As I mentioned in an earlier post, I have a hobby of discussing politics with colleagues from other countries. Lately, a number of these conversations have centered around the subject of health care. One of the more common statements parroted by the progressive crowd is that we need health care reform to “control the free market” capitalists that are driving health care costs out of control. Hearing that last sentence alone should be enough to convince any of us that a government education is bad for our children.
“It’s not that liberals are ignorant, it’s just that so much of what they actually know is not true.” – Ronald Reagan
You see, in a truly free market (in spite of the hot air coming from elected officials) it is impossible to make obscene profits for an extended period of time. Markets tend to self-correct. If there is a market where high profit potential exists, additional entrants will enter the market. The increased supply from additional market entrants tends to lower prices (and assuming static costs it will lower profits as well). The higher the difficulty in entering the market, the greater the profit potential that is required for additional entrants into the market. There could be many reasons for a potential competitor to resist entering into a new market. In something like semiconductor fabrication there is a significant amount of capital required to build the manufacturing lines. So, there has to be enough profit potential to entice a new entrant. Intellectual property concerns, or other factors could delay entry into the market. But, truly free markets in the real world (if they ever exist) tend to prevent monopolies. So, the best way to create a true monopoly is to lobby your friendly neighborhood bureaucrat. If the government can prevent your competitors from entering your market, you can continue to make artificially high profits.
What does this have to do with health care? Let’s go back to our economics lesson. If you were operating a hotel and all of your rooms were constantly filled what types of things might you do? Perhaps you would increase your nightly rates. You might, also, expand. If you could not increase rates because you were contractually obligated to sell your rooms at a particular rate, you would certainly consider expanding to help increase your profits.
What does this have to do with health care? Under the current system, medicare and private insurance companies have contracts with most providers (hospitals and doctors). So, rates are capped. As independent businesses, many would like to expand to increase their profit potential. That’s where the government gets involved.