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Considering the excitement over a new Medicare RX drug benefit and the cost of drugs, it's time for some elementary economics.

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Debunking Free-Lunch Medicine

Considering the excitement over a new Medicare RX drug benefit and the cost of drugs, it’s time for some elementary economics.

It is always fascinating to see elementary economics make front-page news. It was front-page news in the Wall Street Journal of November 12th that there are long waiting times for seeing medical specialists in Canada and in other countries with government-controlled medical care systems — but not in the United States, where some politicians are trying to get us to imitate these countries.

Shortages where the government sets prices have been common in countries around the world, for centuries on end, whether these shortages have taken the form of waiting lists, black markets, or other ways of coping with the fact that what people demand at an artificially low price exceeds what other people will supply at such prices.

This principle is not limited to medical care. There were waiting lines for food, undershirts, and all sorts of other things in the Communist bloc countries in Eastern Europe before the collapse of Communism in that region. You had to get on a waiting list to buy a poorly made car in India before they began to free up their economy from government controls.

You could go back literally thousands of years and find shortages under price controls in the Roman Empire or in ancient Babylon. But it is still front-page news today because elementary economics has not yet sunk in.

An OECD study shows that the percentage of patients waiting more than 4 months for elective surgery in English-speaking countries is in single digits only in the United States, where we “lack” the “benefits” of a government-run medical system. In Canada 27 percent of patients wait more than 4 months and in Britain 38 percent. Elective surgery includes some heart surgery.

Depending on what you are suffering from, and how much you are suffering, longer waits can be a cost that far outweighs monetary savings under price controls or government subsidies. Sometimes the wait can be fatal.

There is another kind of waiting — waiting for new medicines to be developed for scourges like cancer, AIDS, and Alzheimer’s. Countries with price controls on pharmaceutical drugs have far fewer of such drugs created than the United States does.

Yet Americans, who produce a wholly disproportionate share of the world’s new life-saving drugs, are being asked to imitate price control policies in countries where such policies have dried up the costly research behind such discoveries.

These countries have left the development of new drugs to the United States. But if we follow their example by killing the goose that lays the golden egg, who can we turn to for developing new medicines? This could be the most costly free lunch of all.

None of the various schemes for lowering the prices of medicines seems willing to face up to the simple fact that each new medicine developed costs hundreds of millions of dollars. This huge inescapable fact seems to just evaporate from the discussion as politicians vie with one another for the best way to make these medicines “affordable” at “reasonable” prices.

Politicians who claim to be able to “bring down the cost of health care” are talking about bringing down the prices charged. But prices are not costs. Prices are what pay for costs.

No matter how much lower the government sets the prices paid to doctors, hospitals, or pharmaceutical drug manufacturers, none of this reduces the costs in the slightest.

It still takes just as much time, equipment, and training to turn a medical school student into a doctor. It still takes just as many hospitals to care for the sick. It still takes just as many years of scientific research and clinical trials to create a new medicine.

Those who are dying to control the prices of pharmaceutical drugs are oblivious to the fact that other people may be literally dying unnecessarily if they succeed. There is no free lunch, even though politicians get elected by promising free lunches.

Government price controls on medicines and medical care simply mean that these costs do not all get covered. This works in the short run — and the short run is what politicians are interested in, because elections are held in the short run. But the rest of us had better think ahead, if we value our health.

* * *

Any attempt at a rational discussion of the economic realities of government-controlled medical care is almost certain to run up against the trump card of the political left: The Poor.

The image that is often invoked is that of the elderly poor, forced to choose between food and medical treatment. Who could be so heartless as to abandon them to the vagaries of the free market?

This has proved to be a very effective political strategy for extending government power, not only over medical care but also over housing and other sectors of the economy.

The phoniness of this argument becomes apparent the moment you suggest that money be set aside specifically for dealing with the special problems of the poor, rather than bringing whole sectors of the economy under the dominance of politicians, bureaucrats and judges.

The amount of money needed to take care of the poor is often some minute fraction of what sweeping new government programs cost. But, while big government liberals are willing to use the poor as human shields in their political battles, their more basic strategy is to proclaim that everyone has a “right” to some “basic need” that they want the government to provide.

As a matter of practical politics, programs for the poor alone do not have as large a constituency as programs to give everybody some benefit, so that we can all have the illusion of getting something for nothing — or at some arbitrarily defined “reasonable” or “affordable” price.

It is completely unreasonable to talk about reasonable prices.

Such talk amounts to saying that economic realities have to adjust to what we are willing to pay, because we are not going to adjust to economic realities. The biggest economic reality that gets ignored in discussions of medical care is that developing a single new medicine or training a single new doctor takes huge amounts of resources.

What we think we can afford has nothing to do with what pharmaceutical drugs cost to develop. Nor does it have anything to do with the costs of training a new doctor or building a new hospital. We are either going to pay those costs or we are not going to get the quantity or the quality that we want.

Schemes for re-importing American drugs from Canada or buying in bulk from pharmaceutical companies are essentially ways of shifting costs around — without reducing these costs by one cent. Already government agencies, HMOs and others are engaged in shifting medical costs onto somebody else. But, for society as a whole, there is no somebody else.

No matter how much the costs are shifted around in clever shell games, those costs do not go away. That is the hard reality which no political rhetoric can change.

The only reason such rhetoric has even the appearance of plausibility is that price controls work in the short run — and that is good enough for politicians, since elections are held in the short run. After all, when the government drives down prices paid to doctors, hospitals or pharmaceutical companies, there is not much that they can do about it immediately.

Doctors are not going to give up practicing medicine and become truck drivers. Medical schools are not going to be turned into bowling alleys or hospitals into skating rinks. Pharmaceutical companies cannot suddenly shift to manufacturing cars. So price controls seem to work in the short run — but only in the short run.

When you confront doctors with more hassles with bureaucrats and lower payments for their services, do not expect the medical profession to remain as attractive to bright young people deciding what careers to follow. In the long run, every single doctor is going to have to be replaced by someone from the younger generation, or else we are going to have a shortage of doctors.

Britain, for example, has had government-run medical care for decades and nearly half their doctors are imported, often from Third World countries with lower standards of medical training. Canadian hospitals have less modern equipment available than American hospitals do. They depend on American medicines after destroying incentives to develop their own with price controls.

Is this what we are supposed to imitate?

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Written By

Dr. Sowell is a senior fellow at the Hoover Institution and author of "Applied Economics" and "Black Rednecks and White Liberals."

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