Statist Illiteracy with regards to Healthcare Economics

Regarding the debate as to whether or not the government should be involved in covering health care costs for those who cannot pay, many statists have argued that cost shifting alone justifies government involvement in the health care industry. Cost shifting is the practice of charging customers two separate rates. The first group of customers cannot afford treatment, but hospitals admit them for free out of charity. The second group of customers can afford treatment. Cost shifting implies that the second group of customers is charged a higher rate to compensate for the losses incurred on treating the first group of patients. Advocates of government intervention will argue that if the government simply covers the cost of the nonpaying patients, hospitals will charge the paying customers less.

There’s only one problem with this statist argument. Cost shifting does not exist in the real world, and it never has. A simple glance at economics will explain why. When firms (hospitals included) decide what price to charge paying customers, they face a tradeoff. A lower price will attract more customers but a higher price will entail higher revenues per unit sold. If a firm charges a price too low, it will risk earning too little on each unit to earn the money needed for day to day operations. If a firm charges a price too high, it will risk selling too few units to earn the money it needs. Each individual firm will find the optimal price to charge paying customers to maximize earning potential.

In other words, it would not be in a hospital’s best interest to respond to the admission of nonpaying patients by raising prices on patients that do pay. If the hospital were to change the price charged to patients in any way that deviates from the optimal price, the hospital will earn less money than it otherwise could.

However, let’s give our statist friends the benefit of the doubt. What would happen in the health care industry if the government were to pay for non-paying patients rather than let hospitals incur the cost? Hospitals would soon realize what a big checkbook the government has, and realize that if they were to start raising prices out of reach for most patients the government would simply look at these patients as if they were non-paying patients in need of the government’s help. In other words, hospital prices would skyrocket. As for dissenters who say that hospital prices have already been rising in our supposedly free market health care industry, I’ll point out that prices have only been rising rapidly since the government began to get involved in health care spending (think Medicare, Medicaid, etc).

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