Industries afflicted with Baumol's Disease have slower productivity growth.

The Price System: Health Care

Mar 5, 2013 • Behavioral Economics, Demand, Supply, and Markets, Health Care, Households, Regulation, Thinking Economically • 165 Views    No Comments

The price system is rather amazing.

Please imagine for a moment that you heard a gallon of gasoline was $1.50. First you would think, “cheap!” Then you might rush to fill your tank. Or, told that a diamond ring was $50, you might not buy it.

Price fluctuations are called a system by economists because they move predictably in markets. Prices can be incentives and quality barometers and used to measure productivity and profitability. Just one number, a price can say so much. But not always.

And that takes us to hips.

What if you were told that a hip replacement could cost $11,000, $125,000, or somewhere in between? Sort of like learning that a wagon could be purchased for 1000 Continentals, you would not really know that those prices mean.

Recently, several college students called 102 hospitals to see how much a hip replacement would cost for their fictitious grandma without insurance. Not getting many price requests, most hospitals were not sure how to respond. When the students finally got the information, the disparity was massive. Not only did price range from $11,000 to $125, 000 but also there seemed to be no normal tie to demand, supply or quality.

In another study, researchers found appendectomies could cost anywhere from $1529 to $182,955. As for the emergency room, a study revealed that a visit for a headache could cost anywhere up to $17,797 but as little as $17. A sprained ankle? $4 to $24,110.

You know where this is going. Lacking the normal signals of the price system, medical care creates alternative incentives. And therein lies our problems.

Emergency Room Charges

Sources and Resources: Interesting Washington Post articles here, here and here discussed each of the three studies. Gated, here, here for hips and appendectomies and not gated here for emergency room visits, are the formal articles with all of the details. Connecting the US health care system to moral hazard, this econlib article explains the incentives that artificially low prices create.

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