Heatlthcare Reform. Why Not Go Back to Economics 101?

There is an utter panic on both sides of the aisle concerning the health care debate. The United States has the highest quality medical care in the world. This is not debatable. Our doctors are the best trained and our medical schools are second to none. Foreign citizens flock to the USA for medical care and the opposite is anecdotal.

The critics of our current system site costs and access as the main problems. Let's talk about costs today.

Advances in technology including such procedures as CAT scans and MRI scans have taken a bad rap in the rise of medical costs. However, these procedures have led to earlier diagnoses and therefore reduced mortality and morbidity. These machines allow doctors to diagnose diseases in a noninvasive manner (no cutting on the patient). Just a quarter century ago, some of the same diseases had to be discovered with exploratory surgery. Despite the risks of the surgery and the anesthesia, some of these explorations found nothing. These surgeries certainly were more expensive relative to the modern cost of a CAT scan or MRI and by far posed a greater risk to the patient.

Is it any wonder that these procedures are highly sought after by doctor and patient alike? The appeal of MRI and CAT Scans are early and accurate diagnoses without surgery or other invasive tests. Patients know they are available and want them. Therefore the natural demand for these procedures is high.

Going back to Economics 101, when there is high demand for a product (increase in quantity demanded), the price of the product (equilibrium price) rises. More profits can now be made by the "seller". What happens next, in a free market, more sellers come into the business and the supply (quantity supplied) increases. As the quantity supplied increases, the price of the product decreases as sellers will lower their price (price competition) to entice consumers. The high profits realized by the initial sellers will also decrease until an new equilibrium price is reached. It is at this price sellers can sell all they want and buyer can buy all they want. Also sellers will only receive "normal profits" which are just enough profit to justify being in that particular business. Thus, the free market has decided what the price of the product should be.

This however is not the case in the medical industry. Third party payers (government and insurance companies) have set prices that they are willing to pay doctors and hospitals for their services. This is called "managed care". Essentially these are price controls or ceilings. Therefore the free market influences have become severely diluted. Usually price ceilings create a situation that lowers the profits of sellers because they cannot charge what the free market consumer is willing to pay. If the price ceiling is too low, some sellers leave the business as they cannot make normal profits. Therefore the quantity supplied decreases, however the demand increases because of the lower prices. This ultimately results in shortages (too many consumers, not enough product). This is the scenario in countries with socialized medicine where patients must want months, sometimes years for procedures. Many die waiting. We do not want this in the USA. Cuts in medicare funding proposed in some of the legislation may do just that.

Here at DICCF, we are not here to criticize the current system or any one's opinion about health care. The purpose of this piece is to generate ideas of how this country's outstanding health care could be better distributed to its citizens. DICCF believes in the free market approach as do many scholars in the field. This system works in all businesses, why not health care? What can we do as citizens to maintain our highest quality health care and at the same time make it affordable to our citizens without driving doctors and hospitals out of business? Here at DICCF, we believe Adam Smith's invisible hand of free market capitalism needs to become more visible in health care.


Post a Comment