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”

Just about everyone, left, right and center, seems to be weighing in on the health care debate: nationalize the health care system (as in Canada and the UK), require health insurers to provide coverage for everyone, merge Medicare and Medicaid into one common health care plan for everyone, provide health care to the immigrant population, reduce costs by cutting Medicare payments to doctors and hospitals, etc.

The arguments rage back and forth, many anecdotal, others statistical or numbers based, but they all boil down to one basic issue: less government involvement vs more government involvement in health care.

Having run a hospital for seven years, I have given this problem a lot of thought and would like offer the following observations:

First, I must admit that my bias is against any form of universal or nationalized health care, “public option” or otherwise. My experience is that a major part of the cause of the problems in health care today is the extent of government involvement, federal and state, that already exists. For example, the costs that hospitals are forced to absorb as a result of government regulation, mandating everything from details of construction and maintenance to cleanliness to the ratio of nurses to patients. One of the principal reasons for high hospital costs is government mandates, all of which drive up costs.

Some simple things could be done that would go a long way toward improving the health care situation in the U.S.: Tort reform, removing barriers that prevent health insurance companies from insuring people across state lines, allowing insurance companies to offer a wide-range of policies, fewer government mandates on health insurance policies (such as pre-existing conditions), and Medical Savings Accounts, for starters.

ABC’s “20/20″ co-anchor John Stossel, noted: “‘Choice, competition, reducing costs — those are the things that I want to see accomplished in this health reform bill,’ President Obama told talk-show host Michael Smerconish last week. Choice and competition would be good. They would indeed reduce costs. If only the president meant it. Or understood it. In a free market, a business that is complacent about costs learns that its prices are too high when it sees lower-cost competitors winning over its customers. The market — actually, the consumer — holds businesses accountable and keeps them honest. No ‘public option’ is needed. So the hope for reducing medical costs indeed lies in competition and choice. Today competition is squelched by government regulation and privilege. But Obama’s so-called reforms would not create real competition and choice. They would prohibit it.”

And, economist Walter E. Williams commented, “President Obama and congressional supporters estimate that his health care plan will cost between $50 and $65 billion a year. Such cost estimates are lies whether they come from a Democratic president and Congress, or a Republican president and Congress. … At its start, in 1966, Medicare cost $3 billion. The House Ways and Means Committee, along with President Johnson, estimated that Medicare would cost an inflation-adjusted $12 billion by 1990. In 1990, Medicare topped $107 billion. That’s nine times Congress’ prediction. Today’s Medicare tab comes to $420 billion with no signs of leveling off. How much confidence can we have in any cost estimates by the White House or Congress? Another part of the Medicare lie is found in Section 1801 of the 1965 Medicare Act that reads: ‘Nothing in this title shall be construed to authorize any federal officer or employee to exercise any supervision or control over the practice of medicine, or the manner in which medical services are provided, or over the selection, tenure, or compensation of any officer, or employee, or any institution, agency or person providing health care services.’ Ask your doctor or hospital whether this is true.”

I’m always struck by the disconnect that seems to exist when people complain about how ineffectively the government runs programs, yet they are willing to trust that same government to manage something as big and complex as health care. President Obama summed up the inefficiency of big government organizations pretty well when he said, “Fed Ex and UPS are doing just fine, it’s the post office that’s always having problems.”

The following commentary on the health care plan that recently circulated on the Internet sums up the situation rather neatly: “Let me get this straight. We’re going to maybe have a health care plan written by a committee whose head says he doesn’t understand it, passed by a Congress that hasn’t read it but exempts themselves from it, signed by a president who also hasn’t read it and who smokes, with funding administered by a Treasury chief who didn’t pay his taxes, overseen by a surgeon general who is obese, and financed by a country that’s nearly broke. What could possibly go wrong?”

In the final analysis, perhaps the biggest problem with health care reform is that Americans do not trust the politicians who are trying to reform the system.

© 2009 Harris R. Sherline, All Rights Reserved

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