Tag Archives: Free markets

Engineering False Pricing Pressures In Healthcare

I recently heard a representative of a non-profit organization committed to stemming the rising cost of healthcare interviewed on a local public radio program.  She said that her organization has launched a state wide program which is patterned after a national initiative implemented by the American Board of Internal Medicine Foundation.  The goal of the program is to ensure that health care providers are providing necessary treatments and therapies efficiently and only as actually needed.  During the interview, she gave an example of the type of activity and interaction the program is designed to achieve.  Paraphrasing, she said that “if a doctor orders a test or some treatment, we want the patient to inquire whether this is really the best thing to do or should I just wait to see if it gets better on its own”.  Because her comment was “off the cuff” and not well measured, we should not take it literally.  I don’t imagine the primary focus of this program is to induce patients to question their doctor’s judgment with respect to every test or therapy the physician might prescribe.

What is interesting isn’t the program or its specific focus but the underlying truth her comments reveal.  Because our healthcare is generally paid for by employer or government provided “insurance”, the end users (the patients) have had little incentive to monitor the price of medical care.  As a result, the role of prices in determining demand is muted.  The consumer of healthcare is not as directly interested in the price of his treatment because he does not directly pay it.  In a free market, higher prices result in lower demand which in turn keeps prices in check.  When the healthcare consumer doesn’t pay for the healthcare he receives, his demand is not nearly as affected by increasing prices.  As prices go up, his demand does not decrease as it normally would.

The program discussed by the representative of the local non-profit apparently seeks to redress the problem by artificially inducing consumers to act as though they have the same interest in health care pricing as they would if they paid for it directly.  It is hoped that sufficient numbers of patients can be coached to act like paying consumers so as to reintroduce the effect of diminishing demand into the economic equation.  Though this is no doubt a well intentioned effort, it ignores human nature and history.  We know from the communist experiment that individuals cannot be prodded en masse to act in the “best interest of the collective”, at least not for long.  Ultimately, the vast majority of individuals are rational economic actors, which means that they act in accord with their own perceived best interests.  For this reason, the percentage of people who can ever be expected to pressure their doctors about the real need for suggested therapies pales in comparison to the number of individuals who will do so when they are actually responsible to pay for the therapy out of their own pockets.  Even at that, the few who are initially willing to question their doctors in this fashion will lose the initiative to do so going forward.

Try as we have, mankind has not been able to efficiently plan a route around human nature.  Government restraint and coercion gives rise to unintended consequences.  In this case restraint and coercion in the form of redistributing and regulating health care gives rise to the unintended consequence of inflexible demand for healthcare which in turn gives rise to higher and higher prices.  Asking and expecting the citizenry to act in contradiction to their nature is not the answer to the problem.  The answer to the problem is a return to the free market, the natural state of society in which human nature flourishes.

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