Theory of high healthcare costs and why Obamacare fails

Discussion in 'Economics' started by MarkJC, Jan 18, 2011.

  1. MarkJC


    I'd like to present some economic theories for debate in this post and others that I have thought about over the years. I'm no economist, but enjoy studying the subject, and I would like to discuss/debate these ideas with others who are familiar with different schools of economic thought.

    First off, I want to present my theory for a mechanism for price increases that outpace inflation - in other words, the reason why healthcare and subsequently health insurance costs are so high, and why Obamacare will only exacerbate the problem:

    My theory/argument is that the chief determinant of the price of a good or service in a relatively free market is the weighting consumers place on the importance of price. When situations occur where consumers are shielded from the true price of a good, price no longer becomes as big of a concern to them when they purchase the product - other factors take precedent, such as quality, uniqueness of the item, etc. What this means is that companies and their competitors then have free reign to raise prices across the board without harming their sales significantly, because consumers no longer care "as much" about price.

    With this in mind, consider what has happened in the healthcare industry because of insurance. Unlike in most any other business, where the first thing you would ask upon walking through the door is "What is the price of X?", and make your decisions based upon the response, in healthcare it has become customary to simply flash the insurance card and pay a flat copay fee. Because insurance pools are being used to pay for almost every single healthcare purchase no matter how insignificant, the price of a healthcare procedure has become an almost meaningless concern to consumers of healthcare industry services because they are shielded from the true cost of medical expenses because of pooling.

    Like in the example above, this reduces what would normally be a downward price pressure on healthcare services. Consumers then, for instance, no longer care as much about the price of a surgery when their insurance is covering most or all of it, which means that the providers of healthcare services have less incentive to minimize price. The result is what we have seen - healthcare prices rising far in excess of inflation, because consumers are no longer as concerned with the price of the healthcare goods and services they are purchasing. And this is why I predict that Obamacare, which has effectively added some 40 million new patients to health insurers, will likely only make this problem worse.

    The solution? A partial one is that if insurance was limited to only lifetime expense procedures, and people paid out of pocket for all other healthcare expenses, they would be much more inclined to forego unnecessary procedures or shop around for better prices through other physicians/companies.