Saturday, August 29, 2009

Rationing Health Care Versus Resource Allocation By Prices

Many people, including editorial writers and bloggers, who are worried about more government involvement in health care, cite rationing as a likely outcome. Their argument is that there will be a decision maker who decides what medical procedures are approved and what are not, or that in the alternative, the government will limit the amount of funds available for health reimbursement, which will force doctors or government officials to limit the availability of medical procedures, i.e., ration health care.

Those in favor of current proposals for reforming our health system say the medical market already rations health care because many people cannot afford health insurance or are otherwise uninsured.

Functioning medical markets do not ration!

Markets set prices and producers and buyers make individual decisions based on these prices. Markets do not prevent anyone from producing a good or service if they are willing to invest the resources to do so. Likewise, markets do not prevent people from buying goods and services within their budgets. The individuals decide how they will spend their money. Individuals decide if they spend their money on a new car every few years or if instead they want some elective surgery, a new lcd tv versus a new computer, a fillet Mignon in a fancy restaurant versus a Big Mac, etc. The whole process is how an economy allocates resources based on peoples' preferences.

In a rationed economy, such as that proposed for health care reform, the government or some other decision maker decides how much the producers produce of an item and they also decide how much individuals can buy or use. The governing body artificially sets prices, and these prices are not signals to users or producers. There are no profit motives to create efficiency incentives or to reallocate resources to meet excess demand with extra production.

One of the differences between rationing and a market is that rationing creates tremendous inflexibility and rigidity in production and use that does not respond to changing needs, demands and resource availability and scarcity. Black markets often spring up to compensate.

If government only bakes bread instead of making pasta, you will eat a lot of bread and no pasta. A market-based system will never allow something like that to happen. A government-planned system could. Just visit Cuba or read about Russia thirty plus years ago.

Anyone who says our capitalistic system rations because something is expensive does not understand markets and market pricing or they are just trying to make health care reform look better based on incorrect logic.

Many have written much about how our current system of health and tax laws distorts the health marketplace. The employer tax deduction grossly distorts the price signals to the users and to the suppliers. Restrictive licensing laws and limited medical school enrollments curtail the supply of available doctors to meet the ever-growing demand.

The list goes on and on, but the President and Congress are not willing to propose anything that will restore accurate pricing signals to the health market place or increase the supply of medical providers to meet demand and lower costs. A normal price signaling mechanism and removal of unnecessary barriers to entry into the medical field, as exists for almost every other product, would end most of the problems we see in health care today.

This post is derived from a comment I left on August 11, 2009, on Megan McArdle's blog post, "Rationing By Any Other Name" on the Atlantic, Asymmetrical Information Blog.

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