Healthcare Pricing

A recent post at the blog Project Millennial outlines some of the issues relating to health-care as understood by liberals. According to the post, healthcare prices are a “total mess” because “list prices” vary immensely from provider to provider and the price of a proce-dure can vary widely at the “same provider,” depending on the payer.

Although not explicitly stated in the post, the general liberal view is that prices are too high when compared to prices in Europe. And based on the post, the favored liberal solution is government price controls, but if that’s not feasible, then a system that allows providers to collude to fix prices is a good alternative.

The idea that pricing might be restrained through competition isn’t mentioned in the post and it contains nothing that can be characterized as a call for more competition. In fact, the article goes in the opposite direction, claiming there’s a tradeoff between “free markets and cost control” in U.S. healthcare (more on this later), apparently based on liberals’  (mis)perception that government healthcare programs control costs better than private insurers.

So where do liberals go wrong about prices? First, according to Christopher Conover, a healthcare expert at Duke University, properly performed studies show that when we account for income levels, healthcare spending in the U.S. is about where we would expect it to be compared to European countries. If Conover is correct, then U.S. prices may not be too high after all, although liberal wonks insist that prices are higher even after taking income into account.

Second, liberals mistaken believe there’s a single healthcare system in the U.S., implying that healthcare is a set of interdependent parts forming an integrated whole. Rather, medical care in the U.S. is delivered in countless unrelated geographic markets across the country. Doctors, hospitals, and insurers who interact to provide medical care in Miami have no necessary connection to those who provide healthcare in Kansas City. Because demand and supply conditions may vary widely in these individual markets, we shouldn’t be surprised if prices also vary throughout the country.

Third, “list” prices are not real prices – they are simply the starting point from which pro-viders and health plans negotiate actual prices. Because list prices are phony, it makes no sense to get too worked up about their level. And it’s unlikely that actual prices, unlike list prices, will vary significantly in a genuinely competitive market, i.e., a market where alternatives exist.

Fourth, it appears that European countries have more doctors and hospitals per capita than we have here in the U.S. This suggests that we have a relative shortage of doctors and hospitals, and if true, say hello to higher prices. So increasing the supply of providers would be one obvious way to bring down healthcare prices. This may be all that’s needed, yet the Project Millennial post neglects to consider such general supply and demand conditions.

Liberals believe that government does a better job controlling costs than competitive markets, apparently because Medicare prices are lower than those in the private sector. The idea that arbitrary, government-controlled prices in Medicare just might result in higher prices in the private sector (called “cost shifting”) is denied by liberals although the theory they rely on uses unrealistic assumptions.

Any government can restrain costs simply by imposing price controls and restricting access to care. But history proves that centrally directed and controlled economies never outperform economies based on competition and markets. So a price-fixing government may be able to look good, but the look would be temporary:  in the longer run, centrally directed healthcare would only result in relative stagnation and eventual decline.

But don’t count on liberals to understand this – they are competition deniers. And that’s going to harm all of us.

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