Economic Concepts. The Most Basic

¶ … economic concepts. The most basic concept is that of price controls (price ceiling), and whether those would be effective in controlling health care costs. In principle, price ceilings are a distortion in the market and can even lead to market failure. The article does not delve in that issue too much, noting that there are many examples around the world of price ceilings in health care, with a variety of outcomes. The price ceilings discussed for health care are about controlling the growth in health care costs.

The article does not really mention that the growth in health care costs is going to accelerate anyway with an aging population, because older people cost more per capita in terms of their health care. Price ceilings facing such pressure are more likely, one would think, to result in market failure. There are other issues in the health care market -- information asymmetry and the very low price elasticity of demand for the most expensive (i.e. life saving) services.

Such traits of a market would normally lead to a high equilibrium price, so a price ceiling set low would only result in a stronger market distortion. One of the elements of the paper is the idea of marginal cost -- that government seeks via price controls to be a marginal cost consumer. Other consumers therefore need to supply much of the profit, leading to runaway costs.

The author notes that if the government refuses to pay above marginal cost, the more people going on government plans will transfer the costs on the smaller number of remaining consumers. Thus, the author notes that there is an opportunity cost of putting more people on Medicare/Medicaid (or implementing price ceilings, as these are the only ways to enact price ceilings in the U.S. system). This opportunity cost is that others will foot the bill.

Thus, while for some consumers there may not be much change in health care costs, for other consumers the costs are likely to skyrocket. The average cost in the health care system will still rise, as the market equilibrium point will not change. Price ceilings only shift the burden of achieving average cost equilibrium around to different people within the system. The author does touch on reduced amounts of competition as a factor in increasing costs.

There was more competition in the 1990s, leading to lower costs and lower cost growth. Competition can be expected to lower costs, but to some extent it might not be sustainable. There are issues with supply in health care markets, for example. If there are insufficient numbers of providers, the equilibrium point is going to be higher. If demand is higher -- whether the effects of an aging population or aggressive pharma marketing campaigns to get more people on more pills -- that also drives the equilibrium higher.

It is at the equilibrium point where the best solutions lie. The article dances around this to a point -- it gets to the part where it is explained how price ceilings do not shift the equilibrium point and are therefore unlikely to be successful in the long run. The next step in that line of thinking is that the true solutions to health care cost increases like with increasing supply, increasing competition, reducing demand and increasing information among buyers so that health companies cannot get away.