Sunday, May 20, 2007

Economic Value is Subjective

I'm a little short on time this month, so I'm taking a break from your regularly scheduled series on medical school economics and instead writing on a key point in understanding capitalism. I'm going to use some healthcare examples, but this is mostly an economic point.

In a free market, value is subjective. An object, a service, or a piece of property has no particular intrinsic value. Value has to be ascribed by an individual. When people attempt to say that something is worth something, they are really saying that it is worth it them. Either that, or they are quoting a government official or real estate agent who doesn't understand what something being "worth" is in a free market economy.

I'll give you an example. The house I used to live in down in South Florida was originally purchased by my family for the price of $105,000. Over time, houses in the neighborhood went from selling for 90k-110k to 300k-500k. The only change to the houses was some age. Many of our friendly neighborhood real estate agents now claim that the house is worth $450k. This is simply not true in and of itself. The house is actually worth what someone is willing to pay for it. In today's market however, it is much more likely that someone will be willing to pay $450k for the house. Without the buyer however, as many people have discovered down here in the recent real estate downturn, the house isn't actually "worth" anything.

This may seem like semantics, but it is crucially important in understanding free market economics. One of the key principles given to us by the austro-libertarian economists is that the value of an object for sale or trade is what it is what it is worth the the person buying it. If the seller doesn't come down to the buyer's price, then the object has more value to the seller than the buyer is able or willing to trade for it. This is in contrast to previous economic theories which placed the value of an object at the investement required to make it. This is the principle that underlied most controlled economies, which is why they always end up failing. It is patently false as proven by the houses. Many houses sold for 2-3x the original price, but no further significant investment was made. In any sort of trade, both parties are getting something that they consider to be worth the price that they paid for it. That is the only true measure of economic value.

Let's apply this concept to medicine. All moral worth aside, the economic value of a doctor is whatever someone is willing to pay. Period. A decline in physician reimbursement is 100% related to a decline in the valuation of a doctor by whatever entity is paying for the doctor. The number of years of training has nothing to do with it, aside from giving the doctor a skill for which an individual might decide to ascribe higher (or even much higher) value to the doctor. In the current system, where the government takes over a greater proportion of medical payment, the value of the doctor progressively becomes whatever the government ascribes.

If we remember our high school supply and demand curve, we realize that this curve is an aggregate representation of a series of subjective decisions about the value of a good or service and the number of willing buyers and sellers at a particular price. Thus, in a world of no economic restrictions, more people are generally willing to buy a cheaper good or provide a more expensive service. Medicine is no different. By and large, a "shortage" is simply fewer people than "required" providing a service at the price being paid.

Let us remember though, that there is a subjective component when it comes to provision. An individual who is willing to sell a good or service at a certain price may be willing to sell or provide a different good or service at a different price. Thus, when the value of giving the service declines for the individual, the price often has to go up in order to convince the individual to continue providing the service.

Here's a final example:

A doctor loves medicine but hates administrative paperwork. He has a practice that generates $150,000/year and it is 80% medicine and 20% administration. He is satisfied. Due to a new restriction or rule, his practice becomes 50% medicine and 50% administration. He is now unsatisfied. Depending on his subjective value, $150k may no longer be worth it. Maybe it is. As an aggregate, the number of people who love medicine and hate administration willing to work for $150k will probably decline if the job goes from 80/20 to 50/50. Thus, there is now a shortage. Remember that many factors play into value, and the ability of the doctor to find a different position paying enough to get by is also important, which is why many people will continue to practice, regardless of the decline in satisfaction. Maybe the 50% medicine is worth the extra administration. It all depends, but it is all subjective.

Current declines in physician income are nothing but a decline in the valuation of physician's services by the entities paying the bills. Physicians have no inherint economic value, regardless of how positive their services may be. Just remember that as people begin to feel more entitled, they will pay less. As the government takes over, they are less invested in the health of the individual than the individual himself. As people become more fat and lazy, the may simply not care enough to pay you. Whatever the case, keep these things in mind when making decisions. Past performance is no indication of future results, and people's subjective whims will change on a dime.


Anonymous Half MD said...

I actually heard some fool say that a doctor shortage is good because supply will be low and therefore we'll get paid for. This idea is simply false as already indicated given that physicians are paid less in addition to the doctor shortage. Docs make less money simply because insurance companies are willing to pay less. A physician could refuse to take Medicaid or HMO patients because the reimbursements are so low, but so long as someone else is willing to see the patient, the insurance company is the one who wins.

9:59 PM  
Blogger MiamiMed said...

I will say that to an extent, this is exactly what capitalism is supposed to do in driving prices down. The problem, is that government regulation of today's market has been the catalyst for moving the purchasing from the consumer to third party payers. Thus, improved quality which might motivate a consumer to pay more for a good doctor ceases to be a factor when that consumer's bills are paid by an entity that he largely didn't choose. Not getting as much money as you want isn't inherintly wrong, but non-market conditions in this instance put you at a disadvantage in your bargaining power.

9:16 AM  
Anonymous Anonymous said...

I think one of the biggest issues here is the cost and level of training for a doctor. When one decides to become a doctor they invest hundreds of thousands of dollars and years of their time. For this investment they expect a return. So when doctors are paid less it is very easy to become dissatisfied but difficult to leave. Very few people are willing or able to throw away their investment because they have become unsatisfied with the pay. A doctor shortage then, like the engineer shortage from my previous career, simply meant that you did more work for less, because your options everywhere were limited. Skilled professionals it seems hold fewer bargaining cards as shortages increase, though that appears contrary to what one might expect.

9:36 AM  
Blogger MiamiMed said...

The impact is going to be delayed when taken on an aggregate scale. Unless medical salaries dropped significantly, the cost of leaving would probably not be worth it. However, in time, early retirements and an eventual decline in interest in the field will lead to greater shortages.

I tried to keep this post simple, but it is no secret that there have already been significant declines in certain fields. Right now, doctors don't leave medicine, but they do change their practices. The increases in concierge practices or practices selling laser treatments are testaments to this. The decline in hours worked (almost across the board) is a testament both to a diminished professional satisfaction that makes physicians want to work less and a system that is increasingly recruiting students who are only looking to get paid. Burnout is high. The drop in quality practicioners comes next.

P.S. There will never be a shortage of lazy applicants, but they will produce less work for the money. Thus, a seemingly even number of practicing physicians could translate to a shortage of service.

7:45 PM  

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