Thursday, October 22, 2009

Prices vs. costs in the House health care bill

5 comments:

Evan said...

The assumption here is that the market is priced rationally, but do we have any evidence this is the case? The doctor-insurance company relationship is not exactly a free market.

Lachlan said...

No it's absolutely not a free market. But that doesn't detract from the irrefutable logic of refraining from arbitrarily imposing price controls, a la Medicare.

Evan said...

But being a "price control" assumes that the price being offered is a below-market price. If New York had rent-controlled apartments above the equilibrium price of an apartment, the regulation would be there but there would be no impact on prices.

Simply saying that prices are stated by a regulator or outside actor doesn't prove that a price control is a bad thing. Maybe a truly free market would actually undercut Medicare's rates.

Lachlan said...

If the market price were below the level set by the regulator, it would defeat the purpose of having price controls in the first place.

Evan said...

But we don't know what the market price is, which is my point. So saying that Medicare puts the squeeze on doctors isn't necessarily correct. Maybe doctors provide care inefficiently because insurance companies implicitly incentivize that sort of behavior. And thus when they're paid appropriately they feel like they're getting cheated.

I'm not saying that this is the case but there's no prima facie reason to believe that Medicare charges "incorrectly" (and in a stingy manner) relative to insurers.