Whose costs are these?

posted at 3:50 pm on October 23, 2009 by King Banaian

Ed Morrissey has a fabulous post on price fixing as a remedy to something costing you too much.

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.

Cross-posted at SCSU Scholars.

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its all paper money, there are no costs, just profits that must be taken away by the government and replaced with the Democrat party influence peddling operation.

rob verdi on October 23, 2009 at 3:52 PM

I expect this to be a troll free thread. How does one refute the argument, “nothing in life is free” when force to consider costs and who bears them.

WashJeff on October 23, 2009 at 3:59 PM

Government-run health care has nothing to do with costs period. It is about control, social engineering, etc. That’s why the cost factor is unimportant to those pushing for it. Try suggesting that people should simply pay the total cost of a regular check-up out of pocket and see who screams.

Connie on October 23, 2009 at 4:00 PM

Well done, King. A lucid & concise explanation.

OhioCoastie on October 23, 2009 at 4:01 PM

Greensleeves oohhhh greeensleeves, whose costs are these…

Skywise on October 23, 2009 at 4:04 PM

Such a shame that an elementary fact of life has to be taught to adults. Makes me laugh whenever my wife would find a penny on the ground she would say it is free until her pain in the hips was no longer cost effective.

fourdeucer on October 23, 2009 at 4:08 PM

Connie on October 23, 2009 at 4:00 PM

What is the corporate tax rate in America? 30% or so? Do you want to lower the price of healthcare in the US? Stop taxing hospitals and healthcare insurance providers. That would drop the cost for EVERYONE and it would be instant. Washington would have to figure out how to spend less money, but so do I since I am now unemployed.

I know, I’m a dangerous right-wing nutjob.

Mord on October 23, 2009 at 4:09 PM

TANSTAAFL…

There Aint NO Such Thing As A Free Lunch… someone ALWAYS pays…

If only members of the Government understood this…

Romeo13 on October 23, 2009 at 4:11 PM

Romeo13 on October 23, 2009 at 4:11 PM

The moon is a harsh mistress. Kinda scary how many parralels to that book are in the pipeline.

Mord on October 23, 2009 at 4:14 PM

If only members of the Government understood this…

Romeo13 on October 23, 2009 at 4:11 PM

At the rate we are accumulating debt, we can’t afford the down payment on a free lunch.

fourdeucer on October 23, 2009 at 4:16 PM

Costs are racist.

j_galt on October 23, 2009 at 4:17 PM

Saving money by passing a measure that has to include tax hikes or offsetting cuts. Brilliant liberal logic.

Of course, this experiment has already been performed. The result? More and more patients are losing choices, as doctors opt out of the Medicare system because it doesn’t cover costs. Don’t we want more of that?

The logical conclusion of this approach will be to tax Americans for a massive, poorly-run health care system that employs few doctors, alongside a very successful pay as you go doctor system.

Sounds just like our school system. And like education, the result is that the poor receive worse and worse results, while those who can afford to pay twice get much better results.

hawksruleva on October 23, 2009 at 4:21 PM

Oh come on guys, what is all the fuss about. Healthcare is only projected to cost 1,000,000,000,000 over ten years. I mean, if we took the history of govt run programs its only gonna be about triple that when its all said and done. I say we give the govt another chance.

/sarc :)

deepinthought on October 23, 2009 at 4:31 PM

These democaticals are smelling quite Nixonian with their price controls and wage controls.

Nixonian Socialists. How quaint.

MarkT on October 23, 2009 at 4:54 PM

The saddest part of this whole debate is that even if this massive bill passes and changes a whole lot about health care in this country. . . it still won’t fix Medicare.

Congress is STILL going to have to confront rising Medicare costs at some point soon. They should be doing JUST that now instead of breaking everything except an already broken Medicare.

ThackerAgency on October 23, 2009 at 5:41 PM

This article doesn’t quite get it right.

The reality of a poor paying ‘public option’ will be providers will limit (ration) how much PO care they provide. Forget seeing your doctor, PO folks may (or will most assuredly) struggle to find any doctors that will see them, much as happens currently under Medicaid, SCHIP and to a growing extent Medicare. Folks with regular insurance will move to the front of the line, at least with any elective care.

Competition was killed in health care when Congress wrote anti-trust exemptions for carriers to price fix the cost of care with providers. Individuals have very little if any incentive to price shop care — in many plans are covered at 80% of the doctor’s fee.

If one is truly interested in getting competition back into health care, eliminate the price fixing and let carriers develop other paradigms for writing coverage. One option might be for carriers to pay 80% of the average fee charged. In other words, if the average fee for a colonoscopy were $1000, the carrier would pay $800, regardless of who you saw or how much they charged. If you go to a clinic that charges $800, you’d pay nothing. If you go to a clinic that charges $1200, you’d pay $400. This creates a market incentive toward cost effective care which doesn’t currently exist. Many current plans would pay 80% of the charged fee, which would be $160 or $240. An $80 differenct isn’t a big incentive or market force.

Without this sort of real marketplace changes, any competition created by ‘reform’ will be largely artificial contrivances whose intention is to buy votes and contributions from this or that special interest.

drfredc on October 23, 2009 at 5:57 PM

Not only does someone always pay the costs and government is good at hiding who those someones are, but the freemarket has built in incentives to drive the costs down so that profits can increase while prices stay the same. Furthermore, government buracracies inevitably invariably increase the cost in the system. It can also be argued that generaly they do so for little added value, compared to them having left things alone.

AnotherOpinion on October 23, 2009 at 6:17 PM

Excellent article and comments.

Question for the clueless in Washington DC:

1. What is the COST to taxpayers, their families, and society in general of an increase in premature deaths due to shortages and delays in delivery of health care and/or inferior health care?

2. If the government is smart enough to be trusted with everyone’s health care, then how come there is a shortage of H1N1 vaccine? Are any deaths, disabilities, and/or lost time due to unnecessarily long H1N1-related illness part of the COST the bureaucrats used to figure out how and when to buy the vaccine??

3. If Kathleen Sebelius* isn’t smart enough to get a skin lesion removed without screwing up her eyelid, why do we want her in charge of OUR healthcare??? Do we really think she’s the one who should tell us what medical treatments we should have…and from whome we can get them?

(*Note to Obama: you bought her: she’s yours – no returns, no refunds!! – A Kansan)

landlines on October 23, 2009 at 6:56 PM