As the debate rolls on about the Affordable Care Act (ACA), there are some fundamental problems with the legislation that causes it, at its foundation, to be contrary to what its name desires to achieve. Instead of working to reduce healthcare costs, if nothing changes, it will prove to keep healthcare costs higher in the long run. The problem comes in the form of fundamental supply and demand.
First, I am not concerned in this article in getting involved in the discussion of why there are a limited amount of suppliers. We can look at that topic at another time. As we see the market reacting to this legislation, we see more and more healthcare providers opting out of participating in this program. I will explain how this decrease in service participation will affect cost in the long run. Second, the word “affordable” is very subjective and changes from person to person. Instead of debating whether or not healthcare services will be more affordable under the ACA, I will address how prices will be affected. Each individual will determine on their own whether or not the services are affordable or not.
In a free market, price (cost) is affected by certain factors, namely supply and demand. Assuming the demand for a product (or service) remains unchanged (constant), if the supply of that product decreases, the law of supply and demand tells us that the price of the product will eventually increase. And that’s easy to understand. When the amount of stuff consumers want to buy decreases, and the number of people that wanted to buy the same stuff does not change (demand remains constant), then those people (consumers) will be willing to pay a little more than they were previously willing to pay, when the product was more readily available. Manufacturers know this and more than willing to increase their price to accommodate the change in the supply as it relates to the unchanged demand.
Apply this to the ACA. The ACA seems to be heading towards reduced amount of doctors and healthcare providers being willing to “supply” their healthcare to the growing number of “wanters” (patients) that desire the same healthcare. As the supply of providers continues to decrease, assuming the number of patients at least stays the same or increases (which is very likely), the more those healthcare services will cost. That is, unless the government intervenes once again to put controls on certain, if not all prices for the healthcare. If that happens, there will prove to be some dangerous consequences in that scenario (read my article on The Danger of Price Controls).
The word or idea of “supply” in this scenario can also be explained by using the word “competition”, as they are closely related. You see, when there are two or more suppliers supplying the same or similar product to a set of consumers (“wanters”), then that is what causes the phenomenon of competition. The more the suppliers, the more the competition, and the better off the consumers become. In a competitive market (a lot of suppliers supplying the same or similar products), a decrease in price will naturally occur, without any government intervention to control prices. Let’s explain this in basic terms.
Let’s say you have one company that manufactures latex gloves for the entire medical industry. Now, if that were true, then that company could literally charge just about any price to its customers for latex gloves. This company knows that the customer has no other option but to buy latex gloves from them and as such, the company has no incentive to sell the latex gloves at a lower price. This is not a good situation for the customers. Enter in another company that manufactures the same, or similar latex gloves. To incentivize the existing consumers to buy from their company, this second company prices their latex gloves a little lower to attract business. When this happens, the first company becomes aware of this development and is then forced (by natural and fair competition) to reduce their price to a price that is closer, if not lower than what the second company charges. The first company (by the effect of competition) now has an incentive to lower their price of latex gloves. This can only be good for the customer. Now, these two companies could get together and agree to keep their prices the same, or similar in order to keep their desired share of customers. Despite being illegal to do this, you see how this cannot be good for the customer.
Enter in a third company that manufactures the same latex gloves and is uninterested in “fixing prices”, as the first two companies are. They set their price lower than the “fixed price” (but at a price that still provides a profit) to incentivize the existing consumers to buy latex gloves from their company. Again, you see how this can only good for the customer. This could go on and on until you have several companies competing for the same number of customers, driving the price lower and lower, ultimately to the benefit of the customer. And this happens naturally in free market, without any legislation to control prices.
Another by-product of competition in the free market is that is creates an incentive for the manufacturers to improve the quality of the product. Using the previous example, when there are several companies that are manufacturing latex gloves and they are competing for the same customers, it is not only in their interest to lower the price as much as they can (and still produce a profit) but also to make their product better, and more desirable. Not only does a lower-priced product (that is similar in quality to the other manufacturer’s product) cause customers to buy a company’s product, but a better quality product at even a higher price will cause some customers to buy their product.
Now let’s circle back around to the ACA. Again, I’m not interested in getting involved in the discussion about why there are a limited amount of suppliers of healthcare services as related to this legislation. That is another topic altogether. But, as we can see in the example of the latex gloves, a limited number of suppliers of products (in this case, services) will ultimately serve to keep the cost of healthcare high and reduce the quality over time. As in the example of the latex gloves, when there are a small number of suppliers of healthcare services, the incentive for those providers to reduce their costs (by the natural effect of competition) is reduced, in relation to what it would be if there were several suppliers involved. The incentive for these service providers to be efficient and to increase the quality of the healthcare that they provide is also reduced.
Many suppliers leads to more competition, which leads to lower customer prices, which leads to better quality of service and increased efficiency.