Supply and Demand: Reviewing the Unbreakable Theory That Shall Doom ObamaCare in Short Order

This bill authorizes the IRS to hire 16,000 new agents to enforce the bill's requirement for individuals and businesses to buy “government-approved” health insurance.

Instead of increasing health care capacity and moving the supply curve in a direction that will drive down costs, Democrats prefer to impose price controls. They favor a plan to give the federal government the power to reject proposed health insurance rate increases. They would also like to give the secretary of health and human services the power to order insurance companies to give back part of premiums if the government should decide that companies spent too much on salaries or advertising. Though Democrats couldn’t get it into the current bill, they will continue to push for federal authority to "prevent unfair rate hikes."

But here is what government imposed price controls actually do and what problems they cause. Back in the '70s when OPEC was able to shift the supply curve, our federal government, in its infinite wisdom, maintained a price limit in the vicinity of the old equilibrium point.

Reminder: what supply and demand curves measure is the effect of price changes on quantity supplied and quantity demanded.

Maintaining an artificially low price provides a measurable disincentive for suppliers to supply.

Notice the point on the new supply curve where it intersects with the imposed price limit. The artificially low price also provides great incentive for buyers to demand more. Notice the point where the imposed price limit intersects with the demand curve. The difference between quantity demanded at the imposed price limit and quantity supplied at the imposed price limit represents a shortage.

Anyone old enough to remember life under Jimmy Carter may recall the summer of 1979 when a price control on gasoline caused a shortage that had cars lined up at gas stations across the nation. Rationing schemes were instituted, like using odd and even numbered license plates to say who was allowed to pull into a gas station on which days.

On the health care front there are additional complications. Democrats contemplate imposing price limits at several levels.

Besides the "unfair rate hikes" that they will no doubt seek to prevent by regulatory means, there are already controversial limits on physician reimbursement for services provided under Medicare. Doctors have been opting out of Medicare for years, and that trend can be expected to get much worse. Once our new health care reform bill has had time to take effect, we can expect fewer insurance options as price limits take their toll on that supply.

In an article describing the bill's passage, this morning's Washington Post put the spotlight on the factor that will do the most to drive medical costs through the roof:

House Democrats scored a historic victory in the century-long battle to reform the nation's health care system late Sunday night, winning final approval of legislation that expands coverage to 32 million people and attempts to contain spiraling costs.

By suggesting that the bill attempts to contain costs, the Post is oblivious to the significance of expanding health insurance coverage to 32 million more people.

Adding that many to the insurance rolls will shift the health care demand curve to the right, creating an even higher equilibrium price for any care that is not subject to federal price controls. For medicine and medical services subject to price controls, shortages will be even more pronounced.

The health care takeover that House Democrats have approved will take us back to those days of shortages and malaise.

The fight over it is so much like the one we had back then when Democrats railed against oil company profiteering, and pretended to champion the "little guy" by promising to keep gasoline affordable.

They succeeded in making it painfully scarce.

Today’s Democrats rail against the evil insurance companies and their profits, and once again pretend to champion the little guy. This time it’s medical care, not gasoline, that will be in short supply. The new bill will have a significant impact on seniors, since cuts to Medicare and Medicare Advantage are a large part of the plan's advertised savings, and that means more doctors will be opting out as the cost of everything medical skyrockets.

If there is a ray of hope in all this, it is that Washington finally woke up to the fact that gasoline price controls didn’t work, but it took a Republican president to get them lifted. It will take a Republican president and a Republican Congress to straighten this mess out as well, and there is no guarantee they will be successful.