Fallacy: Governments cannot reduce costs

One argument made by conservatives and libertarians against universal health coverage is that governments are incapable of controlling costs. This is incorrect.

Before we dive into that, however, let’s work through a couple of definitions. When discussing health care, many people (especially pundits and politicians) refer to “cost” when they mean “spend”. “Cost” refers to price at an individual level, whether for a person or a procedure. “Spend” is an aggregate amount of the costs of all the procedures for a population.

Pelosi And House Members Discuss Healthcare Reform

Spend is of great concern to governments as it’s easily measurable and reflects what the government must pay. For instance, Medicare spent $256.8 billion in fiscal year 2002 and $440 billion for fiscal year 2007 (source: Wikipedia). The U.S. Government is concerned with keeping such costs down as they have to find room for them in the budget (one can only run deficits or print new money for so long).

I would posit that the correct spend is not a decision that governments should be making, however. We’re a wealthy country. It’s not unreasonable that we’d want to spend a lot of our wealth on staying alive. Do we really want a politician or technocrat making those decisions for us?

Let’s work under the assumption that reduction in spend is desirable. There are actually three ways a government can achieve this: fraud reduction, rationing, and lowering of the previously defined costs.

Spend can be reduced by removing fraud, which is rampant in Medicare and Medicaid. In Medicare alone, fraud is estimated to amount to some $60 billion a year. Certainly the government can remove that and use those savings to fund the increased spend of covering additional people.

I’m all for reductions in fraud for Medicare and Medicaid. In fact, I’m so supportive of it that I wonder why the Feds haven’t done it already. They should remove the fraud from the system before they grow that system. Prove they can do it and then we’ll talk.

Rationing is just what is sounds like, and every government controlled health care system has rationing. Many people believe that there is a solution where everyone gets all the healthcare they want. That’s a utopian belief, not reality.

The reality is that healthcare is a scarce good economically. It simply can’t be provided to everyone at unlimited levels.

This means that your grandmother might not get the operation she needs, as a technocrat decides that at eighty years old, she just doesn’t have enough value left to society. Or that your two month premature baby is going to be too expensive to save. Or that you just have allergies when your doctor thinks you have chronic tonsillitis.

Yes, today those decisions are sometimes being made by insurance companies (which sucks), but at least you can sue your insurance company. Have you tried suing the Feds lately? It generally doesn’t work so well.

Which would you rather have making your medical decisions, someone with a decade of medical training that you can meet with in person, or a faceless technocrat who can only get a government job?

Last up are true reductions in the cost of procedures. Unfortunately, the government really has only one way to do this: pay less for those procedures.

Certainly, many medical procedures are overpriced and/or over-prescribed. This is largely because our medical insurance system insulates cost signals from the consumers of health care. In other cases, cutting edge technology is simply expensive to develop and procedures based upon it are naturally expensive.

One way government can reduce cost is by insisting on less advanced, less expensive, and perhaps less effective procedures and treatments. This is really just a form of rationing, however.

Government’s only other real option is to pay out less to the providers. Having a monopoly on the legal use of force, they can choose to do this.

Unfortunately, in many cases, they reduce the payment below what it costs the doctor to provide the service. The result is fewer people providing the service.

We’re seeing this with primary care physicians in the United States already. In many parts of the country it has become extremely difficult to even find a primary care physician. Some have stopped taking Medicare/Medicaid patients and others have stopped practicing entirely.

And fewer and fewer medical students are choosing the primary care specialty because the pay is at the very bottom of the scale for physicians. Why go school for a decade to make approximately what a recent graduate from a mid-level MBA program makes?

Many politicians are arrogant enough to believe that something like health care can be centrally controlled. One of the most brilliant insights of Nobel Prize winning economist F.A. von Hayek is that the information needed to run an economy does not exist in a single place where it can be accessed by central planners. It is scattered among millions of consumers, whose collective wisdom is much greater than any technocrat (not to mention Congress).

Of course we all want costs to go down. But we need the influence of a free market to push down prices where they’re too high and push them up where they’re too low.

And, no, what we have now is not a free market. Not by a long shot.

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