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Friday, September 29, 2006

Price controls for physician services, the results are predictable

In the September 28, 2006 edition of DB's Medical Rants we find a great quote from Scapel entitled "Are all physicians equal?"

In one of the subsequent letters to Scapel we are correctly told that in the health care "market" prices are determined by a fairly small number of payers, e.g. CMS and the major insurers who follow CMS lead. In regard to physician's fees, there is -for the most part- price controls.Since insurers tend to duplicate CMS's fee structures we have in effect government price controls on physician fees.
(I realize there are a small minority of physicians who operate outside of this control system, for example some dermatologists who do mainly cosmetic work and the concierge practices)

I wrote about this issue before when I suggested an important addition to the medical school curriculum, namely a primer on basic real world economics.What happens when there are price controls is well recognized and repeatedly has been explained in great clarity by economists such as Thomas Sowell.Here are some of his comments on that subject.

Four things tend to happen when there are price controls:

1.Demand increases,there is increased use of the service or product (A recent example-see how long it takes to get in for a colonoscopy since Medicare began covering screening exams)

2.Supply decreases and shortages develop(with price controls in place, suppliers do not rush into that market and we are seeing that in the area of primary care, where fees are set the lowest, fewer medical graduates are opting for primary care specialties)

3.Quality decreases.(providers have little reason to try and differentiate themselves on the basis of quality because of 1 and 2 they have no need for new customers.They may try and make up for lower unit prices by increasing their volume of business, spending less time with each customer, etc.)

4.Black markets tend to develop.This apparently has not happened yet here but has in rigidly socialized countries.

To quote Sowell (from Applied Economics,Thinking Beyond Stage One,2004,Basic Books, p.93)

"All of these things have been found when the prices of medical care have been controlled-and all are particularly harmful in matters involving, pain ,disability and death".


Sara said...

Isn't private medicine (no insurance, no Medicare) basically the same thing as a black market in this case?

james gaulte said...

I believe the economics textbooks talk about black markets as an illegal activity in which suppliers charge higher than the price control allows.If a doctor opts out of Medicare ,for example, he and the patient agree to a different fee schedule and they are not breaking the law.Should you consider this as "sorta like" a black market without the illegality? Prior to Medicare and Medicaid and widespread employer medical insurance all medicine was a private, free market operation.