Tuesday, October 9, 2012

Health Insurance markets are tricky

The problem with trying to harness market forces to provide less expensive health care for older adults is the lack of an open price system.  Matthew Yglesias critiques David Brook's alternative to the current proposal of using a panel of experts to try and set costs:
Brooks says Obama's plan to do this with price controls is doomed for political economy reasons. A politically powerful coalition of elderly people and health care providers will block it. That's certainly plausible. But what's the alternative?

Brooks says the alternative is to insert an additional layer of rent-seekers into the dynamic by contracting Medicare services out to private health insurance companies.
This approach always assumes two things: 1) that there is a functional market that can set prices independent of the insurance system.  How many elderly patients pay out of pocket for major medical services in the United States and then brag about the transparent pricing?  2) that there are real efficiencies to be gained by a private firm that could not be availed by the government.  Notice that the insurers are not the providers, we already have private hospitals.  So the efficiency would have to come from somewhere else.  For example, that the firm could simply billing procedures to reduce administrative overhead.  But medical billing tends to be complicated and needing to interface with a lot of different systems/reporting structures reduces efficiency.  Or they could set prices more saccurately, but then they are just another panel of experts that is not accountable to the electorate. 

We have the same issues with defense contractors.  It is very hard to set market prices for items that can only be sold to the United States government (think nuclear weapons or aircraft carriers). So we rely on expert judgement (on the part of the government) as to what costs should be for these items.  Would we really expect to see costs drop if we inserted another layer of "bargainers" who acted on behalf of the government to set prices and then got to have a percentage of expenditures?  How could such incentives ever work out? 


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