John Goodman on the social cost of health reform

John Goodman, one of the best writers on health care policy, wrote an interesting piece on the social cost of health care reform.

Social cost is the sum of all the individual costs. That is, it’s the cost to me plus the cost to you plus ... etc., summing over 300 million people. In doing the summation, we can’t omit whole groups of folks. Although this may come as a surprise to some, doctors really are people! So are nurses. So are hospital personnel. Squeezing the incomes of providers shifts costs, but it doesn’t lower them. It makes patients better off (in the short run) and providers worse off. But that does not lower cost for society as a whole.

As Gregory Mankiw explained in a recent New York Times editorial, if we want to shift costs, we do not need monopsonistic buying power. We could simply impose a tax on all the providers and use the proceeds to subsidize the health care purchases of patients. Good for patients and bad for doctors, perhaps. But since the gains and losses cancel out, the benefits for society as a whole are nil.

Those on the political left tend to think that health care is differerent in some way from other services and markets and so is immune to the cost-lowering, value-increasing effects that competition, innovation and entrepreneurship have in every other area of human activity. As a result, their proposals for reducing health care costs always come down to limiting treatment to patients and payment to doctors. Often they don’t recognize that this is the likely outcome of eliminating “unnecessary” and “inefficient” care regimes, or of setting “fair” prices for health care services. So overall, the costs to society won’t be lowered, just shifted. This is all the government can ever do — they operate in a zero-sum world.

When reformers talk about using government to lower costs in health care, just remember that the costs will be lowered for some, but raised significantly for others — and overall, we won’t be any better off for it.

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