Green Room

Whose costs are these?

posted at 1:11 pm on October 22, 2009 by

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.

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I posted this earlier on Dr. Zero’s pallet:

As well written, thought out and comprehensive as Ed penned, and yourself as well Dr. 0, there are some hidden costs in any transactional process. Sometimes called soft costs they only recently have gotten much more than short shrift in the majority of business classes. Although recognized by business owners and larger, cranially well-endowed corporations, government and particularly government officials (politicians and bureaucrats) most likely haven’t the slightest clue that they exist.

But that bureaucracies exist demonstrate as well as any evidence that those costs must be accounted for. Yet they’d be the first to deny that they are a cost center, not a profit center. Controlling costs, and keeping them in perspective to price, is often the difference between profitability and bankruptcy. Some of the smartest, most successful businessmen will tell anyone who will listen that there is no substitute for understanding this principle better than the competition. Without competition, what would be the point.

Robert17 on October 22, 2009 at 7:02 PM

Dear King,

I truly miss your NARN Saturdays. Salt in the wound is that your new gig doesn’t stream.

Good luck with the new venture.

YankeeinCA on October 22, 2009 at 8:40 PM

The AMA, the Government & the CPT codes …price fixing. The insurance industry jumped in on it & uses it just as the government reimbursement on Medicare Medicaid. But you have to use it if you take Medicare or Medicaid. The AMA makes over 70 million dollars every year in licensing fees to use the codes – the government won’t bid out the licensing (more price fixing).

This is why you don’t know what things cost. And another issue that is not “fixed” in the current health care/ health insurance debate, because it’s a problem created by the government to begin with.

batterup on October 22, 2009 at 10:57 PM

This post has been promoted to

Comments have been closed on this post but the discussion continues here.

Ed Morrissey on October 23, 2009 at 6:19 AM

We need food and electricity more often than we need medical care. Why can’t I get the government to fix the price of a filet mignon to be the same as the price of a McDonalds quarter pounder w/cheese?

oops, maybe the qpwc will be $30….backtrack…erase that comment…is Axelrod reading this?

percysunshine on October 23, 2009 at 6:28 AM