US Health Care: Your $ or Your Life?

USA: Last Bastion of Market Priced Health Care

“..The USA is the last holdout with market-priced medical care not because of any inherent conservative or free market ideology. Rather, as the wealthiest nation that ever existed we are the last ones who can afford it. Switzerland was one of the last advanced economies to abandon market-priced medical care. It is arguably a greater bastion of conservatism than the USA. Switzerland’s women were not granted the right to vote until 1971.

During the debate as to whether Switzerland would abandon market-priced medical care there was considerable concern about how it would affect the major Swiss pharmaceutical giants such as Hoffmann-La Roche (RHHBY) and Novartis (NVS) which was Sandoz prior to the merger with Ciba in 1996. However, it was then realized that the Swiss pharmaceutical giants made much of their profits in the American market.

The reason that no nation, including the wealthiest can allow markets to set the prices of medical care indefinitely is that demand for medical care is inelastic. Demand for a good or service is inelastic if a percentage increase in price results in a smaller percentage decrease in the quantity demanded. Basic economics tells us that sellers facing inelastic demand will continuously raise prices until prices reach the elastic portion of the demand curve. Consequently in every developed country in the world, all goods or services with inelastic demand have their prices regulated by government. Medical care in the USA being the only exception.

Health care is one of the very few things for which the sellers face inelastic demand. The prices of all other goods and services facing inelastic demand in the USA are regulated by government. Retail electricity service providers face inelastic demand. Consequently, their prices are strictly controlled by all governments worldwide, including the USA.

The inelasticity of retail electricity is obvious. If Consolidated Edison (ED) or any other electric utility were to triple retail service prices, people might be a little more careful about turning off the lights. Turning off their refrigerators? Watching less television? Not likely. Thus, tripling the price would result in only a small reduction in kilowatt-hours sold. Almost all other goods and services are price elastic. That includes non-medically necessary elective cosmetic and lasik surgery whose prices have actually relatively decreased over time. Medical care in the USA is the only instance in any developed country where any product facing inelastic demand is not substantially price regulated.

Medical prices are controlled in various ways in the rest of the developed world. In Japan, the land of $100 melons and tiny $10,000 per month apartments, all medical care prices are listed in a book, thicker than the Manhattan telephone directory. The prices set in the book are usually less than a third of those in the USA. An MRI that costs $1,200 in the USA costs $88 in Japan. Japanese insurance companies are private as are most doctors. Japan spends less than a third per capita on medical care than America. However, the Japanese are greater consumers of medical care than Americans. They visit doctors and hospitals more often, have much more diagnostic tests such as MRIs. They also have better health outcomes as measured by all metrics such as life expectancy. They also wait less for treatment than Americans do as Japanese doctors work much longer hours for their much lower incomes.

Japan’s explicit price controls are roughly emulated in other countries via the use monopsonistic systems. Monopsony, meaning “single buyer” is the flip side of monopoly. A monopolist sets prices above free market equilibrium. A monopsonist sets prices below free market equilibrium. It does not matter if there is an actual single payer or many buyers (or payers) whose prices are set by the government or by insurance companies in collusion with each other. More competition among sellers generally leads to lower prices. However, more competition among buyers leads to higher prices. In the health insurance industry the beneficial effects of more insurance companies competing for patients are far outweighed by the adverse effects of insurance companies competing for doctors and hospitals in their HMO plans. This was completely misunderstood during the recent debate on health care reform. With health care, more competition among insurance companies on balance results in higher prices.

Focusing attention on the insurance companies, which are simply intermediaries between the doctors and the patients, was a tragic error. It would like trying to solve a problem of high energy prices by focusing on gasoline stations. Only if the government sets prices can health care prices be controlled. Controlling prices does not automatically result in longer waiting times. Japan and Switzerland generally have shorter waiting times to see doctors than does the USA. Additionally, if prices were controlled there would be no such thing as “in-network” or “out-of-network” since all doctors would accept all insurance plans…”

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