I think some “reality freebasing” is in order here.

Have you ever, ever, in the history of mankind ever recorded a single government good that was provided for cheaper than the public sector?

To what extent is it a cost shift? Well, what is a cost shift? A cost shift occurs when the lower price paid through the employer discount program causes the price others pay to be higher than it otherwise would be. It need not be dollar-for-dollar higher. Perhaps there is a cost shift of 10% or 20%. How would we find it? Strong evidence would be if variations in the discount price were related to variations in the non-discount price, all other things being equal.

Move to health care. There have been studies that have looked for exactly that type of causal relationship. MedPAC, CBO, and I have looked at those studies. They either show no cost shifting in health care or a very low level of it, on the order of 4-17%.

Meanwhile, the Miliman report gives the impression that the cost shift is dollar-for-dollar. That’s because they look at price differentials and call it a cost shift. That’s just not right.

I challenge anyone to find a recent (within the last decade), peer-reviewed, body of work, not obviously conflicted through relationships with insurers or providers that shows a significant cost shift. If you find it, send it to me. I will read it. I will blog about it.

My take is that since there was never real value being created in how insurers channel hospital use by consumers, we’ve always been cost shifting — the uninsured have been picking up the tab for the “value” that insurers have supposedly been creating in this domain. The price differential is a result of many iterations of cost shifting and finding an equilibrium in which the uninsured still can afford to pay and the insured still feel like they’re getting a bargain.

Better than chickens: let’s use the frequent shopper card at my grocery store. If I join the free program, I get lower rates; if I don’t (because I don’t think I’ll be using the services much, but in fact I do; cause heck, I really like milk), I end up paying the higher rates and subsidizing the people who have joined (if they are in fact getting a discount). The grocery store probably created this program for marketing purposes: to watch my spending habits. But here lies the problem: the supermarket isn’t creating real value for me (having the shopper card doesn’t change the way milk is produced or distributed, so there is no market efficiency here). Instead, the supermarket picks up the value of the system: they have personalized marketing data on my habits that I would normally want to protect, and they’ve gotten me to identify with their shopping brand (by having my carry around their card).

(and even if I’m not subsidizing the cost of milk for those who have joined the program because their price is the true price of the product, I am contributing to the store’s profits, so my point is still useful here.. since the price differential facilitates the store’s business model)

I objected because I have been hearing lots of pundits casually mentioning the importance of monopsony market power ideas in a variety of contexts as if it were totally obvious, even where it may be completely misguided.

I’m still not clear on what you believe causes differences in prices between public and private insurance. I’ll be interested in looking at some of your other posts.

See the posts under the monopsony tag: http://theincidentaleconomist.com/tag/monopsony/ .

I’d say the reason McDonald’s pays less for chicken is largely because of lower real costs. Chicken sold to McDonald’s doesn’t need the resources spent on distribution and marketing that are needed to get small quantities of fresh chicken to consumers. There is little or no packaging, or overhead, or spoilage, etc. etc. Contracting with producers probably also reduces transaction costs per unit and lowers risk for producers, thus lowering price again. These are all real savings and have nothing to do with lowering monopoly rents for producers.

I expect the wholesale market for chicken is a quite competitive market with few monopoly rents. The grocery market is also fairly competitive, with low margins and lots of options. So if McDonald’s pays less, it’s not market power, it’s real cost savings.

Can you cite any evidence for how important monopsony market power is in markets like this? I’d be sincerely interested.