Medical Price Ceilings and Floors

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Understanding Basic Health Economic Concepts

[By Dr. David Edward Marcinko; MBA CMP™]

biz-book3Healthcare price ceilings and floors benefit certain groups but impair the distribution of medical goods and services by the price system in free competitive markets. 

And, government intervention interferes in the functioning of competitive markets and is likely to result in “resource allocation” problems. 

Health Economics Definitions

“Price ceilings” are maximum legally charges and always result in shortages when set below market equilibrium prices. How long is the wait at a local charitable hospital vs. a local for-profit medical center? Price ceilings often result in an underground black market economy that exceeds legal limits.  

Non-price rationing (i.e., free medical care) on the other hand, distributes available services to patients on a basis other than ability to pay. The most common non-price rationing device is, “first-come, first-served”. 

“Price floors” establish minimum prices, which often result in surpluses when they exceed equilibrium price levels. The minimum wage is a good example of a price floor.


Remember, Keynesian macro-economic philosophy.  In evaluating managed care price controls, the gains to beneficiaries of price ceilings and floors must be weighed against the resulting allocation problems.

Alternative methods that will make the gainers just as well off without impairing the rationing function of medical prices, can be considered as ways to increase efficiency in the medical economy. 


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3 Responses

  1. Did you know that prices for hospital services rose 1.1 percent in January, up from a 0.6 percent increase in December?

    The increase was the highest jump since April 2002 when it increased 1.2 percent, according to the U.S. Bureau of Labor Statistics’ [US-BLS] seasonally adjusted Consumer Price Index [CPI], according to Modern Physician.

    For the 12 months ended in January, the hospital CPI was up 8.8 percent, compared with a 6.4 percent rise in the year-ago period, while the physician CPI rose 0.2 percent in January, down from the 0.3 percent rise in December.

    For the 12-month period, the physician CPI rose 3.5 percent, compared with a 3.2 percent increase in the year-ago period.

    And so, how does this compare with your local geographic area?


  2. Dr. Marcinko,

    I agree that non-price rationing (i.e., free medical care) is still rationing. Just wait till you see the lines when care is rendered on a “first-come, first-served” basis … long and rationed, indeed.



  3. Minimum Wage

    The House of Representatives recently voted to nearly double the national minimum wage from $7.25 per hour to $15. Democrats are rejoicing that this change, if passed by the Senate, will lift 1.3 million people out of poverty. Republicans are complaining it will cost 1.3 million people their jobs. According to the Congressional Budget Office, both are right.

    Remarkably, we haven’t heard from either side about a much bigger issue: a national fixed minimum wage poses a gross inequity when adjusted by local cost-of-living expenses and taxes. These vary enormously from state to state.

    The dollar amount of the minimum hourly wage isn’t as important as what workers have left after paying taxes and what the remainder buys in goods and services. For example, a $15 hourly wage in a state with high taxes and a high cost of living is hardly equal to the same $15 hourly wage in a state with low taxes and a low cost of living.

    I did a comparison, adjusting a $15 minimum wage for state and local taxes and for the cost of living, using data from the Council for Community and Economic Research as presented by the Missouri Economic Research and Information Center. I selected Washington DC as my base location for comparison, as it has the second highest cost of living in the US behind Hawaii. It is also representative of the cost of living and taxes in many major metropolitan areas, where the drive for a $15 minimum wage seems strongest.

    After adjusting for cost of living and taxes, the purchasing power of a worker earning $15.00 an hour in Washington DC is equal to a worker in Mississippi earning just $8.46 an hour. In South Dakota, someone earning $9.67 an hour has the same purchasing power as someone earning $15.00 an hour in Washington DC.

    A flat “one size fits all” wage does not consider local variations in cost of living and taxes. Currently, 51.1 million workers earn less than $15 an hour. It isn’t hard to understand the CBO’s data that says forcing small businesses in low cost-of-living states to raise wages to match a wage in high-cost municipalities like DC will cost 1.3 million to 3.7 million employees their jobs and raise costs for everyone.

    But no worries, according to Jim Tankersley and Emily Cochrane in a New York Times article on July 8, 2019 titled, “$15 minimum wage would reduce poverty but cost jobs.” They write that money to fund the wage increases would come “mostly at the expense of business owners, who would earn lower profits because of increased labor costs, and other higher-earning Americans, who would pay more for goods and services, like food in restaurants.”

    I find this reasoning amazingly naïve.

    The money to double many worker’s wages would not simply come out of profits, as many businesses don’t have enough profit to absorb the increased costs. Nor would it realistically come from the rich paying more for goods and services. Higher prices would raise living costs for everyone, not just the rich. The result of higher prices is falling revenues to businesses as fewer consumers can afford to sustain their current levels of spending.

    Instead, a $15 national minimum wage would make lower-paying jobs even more scarce while the cost of living would increase, wiping out the advantages of the higher minimum wage for many.

    States need the power to set their own minimum wages to account for local cost-of-living expenses and taxes. A federal minimum wage needs to accommodate the states with the lowest cost of living. It is a floor, not an average or a ceiling.

    Rick Kahler CFP


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