Healthcare and Rent Control: What Happens When Government Sets the Price

There are two very good examples of the economics of government price controls: rent control and government medicine. Each of these can easily be dissected for conclusions on what happens when government sets the price.

Most government healthcare plans cost the people who are using them nothing. Some have minuscule co-payments. Meaning, the government sets the price for healthcare at zero dollars. This is perhaps the most aggressive example of government price controls. Another example is rent control in inner cities. Both show the undeniable fallacies of government involvement in the free market.

Numerous cities worldwide attempted to create “affordable” housing by enacting rent control. Essentially, the government sets a ceiling the landlord can collect for rent. As the price falls, the number of people supplying housing falls. Within three years after rent control was imposed in Toronto, Canada in 1976, 23% of all owner occupied rental housing was withdrawn from the market. As the ability to recover expenses falls, builders produce fewer housing units to place on the market. This decreased supply with an inflated demand due to an artificially low price creates a shortage of housing. In a 2001 study in San Francisco, more than 75% of rent-controlled housing was more than 50 years old. After Massachusetts enacted a state law banning rent control laws some communities saw residential housing construction begin for the first time in over 25 years.¹

Further, the shortage that results when government sets the price means landlords can always find a renter. Unlimited demand coupled with decreased reimbursement means a decrease in quality. Why would any landlord spend more to keep the place up if he is guaranteed renters, and can only collect what the government allows? Whenever the government fixes the price, quality suffers.

The black market in housing is so prevalent that it even made it into an episode of “Seinfeld.” In San Francisco, in the 2001 study mentioned above, more than 25% of households living in rent-controlled units had incomes greater than $100,000.00. Seems the artificially lower costs led to the black marketing of rentals inside the city.

Government healthcare is another great example of what happens when a third party sets the price. Whenever something is free or nearly free, there are no barriers to its use. When there are no barriers to its use, there is no medical complaint too small. Abuse of the emergency department by people who do not see the cost of that care is rampant. People are using the emergency department for minor ailments that often times need not see a physician at all, let alone the emergency department. When no complaint is too small, there is no end to the demand and no supply that can meet the demand.

As patient visits skyrocket for minor illnesses, supply is often met by decreasing the time the physician has with the patient. This often places physicians in difficult situations. The more rushed the provider, the higher the likelihood of a mistake. Another quality impact to fixed pricing. Many friends who started in medicine left because they felt the risks were too great as they were asked to see more patients in a day than safely possible. Too, as the length of the visit decreases, the number of visits required for fixing a problem often increases. A study of government healthcare in Japan revealed that while politicians were able to say the cost per visit had decreased, the actual cost to heal the ailment increased due to a need for more visits over time.² Go government healthcare!

At many hospitals, a quasi barrier to use has developed as wait times in the emergency departments have jumped. This barrier is risky, and significantly impacts quality because numerous times patients who are genuinely ill leave before being seen. In socialized medicine, the “wait” barrier takes on astronomical dimensions. In Britain in 2001, more than 10,000 people waited 15 months or more for needed surgeries.³ Seems the supply of surgeons has fallen off with price controls.

In certain economic areas, price controls have driven doctors out. As the doctors leave the shortage is worsened. Those doctors who remain have no need to maintain quality and service because all their appointment slots are filled due to an excess demand. Demographic data studying health statistics show drastic deficiencies compared to other areas of the country. Despite all our good intensions, the result is a further decrease in quality.

Whenever government sets the price, four things typically happen: 1^st, there is a significant increase in demand, 2^nd, fewer people supply the product or service resulting in a shortage, 3^rd, quality decreases and a 4^th, the emergence of black markets happens nearly overnight. Both in rent controlled housing and healthcare these all exist. So, government intervention is not the answer. But how can a minimum wage earner be expected to pay $800.00 for a bone scan? There is an answer, but you’ll have to wait for a coming blog…

Mark

^1,2,3Thomas Sowell, Applied Economics, Basic Books. New York: 2004.