cost shifting

It's Black Friday, the day after Thanksgiving.  Shoppers wait in line outside retailers, hoping to buy expensive consumer goods below the retailers' cost.  People will line up before 3am to buy a $600 notebook computer for under $400.

Marketing types refer to such sale items as "loss leaders."  Yes, they lose money on each item sold below cost, but the losses are offset by the profits on items at the normal price.  Bringing people into the store with an ad will help sell those items, too.  The trick is to balance the quantity of loss leaders against a massive volume of goods sold at the regular price, and Black Friday generates a lot of sales.

The point is that you can't use one price, one policy, one transaction or one item to assess an entire market without considering all the other transactions as well. 

Imagine what would happen if Congress stepped in and told Best Buy it must sell every notebook $200 below cost.  Or if Congress was using the fact that Best Buy can sell a few people notebooks below cost as evidence that it's ripping everyone else off.

Medicare does not "negotiate" its reimbursement rates.  It dictates rates, telling providers exactly how much it will pay for various procedures.  Sometimes a hospital will make more money off a procedure than the doctors, and the hospital will then require doctors to accept Medicare cases as a condition of their privileges at the hospital.  But nobody's going to require doctors to stay in business if they're not making an overall profit -- so they in turn must charge their losses to someone else as well.

Private insurers like Blue Cross have studied this phenomenon, called cost-shifting, concluding that one of the reasons they pay higher rates for care is because providers are making up for their own Medicare losses (and Medicaid is even worse).  The hospitals and doctors aren't "ripping anyone off," in the sense that their overall bottom line is pretty reasonable.  They're just redistributing losses based on their various clients' abilities to pay, and it just so happens that Medicare's ability to pay is very limited by policy.

Liberals are in rather stark denial about all this.  One of the biggest pushes from the far, far left is to expand Medicare to cover everyone.  Or at least to impose Medicare rates on all care, guaranteeing that all medicine be delivered at the same low price as Medicare.

The problem is called "the fallacy of composition."  What works for one person cannot automatically be applied to everyone.  If an arrangement allows one person to live at everyone else's expense, then by definition the scheme requires someone else to bill it to.  Putting everyone in Medicare leaves nobody to pay for it.

It's kind of funny when you think about it, considering that the whole point of Medicare is to shift the cost of caring for the elderly, sick and retired onto the young, healthy and employed.  The notion of the medical industry performing its own redistribution internally, in order to remain solvent, is insulting to the elitists who feel that government alone should be reassigning healthcare costs between patients.

It's this denial that makes the latest compromise plan so attractive to liberals: The promise of getting millions more patients the "bargain" that is Medicare.  But it's also what tells us why this would be a complete disaster for everyone else's healthcare costs.  So we should not be surprised to hear that experts are saying this option is actually worse than before they "fixed" it.  Like I said yesterday, it will be interesting to see how the CBO scores it.

By the way, a similar situation exists with pharmaceuticals.  Canada can fix prices on American pills, but if the U.S. industry can't bill the cost of its R&D to somebody, then research and development will cease.  Right now that somebody is Americans, and when we find a way to get out of paying for it, then there will be no more new drugs.  I don't know what the "correct" response is, to a model where foreign countries won't pay full price for meds that Americans can't reimport at a discount, but I do know that the industry relies on the overall package deal to survive.  We can't all have the discounted rate, because then nobody would be paying for the venture.

Comments

[Hank Rearden]

On a totally unrelated note, I saw a great 2010 campaign slogan the other day:

"CHANGE" it back!

[John Galt]

LOL. Did you see where I put that on Twitter a couple of days ago, or did you see it somewhere else? It got retweeted like a dozen times.

I honestly expect someone to use that as a slogan by 2012, if not next year.

[Hank Rearden]

No, I did not see that. It was part of a comment thread I found on some Bloomberg article (I forget which one).

[John Galt]

Great minds think alike! I have to admit, it seemed rather obvious at the time.