Wednesday, February 27, 2013

Time Magazine's wrong on the cost of healthcare


Time magazine devotes an entire issue to the economics of healthcare, and while I appreciate the effort, and it gets somethings right, its written by someone who makes really basic fundamental mistakes in terms of the economics of cost benefit analysis, and focuses on a really minor part of the problem, which is the difference between list price and actual price.

It makes for shocking anecdotes to look at the markups hospitals charge for things like asprin (10000%), but since the only people who pay the list price are the handful of patients who don't have insurance but are rich enough to pay the list price, it is hardly a fundamental problem. Lots of industries have odd markups and strange pricing (like airlines or government contractors or consultants), and yes this is problematic, but I'm not sure this is fundamental.

His larger point that we should have price competition is a popular solution by conservatives, it was big under the W. Bush administration, but hardly any other country in the world relies on price competition to set prices. Also his other proposed solution of using medicare to set prices is a popular solution amongst marxists, but is also problematic. The distorting effect of government set pricing has been shown to create huge costs.

The article also to make this more dramatic, talks about the large profits for non-profit hospitals. So this is odd since non-profit hospitals are by definition zero profit companies. So in perhaps the only footnote i've ever seen in a magazine, it defines profit as revenue minus operating cost and depreciation. What he calls profits, is the money spent on expanding the hospital. The author defines this as pure waste and spends most of the article talking about how to get rid of it, but usually when its measured, most healthcare spending does seem to yield real returns. So getting rid of these "profits" really means getting rid of future healthcare services.

The fundamental flaw is he makes the freshman mistake of conflating cost and price. The cost of something is the opportunity cost of producing it. A real cost. The price represents a transfer. There's a difference. Transfering $1 from me to you, by itself represents no real cost to the economy. I lose $1, you gain. The net is zero. The cost occurs only from the distortions that occur.

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