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Brooks Wilson's Economics Blog: Some Consequences of Government Rationing

Friday, September 30, 2011

Some Consequences of Government Rationing

In “Rationing Health Care” and “More on Rationing Health Care” I describe why employer provided health care how employer provided health care was created as a response to the price and wage controls imposed during WWII.  Employers could not raise wages but the government permitted them to offer health care benefits to employees in addition to wages.  New laws made health care expense deductible for the employers and did not count the health care benefits as taxable income for the employees.  Because health care payments paid with the employees wages were taxable, both the employer and the employee had a financial motive to push more medical employee paid health care expenses onto the group plan paid by the employer.

The law created a tragedy of the commons and the common resource was the group plan.  Health care is over consumed because the employees have no incentive to control expenditures but all pay for the increasing costs because the cost of the group plan has increased.  There are basically two ways to control rising costs.  Employees must be again be exposed to market prices or the employer through the group provider must ration health care.

Medicare and Medicaid have created similar tragedies of the commons.  The elderly and the poor get benefits paid for largely by taxpayers, and consequently have little incentive to control consumption.  President Obama’s health care reform would ration health care benefits through expert committees.  A couple of articles describe the impact of government rationing in the Tennessee and the United Kingdom (“Patients to wait longer for care under new health law, think tank says,” “Cataracts, hips, knees and tonsils: NHS begins rationing operations”).

In Tennessee, approximately 700,000 citizens will gain health coverage (demand expands from D0 to D1), most will be younger men with low incomes who will become eligible for Medicaid.  The remainder are people who qualify for subsidies to buy insurance though newly created state health exchanges.  As demand expands without a corresponding increase in health care providers, the price of health care increases as does the quantity of health care provided (the increase in demand has caused a change in quantity demanded along the original supply curve and equilibrium has shifted from A to B).  More health care will be demanded at a higher price.  Somebody has to pay.  Sources cited in the article suggest that taxpayers and healthy young adults that do not qualify for subsidies will subsidize the poor and infirm. 

The second article explains that the National Health Service will ration hip replacements, cataract surgery and tonsil removal as well as other operations to control burgeoning budgets. 

Society cannot afford to provide all the health care that people desire.  As health care becomes more effective and more expensive, people will not be able to afford all beneficial care.  Public payment for health care has or will hit the same ceiling.  We as individuals or collectively cannot afford everything we want.  Resources are scarce.  It seems cruel to force a dying person to examine their financial records to determine if they wish to spend their remaining wealth on a procedure that might be effective.  Many will not have the resources to pay.   It also seems cruel to tell a dying patient that she does not meet the cost benefit criteria for a procedure that might extend her life.


  1. Calin Baban said...

    Limiting the amount of health care a patient is able to receive in order to save lives seems unmistakably wrong. The type of care and medication a patient is to receive should be decided by the doctor and patient, not by some bureaucrat in Washington. Health care should not be based on efficiency V quality; it should be based on doing everything possible to saving lives. If the free market is eliminated by government control, prices for health care may possibly be lowered, but demand may never be reached. The shortages in health care will result in many unhappy customers just like in Great Britain.

  2. Dena Derby2/10/11 4:53 AM

    Reading this blog only intensified my feelings that the government is becoming detached from its peoples needs. I understand that for every cost someone has to cover the balance whether that is the employer or employee. But I have to ask who are we to ask a person not to receive health care that they need. Everything has a price, but to place the health of our citizens at risk is ridiculous. Why is it that there are other countries (Germany, Iraq, Canada etc..) that can provide their citizens with universal health care? And we the (western civilization) struggle to have even have every citizen with some form of benefit? There is no doubt that if there was some form of restriction on how much an individual/ employer was allowed to be charged for their plan more Americans could afford insurance (provided since no UHC). They say "scarce resource"? seriously what resource are they referring to? There is no shortage of health care professionals, just a increasing desire for the medical industry to increase profits. How do we put a price on a human life? Supply and demand? Demand: the need for medical services to maintain, extend the quality and quantity of human life. Supply: the resources need to provide said materials. Either way it doesn't seem to me that there should ever be a point where someone has to choose quality over quantity.

  3. Kevin Rhodes2/10/11 10:32 AM

    Healthcare is a huge issue in our country today but the way Obama is going about it is all wrong. Everyone wants to blame the greedy doctors for wanting more money when in fact they are the ones manning the ER's taking care of indigent patients. Some fellow bloggers mention other countries and how they take care of their citizens when in fact one of our major problems with healthcare is the people who are not citizens, that do not pay taxes, and use the ER's as their primary care physician. People complain about not having universal healthcare, when in almost every town you drive through has a hospital that can't turn away anyone. I agree that we need change in the healthcare industry but it needs to be more regulations on Insurance companies. They set back and choose who they will cover and if you are chosen by them they can still drop you at anytime because of health problems that they deem too costly. If the politicians will take the insurance companies hand out of their pocket we might find the correct road to travel down. In regards to doctors, everyone wants to complain about how much money they make but no one wants to walk in their shoes. They may make 400k but they go to work everyday trying to save lives and avoid being sued by the opportunistic Americans who are looking for a free ride. At the end of the day everyone goes to college to get a degree, that will lead to a job, in turn will allow you to make the most money possible. Doctors go to school for 12 years to help people and make the most money possible but everyone wants to say they are greedy because they made the sacrifice and they are worth what they get paid and if healthcare reform happens the way it is being pushed then you will see a shortage of healthcare professionals because the cost of practicing would not out weigh the benefits.

  4. I would have to agree with Kevin when he said that everyone seems to think the Dr's are being greedy and that they how some people are just looking for a free ride. I think it is crazy how someone can sit there and say nonsense about Dr's just want our money so they charge us so much for certain procedures, but in return when they need something done to help save their life or a loved ones, they want them to preform and do everything they can for them. I would have to say that the way the government is handling the health insurance is ridiculous, and how there are some people who can't afford and get the insurance they need get turned down, or have to pay more than others. I am lucky to have a job where my insurance is paid for by my employeer, and that my daughters are on medicaid. I pay my taxes so that I can at least say that I somewhat pay for insurance for my girls, and some of my child support goes to the government because they are on medicaide also. But you see plenty of people out there who gripe about not being able to afford health insurance, buy yet they drive expensive cars that have a monthly payment of at least $300 or more. I mean if I had to choose between a fancy car or health insurance for my girls and I, I would certainly choose the insurace. I agree that the government and the insurance companies need to change things about the health insurance so that everyone has an equal opportunity to have the coverage that is best for them or their family. Because no one no matter who they are or what their job title is has the right to tell someone that they cant get insurance just because of where they live or age or some stupid question that was answered in a way that disqualified them from potentially having the coverage that could someday save their lives. Like Kevin said you do see a lot of towns these days that have hospitals who do not turn people away when they need help. But most people are afraid of going even still because of the huge bill that they know is coming, and with that people choose not to go in so they don't have to pay later. So overall, there defiantly needs to be a better solution for the health care that we have here and it needs to be done pretty soon.

  5. Gena Harcrow

    I do not understand alot of the details surrounding the health care reform, but what I do understand is that the supply/demand for health care really needs an overhaul. I also think it is cruel that a person who has a chance to extend their life must examine their financial records or wait to see if they meet the criteria. I think that all persons should be allowed the necessity of health care, but i also think that the providers need to take a serious look at how their practices are run. I know from experience that a patient may call a doctor for information on how to treat a cold. The doctor then tells them they must be seen. The patient comes in, gets an office visit charged to their insurance, and all they were told was to keep hydrated and get rest. There are providers out there who take advantage of the health care system and that, in turn, is what has helped make the health care crisis what it is today.