Saturday, August 22, 2009

Health-Care Rationing and Socialized Medicine: Price Distortions, Demand Shock, and Overutilization

Will Socialized Medicine cause health-care rationing?

The economics are as follows:

(1) the attempt to limit price (health care price controls) then distorts price,

(2) demand and supply, for any good or service in the free market, is rationed by "price". That is, demand and supply intersect at price,

(3) if you distort price, then demand and/or supply become distorted,

(4) when demand and supply are not allowed to intersect at price, then price is not the natural rationing equilibrium,

(5) if price is not the established equilibrium of demand and supply and an artificial equilibrium is established through price controls, then the result is true rationing.

Introducing between 19-47 million new consumers to the demand curve of health care services, the supply of health care services then becomes swamped as the supply curve is constant. With a demand shock, and supply constant, price would rise as the rationing agent. However, price will not be allowed to rise. If price can not rise to act as the rationing agent, then true rationing occurs.

The 19-47 million new consumers added to the demand side of Health Care add yet another effect: over utilization. If you previously have had no health care coverage, you likely have pended-up-demand. Suddenly you want certain items looked into that you have put off.

Over utilization also occurs when part of the 19- 47 million are receiving free or heavily subsidized health care. The perceived free or low cost access causes over utilization.

The current Health Care Reform Bill also mandates low deductibles and low co-pays. Low deductibles and low co-pays create an environment of over utilization.

Hence Price Distortions, Demand Shock and Over Utilization will cause true rationing.

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