do not belong to a health maintenance group, and are not covered by any government program.

In short, misconceptions of the economic function of prices lead not only to price controls, with all their counterproductive consequences, but also to organized attempts by various institutions, laws and policies to get most of the costs reflected in prices paid by somebody else.

For society as a whole, there is no somebody else.

Full article:
http://www.investors.com/NewsAndAnalysis/Article.aspx?id=511637

This entry was posted on November 9, 2009 at 7:55 am and is filed under Health Care / Medical Insurance. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.