Basic economics and the health care plan

“Here are some basic principles of supply and demand: If a government policy increases the demand for a service, the price of that service tends to rise. If the government prevents prices from rising, shortages develop. The quantity provided is then determined by supply and not demand. In the presence of such excess demand, the result could be a two-tier market structure. Consumers who can somehow pay more than the government-mandated price will be able to purchase the service, while those paying the controlled price may be unable to find a willing supplier.

Those principles lie behind this story from the Washington Post:

A plan to slash more than $500 billion from future Medicare spending -- one of the biggest sources of funding for President Obama's proposed overhaul of the nation's health-care system -- would sharply reduce benefits for some senior citizens and could jeopardize access to care for millions of others, according to a government evaluation released Saturday.

The report, requested by House Republicans, found that Medicare cuts contained in the health package approved by the House on Nov. 7 are likely to prove so costly to hospitals and nursing homes that they could stop taking Medicare altogether.

Congress could intervene to avoid such an outcome, but "so doing would likely result in significantly smaller actual savings" than is currently projected, according to the analysis by the chief actuary for the agency that administers Medicare and Medicaid. That would wipe out a big chunk of the financing for the health-care reform package, which is projected to cost $1.05 trillion over the next decade.

More generally, the report questions whether the country's network of doctors and hospitals would be able to cope with the effects of a reform package expected to add more than 30 million people to the ranks of the insured, many of them through Medicaid, the public health program for the poor.

In the face of greatly increased demand for services, providers are likely to charge higher fees or take patients with better-paying private insurance over Medicaid recipients, "exacerbating existing access problems" in that program, according to the report from Richard S. Foster of the Centers for Medicare and Medicaid Services.

Though the report does not attempt to quantify that impact, Foster writes: "It is reasonable to expect that a significant portion of the increased demand for Medicaid would not be realized."”

N. Gregory Mankiw, “Supply, Demand, and Healthcare Reform”, Greg Mankiw’s Blog (15 November 2009).

http://gregmankiw.blogspot.com/


N. Gregory Mankiw is professor of economics at Harvard University and a former Chairman of President George W. Bush’s Council of Economic Advisors.


The health care bill now passed by the House and now being considered by the Senate is not simply bad legislation. It simply cannot work in the real world.

Among its many problems is that the focus of policy discussion has been on the terms and conditions of health care insurance when what really matters is the provision of health care services to the people who need them. The government can place any regulations and rules it wants on the insurance industry (and I for one consider those in the bills to be unhelpful) but they will not increase the supply of doctors or expand hospital facilities or add to the number of nursing homes needed to meet the existing demand for health care services, much less any new demand. Adding millions of new patients by subsidizing their demand for health care will only make the existing problems of access to health care worse. And on top of this, sharply reducing increases in Medicare funding associated with expected rise in recipients is equivalent to putting in place price controls which will further restrict supply and lead to the two-tier market mentioned by Professor Mankiw.

The problem of doctors refusing to accept new Medicare or Medicaid patients has been growing, especially in rural areas, and is likely to accelerate once the funding cuts in the present bills are implemented. Add to this, the large increase in demand for services stemming from its subsidies and the problems of the health care sector of this economy multiple. Finally, its impact on the supply of health care services stemming from its controls over pricing would be terrible.

The country needs to reform its health care sector. But the bills now in Congress are not the way to do it.