• The private price signal

    I have about two minutes to dash this off, so forgive me for brevity. Something in Aaron’s latest post struck me. He quotes Frum:

    [Medicare's pricing] method can work within the context of a private market. A price level exists “out there.”

    The idea that there is some default, legitimate price in the health care market is common and wrong. There’s no legitimacy there. There’s not even one price! The only sense in which economists lend any legitimacy to private prices is to the extent the market is competitive. The unstated point of Brill’s piece is that it isn’t. Not even close. This is well known. I would think Frum would have heard.

    That doesn’t make Medicare prices “right”. It just means we can’t invoke some market magic to divine the “right” price unless we first have a market that is reasonably competitive. The subtext of much of the health policy debate is whether it ever could be.

    UPDATES: For typos and clarity.


    Comments closed
    • I suppose that there are people out there who believe in the magical form of market prices that you are describing above, but if you fixate on that I think that you are engaging with something of a strawman, or at least a very weak form of the “market price” argument that is far from universally held.

      I’d argue that most people who invoke “market prices” are using the term as shorthand for a highly variable, dynamic, and noisy price *distribution* that emerges from highly distributed market processes rather than a singular (much less perfect) price that can be abstracted away from such processes and successfully translocated into a bureaucratic price system.

      You don’t have to believe that such a price distribution is perfect in any absolute sense to argue that prices that emerge from such processes will more be vastly more likely to efficiently coordinate supply and demand than a set of prices determined by a static and highly centralized bureaucratic formula (RBRVS), even in a highly imperfect market (e.g. a real market populated by real humans that exists outside of a computational simulation).

      Given that there hasn’t been a real market in history that satisfies all of the neoclassical requirements for efficiency, but real markets have emerged and functioned for all of recorded history, it’s worth asking just how flawed an actual market has to be before one can assert with confidence that a bureaucratic coordination mechanism will work better.

      Given that the market for everything from computer chips to cucumbers to condos is beset by massive information asymmetries, policy distortions, agency problems, irrationality, etc but all still functions the insistence that the marketplace for medical goods and services is uniquely compromised from this standpoint and market processes can’t serve the same functions that they do every other imperfect market else seems every bit as much an article of faith as the purported belief in magical prices that you describe above.

      • I have no debate with those that think that the extent to which a market is competitive is a matter of degree, not an absolute. At the same time, I fail to see how anyone who has read Brill’s piece or any of a myriad of other, similar works can believe that the inefficiency of the health care market is of the same degree as that for cucumbers.

        • -The point in mentioning something like , say, cucumbers is simply to restate the point that all real markets for real things in which goods and services are exchanged between real humans are imperfect to one degree or another. This hasn’t stopped markets from emerging, evolving, and functioning.

          Goods and services still flow from buyer to seller despite market imperfections. Where the imperfections ranging from lack of trust to information asymmetry are particularly acute, mechanisms such as agents, professional standards and licensing, escrow, commercial law, etc, etc, etc, have emerged to allow buyers and sellers to transact despite the existence of these imperfections.

          The question that you have to ask in general is when are the market mechanisms that determine prices for a particular good or service severely distorted that a bureaucratic substitute will necessarily be superior. It seems like that could be a difficult determination to make in many cases.

          -When it comes to health care, the mixture of goods and services is so vast that even if you could demonstrate that market prices for one good or service are so distorted that a bureaucratic substitute would work better in some dimension, it doesn’t automatically follow that this is true for every good or service that has anything to with health care at a given point in time, much less in the future.

          People who make the argument for bureaucratic pricing mechanisms would be on much stronger ground if they limited that argument to a limited subset of goods/service where the “markets prices are too distorted to function” necessarily applies. Even if you believe that applies to most of health care, it’s silly to argue that this condition holds for all of health care.

          • I agree with your conclusion. I think there are areas of health care that would benefit from a lot more market and a lot less price and form control. Remember what I just wrote. No, it’s not the first time. Surprised?

            • “I think there are areas of health care that would benefit from a lot more market and a lot less price and form control.”


      • “everything from computer chips to cucumbers to condos”

        And, everyone knows that medical care is essentially no different.

    • “The unstated point of Brill’s piece”. It would have been helpful if Brill had stated his point, although I’m not so sure he had one.

    • One thing that seems really obvious to me, though I’m no expert on economics, is that market mechanisms to set prices depend heavily on the value of the commodity being priced.

      What is the value of life or health? Potentially infinite, or effectively without limit within the scope of our economy at least. As long as there are enough wealthy individuals willing to pay exorbitant prices to keep themselves healthy and alive, it seems natural market mechanisms can’t help but converge on price points that are out of reach and in an obvious sense extremely unjust to lower income folks, who in any modern civilized conception of society ought to have the same rights to exist and survive.

      Is there any reason at all to doubt that this puts health care in an entirely different ethical category from say, luxury goods, and that using the same market based models to price them is in some fundamental way immoral? Why is this never brought into the discussion?

      I may not be viewing this correctly from an economic standpoint, but this is such a natural and obvious concept to me that I really get a visceral feeling of revulsion whenever anyone talks about using market mechanisms to price health care, as though some people by their nature deserve Gucci or Rolex health, while others deserve Timex or Casio health..

      Shouldn’t we be treating health care as a special case, as we do for example defense? Nobody ever talks about defending American’s security based on their ability as individuals to pay for it. Why don’t we feel such a strong obligation to provide health for everyone? The attack of deadly diseases deprives ordinary Americans of life, liberty, and the pursuit of happiness every bit as much as foreign invasion could.

      • Efficiency is one thing, fairness is another.

        It’s much easier to promote fairness by giving poor people the money they need to buy something than it is to promote efficiency (or broad distribution) by using bureaucratic mechanisms to force prices down to levels that everyone can afford.