Healthcare and the Free Market
In capitalism, everything’s kept in check by balanced pressures. The profit motive provides upward pressure on prices; the more profit, the happier the producers are. The consumers exert downward pressure to get the lowest prices they can.
Let’s say Simpson’s Ice Cream Parlor and Walton’s Creamery are both selling ice cream for 5 bucks a cone. Now, let’s say Simpson drops her prices to 4 bucks to sell more units. What does Walton do? Well, he could drop his prices to match hers. They both might sell more at the lower price point, or the lower price might cancel out the higher volume. Or he could slap a “premium” label on his cones and try to differentiate that way and capture more of the business. Or he could do nothing and watch all his customers buy the same thing from Simpson at a lower price. At some point, if prices get too low, it’s not worth selling ice cream, and producers start to exit the market.
But what if Walton thinks the market will bear 10 bucks a cone? He could make an agreement with Simpson and anyone else selling ice cream that the price will be 10 bucks, but that’s price fixing, which is illegal. He might get that price with added services or perceived value, in which case Simpson might follow and ice cream prices might go up. At some point, though, the consumer decides not to buy ice cream when prices get too high.
There’s the key right there: consumer choice. If ice cream costs too much, people don’t buy it. And this downward pressure, coupled with the upward pressure of the profit motive, keeps the price at a point where it’s worth it for the producers but acceptable to the consumers.
Health care is different.
Let’s say Walton and Simpson get out of the ice cream business and start doing cardiac procedures. It costs 5000 bucks to get heart surgery. Now, what if Simpson drops her price to 4000 bucks? Or what if Walton thinks he can sell the surgeries for 10,000 bucks? If Simpson drops her price, all the patients will go to her. So there is, it would appear, the potential for downward pressure. But if Walton slaps a “premium” label on his scalpel, he still can’t charge 10,000 bucks. So, no upward pressure. Right?
Demand is inflexible. No one is getting heart surgery for fun (like ice cream). So there’s no incentive for Simpson to lower her prices. There really is no downward pressure. And in fact, if all the prices went up, people would still get the surgeries. What if the price were 500,000 instead of 5,000 bucks? You’d still do it if you could. At some point, the consumers simply can’t afford it, but that downward pressure is small and comes very late, meaning that there’s not much to naturally balance prices.
In that situation, with inflexible demand, how can there be upward pressure without price fixing? The answer is: you don’t tell the customer what the price is until they’ve bought the surgery. And that’s exactly what’s happening:
With inflexible demand, no downward price pressure, and plenty of profit motive, it’s no wonder health costs are so high. Even being up-front about prices won’t solve the problem, though; it merely relieves some of the upward pressure. To lower health care costs, we need to get the profit motive out of health care.