The Price System

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The Price System

Post by collegestudent22 » Fri Aug 26, 2011 8:47 pm

Continuation of the discussion of price gouging (and the relation to the price system) from this thread.
ijuin wrote:
collegestudent22 wrote:Price-gouging in emergencies is an effective way to redirect resources where they are most needed. Yes, it bites to pay that much for something that would normally be cheap, but that higher price provides the incentive for the provider to act.
Let us say that both Bob and Dan have an equally dire need for X, but there is only enough of X available to supply one of them. Bob possesses $500 and Dan possesses $200. Your reasoning would then imply that Bob should be the one to get X, to the exclusion of Dan, though the only difference between Bob and Dan is that Bob has more cash-on-hand. This is the very essence of the argument that "the wealthy take everything".
Bob should get X, having more resources available, and Dan should not, if the item is that scarce. Scarcity is, always has been, and always will be a problem, and the wealthy do have a larger buffer to protect them from it. This is a fact of life. It's not really fair, but unless you can invent a Star Trek replicator and do away with scarcity of resources, that's how life works.

On the other hand, since the price is higher, it increases the incentives to create the product, thereby increasing both competition and supply - driving prices down so that, while Dan may not be able to get it right now, it is possible that he might get it later.
For those goods, making them unavailable in the short term to those with less money contributes very little towards increasing their long-term availability--it merely shifts the distribution of those who get it towards those who have more funds.
Higher profit margins in the short-term increase long-term availability. Specifically, with more profit, more capital can be reinvested into the company to ramp up production and bring the price down - a beneficial thing, as selling millions of vaccines at a low price can make even more money than selling a few thousand at a higher price.
but there are many goods and services whose supply can not be ramped up quickly due to long lead times in production and distribution--e.g. flu vaccines take several months to produce
It is extremely rare that a good that is necessary in the very short term for survival requires such a long lead time - distribution can be done in hours, and supply can be redirected if it cannot be produced (if vaccines are direly needed in New Orleans, for example, they can be redirected from an area of less need like, say, Colorado, provided the price system is allowed to incentivize such a transfer).

More often, it is that one need is greater than the other, and therefore they are willing to pay a higher price for the necessary good. In this case, the higher price helps to relocated goods to where they are most needed, as the guy who doesn't need it right away might not pay the higher price, allowing there to be enough supply for those that have a more urgent need.

Keep in mind, also, that these long lead times are often the result of burdensome government regulation - the flu vaccine is a good example of this. When swine flu appeared to be a problem, government regulations on vaccine creation were relaxed or even ignored, and the lead time for developing and producing the flu vaccine was incredibly shortened.
Arres wrote:You say that like it's a bad thing. Really, it's only a bad thing if you happen to be the person who has less money.
And what is the solution, anyway? Have their wealth redistributed so that they both have $350 (assuming no bureaucrat takes his cut - so really, this is nonsense) and they then proceed to beat the shit out of each other to decide who gets the necessary good, because there is still only enough for one? Or they both get half of what they need, and both end up dead/hurt/whatever other consequence they were facing for not getting what they needed.

Really, any attempt to prevent "price gouging" is an attempt to set prices and eliminate the law of supply and demand. That will not end well. Ever.
Frédéric Bastiat wrote:And now that the legislators and do-gooders have so futilely inflicted so many systems upon society, may they finally end where they should have begun: May they reject all systems, and try liberty; for liberty is an acknowledgment of faith in God and His works.
Count Axel Oxenstierna wrote:Dost thou not know, my son, with how little wisdom the world is governed?

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Re: The Price System

Post by collegestudent22 » Mon Aug 29, 2011 11:35 pm

And here is a pretty good explanation of how price gouging actually saves lives:

[youtube]eWTsq7F25kg[/youtube]
Frédéric Bastiat wrote:And now that the legislators and do-gooders have so futilely inflicted so many systems upon society, may they finally end where they should have begun: May they reject all systems, and try liberty; for liberty is an acknowledgment of faith in God and His works.
Count Axel Oxenstierna wrote:Dost thou not know, my son, with how little wisdom the world is governed?

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Re: The Price System

Post by Deacon » Tue Aug 30, 2011 12:43 am

It's an interesting take on price gouging for the distribution of physical resources like water bottles or cans of tuna, but it doesn't really have much to do with medical care. The argument is that if a bottle of water costs a lot, then you'll buy fewer bottles, leaving more bottles for everyone else to buy, so everyone gets a little instead of a few getting a lot. That works--kind of, depending on the extent of gouging--in some disaster scenarios, but it doesn't explain why charging someone $5 per Tylenol at the hospital is helpful.
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Re: The Price System

Post by collegestudent22 » Tue Aug 30, 2011 9:23 pm

Deacon wrote:That works--kind of, depending on the extent of gouging--in some disaster scenarios, but it doesn't explain why charging someone $5 per Tylenol at the hospital is helpful.
It's the same mechanism. If it only costs a few cents per pill, then someone in pain might buy up all the Tylenol - where if someone judges the need for pain relief to not be worth the higher price, there will be Tylenol for others who feel they need it. Tylenol at hospitals is not a unending resource, either, although it is somewhat more plentiful than other pills.

Scarcity does not apply only to physical resources, either. The same reasoning applies to hospital beds, doctor's time, and anything else provided by the hospital, as the hospital essentially operates in a state of constant emergency (especially the ER).

Now, that isn't to say that $5/pill is reasonable, even in an emergency situation. It is not. But that price can be readily attributed to the destruction of the standard pricing system through widespread insurance, forcing those without insurance to make up the discounts the insurance companies get.
Frédéric Bastiat wrote:And now that the legislators and do-gooders have so futilely inflicted so many systems upon society, may they finally end where they should have begun: May they reject all systems, and try liberty; for liberty is an acknowledgment of faith in God and His works.
Count Axel Oxenstierna wrote:Dost thou not know, my son, with how little wisdom the world is governed?

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The Price System

Post by Deacon » Tue Aug 30, 2011 10:14 pm

collegestudent22 wrote:If it only costs a few cents per pill, then someone in pain might buy up all the Tylenol.
That may be one of the single most retarded things you've ever said.
Scarcity does not apply only to physical resources, either. The same reasoning applies to hospital beds, doctor's time, and anything else provided by the hospital, as the hospital essentially operates in a state of constant emergency (especially the ER).
Ah, so if there's no disaster then the price of these resources are significantly reduced to reflect the grater availability? But whether someone's broken body gets seen after being hit by a drunk driver depends on whether that person believes the expense to be worth it? It's such a ridiculous stretch to apply the same concept...
Now, that isn't to say that $5/pill is reasonable, even in an emergency situation. It is not. But that price can be readily attributed to the destruction of the standard pricing system through widespread insurance, forcing those without insurance to make up the discounts the insurance companies get.
You're convinced about that? That hospitals are forced to operate at a loss because insurance companies don't cover costs? And in fact that the hospital receives more money per patient from those with no insurance than they do from insured patients?
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Re: The Price System

Post by collegestudent22 » Wed Aug 31, 2011 2:23 am

Deacon wrote:
collegestudent22 wrote:If it only costs a few cents per pill, then someone in pain might buy up all the Tylenol.
That may be one of the single most retarded things you've ever said.
It is hyperbole, but are you honestly telling me that you've never thought about taking more than the recommended dose of Tylenol? Even when in severe pain? More accurately, it keeps the people that are, you know, kinda hurting, but not really, from taking Tylenol from people that in worse pain.
Scarcity does not apply only to physical resources, either. The same reasoning applies to hospital beds, doctor's time, and anything else provided by the hospital, as the hospital essentially operates in a state of constant emergency (especially the ER).
Ah, so if there's no disaster then the price of these resources are significantly reduced to reflect the grater availability?
If there is no scarcity, then yes, the prices come down. This is the essence of the law of supply and demand.
But whether someone's broken body gets seen after being hit by a drunk driver depends on whether that person believes the expense to be worth it? It's such a ridiculous stretch to apply the same concept...
This is the essence of triage - greater need comes first. Greater need also costs more to reflect that.
You're convinced about that? That hospitals are forced to operate at a loss because insurance companies don't cover costs? And in fact that the hospital receives more money per patient from those with no insurance than they do from insured patients?
No - my point is that if 95% of the people get massive discounts, the base price goes up. This occurs to a lesser extent at stores that always give discounts - the base price is higher. No one actually PAYS that price, but when people say "the price is rising too much", that is the price they are referring to. This price is also what is charged of the 5% that don't get the discounts - although, after much heartache and debt issues, they rarely pay it, either.

The reason why this occurs is fairly simple. Hospitals either run a loss (made up for by charitable giving and/or government subsidies), or they need to make a profit to get investors. That profit must be high enough to entice investment there instead of in some other enterprise. Furthermore, the high expense of diagnostic machinery that not everyone uses requires that either those that get things like MRIs pay through the ass, or the cheaper stuff is sold at a slightly higher price to subsidize the cost of those machines.

Government subsidies (like Medicare) don't work, for the same reason that government-guaranteed student loans cause school tuition to climb higher and higher every year. With a (virtually) infinite supply of money coming from the government, people can charge pretty much whatever they want, and as long as it doesn't rise too fast and cause a push for regulation. Even if that doesn't occur on the hospital level, it could occur with their suppliers (like the manufacturers of said expensive diagnostic equipment), and trickle back down.

Thus, charitable benefactors can help provide things like free clinics at some hospitals, or just donate some money to help defray costs, but that supply of funds is limited, especially as many rich folks prefer to start charitable foundations to fund medical research instead of donating directly to hospitals, if they donate to help fund medicine at all (as opposed to some other, perhaps equally valuable cause).

So, really, the problem with the hospital system (and the healthcare system in general) is complex and multi-faceted. Part of the problem is Medicare itself, another part is the near-universality of insurance coverage, and part is just due to unavoidable facets of the law of supply and demand, and the lack of an economy of scale with the expensive machinery (this last issue could probably be lessened by lowering the incessant drive to get the latest and greatest equipment - with only a tiny improvement in capability - to "save lives").
Frédéric Bastiat wrote:And now that the legislators and do-gooders have so futilely inflicted so many systems upon society, may they finally end where they should have begun: May they reject all systems, and try liberty; for liberty is an acknowledgment of faith in God and His works.
Count Axel Oxenstierna wrote:Dost thou not know, my son, with how little wisdom the world is governed?

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Re: The Price System

Post by Deacon » Wed Aug 31, 2011 4:58 am

collegestudent22 wrote:it keeps the people that are, you know, kinda hurting, but not really, from taking Tylenol from people that in worse pain.
That's still insanely stupid, yet you keep repeating it. Who at the hospital is deciding to buy out the pharmacy of Tylenol, especially when they're not deciding what to take? Especially when they can go spend the same amount for a whole bottle anywhere else? Why would anyone go to the ER just to buy Tylenol anyway? It's a practically unlimited resource you can only consume a little of at a time regardless.
If there is no scarcity, then yes, the prices come down. This is the essence of the law of supply and demand.
Oh my god you have to be kidding me. Do prices go up during flu season? If a hospital is having a slow month do they have a sale on appendectomies? This is getting ridiculous, 22. Especially since you're suggesting that Tylenol is now priced up there with rare precious jewels or something.
No - my point is that if 95% of the people get massive discounts, the base price goes up.
What are you talking about. You have to explain these kinds of "WTF??" statements. Are you saying they artificially inflate the prices of things so that a 95% discount (WTF??) is a higher number, since health insurance pays less than people who have no insurance (WTF??) by a massive amount? WTF. None of this makes sense. Especially when you seem to be insinuating that health insurance companies pay less than cost, then when challenged you say no, they pay less than cost.
This price is also what is charged of the 5% that don't get the discounts - although, after much heartache and debt issues, they rarely pay it, either.
So they don't pay, the insurance company pays only at a rate that incurs loss, and yet doctors park Porsches in their assigned spots and the whole thing keeps going.
they need to make a profit to get investors. That profit must be high enough to entice investment there instead of in some other enterprise.
What investors? What, are these hospitals publicly traded businesses? The shareholders demand higher EPS? And if they're private and profitable, why would the owner(s) want to dilute their take? You can't just say shit, man. If you're going to through stuff like that out there, you have to explain wtf you're rambling about.
Furthermore, the high expense of diagnostic machinery that not everyone uses requires that either those that get things like MRIs pay through the ass, or the cheaper stuff is sold at a slightly higher price to subsidize the cost of those machines.
Oh, so now those incredibly high MR prices are actually the hospital once again operating a loss? Really? And they're making it up by charging a captive audience $5 per Tylenol?
Government subsidies (like Medicare) don't work, for the same reason that government-guaranteed student loans cause school tuition to climb higher and higher every year. With a (virtually) infinite supply of money coming from the government, people can charge pretty much whatever they want, and as long as it doesn't rise too fast and cause a push for regulation. Even if that doesn't occur on the hospital level, it could occur with their suppliers (like the manufacturers of said expensive diagnostic equipment), and trickle back down.
THAT is the problem with Medicare?? It floods too much money into the market so that people charge random, exorbitant prices?! Dude.
So, really, the problem with the hospital system (and the healthcare system in general) is complex and multi-faceted.
I wonder if you understand even a single facet of this mysterious gem.
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Re: The Price System

Post by collegestudent22 » Wed Aug 31, 2011 6:41 am

Deacon wrote:
collegestudent22 wrote:it keeps the people that are, you know, kinda hurting, but not really, from taking Tylenol from people that in worse pain.
That's still insanely stupid, yet you keep repeating it. Who at the hospital is deciding to buy out the pharmacy of Tylenol, especially when they're not deciding what to take?
Pain relief is a special case - the doctor prescribes pain pills, not because of some obvious need, but because the patient requests it. Obviously, with extreme pain - which would be treated with morphine or Vicodin or something - the response is (mostly) obvious. But with the "I have a headache, can I get some Tylenol?" level of pain, this is not the case.

And again, you seem to balk at the "higher prices for the common stuff to help pay for the expensive, rarely used stuff" explanation, without giving any reason as to why that wouldn't occur. Seems to me that if I had to pay for a couple multi-million dollar machines, but couldn't charge tens of thousands for the scans that are relatively rare, I would need to recoup the cost somewhere else.
If there is no scarcity, then yes, the prices come down. This is the essence of the law of supply and demand.
Oh my god you have to be kidding me. Do prices go up during flu season?
Go up where? This is nearly impossible to determine, as hospitals only provide flu-related services during flu season. If you mean as a whole, the answer is clearly not - but again, I have pointed out that price-gouging laws prevent this. However, scarcity of hospital beds/doctors does become a (bigger) problem during times of greater illness, such as flu season.
No - my point is that if 95% of the people get massive discounts, the base price goes up.
What are you talking about. You have to explain these kinds of "WTF??" statements. Are you saying they artificially inflate the prices of things so that a 95% discount (WTF??) is a higher number, since health insurance pays less than people who have no insurance (WTF??) by a massive amount? WTF. None of this makes sense. Especially when you seem to be insinuating that health insurance companies pay less than cost, then when challenged you say no, they pay less than cost.
Insurance companies pay less than "sticker price" - which is highly inflated so that after applying the massive discounts, profit is still made. That is my point.
This price is also what is charged of the 5% that don't get the discounts - although, after much heartache and debt issues, they rarely pay it, either.
So they don't pay, the insurance company pays only at a rate that incurs loss, and yet doctors park Porsches in their assigned spots and the whole thing keeps going.

they need to make a profit to get investors. That profit must be high enough to entice investment there instead of in some other enterprise.
What investors? What, are these hospitals publicly traded businesses? The shareholders demand higher EPS? And if they're private and profitable, why would the owner(s) want to dilute their take? You can't just say shit, man. If you're going to through stuff like that out there, you have to explain wtf you're rambling about.
For-profit hospitals do exist. Further, this was only relating to them - I also went into detail about why prices are inflated with government-owned public hospitals, as well as the problems facing non-profit hospitals.
Furthermore, the high expense of diagnostic machinery that not everyone uses requires that either those that get things like MRIs pay through the ass, or the cheaper stuff is sold at a slightly higher price to subsidize the cost of those machines.
Oh, so now those incredibly high MR prices are actually the hospital once again operating a loss? Really? And they're making it up by charging a captive audience $5 per Tylenol?
Yes, hospitals take a loss on MRI machines. The typical scan will be reimbursed by Medicare about $450 (including the doctor/technician's time - who must also be compensated out of that). But MRI equipment is expensive. 1.5 tesla scanners often cost between US$1 million and US$1.5 million. 3.0 tesla scanners often cost between US$2 million and US$2.3 million. Construction of MRI suites can cost up to US$500,000, or more, depending on project scope. So you need to recoup about $2-3M in cost from $450 scans (assuming the actual employees don't get paid to work the thing) - meaning at least 4,445 scans before you have made your money back.

And again, who actually pays the $5 per Tylenol? Not the insured - the insurance companies negotiate a huge discount. Not the poor - Medicaid also has a huge discount. Not the elderly - Medicare, again, gets a huge discount. Only those that don't bother to get insurance, apply for Medicaid, or get other federal aid for the poor. So, in reality, the prices are so high partially due to the fact that the hospital still needs to make its money back, even after applying a huge discount (sometimes around 50+%) to pretty much everyone that walks through the door.
THAT is the problem with Medicare?? It floods too much money into the market so that people charge random, exorbitant prices?! Dude.
That is A problem - although, more accurately, it covers virtually anything, so creates an issue where the consumer doesn't care what it costs - even in non-life-threatening scenarios - which rises the price for basic care, as the supply of general care doctors doesn't change.
Frédéric Bastiat wrote:And now that the legislators and do-gooders have so futilely inflicted so many systems upon society, may they finally end where they should have begun: May they reject all systems, and try liberty; for liberty is an acknowledgment of faith in God and His works.
Count Axel Oxenstierna wrote:Dost thou not know, my son, with how little wisdom the world is governed?

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Re: The Price System

Post by raptor9k » Wed Aug 31, 2011 3:11 pm

Hospitals aren't operating at a loss based on what insurance pays. Insurance companies set the price at what the service is ACTUALLY WORTH. If hospitals were operating at a loss they would elect not to accept said insurance. The main reason they charge ridiculous amounts to people without insurance is because they're not likely to ever see the full amount charged from said person. If you can actually afford the services most hospitals will offer you a 30-50% discount for paying within 30 days. If you can't, then they have to take what you can afford which is very little in most cases. Therefore, it may be 20 years before they actually get paid in full. It's like building interest into the government enforced loan. If you can't pay or don't pay, they sell it to collection agencies at pennies on the dollar prices so they have to charge quite a bit more to be able to break even on the people who never pay. Given the hoops they have to jump through because of government interference they've come up with a business plan that lets them survive and pay the doctors the ridiculous salaries to which they feel entitled.

Rather than force the hospital to take what a patient can pay why not force the government to issue said patient a reasonable loan and make a little interest money that could be put towards a government run insurance option or hospital system. Hell, why not just treat a government insurance option as a nonprofit providing the world's largest group rate.

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Re: The Price System

Post by collegestudent22 » Wed Aug 31, 2011 8:38 pm

raptor9k wrote:Hospitals aren't operating at a loss based on what insurance pays. Insurance companies set the price at what the service is ACTUALLY WORTH. If hospitals were operating at a loss they would elect not to accept said insurance.
I didn't say the hospitals were operating at a loss. I was saying that they inflate their prices so that they don't do so, even with massive discounts from insurance companies and Medicare. Specifically, if I know the government or insurance company is going to pay 40% of the price I actually charge, whatever it is, then I will inflate my charged price to as close to 250% of the actual cost as I can get to balance it out. That 250% price is then used to show that healthcare costs have inflated, when if you look at the actual price paid healthcare costs are much closer to normal inflation, especially after accounting for improvements in technology that cost more and the related improvements in care.
Rather than force the hospital to take what a patient can pay why not force the government to issue said patient a reasonable loan and make a little interest money that could be put towards a government run insurance option or hospital system.
This does not solve the problem. All one has to look at for possible government loans is to tuition. When government loans are provided and guaranteed, charged prices skyrocket.
Hell, why not just treat a government insurance option as a nonprofit providing the world's largest group rate.
Government insurance doesn't work that way. Eventually, ostensibly to "help the poor", the government will provide the cheapest insurance, and distort the market by inserting a competitor that can operate at a loss and has a virtually infinite supply of (recently printed) funds. Thus, this is a pretty bad idea.
Frédéric Bastiat wrote:And now that the legislators and do-gooders have so futilely inflicted so many systems upon society, may they finally end where they should have begun: May they reject all systems, and try liberty; for liberty is an acknowledgment of faith in God and His works.
Count Axel Oxenstierna wrote:Dost thou not know, my son, with how little wisdom the world is governed?

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Re: The Price System

Post by raptor9k » Wed Aug 31, 2011 9:45 pm

Actual price paid by an insurance company doesn't track with price charged. Insurance companies operate on a payment schedule that is the same regardless of what hospital submits a claim. If hospital A submits a $104 charge for a procedure that the insurance company will pay $57 for and Hospital B submits a $800 charge for the same procedure, they both get paid $57.

It only doesn't work that way if the legislature that creates it allows it to work any differently. If it's written to be a self sustaining non-profit then it would have to operate in a manner that would not allow it to operate at a loss. No other funds would be made available for its use. Consequently it really wouldn't be that much of a competitor to private insurance companies and would likely have to be a strictly in-network type plan. Hell the AARP and the NRA offer group rates that aren't that far off from my Employer's offering. Both of those organizations would have far fewer members to offset the costs than a government sponsored non-profit. It would of course have to be run as a business and not a bureaucracy which is the most likely point of failure.

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Re: The Price System

Post by collegestudent22 » Wed Aug 31, 2011 10:41 pm

raptor9k wrote:Actual price paid by an insurance company doesn't track with price charged. Insurance companies operate on a payment schedule that is the same regardless of what hospital submits a claim. If hospital A submits a $104 charge for a procedure that the insurance company will pay $57 for and Hospital B submits a $800 charge for the same procedure, they both get paid $57.
Not so. Hospital A and Hospital B negotiate separate contracts with the insurance companies. It is entirely possible that they will pay $57 to Hospital A, but something like $189 to Hospital B.
It only doesn't work that way if the legislature that creates it allows it to work any differently. If it's written to be a self sustaining non-profit then it would have to operate in a manner that would not allow it to operate at a loss. No other funds would be made available for its use.
And I'm saying that the government cannot do that - if it tries, it will shortly devolve into something like the USPS or Amtrak, where they frequently DO operate at a loss. Plus, if this additional insurance company was needed, why would the private market not have already created it, along with the non-profit hospital?
It would of course have to be run as a business and not a bureaucracy which is the most likely point of failure.
The point of failure occurs when, like in Obamacare, the new government insurance company realizes it can force people to pay for its services in one way or another. Business + government = monopoly. Always. You will not get a government-sponsored business that does not quickly become a monopoly. Anti-trust law is superfluous (mostly used for political witch hunts), because the only way a coercive monopoly can actually exist is with the assistance of the government.
Frédéric Bastiat wrote:And now that the legislators and do-gooders have so futilely inflicted so many systems upon society, may they finally end where they should have begun: May they reject all systems, and try liberty; for liberty is an acknowledgment of faith in God and His works.
Count Axel Oxenstierna wrote:Dost thou not know, my son, with how little wisdom the world is governed?

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