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Mises, Prices, and Australian Health Care


In Australia, Judith Sloan points out that the “prices” for health care services set by state adjuncts are not really functioning prices at all:

Clearly, the bureaucrats who dreamt up this [healthcare-pricing-by-government-fiat] scheme had never read the Austrian economist Ludwig von Mises. If they had done so, they would have become very unsure about the value and impact of the onerous exercise of constructing thousands of “prices” across the Australian Diagnostic Related Groups undertaken by the number crunchers at IHPA.

According to von Mises, “prices are a market phenomenon. Prices cannot be constructed synthetically. Such fantastic designs are no more sensible than whimsical speculations. At the bottom of many efforts to determine nonmarket prices is the confused and contradictory notion of real costs. Economic analysis cannot help reducing all items of cost to value judgments.”

Stephen Duckett responds with the following claims:

1. Government agencies can create an “efficient” price that everyone can use as the standard for medical services.
2. Mises was wrong because he wrote a long time ago, and we’re much smarter now than people were in the 1940s.

He writes:


Quoting from a piece written by economist Ludwig von Mises in the 1940s, [Sloan] derides the whole prospect that setting prices could encourage efficiency. Economics has developed since then and there is now a body of theory on how to create efficiency incentives in regulated industries.

The role of the Independent Hospital Pricing Authority, her particular focus, is to establish the “National Efficient Price” for public hospital services. As Sloan notes, it currently does that by examining the distribution of costs for each type of care (say a hip replacement) and establishes the average cost as a fair and reasonable amount that ought to be paid to hospitals for providing that sort of care. There are minor adjustments to account for the additional costs associated with treating people from remote communities, indigenous people and for a handful of other factors.

Establishing a “National Efficient Price” sends a clear signal to hospitals about their relative efficiency. State hospital funding policies now generally follow a similar path designed to ensure that those hospitals that cost more than a state efficient price bring their costs down.

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