Tags: Price Controls | FDR | Pedro Gonzalez | Harvard | IMF | Venezuela | World War II

Medical Care in Venezuela Destroyed by Price Controls

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Monday, 16 Mar 2015 09:54 AM Current | Bio | Archive

Anyone who believes central control of the medical system is a good thing should read the report from Venezuela in the Wall Street Journal. Here’s an excerpt:

“His heart failing fast, Pedro Gonzalez checked into one of Venezuela’s leading public hospitals in September, hoping for a new heart valve to save his life.  . . . In late November, the director of cardiovascular surgery at the University Hospital sent out letters to the cardiology ward’s patients, telling them they were being discharged. The reason cited: a dearth of operating room supplies — no catheters, no working blood-processing machine, no heart valves. A week later . . . he collapsed and died in front of the altar.

“Inflation, at nearly 70 percent, is the highest in the world, and the International Monetary Fund says the economy will contract 7 percent this year. Widespread nationalizations and price controls have hobbled local industry, and currency controls starved the country of dollars provided by the state and needed to pay for imports. The result: shortages of everything from car parts to toilet paper and medical supplies in a country that produces few of its consumer goods.

“Drugs from aspirin to antibiotics, insulin to anesthetics, are scarce. All manner of equipment — X-ray machines, ultrasound scanners and defibrillators — is often out of service because of a lack of spare parts.”

Think it can’t happen here? Think again. Our medical system has already been severely and adversely affected by price controls.

Wage and price controls instituted by FDR during World War II led to the anomalous practice of employers substituting medical insurance for wages.

This led to overuse of medical services, a shift away from true insurance to prepaid care, and set the stage for massive inflation in the medical sector. The latter was exacerbated by further price controls.

Medicare instituted physician price controls during the 1980s with a prolonged fee freeze, and again during the 1990s with the introduction of the Resource Based Relative Value System (RBRVS; a Stalinist creation of Harvard PhD William Hsiao).

Another round of controls came around the turn of the century. In the years immediately following each intervention, total Medicare spending increased, as doctors increased volume of services to compensate for reduced payments.

Price controls during the Clinton era, and other factors, forced the vaccine industry out of business or offshore. This resulted in a major shortage of influenza vaccine several years back.

We are currently in the midst of a major crisis in drug availability, particularly for injectable agents used in cancer chemotherapy. An article in the New York Times last year reports, “In 2012, the number of drugs in short supply, both new and long-term, was 456 . . . up from 154 in 2007.”

While they state the cause of shortages is a “mystery,” they add, “changes in Medicare reimbursement and the role of group purchasing organizations, which buy drugs on behalf of hospitals, could also be contributing, by further reducing prices that producers get for the drugs.”

In other words, price controls. Around 2001, Medicare changed the way it paid for injectable drugs from a formula based on the average wholesale price, to one based on the average acquisition price. This change crimped profits, and shortages began to appear.

In a free market, supply and demand are automatically and exquisitely balanced through the price mechanism. Rising demand for a drug, or for any good or service, leads to an increase in price, which signals suppliers to rev up production, eventually lowering the price.

Chronic shortages are invariably the result of government price fixing. We witnessed this during the Carter years when retail price controls on gas and oil led to long lines at the pumps. We are now seeing what happens when excess supply drives the price of oil down: the lower price stimulates increased demand, which pushes the price back up.

No one is clever enough to set prices correctly, and mistakes often have devastating consequences, as we are seeing now in Venezuela, and increasingly, here at home. The solution to shortages is to end price controls; get the government out of the way and let the marketplace work.

Since 1990, Dr. Amerling has been on staff at the Beth Israel Medical Center (now Mount Sinai Beth Israel) in New York. He served as director of Outpatient Dialysis from 1995-2012. Amerling is board certified by the American Board of Internal Medicine for Internal Medicine and Nephrology. He also is president of the Association of American Physicians and Surgeons. He has been published in many journals. For more of his reports, Go Here Now.
 





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RichardAmerling
No one is clever enough to set prices correctly, and mistakes often have devastating consequences, as we are seeing now in Venezuela, and increasingly, here at home. The solution to shortages is to end price controls.
Price Controls, FDR, Pedro Gonzalez, Harvard, IMF, Venezuela, World War II
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Monday, 16 Mar 2015 09:54 AM
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