Wednesday, July 20, 2011

Surprise-economic principles apply to old folks and Medicare costs

See here for a report on some data gathering that should be filed under the heading of "very bloody obvious". The link is to the 7/16/2011 blog entry from Dr. Mark J.Perry which tells us 1)Medicare utilization is about 50% higher than private health insurance utilization and 2) why Medicare patients see their doctor so (too?) much. Hint:it has something to do with spending someone's else money and the law of demand.

Economists are fond of saying "demand curves slope downward" which is their jargony way of saying that people buy more when the prices is lower and less when it is higher. Milton Friedman has been quoted as saying that economics is simple- just remember there is no free lunch and demand curves slope downward.

Economists ,for some obscure reason possibly found deep in the history of their discipline, place the dependent variables on the X-axis and the independent variable on the Y-axis. This is just the reverse of the practice of physicists and engineers and most other people who like to draw graphs. So they place price on the Y axis and quantity demanded on the X axis and thus the demand curves slope downward because folks buy more when the price is cheaper.

Medicare patients "buy" more health care because of the way Medicare works they get a really good deal on the price that CMS allows to be charged. It gets better, Medicare generally pay 80% of a significantly lower "allowed price" and many seniors have supplemental insurance which further amplifies the illusion of a free lunch.So,of course,Medicare users utilize more services and the reason is not that fee-for-service doesn't work. Blaming fee-for-service is the current battle cry on many in Congress and many of the organizations who allegedly represent the practicing physicians.

Some would conflate fee-for-service with free markets in medicine but there has been no free market in medical care for many years now (except for a few markets such as lasik surgery and some plastic surgery and much of alternative medicine) and the Medicare system is characterized by price controls and the demand side characterized by folks buying services with someone else's money,both of which are the products of central planning. What could possibly go wrong with that circumstance?

The list of problems in medical practice are not due to fee-for-service but rather what happens in a nominal fee-for-service setting when there are price controls namely shortages,long waiting lines,poor quality and various other forms of rationing by other than prices.As is often the case, the results of central planning are blamed on that heartless,run-away greed all the way down, free market.And as is also often the case the solution is more central planning,which is what Obama care is all about.

1 comment:

Alert and Oriented said...

James,
You are right, it is "bloody obvious." But remember that the wise economists at RAND thought that the spread of post-war health insurance only accounted "modestly" for the rise in health care costs. They had conveniently ignored the impact of Medicare. Someone at MIT named Amy Finkelstein is trying to correct that but one wonders why it should take pages of incomprehensible econometrics equations to demonstrate what is obvious true. Aahh, health policy...