Thursday, January 07, 2010

The Real Reason Healthcare Prices Keep Going Up

You never spend other people’s money as carefully as you spend your own.


(HT Greg Mankiw)


thinking said...

This is an oversimplified analysis of a far more complex issue.

Consumers of healthcare process and evaluate information on healthcare far differently than consumers of standard goods like colas, TVs, etc. It's not at all comparable.

In other words, people don't shop for healthcare like they do the best TV or the best soda, nor should they be expected to do so.

Nobel Laureate Ken Arrow has written about this, as well as Nobel Laureate Paul Krugman.

From a summation by Krugman:
One is that you don’t know when or whether you’ll need care — but if you do, the care can be extremely expensive.

The second thing about health care is that it’s complicated, and you can’t rely on experience or comparison shopping. ("I hear they’ve got a real deal on stents over at St. Mary’s!")

All of this doesn’t necessarily mean that socialized medicine, or even single-payer, is the only way to go. There are a number of successful health-care systems, at least as measured by pretty good care much cheaper than here, and they are quite different from each other. There are, however, no examples of successful health care based on the principles of the free market, for one simple reason: in health care, the free market just doesn’t work. And people who say that the market is the answer are flying in the face of both theory and overwhelming evidence.
--end of Krugman citation

In the final analysis, we have a healthcare system that empirically delivers less for more cost than systems in other modern countries. That needs to be changed.

Kevin said...

Oversimplified, maybe, but most folks have no clue that more money chasing the same number of good will cause inflation of prices for that good.

Also that we are in a positive feedback. It's one industry where more doctors has not meant lower costs, but lower standards of when doctors recommend a procedure or drug (Vermont study, but I don't have reference at hand). Patients are more informed now via many ad campaigns, so will push doctors for product and services which they may not need but are more involved in the health care process. Insurance companies actually tried to cut cost with HMOs and denied services, but there was a consumer rebellion, so not use a push-through cost model where total cost + 4%-6% profit tacked on, divided by number consumer (yes, oversimplification, some data modeling of risk), and pushed out the door, thus no incentive to cut cost for 4% on $100M is > than 4% of $50M.

Woe to the one who truly willing to be the one to insert some negative feedback into the system -- badly needed , but to truly do something will be instantly publically demonized.