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.

New Posts

I'd like to thank everyone who has kept the discussion going here at Medical Economics. As of right now, I am preparing for Step I, which I will be taking in early June. I'm not sure whether I'll have a chance to post again before then (It depends on how the studying goes). I hope to have you all return in mid-June. We're just getting warmed up.

Market Controls and Medical Training Part 2: Applying to Medical School

The application process to medical school is one of those things that shows the true level of absurdity that can be achieved when artificial constraints are mixed with huge amounts of easily accessable money. Having gone through the application process myself, I can honestly say that if someone read on the internet that Harvard liked nudist animal impersonators, there would be 1000 pre-meds disrobing in Harvard Yard while clucking like chickens the next day. Some people's desire to get in almost seems to transcend logic. At times, the insanity and the competativeness will drive people into a mode where they forget why they're doing what they are doing, with the goal of getting into medical school transcending all else. This post will mix the usual economic banter with a touch of pre-med psychology (unofficial of course), in order to truly elaborate on this nearly mystical process for those that haven't had the pleasure of experiencing it.

You might say that some people are just naturally competative, and besides, I'm probably the biggest proponent of market competition on the face of the planet. Both of these things are true, but not all applicants are naturally this way, and this isn't true market competition. In fact, this may be the most sinister stage of the entire process. This is the true med school bottleneck, and beyond this point, even the most cynical students will probably become physicians. The golden handcuffs have yet to make their way to the wrists of all the bright eyed doctors of tomorrow. In general, no one actually understands what it is that they are trying to achieve at this point, but everyone is convinced that becoming a physician is something magical.

There are a couple of major factors that have to be taken into account here. First, the government provides loan money to all who choose to attend medical school. Recent changes in federal law regarding student loans have made it possible for all students to fund their school's arbitrary "cost of attendance" entirely on the government money. This creates more demand for the product, as money ceases to be a barrier. Second, the number of medical schools are limited. This has changed a bit in the last few years, especially with the AOA allowing for-profit institutions to start using its accredidation, but this is new. It is also highly limited. There are still only two institutions that can accredit schools. There are all sorts of government restrictions on what schools have to offer, and all schools have to follow essentially the same format to meet the requirements. This effectively keeps supply far below demand. Thus, government restrictions effectively create shortages.

With shortages in place, competition for limited resources sets in. The limited numbers of institutions have all the cards. Applicants who are at the top their classes in college will fly around the country, begging schools to let them in. These aren't the cushy recruitment interviews that their overachieving counterparts in other disciplines are engaging in. Students will pay for their own coach flights, often maxing out credit cards, in order to sleep on a medical student's couch and pray for acceptance. Some students will repeat this a dozen times in a cycle, with a small number that will apply in multiple cycles, repeating this process for multiple years.

Of course, this is only part of the expense. Almost all schools go through a specific application system called AMCAS. This sort of system imposes a huge amount of added expense on students. The current version of AMCAS' variable fee schedule is $160 for the first school, with $30 per additional school. Remember that spots are limited, so marginal students may actually apply to 50 or 60 schools, shelling out the extra fees. Any school that feigns interest in an applicant will then request a secondary application. This secondary application will then request a series of information, of which 50% is redundant with what they already received through AMCAS. Another fee of $15-$100+ dollars will then be attached to this, making the effective price per school somewhere between $45 and $130. Occasionally, a school will collect the money usually associated with the secondary application and then instantly reject an applicant without requesting a secondary at all. We'll ignore the fact that this looks a little bit like fraud.

Now, I don't pretend that there would be competition in a free market. There will always be institutions that gain a reputation for which people are willing to work. A big wallstreet brokerage firm will have people competing for spots as well. However, everyone who wants to trade stocks doesn't need to compete. My problem is not with competition in and of itself, but with the process that creates only a single, uniform, and expensive method of pursuing medical training. This is generally the same problem I have with healthcare delivery. The standardization is overly restrictive, expensive, and ripe for abuse by parties that find themselves in a favorable bargaining position due to government intervention. I am not implying that all medical schools are evil and corrupt institutions. However, the nature of the application process is definitely shifted in their favor.

I apologize for the long and somewhat disorganized post. I'll do my best to follow it up with an equally long and disorganized post as soon as I can.