Price Sensitivity in Healthcare

“$14,322 for my x-ray? Those doctors are crooks.” Family members utter government propaganda from time to time, and it is up to us to debunk their bunk.

Forget that it is immoral to force people to subsidize programs, forget that health care is a product– no more mystical than any other. These things are true, of course, but let’s look at why exactly health care is so expensive.

When you see prices that are bananas, you just know there is something wrong with the pricing of the product. The whole idea of the market is that consumers drive prices down because they always want to get a deal– nobody wants to get screwed– and prices reflect what they will pay for the product today. But how much they are willing to pay is much higher when they are not really paying it.

Why Healthcare is so Expensive

Although it is always fun to rail against service providers and especially doctors, who wear those ridiculously presumptive costumes, it is not the doctors that we need to blame.

Vijay Boyapati, a former Google engineer, illuminated four causes of rising costs of healthcare.

1) Employer Health Insurance

Employers are expected to pay for healthcare in the United States because people “need” healthcare. People need to eat and most need to drive, yet employers don’t furnish their workers with Subway sandwiches and Chevy Cruzes.

Employers didn’t provide insurance for their employees until a 1943 tax law made this kinds of insurance tax-free. And besides, employers needed a lure for workers during World War II– a period of evil price controls and wage caps. Employers could sell the benefit of insurance to workers rather than offering better wages.

Employees take advantage of company expense accounts, whether they have to do with travel or healthcare or anything else. Using company money liberalizing their spending habits; whereas paying for themselves would promote a more salubrious atmosphere of spending sanity.

And it is not just on the consumer side that people tend to spend more– doctors too favor far more expensive treatments for only marginally better services. Boyapati noted, “This is the opposite of how the price mechanism works in a free market, where consumers (who are paying out of their own pocket) search for the cheapest prices and providers work hard to provide services that are equally efficacious but less costly.”

 

2) Licensure

Licensure limits supply of providers, supposedly to protect patients. It also happens to maintain high wages for providers. Consumer-driven prices would allow medical houses to find the most efficient uses of their personnel. Unfortunately, the American Medical Association (AMA) makes rational allocation of resources impossible by restricting what each medical worker can do. You can argue that this regulation makes people safer, but you must admit that it shoots the costs up into space.

 

3) Obesity

Obesity is perhaps the biggest health problem of 21st century America. Boyapati blamed the US government’s subsidizing of corn production for the fact that Americans consume 73 pounds of corn-based sweetener per year per person. Americans eat 10% more calories than they did in 1977, due in part to mass subsidies given to food-producers. Increases in obesity numbers cause a corresponding increase in demand for “fat” doctors- who spend their time helping out people with the diseases of fat.

 

4) Intellectual Property

Pharmaceutical companies enjoy government-sanctioned monopolies on their medical patents. Thus they can charge as much as they want without worrying about competing producers. Although patents might well be a legitimate cost of business put on consumers to protect innovators, it is clear that patents drive up prices by excluding competitors. The government heavily regulates patents in the healthcare industry, sharply diminishing the ability to compete.

 

Conclusion

It is not a mystery why medical costs are so high. How could it be otherwise with such a pronounced level of state intervention? Without the price sensitivity associated with free markets, companies and governments just set whatever prices they want.

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