Reply #139: You are EXACTLY RIGHT [View All]

[HamdenRice]

Some of the responses to your post show that, as the cliche says, "a little (economic) knowledge is a dangerous thing." A lot of DUers seem to believe that limiting wages for health professionals is some sort of violation of the market.

The problem is that there isn't really a market for health care professional wages, and in the absence of a functioning market, the government will basically have to step in a set wages.

There are many reasons that there is no functioning market for health professional wages, but I can think of two off the top of my head: (1) demand for many health services is (or should be) completely inelastic, and (2) there are more "agency" problems in health care than in almost any other industry.

As for (1), consider an appendectomy. This is now a safe, easy low cost (note: not low price) operation. If you get appendicitis and don't get the operation, you die. Let's say the cost of an appendectomy is $2,000. When the operation is "sold" in a market, the question is, what is the patient willing to pay for it? What is the value to the patient in terms of future wages, and life itself? The price a person is potentially willing to pay for an appendectomy is up to his entire life's wages, savings, property -- and even more because he prizes life above all other values. So the price could be up to millions of dollars for something that "costs" $2,000.

Therefore, the price of an appendectomy simply cannot be set by market forces.

As for (2), agency problems occur in economic theory whenever one person or party has to do something through another person (the agent). In health care, the patient is the customer or buyer. But all his decisions are made by agents: the doctor determines what care is needed because of his specialized knowledge, the insurance company pays his bills -- and it gets even worse in emergencies and operations, when agents make extremely expensive decisions on behalf of the "customer."

For this reason, prices have to be set before the customer is even a customer -- namely collectively through political processes.

There can be no functioning market system in professional health care wages any more than there can be a market in the services of firemen in the middle of fighting a fire.