Does free market-based medicine save consumers money?

Down here in Oklahoma we have a relative new medical business called the Surgery Center of Oklahoma. This medical store is different from most other business of medicine in that it operates on the principles of the Free Market.

The Surgery Center of Oklahoma does not accept Medicaid or Medicare but will accept private insurance or cash. Because they do not accept Medicaid or Medicare, the government regulations that do not allow the posting of prices on-line do not apply them. This means that customers can check the cost that their Doctor/Hospital charges against the Surgery Center cost. The Surgery Center makes the offer to beat the price of any competitor and thus guarantee the lowest price possible to the consumer. Sounds sort of like the commercials for the furniture stores down on Reno Avenue in Oklahoma City. “Come on down and we will save you a bunch of money.”

Oklahoma County (the county where Oklahoma City is located) switched its medical service to the Surgery Center this year and is saving the county government a lot of money. According to Jon Wilkerson, director of county human resources, “At a conservative level…it looks like we will save about $1.3 million over 12 months”.

Here are a few facts.

Integris Baptist Medical Center, a nearby local hospital in OKC, charges more than $33,000 for a “complex bilateral sinus procedure.” When the same surgeon performs the same surgery at the Surgery Center the total cost is a bit less than $6,000. One of the ways that the prices are made lower is that the Surgery Center has no administrative employees. The head nurse is responsible for human resources and building maintenance. Over at Integris there are 18 administrative employees that receive an average of $413,000 in compensation (this number comes from their 990 not-for-profit tax form).

Over at the Oklahoma University Medical Center the cost for an ankle arthroscopy is just under $24,000 while the same procedure at the Surgery Center under $4,000.

And if you think this is some back room, fly by night operation the Surgery Center is a state-of-the-art multi-specialty facility owned and operated by about 40 of the top surgeons and anesthesiologist in central Oklahoma. It has been accredited by the AAAHC since 1998.

Dr. Steven Lantier, one of the founders of the Surgery Center, stated that “When we first started we thought we were about half the price of the hospitals...Then we found out we’re less than half price. Then we find out we’re a sixth to an eighth of what their prices are.”

This is just an example of what happens when the market-based, low overhead, consumer driven economy is allowed to work. When third-party payments are made and are not transparent to the consumer the costs will tend to escalate over time because the economic incentives [to make more money] are all on the side of the supplier and there are no economic incentives [to save money] for the customer.

Jerry

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Extricating the World's Economies from this Mess!

"Economists are at this moment called upon to say how to extricate the free world from the serious threat of accelerating inflation which, it must be admitted, has been brought about by policies which the majority of economists recommended and even urged governments to pursue. We have indeed at the moment little cause for pride: as a profession we have made a mess of things.

It seems to me that this failure of the economists to guide policy more successfully is closely connected with their propensity to imitate as closely as possible the procedures of the brilliantly successful physical sciences – an attempt which in our field may lead to outright error. It is an approach which has come to be described as the “scientistic” attitude – an attitude which, as I defined it some thirty years ago, “is decidedly unscientific in the true sense of the word, since it involves a mechanical and uncritical application of habits of thought to fields different from those in which they have been formed."

– Friedrich Hayek, from the introduction to his Nobel Prize acceptance speech in 1974

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The Export-Import Bank Saves Small American Business - NOT!

Here is some more data about who the Export-Import Bank "helps". This data is from 2007 U.S. Census and from the Export-Import Bank...there may be some newer numbers out there somewhere but I have not found them yet.

There is a total of 69,676,837 small business jobs in the U.S. of which the Export-Import Bank claims to "support" 205,371 jobs [that is .29% of all American jobs]

There is a total of 6,723,226 small business firms in the U.S. of which the Export-Import Bank claims to support 2,390 [0.04% of all U.S.firms.]

The Small Business Administration and most federal/state agencies define a small business as having less than 500 employees but the Export-Import Bank has a different definition (can you imagine why?). The Bank calls small business those with less than 1,500 employees.

So much for the Export-Import Bank supporters claim that the Bank must be subsidized with taxpayer money for the good of small business in the U.S. Most of these supporters [politicians] receive substantial campaign support from big businesses such as General Electric, Caterpillar, and Boeing.

I am not sure about you, but I don't think that these three companies need the Federal government to loan money to companies in other nations to buy products from these companies. To me this is just a way to subsidize these companies by using a third party to transfer taxpayer money into the hands of these companies.

As far as the economic lesson we should learn from this it is that when the government subsidizes one company and not another company (picks winners and losers) then competition is stifled and the Free Market, such as it is, suffers and when the Free Market suffers, consumers suffer. Government intervention which reduces competition causes a net loss to society not only in monetary terms but also in the development of increased efficiencies.

Jerry

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Luck matters - even if you are Jerry Seinfeld

When the Seinfeld show debuted, it was called "The Seinfeld Chronicles" and NBC was so unenthusiastic about it that the network gave the creators just a four-episode order. Most new pilots at the time got at least a 13-episode order. If the show doesn't perform out of the gates, that order is reduced or the show is canceled. Jerry Seinfeld still has that letter from NBC with the four-episode order. It hangs on his wall ... probably next to all the awards the show won in its nine years on the air.

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The Hockey Stick and the Industrial Revolution

Can we talk about the Hockey Stick? No, not the one that showed that Global Warming is going to cause the planet to become uninhabitable. The Hockey Stick I want to talk about can actually be proven by the numbers to, in fact, be true.

Before the Industrial Revolution the life expectancy of the average person was about 30 years and one in four children would die before the age of five. Today, in the U.S. we can expect to live to be around 80 and the death of a child in the developed nations is about 1 in 200.

Now if you put that information on a graph you will get, you guessed it, a hockey stick with the upturn of the blade starting about 1800. Before the industrial Revolution the life of the average person was not improving. Living standards had stagnated for centuries. 90% of the population worked on the farm producing food and that production was not enough, except in the occasional good year, to feed the entire population. There was mass starvation and disease. Mass poverty was the norm. Few owned more than the "rags" on their back and most were lucky to see a meal that included meat of any kind more than a few times a year.

The Industrial Revolution changed that. Families that were scratching a living out of the ground and living only a bit above the starvation level found that they could move to the city and make enough money in the factories to feed their family and rent a hovel in town which was better than the hovel where they had lived on the farm. The family also found that their children, for the most part, did not have to work full time and so could gain some education thereby improving their lot in life. Was it better than what they had before? Yes, and with each generation their life became better and they lived longer and had more 'stuff'.

So if you graph the living standard for human history you will see that you have an almost flat line until the 1800's but since then the graph has a very dramatic upward slope. A true "Hockey Stick."

Now when you hear folks complaining about how greedy and bad business folks are just consider how far the human race has come in the last 200 years.....

Jerry

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US Exports more than One Million Autos

I have just been reading that the U.S. exported more than 1,000,000 cars in 2012 and last year (2013) it topped that with a 13% increase. In 2009 the U.S. exported only 455,700 vehicles.

What makes this of economic interest, aside from the boost to our economy, is the company that is exporting the most cars. It's not GM, Ford Chrysler.  It's not Toyota or Honda. The company that exports the most cars from the U.S. is BMW. They are sending U.S. made cars/SUVs to more than 140 countries from one plant in Spartanburg, South Carolina. This plant exports more vehicles to other countries than all automotive plants in the state of Michigan.

Now BMW is going to increase their capacity in Spartanburg by 50% (300,000 to 450,000) in the next few years. BMW will have put $7.3 billion into the Spartanburg plant when it is completed in 2016.

The reason that BMW is making more vehicles is that American auto workers (at least in South Carolina) are about 47% cheaper than their brothers in Germany and because of growing energy cost and tightening labor rules in Germany.

Jerry

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Jitneys were the Uber and Lyft Services 100 Years Ago

New news on the ride-sharing front. Uber, Lyft, and Sidecare are all making money and cutting into the commercial taxi trade (where government intervention is not attempting to shut them down). Good news for Mr., Mrs., and Miss consumer......but.....

In Washington D.C. the city council is proposing a new city rule that will require ride-sharing serves to charge at least five times what taxis charge. If you read the proposal it is very clear in its aim to make sure that ride-sharing businesses pose no competitive threat to the taxi business. So far the proposal has failed because of a ground swell of consumer opposition. (Seems to me someone once said "Eternal vigilance is the price of liberty" or something like that)

Chicago has passed rules for ride-sharing and here are just a few of them: Expensive licensing requirements, expensive liability insurance requirements, and prohibitions on pickups made at any airports.

Down in Miami all ride-sharing companies have been banned and the city is using police sting operations to catch Lyft drivers.

Well, looks like "crony socialism" is alive and well. The established businesses are using government to crack down on competition from these new, innovative, young whippersnappers who think that just because we have a free market in this country that they can jump in and start a new business anywhere they want. (I say "free market" with my tongue planted firmly in my cheek.)

Now least you think that this is something new for business and government to work together to scratch each others backs let me tell you about the 'jitney' services. You may not be old enough to remember "jitney" because it happened 100 years ago (1914 to be exact) and heck even I am not that old.

Well, back in July of 1914 in Los Angeles a man by the name of L.P. Draper picked up a passenger in his Ford Model T and drove him a short distance. He accepted a nickel because that was the streetcar fare at the time. That nickel was referred to as a "jitney nickel". By 1915 this spontaneous movement had spread from L.A. to Main. It was operating in 175 cities and it is estimated that 62,000 jitneys were in service. Most of the jitney drivers were unemployed and this allowed them to use their T-model to make money while looking for a "real" job.

Can you guess what happened next? No. Well here is the punch line. Opposition came from: business interests that did not like the increased street traffic, streetcar businesses that did not like the competition, and the cities themselves that did not like the jitney service because they relied on taxes from the private streetcar companies for revenue. Even the newspapers got into the discussion by running stories about jitney accidents and how “pestiferous” (their word, not mine) they were. Because of this outcry, government steped in (intervention) with new rules and regulations. Drivers could only drive a minimum amount of hours a day and they were not allowed to deviate from their routes to pick-up or drop-off riders. Some cities would not allow the jitney service to operate on major urban corridors or on streets serviced by streetcars. Also, in most places, drivers had to pay expensive licenses and bonding charges.

By 1918 the number of jitneys operating in the U.S. had dropped by 90% and a short time later had completely vanished from the landscape.

Well, that is one story of ride-sharing from 100 years ago. I wonder if I can find a ride-sharing story from the Roman empire where private chariots were used to give a "Lyft" to people?

Jerry

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Hard Work Available in the Oil Patch

I have not said anything about the "oil patch" in awhile so when I came across this information from Texas I felt that I should pass it along...

Oil field workers with little experience are said to be making $75,000 a year. A new, inexperienced, "roughneck" (what I use to do when I was 15 years old) is making $24 an hour and if you have some experience you can make $60,000 to $70,000 a year or more. (Dang, if I weren't retired and independently well-off I would consider packin' up the wife and movin' south...)

If you don't want to work in the oil patch (and I must tell you it is hard work) you can get a job at the local pizza parlor starting at $14 an hour.

And if you want to start a business in the area then consider that the folks in Three Rivers need services, dry cleaners, restaurants, grocery stores, boutiques. With all the money coming into the town from the oil people in Three Rivers, they need somewhere to spend it.

Life is good down in the town of Three Rivers, Texas and Ray Smith (construction worker) said: "If you don't work here, it's because you don't want to work...".

Jerry

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Getting the Price of a Tart Cherry "Right"

I have always been taught that the price of a product depends on the supply and the demand for the product. That is to say if the supply of something is low and the demand is high then the producers can charge a higher price. Now I was also taught if the supply of something is low and the demand is high then established producers will increase the amount they are producing and new producers will enter into the market to provide more of the demanded item. After a period of time the supply will increase and the price to the consumer will fall. In economics we talk about a downward sloping demand curve and an upward sloping supply curve. This is the basis for most free-market economic theory.

This brings me to an interesting statement that I read today. Did you know that there is a Cherry Industry Administrative Board (CIAB)? And did you know that the CIAB is a creation of the USDA? And did you also know that the CIAB notes that its role is to make sure “the annual supply of tart cherries matches the demand for tart cherries”? Of course the CIAB enforces the amount of the annual supply with the force of the federal government.

Now I am not much of a cherry (tart or otherwise) eater but I am told that tart cherry are used for the production of 'cheery wine'. Anyone that wants to may grow tart cherries but if you want to sell your tart cherries you must have a permission slip from the CIAB. Much like high-school and your getting a hall pass.

What can I say? The federal government regulates the amount of “tart” cherries that may be marketed which controls the price of the product. If the federal government bureaucrats decide that the price is too high then they let the growers know they can sell a few more cherries or if they think the price is too low then the can reduce the amount of cherries allowed to be put on the market.

This is no skin off my nose because as I said before I don't like cherries or things made from cherries.

Isn't it good that the government is looking out for us by their knowing just how much demand there is going to be for this product and then acting on this future knowledge so that everything stays in balance? Of course if the CIAB did not exist then maybe folks would grow more tart cherries and/or new folks would get into the business of growing cherries and then the price to the consumer would reach its “true” level and everyone from producers to consumers, would know the real price of one tart cherry.

Jerry

P.S.

Just a quick note toremind you of the four basic elements of the Law of Supply and Demand (without government interference).

1. If demand increases (demand curve shifts to the right) and supply remains unchanged, a shortage occurs, leading to a higher equilibrium price.

2. If demand decreases (demand curve shifts to the left) and supply remains unchanged, a surplus occurs, leading to a lower equilibrium price.

3. If demand remains unchanged and supply increases (supply curve shifts to the right), a surplus occurs, leading to a lower equilibrium price.

4. If demand remains unchanged and supply decreases (supply curve shifts to the left), a shortage occurs, leading to a higher equilibrium price.



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A Golden Time to be a Beer Drinker in America

Let me be one of the first to welcome you to the “Golden Age of Beer”. 

Today the U.S. has reached a milestone in the beer industry. There are now, as of the end of June, 3,040 breweries operating across this great country. Now it is hard to determine how many breweries were in operation in the 19th century, the guess is a few less than 3,000, so this is the first time that we, as a nation, have crossed the 3,000 barrier since (maybe) the 1870s. Quick factoid: from 1977 to 1984 there were fewer than 100 breweries in the U.S. (1978 was the low point of 89 breweries).

You may ask what does this mean, aside from your having a large selection of exceptional product to pick from. Well it means that almost 99% of these breweries are small and independent and that the majority of Americans live within 10 miles of a local brewery.  And from what I read there are over 2,000 new breweries planned which means that you may have a local brewer within walking distance of home. It is good to walk and not drive after having a few(?) beers.

Another implication is that competition continues to increase so you should see the quality and diversity of beer increase while the price should get even lower (on a relative basis). This is just standard economic theory. Competition forces a better product and/or a lower price.

And I quote “There’s never been a better time to be a serious beer drinker than today, given the awesome selection of craft beers from every part of the country.” - Mark J. Perry Professor of Economics.

Economics is the bomb ain't it friends.....

Jerry

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Bono and the Cure for Poverty

I have always liked the music of U-2 and Bono. Now I am getting quite fond of his political views as well. Last November at Georgetown University at a meeting sponsored by the Global Social Enterprise Initiative and the McDonough School of Business, these were some of his thoughts:

“Today, we’re gonna discuss why rock stars should never, ever be given the microphone at institutions of higher learning,”

“Aid is just a stopgap,” “Commerce [and] entrepreneurial capitalism take more people out of poverty than aid. We need Africa to become an economic powerhouse.”

"America is ‘an idea.’ That’s how we see you around the world, as one of the greatest ideas in human history"

"Rock star preaches capitalism. Wow. Sometimes I hear myself and I just can’t believe it. But commerce is real. That’s what you’re about here. It’s real. Aid is just a stopgap."

“In dealing with poverty here and around the world, welfare and foreign aid are a Band-Aid. Free enterprise is a cure.

“Entrepreneurship is the most sure way of development.”

Like I said, I like what he is saying about how to improve the lot of people around the world....

Jerry

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A Myth about the Wages Henry Ford Paid

You may have heard that Henry Ford paid his workers a higher wage so that they could buy his cars. That is an old wife's tale. The actual reason that Ford paid more than other businesses was because he found that it cost him more to hire and train new workers than the cost of the higher wages he had to pay experienced workers. He was hiring workers away from other car producers and getting the best and most experienced people because of his higher wages. These experienced workers produced cars for Ford faster and with fewer defects than if he had less experienced workers. 

The average Ford worker could not, even at the higher wage of a dollar more per hour, afford the cost of a new car, and at the time there were no car loans available at the local bank. The majority of people could only buy one of Ford's cars after saving up for several years.

Jerry

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