Health Care is No Different Than Any Other Good

Of all the arguments I’ve heard justifying government controlled health care, the worst has to be the confused statement “The market for health care is different than any other market.”

Somehow, this silly thought has become popularized by apologists for single payer systems, monopsony buyers, mandated insurance, price controls, and all sorts of market short-circuit mechanisms.  Unfortunately for those apologists, making nonsensical Economics arguments doesn’t quite repeal the laws of Economics.

Goods are Goods are… Goods.

“I, Lord PK, Have Decided You Shall Charge $2.91 For This Pill!”

And why is health care different than other products?  Well, of course (comes the response), because denying a person health care could potentially lead a person to death.

That argument, of course, is no different than shelter.  Lack of shelter may not immediately kill you, but inclement weather would certainly polish you off sooner or later.

Don’t like that example?  How about food.  Food is a good where going without actually would kill you pretty quickly, (depending on the amount of fat you carry on your body at the time you ceased eating!).

The fact is, there are other goods which are provided in adequate capacity by a free market without the burden of government control.  True, programs like the Supplemental Nutrition Assistance Plan and Free School Lunches will ease the burden of providing food to the destitute, while Section 8 and other programs are in play on the shelter side.  Still, the fact remains… even though we are considering two classes of goods which are necessary for survival, no government takeover of the food or real estate industry is suggested in sane political circles.  And let’s be honest with ourselves here  – when was the last time you went without food because you weren’t able to find enough food in local markets?  When was the last time you lived on the streets because there were zero homes to buy and no rentals available or hotels and motels with rooms to rent?

The free market can adequately provide even goods necessary for survival.

Great.  So Why Write This Article?

I’m glad you asked – I sacrificed a few IQ points and actually read the comments on an online article about health care.  The number of Internet Health Care Economists present on any health care article is astonishing – surely boosted by the impending enactment of the Patient Protection and Affordable Care Act’s  main provisions.  Now that Health Care is a hotly political topic, everyone has an opinion.

To wit, take note of this article from the German Newspaper The Local.  The key?  The chemotherapy drug Fluorouracil is no longer profitable to make, so even though huge numbers of bowel and breast cancer patients literally depend on it to survive, drug laboratories can no longer make enough money to justify making the drug.  Because there is no profit to be made anymore, only one of the previous six companies that supplied the drug are still producing it.

Why don’t they just up the prices, you ask?  Ha!  Perhaps if this was a free market?

If this situation was as simple as the food markets in the US manufacturers would simply up the costs of the drug.  However, German has a monopsony drug purchaser, the German Government, which negotiates drug costs “on behalf” of patients.  Germany has set the price of Fluorouracil by fiat at €3.90.  (For more on monopsony pricing’s distortions, read my reply in the comments on fellow blogger JT’s article at Darwin’s Finance, and listen to my piece on monopsonies on the Two Guys & Your Money Podcast episode #3).  If you’re well versed in monopsony effects, you will note that the remaining supplier, Medac (based in Germany), probably received an “offer they can’t refuse” from the German authorities to continue production.

Price Controls Don’t Work

As aptly stated by fellow bloggers Joe at Timeless Finance and Greg at Control Your Cash, price controls are like drinking alcohol to cure a hangover – it may feel right in the present, but they likely just delay the reckoning (unless you intervene in the middle).  In this case, price controls have literally left so little room for profit that drug companies are refusing to produce in the face of demand.

Do you think that this is a nightmare scenario in the United States and it would “never come to that”?  Think again – the FDA even maintains a list of current drug shortages.  Even though conjecture would lead you to believe we are a nation of greedy private insurers, 95 million Americans (around 31% of the market) are already covered by Government health care.  (Additionally, a lot of medical care is routed and reimbursed through Medicare, since Medicare covers an aging population with higher demand for drugs and services.)  Even though Medicare technically isn’t allowed to negotiate prices on drugs, Medicare already does have designated reimbursement rates which has lead to doctors straight up refusing to accept new Medicare patients, and (long-term) possibly contributing to less doctors entering the profession (NHS example).  That’s because de facto price controls are being placed on physicians by setting reimbursement rates.

Luckily, there is an easy fix for all of these problems – letting prices rise will quickly end any and all shortages in any market… no matter how different and unique you think that market may be.

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Comments

  1. says

    That’s true, except with food or shelter, there are non-profit organizations to help, and people can help make things and/or keep you alive with what they already use and own.

    With healthcare, who’s going to help pay your chemo bills? Or help make/provide drugs to keep you alive? It’s impossible, you need those drugs from those companies.

    What I still can’t understand is if there are drug price controls, how can your U.S. healthcare (and drugs) cost so much more than Canadian healthcare?

    Yes, we pay for basic healthcare it in our taxes, but we aren’t France! We aren’t paying 75% of our total income towards a country just to have them take care of us.

    The max we pay is just around 45%, which I daresay is not that far off from U.S. taxes.

    So while I agree with the principle that they should raise prices to make a profit.. it makes me wonder where the money is going, if these super low prices aren’t reaching consumers.

    • says

      Let’s trace this through. In Germany, here is how a surplus is rectified:

      1) Government sets a too low price ceiling
      2) Suppliers attempt to supply the country at that price
      3) Suppliers recognize that there isn’t enough profit to be made, and some suppliers shut down. Other suppliers lobby the government for a price increase which is denied.
      4) A single supplier continues (in this case no doubt after an ‘offer they can’t refuse’)
      5) A shortage in a drug happens.
      6) Bloggers and Journalists note the shortage, causing a popular outrage.
      7) The government capitulates, raising the price ceiling enough to fix the shortage (This step hasn’t happened yet.)

      In a non-existent fully free market (I won’t pretend US is the model citizen here!), suppliers would simply renegotiate their next contract or raise prices, allowing them to justify continuing the drug.

      A few distinctions before I continue: Insurance is Different than Health Care. No one in the US is denied Health Care, but they are certainly denied Insurance. Second, ‘Insurers of last resort’ in the US fall to States. This list will change after PPACA, but check it out now – this is without the new law going into full effect.

      Second, the reason drugs (in particular) are so expensive is because the US is a number of small operators competing against monopsonies set up in other countries. I don’t want to rewrite a book here (heh) but the two links above can give you a primer. Roughly, Governments can dictate prices below the costs to make up R&D, so the US subsidizes drug development for the rest of the world. Blue Cross doesn’t have political power over Merck or any other drug company – the Country of Germany does. Monopsonies are truly devastating to non-participants, and I have zero doubt that the US will move in the same direction in the future. This isn’t a conspiracy theory undertaken by just the authors of this blog either – it’s the official position of the Office of the United States Official Trade Representative and Departments of State and Commerce.

      As for overall costs (I assume you mean as a percentage of GDP), you’re opening a whole can of worms. For starters, note that most of the world is under the US’s military blanket, so while we invest in defense, other countries can leverage the security we provide to spend on social programs. There is no doubt in my mind that a weaker US military would cause many Western European countries to reconsider their government spending. Plus, can you prove that the spending is all bad? It would take a whole article to develop the theory, but perhaps some of that spending is directed at last ditch efforts which are only possible here, and people think it is worth paying?

      Anyway, if you read my four part series about PPACA you know the full story about why I’m against PPACA and other systems enacted in other countries. However, the US paying R&D costs for the rest of the world is unsustainable, so I’m sure we’ll be a single payer/monopsony buyer soon enough. The issue with single payer isn’t with basic medical care – breaking a bone, catching a cold is all figured out. Advanced care and uncured diseases are where I think we will see quality declines – and the scary part is no one will be able to prove that we would have a cure without the system! In fact, one of the few ways to show quality declines (since other countries can currently pick up the slack on R&D) is to track wait times for advanced procedures (Canada link).

      I hope you’ll reply again because I want to fill in the gaps I just left – let me know what I left unanswered.

      • says

        FINALLY!

        A clear and rational answer. You’ve answered it..

        It makes more sense that you’re speaking about advanced care (chemo), rather than breaking a bone, although my point still stands slightly that people in a community can help provide food and shelter, but not necessarily to pay or make the drugs themselves, although there are organizations even in Canada where they come up with the money to help those who need drugs.

        So wait, healthcare is not denied to Americans but insurance is? I’m a bit lost. Without insurance, how do people get healthcare and pay for it?

        Seeing as I don’t pay for health insurance, but I do pay for healthcare, I am wondering what the distinction is.

        Or is it an under the table thing? You can treat and care for the person legally but the payment of the treatment itself is another story..?

        I saw an episode of The Mindy Project (a very intelligent and sophisticated show, naturally), where she plays a doctor and tells the kid who is speaking for his mom to pretend that she WILL have insurance by the time she gives birth, which is an outright lie.. but without that sentence of “I promise she will have insurance”, she couldn’t legally (?) treat the patient.

        Is it something like that?

        Lastly, I will also say that I don’t necessarily agree that the U.S. *has* to protect the world (it’s nice, but not necessarily 100% altruistic, as they gain something from it as well), and they could stand to ease up on that spending to start taking care of their own.

        I see it a tiny bit as meddling in the world’s affairs.

        • freeby50 says

          “So wait, healthcare is not denied to Americans but insurance is? I’m a
          bit lost. Without insurance, how do people get healthcare and pay for
          it?”

          Emergency care is not denied. By law. So if you go to the emergency center with a broken arm, heart attack, etc. then they must treat you no matter if you have insurance or not. Some people without insurance go to the emergency room for any ailment because of this. So if I have no insurance and I have an earache they will have to see me.

          Other non-emergency care is not required. If I go to my doctor and complain about a earache then they can ask for insurance and turn me away if I don’t have insurance. Or they can treat me and bill me and I can pay out of pocket.

          In the US poor people get free insurance via medicaid. Senior citizens are covered by medicare. Veterans are covered by the govt. Half the healthcare in the country is covered by the government in these programs.

          But say I am not poor enough for medicaid and I work just part time with an employer who has no insurance coverage and I get cancer. I may find it difficult to get any treatment…

        • says

          Ha, no, not an under the table thing. Freeby50 covered it amply, but emergency care is a protected good. Our failing is with non-emergency care, and with chronic illness. (Note, of course, that chronic illness is poorly managed even for people who have insurance in every country.)

          Something like pregnancy falls into the byzantine structure Freeby50 described. If you delivered a child without insurance (or had any procedure) it would come down to the state, county, or even city level, and if you didn’t qualify, even the individual hospital for reimbursement. Hospitals can and do discount heavily for individual cases (and, believe it or not, when I had high co-pays I’ve talked my way into some huge discounts on a few of my urgent care trips. Of course, I’ll never deliver a child, so I can’t speak with authority on that topic.). Still, no woman in labor would be denied care – it’s certainly a time critical event.

          “I see it a tiny bit as meddling in the world’s affairs.” – Oh, it’s absolutely meddling in the world’s affairs! The problem is and quick pullout would leave a power vacuum with huge unintended consequences. There isn’t really another superpower to fill the gaps, so we’ve sort of worked ourselves into a bad position.

          I would personally greatly prefer getting out of as much business as we can (making exceptions for countries that ask for help or countries which attack us), but, like a glacier moving across land, I know it’ll take a while.

        • freeby50 says

          Many Americans, including myself, would prefer that US spend less on military and be less involved in playing the worlds sheriff. But then we’d also prefer that many other countries stop meddling in world affairs too. Its only meddling if you don’t like it. If you like it then its called helping.

  2. JT says

    Great post, PK.

    With the exception of excessive regulation, health care is certainly no different than any other good. You can add jewelers, furniture stores, airlines, etc. to the list of companies that would seemingly make a ton of money yet because they operate in competitive markets there really isn’t all that much money in it. Furniture and airlines are totally necessary and these companies should be able to screw us, but they don’t and can’t. Go figure – microeconomics to the rescue!

    P.S. Don’t read articles on health care. It’s bad for your blood pressure.

    • says

      I may have misstated – I think the actual case may be along similar lines to the flippant quote “you’re unique, just like everyone else”. So, yeah, health care has peculiarities, but so does every other market.

  3. says

    To all who pronounce health care to be a “right”, we can usually respond wit a “what about groceries, are those a right?” Non-profit charities can provide a safety net in health care as well, but are eventually muscled out by government action.

    • says

      There are something like 30 food programs and another 30 housing programs at a Federal level. And yes, you’re right on about Government displacing private charity – I’ve been waiting for Cameron to do a piece on it, but there’s been a few research papers out lately about the Government displacing private charity spending.

  4. says

    Excellent analogies with the housing and food examples. You hinted about something, but didn’t come out and say it directly. So I will. Healthcare is not a right! It is a privilege, or benefit, to those who are willing and able to pay for it.

    • says

      Well, I don’t think we should start denying people emergency care before treating them – I think that’s a pretty solid policy. I’m picturing a nightmare scenario where someone denies an unconscious patient care since they can’t find an insurance card – not a society I want to live with.

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