Just Your Average Joe

A few times over the years of these missives, there's been occasion to point out the difference between average cost pricing and marginal cost pricing. In particular, the differential effect of a high fixed-cost burden on pricing. Well, here we go again, with a report in the NYT about medical tourism.

Of special interest is the part the doctor's fee plays in the scenario:

Dr. Parisi, who spent less than 24 hours in Cancun, was paid $2,700 or three times what he would have received from Medicare, the largest single payer of hospital cost in the United States.
[my emphasis]

Once again, we see the tyranny of fixed cost in action.

In the United States, knee replacement surgery costs an average of about $30,000 — sometimes double or triple that — but at Galenia, it is only $12,000.

So, it's clear that the cost differential isn't labor, since the doctor got triple what he would have in the US. It's support of the hospital that's the devil in the details.

How are the extra dollars spent? Perhaps some group of health economists have/will manage to do a comparative study, although I doubt many hospitals will be willing to spill the beans. Does most of that large difference go to the CxO class of hospital admin? Or does it subsidize useful, but little used, equipment like MRI or hyperbaric?

And, oh yeah, the patient got a check for $5,000 on top of it all.

The unintentional (one hopes) side-effect of syphoning off such patients from US hospitals is that average cost of such interventions here will go up; there's just fewer patients using these interventions. Since total revenue diminishes, other interventions may also be re-priced upward to cover the 'shortfall'. Guess who'll likely be those patients? The poor, of course.

The tyranny of fixed cost visited my household. For reasons best left unsaid, the roof of the house is now covered with solar panels. The local electric company dragged its feet for months in the process of wiring in the panels. So far at least, electric companies are required to permit clients to co-generate. They don't like that, since it limits their revenue. The number of solar houses in any given utility's area is likely just in the noise, but once the number of installations begins to have a measurable effect on defraying the fixed cost of generation, transmission, and maintenance the lobbying to prohibit new installations and disenfranchise existing installations will gain much speed. There's no such thing as a free market when it threatens vested interest.

The utilities have successfully waged battles to squelch rooftop solar in states such as Arizona and Indiana, mostly by wielding political muscle to reduce compensation to customers for electricity fed back into the grid.

And, in yet another case of, if you can't beat 'em join 'em

For all the conflict surrounding rooftop solar, solar energy last year generated just under 1 percent of U.S. electricity, and utility-scale solar farms have three times the generating capacity of residential solar installations. That disparity is likely to grow.

Finally, the coup

And as more and more customers install solar panels, utilities earn less and less revenue, which means that rates for remaining customers must increase — which drives even more of them to rooftop solar. As battery storage becomes cheaper, some customers will be tempted to leave the grid entirely. A paper published by the Edison Electric Institute in 2013 famously warned of this vicious circle, giving rise to the expression "utility death spiral."

Hemmed in by their business model and regulators who expect adherence to it, many utilities have concluded that they have only one alternative: stop rooftop solar. In this battle, utilities have sometimes behaved oafishly, sabotaging themselves.