Friday, February 26, 2010

Free Markets and Healthcare

I seem to be having this recurrent conversation lately....."Government can't run healthcare, let the free market do it". To which I reply "Well, so you're saying that you want to get rid of Medicare, Medicaid, and SCHIP?" which the usual answer is "NO, just let the private market function as a free one" reply is. "you've never studied economics, have you?"..."No, why?"..."Thought so".

Free market principles DO NOT work in healthcare. It's a great news soundbite, and sounds like a great libertarian fact, John Galt would be proud, but it's simply not factual. There are any number of reasons, including the resultant distribution inequity that would result, but a large part of it is inelasticity. Market forces tend to work well when a commodity or service is elastic. That is, if prices rise by x percentage, then demand falls by an equal precentage. When there is inelasticity, that falls apart. Deflationary pressure isn't applied to prices, and they continue to rise unabated. Sound familiar?

Paul Krugman had a great opinion about this last summer.


He's right, and essentially he is talking about a resultant inequity in distribution, but he never comes out and says it exactly. In other words, the richest people would benefit from reduced prices and increased competition. The upper middle class would see some benefit, but not much, and everyone would else would suffer with decreased access, an inability to afford anything more than a throat culture, and our society would be much worse off.

But sure, the market can solve about an "invisible" hand...

I am reminded of a quote from James NOT that one, James M Buchanan, a nobel prize winning economist, who said:

“Gross misperception, especially in the minds of noneconomists, often prompts the claim that ‘the market’ (or ‘capitalism’) either works or does not work without constraints, a claim that is demonstrably unsupportable, either in analytical logic or in empirical reality.”


Stephen Ferrara, NP said...

Great post. How some people seem to ignore that government already plays a role in health care and I'd be hard pressed to say that the "private sector" is doing any better.

I'll take you up on your offer.


Hudson said...

I read this and wandered off into a thought of a guy with a broken leg shopping around to get a good deal on an x-ray and a cast. The first Dr. he runs into tells him he should have broken his leg last week because they were having a special on casts to try to boost sales....