Economics Dooms Health Care Reform to failure.

In the last post I wrote about the perversions of incentives that cause the problems in the health care system.  Let me point out that it’s not that we are behaving irrationally.  We are behaving completely rationally–given the situation we face.  It’s that the situation (the “help” we are getting) encourages bad decisions that drive up costs.

So now we face  the BIG PROBLEM.

By shifting to a policy where everyone is now to be insured, we open the floodgates of demand (okay, a bit much. But we certainly will allow millions more in.) Demand for services will increase. So it would make sense that prices would increase to balance out the demand (remember Econ 101, all else equal, in the near term an increase in demand will result in an increase in price. In the long term it should result in an increase in supply, as the market responds to the increased demand for the product).

Will we see prices increase? Not for the consumer–they are capped at the Co-pay. And now we are seeing pressures to not raise prices from the supply side (and the insurance companies will be SHOT if they raise rates significantly).

So what happens now? If prices cannot go up, then demand will remain (unrealisticly) high. Unrealistic in that demand is acting free of the market place.

With demand high, and the inability to increase prices we will see no real “benefit” to more providers entering the marketplace.

More to the point, even if we could see more providers enter the market there are significant barriers to entry. Consider the medical field:

1. Doctors must go through extensive training, and then licensing (not to mention the fact that they never really get it right–so must keep “practicing”)

2. medicines must be approved after rigorous testing, and their labs must be approved, and so forth.

3. Various other licensing and authorizing are in place for therapists, assistants, nurses, and the like.

Supply cannot respond quickly, and with a rising demand and supply unable to keep up, and with no pricing mechanism to regulate the demand we will face:

Shortages of service resulting in long waiting lines/delays.

And how do you deal with shortages? Since the market forces are not allowed to work, we are left with the government stepping in, once again, to fix the mess of it’s own making. They will have to “ration” care.

Sorry–it’s a fact. In every nation that has shifted to “socialized” they have faced shortages, lines and rationing.

It’s not something we can “do better.”

It’s economics.


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