One of the key elements of the proposals for reforming America’s health care system is the use of price controls, which have been employed by Medicare. Since 1984, the government has established, in its sole discretion, a schedule of fees they pay to hospitals and doctors for their services. Hospitals are paid 80% of the scheduled fee that is set by the government, regardless of the actual cost to the provider. That’s price control, and the result is that the Medicare program now has an unfunded liability in excess of $11 trillion.

Price controls have never worked, ever, as far back as 4,000 years ago in Babylon. In a November 2005 post to the Mises Daily, Thomas J. DiLorenzo noted: In Babylon, “the Code of Hammurabi was a maze of price control regulations.”

Price controls also failed in ancient Greece and again during the third century B.C. in Egypt.
In Greece, price control laws were routinely ignored, in spite of the death penalty being imposed for failure to observe them.

In 301 B.C., the Roman emperor, Diocletian (244-311A.D.), issued an Edict on Maximum Prices, in an attempt to curb the inflation that was caused by his overspending. The law was quickly ignored.

Price controls are invariably imposed by people who are woefully ignorant of the most basic economic principles, a mistake that has been repeatedly made throughout history. And, the current crop of American politicians is no exception. Does anyone really believe that Nancy Pelosi, Harry Reid, president Obama or the like minded politicians in Congress are so brilliant that they have the ability decide how much everything should cost?

What such leaders invariably fail to take into account is that people react to laws and regulations and modify their behavior accordingly.

DiLorenzo also noted an early example of this when ancient Egyptian farmers “became so infuriated with the price control inspectors that many of them simply left their farms.” By the end of the century the “Egyptian economy had collapsed as did her political stability.”

The health care proposals that are currently working their way through Congress all rely on some form of price control in the mistaken belief that it will reduce costs. However, to reduce costs, it would be necessary for the government to set prices at every level of production and distribution, which is virtually impossible, considering the billions of buy-sell decisions that are made throughout a society literally every day. There are plenty of examples of the failure of this sort of thinking, the most notable being the Soviet Union, which collapsed after 70 years.

In a November 2005 article, economist Thomas Sowell commented:

People who want the government to control the prices of pharmaceutical drugs seldom, if ever, raise the question of what actually happens in places and times when government has controlled the prices of pharmaceutical drugs.

Canada and other countries do it. What consequences have there been?

One major consequence is that Canada and other countries do not create nearly as many of the new life-saving pharmaceutical drugs as the United States does. These other countries live off the results — the medicines — produced by the enormously costly research that “obscene” pharmaceutical profits finance in America.

Other instances of the impacts of price controls include the Revolutionary War, when George Washington’s army almost starved to death because of controls on food that were imposed by Pennsylvania and other colonial governments. And, in 1793, French politicians passed the “Law of the Maximum,” which imposed price controls on grain and other items and caused starvation in some towns.

In 1971, President Nixon’s wage and price controls failed to lower the rate of inflation at the time and were abandoned in 1974.

In 1979, Jimmy Carter’s price control policies caused oil and gas shortages and in the 1990s, California’s energy crisis was caused by price controls on retail prices (but not on wholesale prices).

In spite of clear evidence that price controls have never worked as planned, Obama and Congress continue to press for a health care plan that will make substantial use of them. If they succeed, they will have unintended consequences that are likely to cause major shortages of health care services and will ultimately lead to rationing.

Thomas Sowell’s November 2005 article concluded, “Costs don’t go away because you refuse to pay them, any more than gravity goes away if you refuse to acknowledge it. You usually pay more in different ways, through taxes as well as prices, and by deterioration in quality when political processes replace economic process…But the lure of the free lunch goes on.”

© 2009 Harris R. Sherline, All Rights Reserved

Read more of Harris Sherline’s commentaries on his blog at “www.opinionfest.com”

Leading the effort to sell his health care plan to the nation, President Obama has been appearing almost non-stop in almost any venue that will have him. There is growing opposition to his proposal, as the details come to light. But he presses on, convinced of his own infallible judgment, that he knows what’s best for the entire nation of 300 million plus people and that only his ideas can possibly solve the problem.

Economist Walter E. Williams noted, “I doubt whether there are many Americans who think Congress has either the right or competency to choose where they live, what clothes they wear or what cars they drive. Yet many Americans stand ready to allow Congress to decide what doctors they can use and what treatments they receive. We forget that once we have government-sponsored health care, it can be used to justify almost any restraint on liberty.”

And, columnist David Harsanyi commented, “The president claims that we must pass a government-run health insurance program — possibly the most wide-ranging and intricate government undertaking in decades — yesterday or a ‘ticking time bomb’ will explode. If all this terrifying talk sounds familiar, it might be because the president applies the same fear-infused vocabulary to nearly all his hard-to-defend policy positions. You’ll remember the stimulus plan had to be passed without a second’s delay or we would see 8.7 percent unemployment. We’re almost at 10.”

If the government is so efficient and capable of running large organizations, how is it that the post office and the railroads have never been able to operate at break even, let alone make a profit? So, why would a gigantic health care system that accounts for an estimated 18 percent of the nation’s total economic output be able to do any better?

Medicare is held up as an example of a government run health care system that covers a major portion of the population (about 13 percent), yet operates efficiently, with only about three percent administrative overhead, while providing almost unlimited care to seniors at a reasonable cost. Unfortunately, the reality is not quite as advertised.

For one thing, Medicare loses money. It is one of the nation’s biggest unfunded liabilities. So, the program may be efficient, but it loses money. The Peter G. Peterson Foundation notes: “… between Medicare’s three programs (hospital insurance, outpatient, and prescription drug), current and future promised Medicare benefits amounted to $36.3 trillion.”

Another little-known fact about Medicare is that the program is able to control costs only because it can dictate the prices it pays for services. In other words, the system employs price controls to keep costs down. However, it’s a well documented historical fact, dating as far back as the early Romans (Diocetianus, 244-301 A.D.), that price controls don’t work. For example, hospital fees for both inpatient and outpatient services are determined by the government, in its sole discretion.

Furthermore, prices are set according to a system established by Medicare, which then pays only 80 percent of the fees that it determines are or should be the proper charges. Still, Medicare loses money.

Another representation of the Obama administration and others who are pushing for national health coverage is that there are 47 million Americans who do not have any health insurance, which provides the basis for their haste to adopt a plan. Once again, however, at best this is simply inaccurate, at worst, it’s a gross misrepresentation. FactCheck.org offers the following information:

“Twenty-six percent of the uninsured are eligible for some form of public coverage but do not make use of it…this is sometimes, but not always a matter of choice.”

“Twenty percent of the uninsured have family incomes of greater than $75,000 per year, according to the Census Bureau.”

“Forty percent of the uninsured are young…many young people lack insurance because it’s not available to them, and people who turn down available insurance tend to be in worse health, not better…”

Star Parker has written, “Pulling immigrants out of the equation, we’re left with an uninsured population that can’t afford insurance that is about a third the size of the widely quoted 47 million. It’s a population that is generally poor, young, uneducated, and not working…We’re already set up to deal with these folks. Either through Medicaid or covering their emergency room visits.”

As usual, statistics are being misused or misrepresented to support a position that is not necessarily valid. In this case, the need for a government run health care program for everyone.

© 2009 Harris R. Sherline, All Rights Reserved

Read more of Harris Sherline’s commentaries on his blog at “www.opinionfest.com”