The other day when I was looking up Scott McClellan and his brother Mark, who's now head of the Medicare/Medicaid Administration, I came across an article written by the latter about the difference between for-profit and community/charity hospitals. His finding was that community and non-profit hospitals fail to respond to a drop in demand as quickly as the for-profit kind. From the perspective of a believer in classical economics, this failure is obviousl a significant negative. What's interesting to me, though, is that there is no perception on the authors' part that a reduction in "demand" may not be a consequence of the service not being asked for, but rather a consequence of it being too expensive to pay for (either by the patient or the payment program).
DEMAND is a funny word, very central to economic theories, and freighted with different meaning. First, it provides the basis for the perception of economics as the "dismal" science because it implies the expression of desires that can never be entirely satisfied--as in the "demanding child" or the "demanding lover."
On the other hand, the notion of demand provides a cover for those who presumably try to satisfy the market for leaving it unsatisfied--the customer is bound to be dissatisfied by something (quantity, price, quality, durability, etc), so why even try?
Then there's the perspective of a decline in demand being an excuse for simply cutting out the good or service that was being provided. If a purveyor simply perceives himself as responding to an external prompt, then he doesn't have to be concerned with WHY that prompt is no longer arriving. Which, of course, is another explanation for why improved quality is not a natural consequence of competition. In fact, when there is competition, it's possible to respond to complaint about quality with the rationalization that "if you don't like it, just go somewhere else." If we were into linear thinking like economists are wont to engage in, we might conclude that "the more competition, the more junk."
But, when one applies the concept of DEMAND to hospital beds, one is double mistaken. That's because the basic assumption, that demand is an expression of what someone WANTS, is wrong. Being sick or injured and in need of hospitalization is not a desideratum (desired item). Rather, it is the lesser of many other even less desirable alternatives (expiring in a ditch, languishing at home in bed waiting for a slow death, being nibbled on inside and out by microscopic predators, being crippled for life by a broken bone in the foot or leg). Trying to decide how much DEMAND there is for such services by counting how many dollars people are willing to exchange or even the number of times they access the services doesn't make any sense.
Granted, the providers of such services do have a problem. They find it difficult to anticipate how many customers/users will show up in a given year and they are totally unable to account for when they are truly not needed because nobody's gotten sick or injured. ( I realize that's a stretch, but I do remember a year back in the sixties when the fire department in our town was not called out even once in a whole year).
But, it's exactly because there are some services that people would rather not have, but nevertheless need from time to time, that we organize ourselves as a community to provide them. Trying to subject these services to the "laws of supply and demand" makes no sense. But that's exactly what's being done. Because economics has a long history of deciding that when the facts don't fit the theory, the facts need to be adjusted. And that's what they are constantly about doing--fitting reality to their models.
Something similar seems to be happening in public education. If children aren't learning the most basic facts of life, the answer is to adjust the programatic structure.
The current President of course argues that if schools are not providing the expected results (another way of saying "satisfying demand"), just shut them down.
Primary education, of course, is different from both hospital care and an ice cream cone. There is demand for it, but not on the part of the recipient of the service. So, the demand/supply model doesn't work there either.
You may be wondering why they haven't developed a model that works, in the sense of accurately representing how our transactions progress. The answer is quite simple. They've tried, but like the human brain, our economic transactions are just too complex for accurate modelling.
Posted by Hannah at February 20, 2005 06:51 AM