Friday, August 12, 2011

Pricing and Quality .... How Established? ... The Unsettling Sameness of Our Medicare and Chinese Housing

Despite coming from completely different directions with one belonging to the American health care system and the other being housing related in China, our Medicare system and Chinese low-income housing have lots in common. Too much, in fact.

In our own case, Medicare and its out-of-control cost structure will inhibit much needed economic growth for years to come. Our economy is already growing too slowly as it has definitely hit stall speed. We have too much debt, both individually and as a country, and our recently enacted medical legislation will simply exacerbate the problem of controlling costs and improving service. Our government mandated health care system needs to change, along with many other things, if we are to resume substantial economic growth anytime soon.

All that said, the broader economic story and Medicare's impact can wait for now. Let's just talk about the similarities of Medicare and Chinese low-income housing today.

The stories of American Medicare and Chinese low-income housing can be told quite simply and clearly. Both systems have opted for government control and pricing in lieu of market based competition. As a result, the impact on users is and will remain unnecessarily harmful, to say the least.

Three Simple Ways Medicare Can Save Money describes the impossible task Medicare has undertaken with respect to pricing and quality in our medical care system. Even if the government officials are indeed and always the smartest guys in the room, as they seem to believe, nobody is smart enough to come anywhere close to doing what the market can do to achieve the desired end result of low costs combined with high quality medical care.

We free Americans should know better than to cede control of health care to the government. It won't work, and we should change this pricing and health care delivery system asap. We're free to choose a market based approach, so let's get moving.

On the other hand, even if the Chinese citizens do know better, they can't vote or otherwise opt to change to a market based system on their own. Therein lies the fundamental difference between Medicare and Chinese housing. We the people did this to ourselves, and the Chinese citizens essentially have no say in the matter.

Stated another way, we are free and empowered to correct our mistakes. That's the fundamental difference between self government and command and control government. We're free to choose, and they aren't.

Cracks in China Housing Push describes the price fixing involved with government housing programs for low-income housing in China. Government has decided how much public housing to build, and how much the contractors will be paid. The "customers" will take what they're given. It's as simple as that.

As you read through each of the articles, you will notice the sameness of our Medicare pricing and its effects on quality and Chinese low-income housing pricing and its effects on quality. That's a story worth knowing.

Here's the broader lesson. The combination of price and quality equals value. This is true for any product or service offering. When markets exist, price is established by the market. The buyer and seller each act in accordance their own best interests, or act to maximize their own utility, in economic terms. In any event, they attempt to come to an agreement with respect to what the buyer will pay the seller for the value received. If one of the parties doesn't agree to the terms set by the other party, no transaction occurs. Thus, buyers and sellers are free to act as they choose.

If nobody buys at the price set by the seller, the seller has to reduce his price or withdraw from the market. On the other hand, if prices are set too low and the quantity for sale is insufficient to meet the demand from buyers, the seller will either raise his pricing or produce more items for sale. And if the buyer can buy from another competing seller equal quality at a lower price, he will often do so. That said, if the quality or price, or a combination thereof, doesn't match up to competitive offerings by other potential sellers, the seller will either go out of business or improve the value (price and quality combined) of his offering to attract buyers. That's how market based competition works.

When a government monopoly or quasi-monopoly establishes pricing, the buyer's freedom to choose is removed. As a result, the "buyer" gets whatever quality the government offers and at whatever price has been set by the government. Since the "buyer" in effect will be forced to purchase the offering at the designated price, there is no reason for the "seller" to be concerned about the quality of its offering either.

In the case of market based competition, price and quality interact to set the price, as well as who will be the seller. Some win and some lose. That's the brutal way markets work, and that's the way customers benefit. The customer is in charge all the way. It's his money, and it's his choice. Being free to choose to buy or not buy at any particular price from any competing seller is a powerful thing indeed.

In the command and control case, the choices are made for us by government officials. In a complex economy where people are involved (that's everywhere), who makes the choice makes all the difference in the world.

Here's the central point. Low costs and high quality go together. High costs and low quality do, too.

In the U.S. the choice is ours to make between the respective roles of markets and governments in setting prices and achieving quality results. That's not the case in China.

So as Americans let's exercise our freedom to choose which system we want for delivering low cost and high quality health care. Will we choose for it to be determined by the government or by free individuals operating in a free market? A no brainer for sure.

Thanks. Bob.

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