[andrew.bonk]

Even though this question is “economics” related, it was originally posted under the U.S. History since 1877 because, as you can see from reading it, the question was also very “Tom Woods” related as well. Anyway, I was redirected here to get the economics perspective.

After reading the article on the Tom Woods blog “Surgery Center Defies Insane Health Market, Keeps Prices Down”, I had a question about the incentives in the health care system.

I re-read the health care section of “Rollback”, and my question still remains. I understand the basic issues at play (boosting of demand by insurance and various restrictions of supply), but I can’t figure out why the insurance companies don’t do more to keep prices down. It is obviously in their best interest to do so. What is the best explanation for their inability to accomplish this task?

I assume the answer revolves around Medicare and Medicaid (which the Surgery Center from the article did not accept), but I would like to hear what everybody else thinks about the topic. Thanks for the consideration.

[jmherbener]

As a general rule, insurance companies do not control the costs incurred by producers whom they pay. Hurricane insurance companies do not control the costs of re-building when a hurricane strikes. If the clients buy insurance for replacing their structures, then the companies agree to pay the costs of replacement.

With health “insurance,” the companies agree to pay for medical procedures. They cannot then “control” the costs of providing the procedure. If the state is subsidizing the companies, then they have more money to spend to pay for the procedures and the price is bid up. If one company tries to keep it’s costs down by paying less or substituting a different less-costly procedure, then, other companies will move in to earn the higher profit. To get business, they will have to provide better terms. That means they spend more and healthcare prices rise.

This is one alleged justification for single-payer system. If there was just one “insurance” company, then the competitive process could be eliminated and healthcare prices held down. I’m not saying I agree with this assessment, only that some people argue this way.

On why the American healthcare system is so much more expensive than those of other countries, it seems to me that one has to entertain the possibility that the system is designed to be so. It has been, after all, constructed by doctors. What is cost for patients is income for doctors. So we have a system designed largely by doctors which makes doctors rich. When insurance companies try to reduce costs by offering limited policies, the state makes doing so illegal, as we’ve seen in the roll out of Obamacare. The state mandates that insurance companies cover all sorts of things because it means that more money will be spent on doctor’s services and other beneficiaries of the system.

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