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Harris Sherline: Health-Care Price Controls Won’t Work
One of the key elements of the proposals for reforming America’s health-care system is the use of price controls, which have been employed by Medicare. Since 1984, the government has established, at its sole discretion, a schedule of fees it pays hospitals and doctors for their services. Hospitals are paid 80 percent of the scheduled fee that is set by the government, regardless of the actual cost to the provider. That’s price control, and the result is that the Medicare program now has an unfunded liability in excess of $11 trillion.
Price controls have never worked — ever — as far back as 4,000 years ago in Babylon. In a 2005 post to the Mises Daily, Thomas DiLorenzo noted: In Babylon, “the Code of Hammurabi was a maze of price-control regulations.”
Price controls also failed in ancient Greece and again during the third century B.C. in Egypt. In Greece, price-control laws were routinely ignored, in spite of the death penalty being imposed for failure to observe them.
In 301 B.C., Roman emperor Diocletian (244-311 A.D.) issued an Edict on Maximum Prices, in an attempt to curb the inflation caused by his overspending. The law was quickly ignored.
Price controls are invariably imposed by people who are woefully ignorant of the most basic economic principles, a mistake that has been repeated throughout history. The current crop of U.S. politicians is no exception. Does anyone really believe that House Speaker Nancy Pelosi, D-Calif.; Senate Majority Leader Harry Reid, D-Nev.; President Barack Obama; or other like-minded politicians in Congress are so brilliant that they have the ability to decide how much everything should cost?
What such leaders invariably fail to take into account is that people react to laws and regulations and modify their behavior accordingly.
DiLorenzo also noted an early example of this when ancient Egyptian farmers “became so infuriated with the price-control inspectors that many of them simply left their farms.” By the end of the century, the “Egyptian economy had collapsed, as did her political stability.”
The health-care proposals working their way through Congress all rely on some form of price control in the mistaken belief that it will reduce costs. However, to reduce costs, it would be necessary for the government to set prices at every level of production and distribution, which is virtually impossible considering the billions of buy-sell decisions that are made throughout a society literally every day. There are plenty of examples of the failure of that sort of thinking, the most notable being the Soviet Union, which collapsed after 70 years.
In a 2005 article, economist Thomas Sowell commented:
“People who want the government to control the prices of pharmaceutical drugs seldom, if ever, raise the question of what actually happens in places and times when government has controlled the prices of pharmaceutical drugs. Canada and other countries do it. What consequences have there been? One major consequence is that Canada and other countries do not create nearly as many of the new lifesaving pharmaceutical drugs as the United States does. These other countries live off the results — the medicines — produced by the enormously costly research that ‘obscene’ pharmaceutical profits finance in America.”
Other instances of the effects of price controls include the Revolutionary War, when George Washington’s army nearly starved to death because of controls on food that were imposed by Pennsylvania and other colonial governments. And, in 1793, French politicians passed the Maximum Price Act, which imposed price controls on grain and other items and caused starvation in some towns.
In 1971, President Richard Nixon’s wage and price controls failed to lower the rate of inflation and were abandoned in 1974.
In 1979, President Jimmy Carter’s price-control policies caused oil and gas shortages, and in the 1990s, California’s energy crisis was caused by price controls on retail prices (but not on wholesale prices).
In spite of clear evidence that price controls have never worked as planned, Obama and Congress continue to press for a health-care plan that would make substantial use of them. If they succeed, they will have unintended consequences that are likely to cause major shortages of health-care services and ultimately will lead to rationing.
Sowell’s 2005 article concluded, “Costs don’t go away because you refuse to pay them, any more than gravity goes away if you refuse to acknowledge it. You usually pay more in different ways, through taxes as well as prices, and by deterioration in quality when political processes replace economic process. ... But the lure of the free lunch goes on.”
[Noozhawk’s note: On a 220-215 vote Saturday, the Democratic-controlled House of Representatives passed a 10-year, $1.05 trillion health-care bill — the biggest expansion of health-care coverage since Medicare’s creation in 1964.]
— Harris R. Sherline is a retired CPA and former chairman and CEO of Santa Ynez Valley Hospital who has lived in Santa Barbara County for more than 30 years. He stays active writing opinion columns and his blog, Opinionfest.com.
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» on 11.08.09 @ 10:41 AM
This is about controling your life with more taxes. Higher Taxes to liberals means they get more control of our lives——50% of your pay goes to their cushy government jobs—liberal losers destroying America—we can stop them..
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» on 11.08.09 @ 12:45 PM
Harris writes:
“There are plenty of examples of the failure of that sort of thinking, the most notable being the Soviet Union, which collapsed after 70 years.”
Hmm… I think the US policy of Capitalism also collapsed after (1937 - 2007) 70 years!
Point - Harris fails to tell you that the last US major recession was in 1983 during the 3rd year of the “god of the GOP” Regan.
Point - health care should be (and will be) one of the guarantees of citizenship in the US.
Point - the military complex which is the BIGGEST deficit contributor is expected to reach $1.5 trillion+ dollars during the same 10 year period.
Point - “[T]he lion’s share of this money is not spent by the Pentagon on protecting American citizens. It goes to supporting U.S. military activities, including interventions, throughout the world. Were this budget and the organization it finances called the “Military Department,” then attitudes might be quite different. Americans are willing to pay for defense, but they would probably be much less willing to spend billions of dollars if the money were labeled “Foreign Military Operations.”
— The Billions For “Defense” Jeopardize Our Safety, Center For Defense Information, March 9, 2000
Point - Obviously the Military complex is responsible for at least half the deficit without actually defending us.
Point - If the people can’t have health care, then what is point of paying high taxes in the US?
All of this very important research that Harris put into his article is important - but it doesn’t help to explain away the the real issue.
ISSUE: Why not take the fat out of the Military Complex and give it back to the people in the form of health care. After all, Mr Sherline, it’s easy to write these articles when you are feeling good - but when you are ill, you just want to feel better.
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» on 11.08.09 @ 03:54 PM
Mr. Sherline has some experience in this field.
There’s not much reason to attack him personally for expressing his view.
It would be interesting to see Sherline’s explanation for why such systems seem to
be working okay in 41 advanced nations.
The Mayo Clinic, Johns Hopkins, the Cleveland Clinic, the medical community of Grand Junction, Colorado, among many superior American health sites, seem to make it work.
The American Medical Association seems to be okay with at least trying it.
Our current system is so expensive. It still covers too few. It kicks in too late.
Stalin’s Five Year Plans aren’t very related to the pending legislation in Congress.
Could Mr. Sherline dig deeper into the actual proposals before Congress now, to explain more clearly why they wouldn’t work?
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» on 11.09.09 @ 11:10 AM
The reason price controls don’t work is that guys like Harris Sherline and William W. McGuire (former head of United Healthcare who got paid $125 million/year) deny care to premium payers to pay their vast salaries and benefits.
I think they all deserve prosecution and possibly incarceration.
Note Sherline makes no comment about the schemes like `Deathstar’ which Enron used to extort money and create the California Energy Crisis:
http://www.mresearch.com/pdfs/19.pdf
In Sherline’s world, there are no ethics or moral responsibilities to respect government laws or give a fair deal to premium payers. Thus, he blames the California Energy crisis not on Enron and other extortionists, but on the goverment whose laws were evaded by the extortionists.
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» on 12.23.09 @ 04:45 PM
You forget one crucial fact in your analysis.
Price controls fail because people tend to buy more stuff at lower prices than higher prices. This is not true with health care.
People will buy more food or gas at lower prices than higher prices.
By contrast, people will not get cancer more often if the price of chemotherapy goes down.
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