Health Care is No Different Than Any Other Good

November 18th, 2012 by 

Of all the arguments I've heard justifying government controlled health care, the worst has to be the confused statement "The market for health care is different than any other market."

Somehow, this silly thought has become popularized by apologists for single payer systems, monopsony buyers, mandated insurance, price controls, and all sorts of market short-circuit mechanisms.  Unfortunately for those apologists, making nonsensical Economics arguments doesn't quite repeal the laws of Economics.

Goods are Goods are... Goods.

"I, Lord PK, Have Decided You Shall Charge $2.91 For This Pill!"

And why is health care different than other products?  Well, of course (comes the response), because denying a person health care could potentially lead a person to death.

That argument, of course, is no different than shelter.  Lack of shelter may not immediately kill you, but inclement weather would certainly polish you off sooner or later.

Don't like that example?  How about food.  Food is a good where going without actually would kill you pretty quickly, (depending on the amount of fat you carry on your body at the time you ceased eating!).

The fact is, there are other goods which are provided in adequate capacity by a free market without the burden of government control.  True, programs like the Supplemental Nutrition Assistance Plan and Free School Lunches will ease the burden of providing food to the destitute, while Section 8 and other programs are in play on the shelter side.  Still, the fact remains... even though we are considering two classes of goods which are necessary for survival, no government takeover of the food or real estate industry is suggested in sane political circles.  And let's be honest with ourselves here  - when was the last time you went without food because you weren't able to find enough food in local markets?  When was the last time you lived on the streets because there were zero homes to buy and no rentals available or hotels and motels with rooms to rent?

The free market can adequately provide even goods necessary for survival.

Great.  So Why Write This Article?

I'm glad you asked - I sacrificed a few IQ points and actually read the comments on an online article about health care.  The number of Internet Health Care Economists present on any health care article is astonishing - surely boosted by the impending enactment of the Patient Protection and Affordable Care Act's  main provisions.  Now that Health Care is a hotly political topic, everyone has an opinion.

To wit, take note of this article from the German Newspaper The Local.  The key?  The chemotherapy drug Fluorouracil is no longer profitable to make, so even though huge numbers of bowel and breast cancer patients literally depend on it to survive, drug laboratories can no longer make enough money to justify making the drug.  Because there is no profit to be made anymore, only one of the previous six companies that supplied the drug are still producing it.

Why don't they just up the prices, you ask?  Ha!  Perhaps if this was a free market?

If this situation was as simple as the food markets in the US manufacturers would simply up the costs of the drug.  However, German has a monopsony drug purchaser, the German Government, which negotiates drug costs "on behalf" of patients.  Germany has set the price of Fluorouracil by fiat at €3.90.  (For more on monopsony pricing's distortions, read my reply in the comments on fellow blogger JT's article at Darwin's Finance, and listen to my piece on monopsonies on the Two Guys & Your Money Podcast episode #3).  If you're well versed in monopsony effects, you will note that the remaining supplier, Medac (based in Germany), probably received an "offer they can't refuse" from the German authorities to continue production.

Price Controls Don't Work

As aptly stated by fellow bloggers Joe at Timeless Finance and Greg at Control Your Cash, price controls are like drinking alcohol to cure a hangover - it may feel right in the present, but they likely just delay the reckoning (unless you intervene in the middle).  In this case, price controls have literally left so little room for profit that drug companies are refusing to produce in the face of demand.

Do you think that this is a nightmare scenario in the United States and it would "never come to that"?  Think again - the FDA even maintains a list of current drug shortages.  Even though conjecture would lead you to believe we are a nation of greedy private insurers, 95 million Americans (around 31% of the market) are already covered by Government health care.  (Additionally, a lot of medical care is routed and reimbursed through Medicare, since Medicare covers an aging population with higher demand for drugs and services.)  Even though Medicare technically isn't allowed to negotiate prices on drugs, Medicare already does have designated reimbursement rates which has lead to doctors straight up refusing to accept new Medicare patients, and (long-term) possibly contributing to less doctors entering the profession (NHS example).  That's because de facto price controls are being placed on physicians by setting reimbursement rates.

Luckily, there is an easy fix for all of these problems - letting prices rise will quickly end any and all shortages in any market... no matter how different and unique you think that market may be.



PK started DQYDJ in 2009 to research and discuss finance and investing and help answer financial questions. He's expanded DQYDJ to build visualizations, calculators, and interactive tools.

PK is in his mid-30s and works and lives in the Bay Area with his wife, two kids, and dog.

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