Lower Costs by Fiat


The cover story in today’s Time magazine is extremely long, and comes to the conclusion that I, and really anyone who is serious about analyzing health policy comes to:

Prices are high because market structure allows hospitals monopoly power over pricing. Health insurers only have limited monopsony power, with Medicare exercising the greatest amount.

Now you have a half hour of your life to do something besides read the cover story. You’re welcome!

If you are a thinking person, the conclusion that you would easily come to is that we should increase the power of the monopsony buyer — i.e cover more people under Medicare. And that is certainly what the theory of second best would tell you. And I agree that if universal coverage is your goal, you should jump in 100% by having government run the payments system.

However, there is another option, here stated by Matthew Yglesias, that is more pernicious:

The other [policy option] would be to adopt all-payer rate setting rules—aka price controls—keeping the insurance market largely private, but simply pushing the prices down. Most European countries aren’t single payer, but do use price controls. Even Singapore, which is often touted by U.S. conservatives as a market-oriented forced-savings alternative to a universal health insurance system relies heavily on price controls to keep costs down.

My question is where are the costs going to shift when the US implements price controls? We already — rightly or wrongly — subsidize world consumption of medical innovation. Now, in reality, when you go to the doctor, most of the what happens to you ranges from useless to harmful. So it is almost certain that we can cut fairly deeply into innovation and perhaps improve welfare. But the reality of medical research is that the vast majority of it is useless. Big name pharmaceutical companies are known to plow their billions in profits from blockbuster drugs like Viagra and Prozac into fruitless drug pipelines…but every once in a while we do get a Viagra. Now Prozac didn’t cure cancer, nor does the new potential wonder-drug Modafinil, but both have a measurable impact on quality of life…so if we want all of the wasted billions to continue, there needs to be a possible revenue source. Price controls prevent that.

What is that I hear? The subsequent call after price controls to publicly fund all R&D? No way. Don’t you know the slippery slope is a fallacy.

P.S. My preferred solution is here.

P.P.S. I realize that a lot of medical research is publicly funded already. That wasn’t the point I was making.

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