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.










Monday, December 7, 2009

Socialized Medicine Scheme: Universal Coverage does not equal Universal Access

The socialized medicine scheme is based in part on the premise that universal coverage creates universal access. What would be the true costs of universal coverage if it truly created universal access?

Defining Terms

(1) Universal Coverage: health insurance coverage for all persons in a state or country, rather than for some subset of the population. It may extend to the unemployed as well as to the employed; to aliens as well as to citizens; for pre-existing conditions as well as for current illness; for mental as well as for physical conditions. (1)

(2) Universal Access: universal access can be defined as access for all to quality health services if need be, with social health protection. Universal access is not, by itself, sufficient to ensure health for all and health equity. The roots of health inequities lie in social conditions outside the health system’s direct control, to be tackled through intersectoral collaboration. Universal access however is the necessary foundation within the health sector on the road to health for all and health equity. (2) (3)

Universal Coverage and Universal Access

From the definition above one can see that universal coverage is on the demand side of the equation. Demand for health-care products and services would certainly increase with universal coverage.

From the definition above, Universal Access is related to supply. Supply of health-care products and services would need to adjust to the increased demand caused by universal coverage.

The Missing Determinant

The missing determinant of universal coverage in relation to universal access, is price. That is, to achieve universal coverage a price (cost) must be paid for those currently uninsured. To achieve universal access an incentive price must exist for supply to accommodate demand.

To achieve universal coverage a price/cost must be paid. To fully insure the entire population, income and/or wealth must be redistributed. The political class attempts to make the moral argument that redistribution of income/wealth must occur from the producer class to the recipient class as the recipient class is uninsured in large part due to price/cost. That is, the uninsured are in large part uninsured due to affordability of health insurance.

However, the price of health insurance is directly related to the cost of producing/providing health-care. In other words, in the free market, the demand for health-care intersects the supply of health-care, at point price. The price point of health care is known and hence the "price" becomes the cost of health insurance. That is, the risk of facing the price of health-care is then a major component of determining the cost of health insurance.

Price Controls

In the scheme of socialized medicine the argument routinely put forth is that the price to provide health-care is too high. That is, even though demand and supply produce price, the price point is too high. In other words, the natural or true price created by demand and supply becomes a socio-economic argument. As the argument goes, the price is too high because only a certain percentage of Gross Domestic Product (GDP) should be allocated to health-care. That somehow and some way, if the percentage of GDP allocated to health-care was lower, then the subsection of consumers uninsured would find coverage affordable. The argument goes on to compare costs in one country to costs in another country and/or percentage of GDP spent on health-care in one country to another country (one economy compared to another economy). Note that it is a price argument.

Welcome to artificial pricing. In a command and control economy "price" is set artificially regardless of demand and supply. Price can be set artificially too high or too low in a command and control economy. In the socialized medicine scheme argument, "price" is artificially set below the price produced by the previous free market for health-care.

Arguments for artificial pricing are artificial by nature. If consumers value an item then they demand the item. For example, if the Chinese economy demands rice, and rice makes up 20% of GDP, why is 20% wrong and 12% right? Price controls always backfire. (4)

Artificially Set Prices in the Socialized Medicine Scheme

As previous pointed out, in a free market, demand and supply intersect at price. The price point can be afforded by most consumers but a subsection of consumers can not afford price due to their particular command of resources (income). For example, the demand and supply of 42 inch flat screen TV's produce price (p). Price (p) attracts certain consumers while other consumers do not have the resources to allocate to a 42 inch flat screen TV.

In the realm of socialized medicine the political class argument is put forth that in order for the subsection of consumers to afford price, income and wealth (resources) needs transferred to to this subsection of consumers (redistribution of income and wealth). However, the producer class resists the redistribution to the recipient class. Further, the redistribution causes the producer class to have less disposable income to pay for health-care. In other words, the price point of health-care then becomes unaffordable for some producer class members due to the redistribution of income. That is, some of the producer class now slips into the recipient class due to redistribution of income and wealth.

Enter political-economy. If price is artificially set below the free market price, then the redistribution of income and wealth from the producer class can be set low enough to cut resistance and to stop the slippage mentioned above of producer class members falling into the recipient class.

The Effects Producing Universal Coverage through Artificial Pricing and Redistribution

When universal coverage is achieved through artificially pricing and redistribution of income the proponents of socialized medicine then promote that they have given the masses universal access. That universal coverage is the avenue to universal access.

However, access is supply driven. If Price is distorted (artificially set below the market) the supply, which is the summation of suppliers, now faces a disincentive in the form of an artificially low price.

Existing suppliers now have to decide to stay in the health-care field or allocate their resources to other ventures. If price is too low, some suppliers leave the market place. Further, with price set artificially low, many other potential future suppliers e.g. future doctors, nurses, medical device makers, pharmaceutical research companies, etc. shift their resources to other more profitable fields where price is set by the free market. However, other supplier will enter the health-care field but enter on "cost". That is to say, the cost sensitive supplier offers cut rate services, service quality below service quality that was available at Price (p) set by a free market. (5)

Hence artificially low prices set by command and control then causes supply to dry up and/or become of lower quality. The ability to access health-care is then diminished for the entire group of universal coverage participants as demand engulfs supply. Price (p) can not function as the rationing agent as it has been set artificially. Therefore, among an array of rationing agents, time (t) becomes a component of rationing. For example, at artificial price (aP) the supply of hip replacements is 1000 per day. However, universal coverage has created a demand for hip replacements of 5000 per day. Time must pass before the hip replacement can occur for the majority of demanders due to restricted supply.


Universal Coverage through redistribution of income and artificial pricing leads to a universal access that is rationed through time and the Universal Access is generally of lower quality. That the only way to create un-rationed universal access is to allow the free market to determine price through demand and supply.

However, if price is allowed to be the determinant, price set by the natural forces of demand and supply in a free market, then un-rationed universal access would have a price tag of redistribution of income and wealth that would break the back of the producer class. (6)

Hence universal coverage, with price set artificially low, as proposed by proponents of the socialized medicine scheme, actually leads to rationed universal access for the entire group of participants.



(3) Advancing and sustaining universal coverage. In: Primary health care: now more than ever. The World Health Report 2008. Geneva, World Health Organization, 2008.