Jack TenneyExtra Point

by Jack Tenney, Publisher

October 2002

Economics 101

My apologies to John Maynard Keynes, but economics is (are?) confusing. Take health care, for instance. Is it supply driven or demand driven? Consider its costs to be fixed at the sum of docs, nurses, cotton balls and real estate. That's supply. Demand is the queue of the ill, injured and worried lined up to see the docs and nurses in the real estate to get a cotton ball to cure their whatevers.

Clearly the total cost in the short run is pretty much independent of the length of the line in the waiting room with the possible exception of the cotton balls. One can quibble about how to pay the costs: Just charge the people in the line; charge everyone on the theory that everyone is benefited by having a place to line up when they feel the need; charge the people who can afford to pay, again, either the ones in line or everyone; or do it the way we do it here: "all of the above."

Each cycle, AKA budget year, the costs are fixed then the demand is estimated. Nominal rates are then calculated by dividing the budgeted costs by the estimated demand. Typically, providers overstate prospective costs and underestimate future demand kind of like how a tax return would look if one had to pay in advance.

Now, depending on your viewpoint, you probably have a view as to how your health care costs might be mitigated. For instance, if you're worried about some aspect of your health, you're no doubt in favor of receiving more sophisticated (expensive, hi-tech) tests at no greater cost to you. If you're a provider of sophisticated equipment or goop used in the diagnosis or treatment of ills, you're in favor of higher utilization of said equipment and point out that the higher the utilization the lower the cost per use.

Continuing with my simplified assumptions about heath care supply and demand, to illustrate how incredibly, maddeningly complicated health care economics is (are?), consider the following: If you had a million dollars and wanted to use it to decrease health care costs, you couldn't. That's right, you couldn't. In fact, you would probably increase costs. For instance, any straight donation to a health care institution (hospital, for example), would most probably end up in its endowment funds, which rarely yield any relief to its operating fund, which is the budgeted fund that drives the charges that are used to measure costs. If you directed your contribution to the funding of a particular machine or project (e.g., new operating room) the costs would still be passed on to users or third-party payers, as there is never a "free" X-ray machine regardless of what the little brass plate might say about who paid for it.

More disconcerting, perhaps, to million-dollar donors: If their contribution funded a real estate project, not only would the cost of the project continue to impact the costs of heath care, but each budget year, the cost of the original project would also be inflated (price-level depreciation) prior to inclusion in that year's budget. Oh my! Perhaps John Maynard Keynes could have sorted all this out. But what would he make of a parking garage?