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Wednesday, March 17, 2010

Will Medical “Reform” Cut Real Costs?

Econ 101.

It seems that the so-called health care “reform” bill will become law soon enough. (President Barack Obama has told recalcitrant Democrats in the House of Representatives that he won’t campaign for them if they vote no. Most will give into the President.)

Therefore, I am more interested in what will occur after the bill is passed, not the sordid politics behind it. Specifically, I want to take a hard look at the president’s claim (echoed by economists like Paul Krugman) that the new law will reduce costs.

According to the Congressional Budget Office, Obama’s plan will produce “savings” in medical procedures. Not surprisingly, much of the media (and especially the New York Times), has been echoing the same chorus.

However, I think this claim truly falls into the “Not So Fast” category. In my view there is no possibility that the President’s plan will even remotely cut real costs. The true legacy of this bill will be to add costs in ways we hardly can imagine.

Given that the bill imposes new mandates, further subsidizes the consumption of medical services, and orders insurance companies to cover applicants no matter their health status, one is hard-pressed to find the “cost savings.”  Medicare will supposedly cost half a trillion dollars less because the government will order such a state of being into existence. The “waste, fraud, and abuse” that every preceding administration promised to root out will finally meet their match with the Obama administration.

Since the plan won’t really cut costs, medical price controls could be in our future. Without going into the various economic dislocations created by price controls, let me deal with an even more fundamental issue: the nature of costs. It is telling that economists who support the bill because of its alleged “costs savings” are exposing their own ignorance about costs. To them, a “cost” is nothing more than a monetary outlay that is paid for a certain good or service. If government orders the prices paid in those transactions to be lower, then — voila! — costs are lower.

Opportunity Costs

At best, this is a childish view of costs and certainly not a view that any serious economist would hold. Costs, according to basic economic theory, are opportunity costs, or the value to an individual of the closest forgone activity. By imposing lower prices, the government would be raising the opportunity costs to individuals taking part in the exchange. Far from lowering costs, the proposed measures ultimately would result in higher real costs.

For example, if the government forces down the price of a medical procedure below the level at which all service providers can be adequately compensated, then the procedure won’t be done at all. While that would mean no money outlays, “officially” lowering costs, the person for whom the procedure is denied would bear a real cost by having to suffer the malady that drove him or her to the doctor in the first place.

Supporters of ObamaCare claim that Canada and Great Britain have lower medical costs with their government-run systems than America does. However, many of those “savings” come about because people are denied care, or must make do with cheaper but inferior alternatives.

In other words, the “savings” come at the expense of individuals who wish to receive care. It might be possible, through accounting trickery, to show that the new medical “system” has lowered the federal deficit, but it cannot and will not lower the real costs we will pay.

  • Dr. William Anderson is Professor of Economics at Frostburg State University. He holds a Ph.D in Economics from Auburn University. He is a member of the FEE Faculty Network.