Medical Care Follows Basic Economic Principles

Economic scholar Thomas Sowell published a book last December called Applied Economics: Thinking Beyond Stage One. He has allowed Investor’s Business Daily to publish the chapter on the economics of medical care. IBD broke it into a nine-part series (see lead page). The parts are:

• Economics of Medical Care applies basic economic principles to medical care and refutes some myths.
• How Quantity Of Medical Care Is Influenced By Price Controls describes how artificially low pricing leads to overuse and qualitative and/or quantitative rationing. Discusses the costs of top-down rationing.
• How Payment By Third Parties Distorts Health Care Decisions explores how our third-party payer system skews medical care and its outcomes. One of the most important factors in medical care, says Sowell, is who makes the decision about the appropriateness of medical care options.
• Costs Of Malpractice Insurance Go Beyond Doctors' Premiums delves into the hidden costs of unbalanced malpractice laws. Sowell doesn’t paint all trial lawyers as bad guys. He believes that one-size-fits-all lawsuit caps are misguided and lead to unjust outcomes.
• How Cost Of Drug Development Is Lost On Public And Politicians explains what happens when long-term drug research and development is killed off in a short-term effort to reduce the cost of currently available medications.
• How Regulation Of Drug Industry Discourages R&D And Costs Lives continues the previous section. Here Sowell asserts that price controls on drugs offer “virtually ideal political conditions for killing the goose that lays the golden egg.” The political rewards are immediate, while the costs won’t sink in until years later and won’t be identified as a problem when they do. He describes some of the perverse political incentives that cause the FDA to do harm. Sowell also takes on critics of pharmaceutical advertising.
• Weighing True Cost Of Delays In The Drug-Approval Process goes into more detail about the problems inherent in a system where a political agency is tasked with ensuring drug safety. Sowell notes, “Sometimes safety precautions can be carried to the point where they are fatal.”
• How Strictest Price Control Of All Restrains A Great Medical Advance rehearses the libertarian arguments in favor of legalized sale of human body parts (from the living as well as from the dead). Sowell treats cultural mores with the kind of disdain that celebrated economist Friedrich Hayek argued against in his book, The Fatal Conceit.
• Misconceptions That Mar Medical Care describes how redistributionist medical care programs shift and hide costs. This leads to apples-vs-oranges comparisons that give the appearance of validity while meaning nothing.

Sowell’s treatise is reasonably well written and lucid. It is geared at a level that could be understood by a moderately informed adult. I am quite disappointed that no bibliography or references were provided. Without this, it can appear that some references and examples were cherry picked and/or skewed. The article series includes many useful tidbits, including this conclusion:

“[M]isconceptions of the economic function of prices lead not only to price controls, with all their counterproductive consequences, but also to organized attempts by various institutions, laws and policies to get most of the costs reflected in prices paid by somebody else. For society as a whole, there is no somebody else.”

I must add that the attempt to obfuscate medical costs plays directly into the hands of the powerful. Both our current system and Washington’s proposed system destroy transparency in favor of obfuscation. If you’ve ever tried to make heads or tails of all of the billing and insurance paperwork that flows from a single hospital stay, you’ll know what I mean.

Those that benefit from such obfuscation include politicians, employers, insurance companies, and the medical industrial complex. When costs are hidden — when it looks like someone else is paying the bill or that you have to make sure you get your slice of the pie — you are more likely to see something as a ‘need’ that would simply be a desire (or even unwanted) otherwise.

Multiply that by all of the people in the system and you have a lot of people getting a lot of care that has diminished real value. But each extra procedure done brings money into the coffers of providers as well as the army of paperwork pushers in both private and public organizations.

Employers look like heroes because they appear to be generously giving employees benefits, when it has been demonstrated that all such benefits are merely in lieu of actual salary. Employees feel more tied to an employer for fear of losing medical insurance coverage.

Politicians get to look like heroes for saving the poor and the sick from horrible fates. Never mind the fact that most of these could be helped without skewing an entire sector of the economy. Moreover, when politicians look like heroes they ensure a continuing flow of calls for political salvation — a self-perpetuating stream of business. Perverse incentives, indeed.

We live in an age where many imagine that they can design methods that exceed the laws of economics. This differs from those that use airplanes, parachutes, and rockets to do things that can appear to defy the law of gravity. They are actually working within the constraints of the law. Rather, there are plenty around today that ignore the very existence of economic laws. They do so at the peril of those that willhave to live with the results of their experiments.