Thursday, October 22, 2009
Fixing prices does not lower costs. ... �Costs� are borne by providers, who get reimbursed by either consumers (in a rational market) or by third parties (American health care) for their goods and/or services. In a competitive market, providers have to set their prices at an attractive level in order to get business without missing out on profit opportunities, but their prices have to cover their costs � or they go out of business.Prices provide many services to a market economy. One is information on the value of something. When you offer more for a pair of World Series tickets you are informing everyone who owns them what the opportunity cost of their use is. Those who don't sell are in essence saying "these tickets are worth more to me than what I can sell them for on the street/on StubHub/etc."
Costs, though, are much more subjective than prices. As I've blogged before, costs are always costs to someone. Actions have costs, not things. Heyne, Boettke and Prychytko put it best: "All costs are costs of action or decisions, all are attached to particular person, and all lie in the future." So when someone asks "what does health care cost", you have to ask "cost to whom?" To use an extreme example, suppose government says to anyone holding an M.D. "You are now required to work one day every week -- we'll pick the day -- at a public free clinic, and we will pay you $0 for your day." To the taxpayer and to the government's budget, that costs nothing. But to the doctor this is tremendously expensive. She loses the income she would have earned had she been permitted to go to her clinic or hospital instead. Maybe this is more or less than what would have been paid if the patients who attended the "free" clinic, but for sure it is not free. It's only a question of who bears the burden.
This is the simple explanation, by the way, of why the Congress tried unsuccessfully to pass the Medicare fix for doctors. No costs would be changed by the act: The decision was whether or not to shift those costs from doctors to future taxpayers.
Likewise, the use of the public option is to, in short, provide pressure on the insurance companies to negotiate lower reimbursement rates for doctors or else lose customers to the government insurance plan. But at best this only changes the distribution of health spending between doctors, patients and insurance firms. What increases the supply of health care is a reduction in the opportunity cost of providing health care.
A misunderstanding of costs applies as well to patients. Alan Krueger wrote last February about the cost of patients' time waiting for health care. Question: Will the wait for health care rise or fall under Baucuscare? Does anyone know? Does anyone care? Not Congress, because it's not their costs.
This is also why the question "is the bill deficit neutral" hides the cost question. All this asks is whether the cost arises through the tax system and through government expenditures. Many costs can be hidden in mandates and "cost controls" that in fact increase costs, just not on the government's budget. Theirs are not the only costs that matter.