Friday, December 18, 2009

The Socialized Medicine Scheme: Bending the Cost Curve

Diagram of Marginal Cost

Proponents of the socialized medicine scheme offer a talking point entitled Bending the Cost Curve. Sounds impressive does it not? However, is the talking point put forth of bending the cost curve merely price controls in disguise?

Definition of Cost Curves:

(1) Short run and long run average cost curves are U shaped,

(2) Short run cost curves are U shaped because of diminishing returns,

(3) Long run cost curves take on a U shape because economies and diseconomies of scale. (1)

Shape of the Cost Curve?

Bending the Cost Curve, that "U" shaped curve in the diagram above, can surely be a different shaped "U". However, the shape will always be "U". Which means marginal cost rises. (2) (3)

Its not about Cost Curves

The concept of a cost curve is being hijacked by politicos when they use the phase "Bending the Cost Curve". That is, there is a complete disregard for the economics of the cost curve itself and merely a catch phrase has been developed that sounds as if sound economics are being applied.

The vast majority of those using the talking point Bending the Cost Curve have no earthly idea what a cost curve is nor the economic theory surrounding the cost curve. In other words, in the current heath-care debate, bending the cost curve is not economics nor political-economy. Its pure politics. Its political speak.

Serious Discussions of Changing the Cost Curve of Health-Care

There are serious discussions on how to lower costs within the realm of health-care. Sound strategies exist that pertain to cost factors such as more efficient organization, physician supply, institutional factors, comparative effectiveness of research, reform medical liability, etc., etc.. In other words, strategies that directly effect a cost curve. (4), (5), (6).

There is a sea of research on how to effectively reduce health-care costs. Ideas and procedures that really do address the concept of a cost curve.

Enter the Politicos

With the political speak talking point of Bending the Cost Curve firmly in hand, politicos merely take the path to price controls. In other words, when politicos say bending the cost curve they really are talking about price controls.

Politicos want votes not real results. Rather than addressing the true problem associated with cost, its more politically expedient to merely apply price controls. Politicos end up with a price argument even though they began with a cost argument. Remember, we are going to bend that mean old cost curve. Forget that, attack price.

The political argument for price controls is articulated with sub-talking points such as the percentage of Gross Domestic Product the USA spends on health-care in comparison to other economies (argued that total price is too high), affordability (argued as price being too high), that the uninsured are uninsured do to price, etc., etc. The point being the politicos make a price argument not an argument for strategies regarding cost factors i.e. bending the cost curve gets thrown out the window in favor of a price argument.

The economic disconnect is that final price is made up of a series of costs. That if you concentrate on cost factors, and truly bend the cost curve then you will have materially changed final price.

However, if you attack final price, and make price a political issue, then somehow artificially reducing price will affect cost? That's the cart before the horse.

Price Control Strategy

You are going to be very hard pressed to find one case in economic history where price controls have ever worked. (7) (8) Then why use price controls? Because really bad economic ideas never die they merely get recycled and sold to the gullible.

What the politicos want you to think is that they have a concern with cost (don't forget that bending the cost curve mantra) but in fact their argument is price and the solution is price controls.

What do Price Controls Produce?

Price controls always end with the same result: depressed supply of the item. Supply falls and rationing of the item occurs.

Sure seems like the rationing argument crops up over and over again within the health care debate. Odd huh?

Price Controls with Increased Price?

As mentioned above, really bad economic ideas such as price controls never die. However, really bad economic ideas can be made even worse. Really? Sure! Why not increase the price first, add some taxes to further increase the price, take the increased revenue produced by the increased price and redistribute to millions of uninsured and make them insured hence creating a demand shock, then slap on price controls and have a real mess. Sounds like a plan!

No Price Control Scheme is Complete without Big Government

When you discuss price controls you are talking bureaucracy. If you are going to control price, you will need plenty of rules and regulations. No rules and regulation manual is complete without an army of government bureaucrats. The current health-care legislation creates upwards of 110 new government departments. Now that's bending the cost curve!


Politicos are using a the slogan "Bending the Cost Curve" with no real understanding of the economic theory of cost curves. (9) That politicos want you to feel they are concerned with cost when in fact their strategy boils down to price control.










1 comment:

  1. Good article! And the blog, too. I like that systematic approach to various talking points. Good luck with it by all means.

    (Note: in "the uninsured are uninsured do to Price" should be "due to".)