Wednesday, October 31, 2012

Why is HealthCare so Expensive- Blue Shirt Analogy

Blue Shirts Analogy

This is my thought experiment. No doubt there are some problems with it. I hope it sparks some ideas on the causes of high health care costs and what we can do about it.

On January 1st, Congress passed a new law, it said that all people should wear Blue Shirts with the exact color (#0313FF) on Mondays to work effective immediately. They put this law in place to prevent that hard decision on monday about what to wear. They said that it would create more creativity over all by reducing stress.

The impacts on the economy were huge.
About 240 million workers minus whatever the unemployment rate was at that time went to the mall/wall-mart/their favorite designer to buy a Blue Shirt. The stores quickly ran out and called their suppliers to get more . Blue Shirt prices soared and a black market quickly developed.

Suppliers including designers, manufactures had never thought about making so many Blue Shirts and quickly re-tooled their assembly lines to crank out more Blue Shirts.

Seeing the dollar signs that could be made everyone went into the Blue Shirt production business. Blue fabric became a commodity expensive than gold. The tone for fabric dye also soared. Scientists began to look for ways to make new ways to create the perfect 0313FF quicker.

Everyone in America got the Blue Shirt fever. Seniors bought stock in companies that made Blue Shirts. Schools moved their pensions over to Blue Shirt stocks. Everyone believed that blue shirts would save them. Demand would never run out since everyone has to wear them to work and they wear out quickly.

Within a few months there was a blue shirt store on every corner and everyone could buy one. Slowly the demand started leveling off. People bought a few shirts and then stopped buying them.

The price of Blue Shirts started to drop and all the people who had quit their previous jobs to go into the Blue Shirt industry saw their profit margins shrink. Soon they had to lay off and try to find cheaper ways of doing business. Those that couldn't cut their production costs had to close their businesses.

All those Blue Shirt stocks went through a sell out and fell sharply. Seniors and schools lost their investments.

After a few more months only the strongest Blue Shirt businesses survived. The prices leveled out.

Then one year later Congress said they liked that shade of blue so much that they now wanted Tuesday and Wednesday to also be a blue shirt day. Anther huge surge happened and the suppliers of Blue Shirts again ran out. Prices again soared. Industry ramped up and opened more businesses, but again after a few months those that couldn't produce to meet the falling market prices went out of business.

This analogy shows how bubbles work. Bubbles happen constantly, so watch out. But this version of the story happens without any price adjustments. It also doesn't take into government tampering, monopolies, unions. Now lets add those items in.

Lets say that right when the first law came out the suppliers of the Blue Tone quickly reacted and joined together to make a monopoly. They asked the government to make a licensing process for new suppliers of Blue Tone. The members of the approval board being the current suppliers. They would only approve a limited number of new suppliers a month. This would reduce the supply allowing them to keep their monopoly on this key ingredient of Blue Cloth.

Soon a black market emerged for everyone who couldn't get approval from the Blue Tone Licensing Board.

Meanwhile the workers in the factories became a union and they requested protection. They said that if they don't get their demands met they will all quit. They requested that the new workers brought on be limited and that they meet a certain set of requirements and be voted into the union. The management just needed to produce Blue Shirts and they saw that the unions were about to stop, so they agreed. This sharply reduced the number of new Blue Shirt makers that could be hired. The production of Blue Shirts continued at a steady pace instead of increasing to meet the new demand.

The prices soared even higher than the first story. The poor who had to buy shirts had to go to loan sharks to get money to buy the extraordinary expensive shirts.

Manufacturers with factories over seas quickly realized their opportunity to meet the huge demand. They started importing Blue Shirts. But the Unions realized this and went to Congress and had them create a tariff to protect themselves. Now Manufactures overseas couldn't make any margin, so they reduced their supply or stopped importing.

Prices continued to sore.
People mortgaged their houses, went bankrupt, others put their life savings into the Blue Shirt Stocks and kept getting richer and richer.

The congress seeing that they probably screwed up decide to drop their law.
Now all the people who were in debt and bankrupt were still bankrupt and ruined. The stocks fell right away and all those who had invested lost their investments. The companies wanted to lay off their Blue Shirt Workforces, but the unions prevented them from doing so. So they kept making blue shirts at a steady rate even though there was no demand for them. Those companies went out of business.

Which model more negatively impacts the economy? A better question is which one ruins more lives?

When an industry which is in demand puts restrictions on entry the prices go up. If we looked in our economy for an area with rising prices, we need to look for tampering and see whats causing the lack of supply. It might be unions, tariffs, of Licensing boards that restrict the number of entries into the market.
I am interested in looking at Health Care. Which of these factors are present in Health Care?
Restrictions/Monopoly in the supply of needed ingredients? Medicine, Liability Insurance, Medical School, Fellowships
Licensing boards that restrict the entry of new suppliers? And recertifications.
Discouragement of imports of doctors from over seas. Most doctors coming from abroad need to go back to school or at least jump through many hoops
Continued demand as more American's have obesity related illnesses

Medical tourism is becoming a new option that should help reduce costs.

We all need health care and we need it to be affordable. If the market was free then prices would adjust as more suppliers entered the market. Even as demand increases as the population ages and gets more sick due to our senentary lifestyle, the supply would increase and keep prices stable. We know there are forces tampering with the market due to the extremely high prices.

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