Had an interesting discussion with my favorite New England liberal this weekend about the Time Magazine article on Hospital pricing and charges. We both found the articles to be excellent. But drew completely different conclusions. She saw this all as a failure of capitalism, a sign of the inherent corruption that occurs that demands more goverment intervention. I saw it as a totally screwed up market, from the dominance of third party payers to government-enforced monopolies (e.g. certificates of need), that killed any incentive of consumers to shop. The entire pricing mechanism is broken, and simply replacing it with a set of fiat prices from the government is not going to make things better.
Megan McArdle has a good interview with Bart Wilson on this very topic. Here is a small excerpt:
Megan: Okay, so let me ask the obvious question: if a whole lot of health care wonks think that government-rate setting would fix health care costs, why should I be skeptical?
Wilson: Who knows the conditions of who values what and the opportunity costs of supplying health care? What set of minds in the government has the knowledge needed to make tradeoffs, to know who is best to supply this service or that one?
The values and costs of healthcare have to be discovered.
Megan: The wonks who favor rate-setting argue that health care simply isn't like any other market. For one thing, there's an information problem: how do I know if I want a heart bypass or not?
Why not let an expert who has read all the studies on heart bypasses make that decision?
Wilson: Right now, the doctor recommends to the patient what the insurance company will pay for. What incentive does the patient have to find alternatives? (None.)
There is the assumption that an expert knows all the alternatives. Doctors are not interchangeable. They know different things.
The function of a market is let us learn who will serve us sufficiently well.
Megan: So let's step back even farther, to 30,000 feet or so, for a second. What does the price do in a market? Why should I want to put a price on my lung transplant?
Wilson: A price is like a symbol at any moment of what millions of people are willing and able to do. All of the technology and services of the doctors have to be weighed against whatever else they could be applied to.
The prices of alternatives to lung transplants are doing the same thing. The difficulty is assuming that a lung transplant is "inelastic". What a price system does is find what part of say, healthcare, is on the margin.
“Inelastic” means that I’m relatively indifferent to the price. The last glass of water in a desert is the quintessential inelastic good; people will pay all they have to get it. Things can be more or less inelastic, which is to say, that demand can be more or less responsive to changes in price. Health care is often thought to be very inelastic.
Megan: But this is precisely the argument that health care wonks make: when I need a lung transplant, I don't have the time, or the emotional ability, to comparison shop. So there's no price discovery mechanism.
Wilson: Does the government know or have the ability to comparison shop for me? Do they know my circumstances?
Also, for some healthcare services, you do have the ability to comparison shop. Those services will then discipline the healthcare market in general.