The Law of Supply and Demand lacks the physical power of the Law of Gravity, but it has a similar effect. Just as acting against the force of gravity requires the expenditure of energy, so opposing the force of supply and demand exacts a price. It is just as possible to affect market operations as it is to launch a rocket into orbit, but it can be just as expensive to do so.
The Law of Supply and Demand holds that the supply of a good varies directly with its price, while demand varies inversely with the price of a good. On the other hand, the price of a good varies inversely with the supply of the good and directly with the demand for it. To take a current example, if the demand for corn rises as a consequence of increased production of ethanol, the price of corn will tend to rise also. If sufficient new land is planted with corn, increasing the supply, the price will fall again.
Most proposals for reforms of the health care system in the United States seem to ignore supply and demand. Political candidates state that their proposals will both provide universal health care and lower costs. Since the provision of universal health care insurance coverage amounts to a large increase in demand for health care services and products, it is unlikely that, in the absence of countervailing measures, prices for these goods would decrease.
Insurance doesn’t provide medical treatment; it merely pays for medical care. Universal health care insurance would give 47 million additional people the ability to pay for medical care. That is a substantial increase in demand. As stated above, in the presence of an increase in demand, the tendency is for prices to rise. In the absence of increased supply, universal health care insurance will cause health care costs to rise.
A health care plan will be incomplete, or will fail of its intended effect, unless it also provides for some means to increase the supply of health care goods and services. Along with universal health care insurance, for example, the government could expand the U.S. Public Health Service, and the Veterans Administration could accept Medicare and Medicaid recipients in its hospitals. If we do not acknowledge the Law of Supply and Demand by planning to balance increased demand with increased supply, the law will exact its price in a host of unintended consequences.
Glenn A Knight
In my study
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7 comments:
The big problem I have with most health care schemes, including our current one is that the built-in limiting mechanism inherent in the market is missing: that the ones who make the decisions are the ones who pay the bills. I think the technical term for this is the principl-agent problem. The second problem with health care is the fact that the doctor is the expert and health care consumers are generally unqualified to question a diagnosis. The last one is the moral hazard associated with insurance - that people will be less likely to watch their health if they know they have a safety net.
I don't know the solution, but I think it must begin to address these three issues.
I had an interesting experience with a portion of this issue just the other day. I received an insurance statement for an outpatient surgical procedure that my wife had recently. The doctors, technicians, hospital, etc billed for a total of $3800. My insurance company covered $1800 while I was left with about $100 as co-insurance.
One of the under appreciated complexities to healthcare (in my opinion) is that the same services do not cost everyone the same amount. When you buy a car everyone ends up within about 10% of each other regardless of how good a deal they make. With healthcare there can be more than a 50% reduction in cost for insurance companies.
In addition, healthcare does not fit the normal model of free market economics because you can't shop around readily for treatments. Insurance providers lock you in to certain institutions and in a lot of cases only one doctor is available. My daughter needed to see a pediatric ENT, there was only one in the state. That tends to remove the comparative shopping that I can do at Sears, JC Pennies, and Kohl's when I go to the mall.
Your experience with lack of competition is illustrative of the "imperfect information" in the health care market. In order for service providers to compete, the consumer would have to have some means of evaluating competence. The lay public doesn't generally have the means to know which doctors are "good" or "bad". The old joke, "What do you call the guy who graduated at the bottom of his class in medical school? Doctor." is a real issue.
The next problem with competition is that trial and error through personal experience is not generally an option. If mechanic "A" messes up my car, I can take the car to mechanic "B". This may not be possible in a medical situation. I can't get a "loaner" body while my regular one is in the shop.
I also had the opportunity recently to review an insurance statement - an "explanation of benefits." The initial charge amount was some $25,000, but the discount for the insurance company immediately reduced it to $16,000.
Why is there a huge discount for insurance companies? I think that's part of Doug's question,and it is an interesting one, but I think we need to restate it.
Why are uninsured patients required to pay a surcharge of 50%?
The answer is risk.
Insurance companies, which have a contractual relationship with the hospital, are sure to pay. If they don't pay, the hospital will stop accepting patients with their policies, and then companies will switch to other insurers. The risk of non-payment is virtually nil.
On the other hand, the hospital runs a certain level of risk of non-payment with uninsured patients. So they increase the charges to cover that risk. From the numbers I've seen, it appears that the hospitals expect 30-35% of their uninsured patients to stiff them.
In other words, if a service costs the hospital $16,000, three of them cost $48,000. The hospital bills each of the three patients $25,000, so that the cost is covered even if only two of the three patients pay. Therefore, in the first instance, the uninsured patients who pay their bills are subsidizing the care of the other uninsured patients.
The principal-agent problem is, in my opinion, the biggest single problem with the way the healthcare system works. If the insurance company will pay for either a $15,000 procedure or a $60,000 procedure, at approximately the same cost to me, where's my incentive to look for the cheaper alternative?
The obvious answer is to raise deductibles and co-payments to a level that forces the consumer to pay attention. Suppose the maximum that the insurance could pay was 50%. In such a case, I imagine people wouldn't be so quick to sign up for the most expensive operations at the most expensive hospitals.
The risk, of course, is that people would forego treatment entirely, or choose an inappropriate treatment, in order to avoid paying for what they really need.
The second problem Sean raises has a couple of aspects. Second opinions can be helpful, if you can get a truly independent source for the second opinion. I recently sought a second opinion, and the doctor confirmed the course of treatment that had been planned by my original doctor. That was a relief.
The hard part, however, was to find a doctor to provide the second opinion. I got lucky: a friend at work suggested I speak with his wife, who worked at a local medical office and knew the reputations of many doctors. Through her I found a doctor who proved to be satisfactory.
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