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Health Care without Prices

Written by John C Goodman

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What’s the difference between the U.S. health care system and the Soviet economy under communism? Very little, it turns out. Under both systems, decision makers face the same dilemma: without market prices to guide them, no one knows how to rationally allocate resources.

What brings this to mind is a post by Uwe Reinhardt the other day about the projected doctor shortage. How do we really know we are going to have a shortage? Reinhardt asks. Only a few years ago everyone was predicting a doctor surplus.

I’ve got a more basic question: if medical care is basically free at the point of delivery, don’t we always have a doctor shortage? If we are mainly paying for care with time and not money and if no one is measuring the time price of care, how can we ever know whether things are getting better or worse?

I’m back in the USSR
Hey, you don’t know how lucky you are

Here’s what Reinhardt writes:

The problem is that forecasting the future supply of and demand for any type of health professional is a highly complex and nuanced enterprise with wide margins of error…

Crucial in such forecasts is the assumption one makes about the average annual physician productivity in future years. That variable depends chiefly on two factors: the number of hours per year that physicians typically devote to patient care, and the degree to which physicians delegate to others tasks for which an M.D. degree is not required — for example, administrative tasks to clerks or business managers and certain medical tasks to physician assistants or nurse practitioners trained to perform tasks now performed by physicians.

The real problem is actually much greater than that.

Let’s turn to the Soviet Union for a moment. They had an economy in which all the important means of production were owned by the state. There were no real markets and therefore, no real prices. To pick a problem at random, suppose the authorities want to expand a railroad. How do they know whether to build the rail with platinum or steel? Without prices to signal the value of the alternative uses of these inputs, it’s impossible to know which choice is best.

Fifty years ago, Murray Rothbard, drawing on the earlier work of Ludwig von Mises, pointed out that this problem has no practical solution. In fact, the Soviet economy would have been in much worse shape, according to Rothbard, but for the fact that it could look to Western economies for guidance in making a lot of these decisions. (See Boettke)

Further, without real prices, there is no way to know the value of a nation’s output. That is, there is no basis for adding together apples and oranges and steel rails and steel beams to arrive at a grand total gross domestic product (GDP). In the early 1960s, many economists believed the Soviets had achieved high rates of economic growth — transforming a largely agrarian economy into an industrial economy in one generation. But if you don’t know what GDP is to begin with, how do you know how much it has increased? You don’t. And, as it turns out, almost everybody other than Rothbard was wrong in judging the Soviet claims of success.

The problem of the Soviet economy writ large is exactly the same problem we have in our health care system. Should we train one more doctor? Or would our money be better spent training a nurse or two? If we choose the doctor, should she be a primary care physician? Or an internist? Or some other specialist? How on earth would anybody ever know? No one in health care ever sees a real price. No patient. No doctor. No employee. No employer. In the absence of real prices, we have no way of knowing the marginal value of one more doctor, one more nurse, one more technician or one more anything.

There is a related issue. Just as the Soviet Union had no idea what its GDP was, we don’t know how much we are spending on health care. That’s why it’s absurd to keep repeating that we are spending twice as much as other developed countries. In fact, we don’t have any idea what any of these countries is really spending. But for the record, our use of real resources per capita (number of doctors, nurses, hospital beds etc.) is about average.

So I am in complete sympathy with Uwe’s general point. But I have no sympathy for his failure to realize the pain that is about to be caused by the Affordable Care Act (ObamaCare). (See his previous post.) The ACA, to remind you, will give people to right to demand a long list of preventive measures without copayment or deductible. The list is so long, that were doctors to deliver the full load, the average primary care physician would spend almost the entirety of every working day delivering screening tests and other procedures to healthy people with no time left to take care of people who are actually sick!  

We don’t need real market prices to know that if you greatly expand demand for primary care and do nothing to increase supply, the time price for virtually every dimension of service will soar. When people react to these severe shortages by turning to concierge care, the rationing problem will become even worse for those who cannot afford the price of “first tier” medicine. And ironically, those in the second tier will primarily be the very people the Democratic supporters of ObamaCare thought they were trying to help.

SOURCE: John Goodman's Health Policy Blog

John_GoodmanJohn C. Goodman is President of the National Center for Policy Analysis, Research Fellow at the Independent Institute, and author of the book Priceless: Curing the Healthcare Crisis [http://www.independent.org/priceless/].   The Wall Street Journaland the National Journal, among other media, have called him the “Father of Health Savings Accounts.” Dr. Goodman’s health policy blog is the premier right-of-center health care blog on the Internet.  It is the only place where pro-free enterprise, private sector solutions tohealth care problems are routinely examined and debated by top health policy experts across the ideological

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