El Salvador
In the United States, the current debate over healthcare reform is really no debate at all. Both sides of the argument accept the fundamental principle of government intervention. Today few can recall a time when healthcare was not considered an entitlement. Americans caught up in this racket would do well to look south, to El Salvador. It has been a half-century since medical care in the United States could be described as a business. In El Salvador that is exactly what it is, a business. There, the customer (patient) meets the service providers (doctors, labs, hospitals, pharmacies) at that voluntary, mutually beneficial place known as the market price.1
The article goes on to talk about how a CT scan cost his family $265 in El Salvador. In the US the same scan costs around $800. Why? That’s a hard question to answer. There are a tremendous number of inputs that go into figuring that number out. I would argue that nobody really knows in the US what a free market price of a CT scan should be. Maybe $265. Maybe more. Maybe less. The fact is that in the US the prices are fixed by the government and then the insurance company follows suit and pegs their price to the Medicare price.
When prices get fixed by an overseeing commision, regardless of the price level, vast amounts of important information is lost. Price in a typical market communicates to a consumer the concept of scarcity. Typically the higher the price, the more scarce the good. High prices tend to drive new producers (competitors) into a given market which then increases supply of a good thus bringing the price down. Example:
Let’s say a town of 50,000 people has one CT scan machine. But it’s population is such that it really needs 2, as patients are waiting days to get critical scans. In a market economy people would begin bidding up the price of the CT scan in order to get in to get the scan. The patient would be forced to prioritize one financial choice over another. Some see this as the root of all evil. I think it’s just part of everyday life. Unfortunately making tradeoffs is something each of us does countless times a day. Should I buy house or rent? Should I eat a hotdog or salad? Should I smoke or not smoke? CT scan providers motivated by profits would sense the higher prices in this town and move in and build another CT scan office, thus eleviating the shortage and driving prices down.
What happens in the US is that the price of CT gets set by a politcal task force and that price stays put until the next meeting of the task force. The government and the insurance industry decide what CT scans are allowable and doctors order them as needed. Suppliers see the fixed price, budget accordingly, build a radiology center and swoop in to any given market trying to suck up as much CT business as possible. All the while the price signal which used to convey the concept of scarcity is lost and we must wait for the next task force to finish their multi year study of the supply of CT scans to tell us that the fixed price must be altered- as the government is coming in over budget because there are too many scans being ordered. Or not, as the CT scan manufacturer’s lobbyists may have already gotten to the commission and convinced them of the utter necessity of the newest high priced scanner and thus justified the current reimbursement rate of the typical scan.
US Medicine is currently in an enormous bubble. Just as prices did not reflect the current supply demand situation in housing over the past 10 years -as housing purchases were largely driven by easy credit- so too is the supply of care now driven by distorted, fixed pricing schemes which do not sufficiently reflect patients’ true health priorities. While I applaud Paul Levy for writing about the detructive nature of price controls in medicine, his solution is as misguided as the problem that he attacks: he would like to substitute one regulatory fiat for another- an administrative council that FIXES PRICES. He, and most others analyzing this problem fail to consider a less popular model: that no appointed body possesses the dynamism, intelligence, computing power or resources to set prices. Only a free market does. In order for price fixing programs to work, they must operate under the principle that those setting the prices understand the priorities of the individuals who choose to exchange their money for goods and services. This is impossible to know on a large (or often small) scale.
What are patients’ true priorities? Hard to say. Everyone wants to live forever and be young and strong. So the demand for health care goods and services will always be infinite. The supply however, at any given time is not.
