Price fixing does not solve cost problems

posted at 9:30 am on October 21, 2009 by Ed Morrissey

Perhaps the leading economists of the US could convene a special remedial course for Congress to explain the difference between price and costs.  One might have expected the political class to have learned that difference from the disastrous US effort to fix prices and wages in the 1970s during Richard Nixon’s term in office, but apparently not.  Democrats hailed their new, revamped House version of ObamaCare and its $871 billion price tag, based on forcing more providers into existing Medicare reimbursement rates.  They claim that this will keep costs low, which is absolutely incorrect (emphases mine):

House leaders have cut the cost of their health-care overhaul to around $871 billion over the next decade, Democratic sources said Tuesday night, and were working to line up votes for the package with the aim of bringing it before the full House early next month.

The $871 billion estimate — well under the $900 billion limit set by President Obama — is the latest of several versions scored by congressional budget analysts, according to a Democratic aide, speaking on condition of anonymity to discuss private talks. The measure would include a government-run insurance plan that pays providers at rates tied to Medicare, the aide added. That so-called “robust” public option is preferred by liberals because it would save the government money and could force private insurers to lower their own reimbursement rates, driving down the cost of health care overall.

But the idea is opposed by many conservative Democrats from rural areas, where Medicare rates are well below the national average. A new insurance plan that paid such low rates would be devastating to their communities financially, these Democrats say. Instead, they argue that any public plan should negotiate rates directly with providers, as private plans do.

Fixing prices does not lower costs.  Let me repeat that: 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.

Not coincidentally, the latter is what happens when price-fixing is used.  When government fixes the price of goods and services, it usually does so to mask costs, not reduce them.  This is what Medicare has done for years, which is why doctors avoid Medicare patients now.  When the fixed price becomes less than the actual cost to provide the service, the provider is forced out of business.

And what Medicare reimbursement schedule does the House use to show those cost savings, anyway?   Would that be the schedule that will start dramatically cutting reimbursements over the next few years?  Or will it use the Stabenow bill in the Senate that would eliminate those cuts, and which the Senate also ignored when calculating the cost of the Baucus bill?


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