[joseph.aman]

I have a simple question about free market economics. How is it reasonable to allow the free market to determine the price of a service that is absolutely necessary? If a person is doubled-over in pain or bleeding profusely, is he not then in a situation where he is incapable of refusing the service that is being ‘marketed’ to him and thus applying a downward pressure to the price of that service and the goods that support it? And then, absent that pressure, don’t prices in that sector of the economy just naturally spiral upward? You might say that competition would hold the price in check with offers of, “I’ll relieve your pain for less”. But wouldn’t even the figure represented by ‘less’ naturally spiral up by the fact that this unique demand ‘in extremis’ is unlike any other normal ‘demand’ of the sort that, with supply, normally controls the price of goods and services in a free market? The free market is a genius at determining prices the way a cat is a genius at keeping warm. I agree with your take on free market economics in every way, but I cannot see a way that simple market forces can ever be relied upon to appropriately determine the cost of ‘healthcare’. It seems like a unique case to me, a unique ‘sector’.

[jmherbener]

In a market economy resources are allocated across different lines of production according to their profitability. As resources move toward more profitable lines, production increases and the greater supply lowers their prices. As resources move away from less profitable lines, production declines and the smaller supply raises their prices. The array of prices of all goods in market economy reflects this efficient allocation of resources. The price of each good reflects the least valuable use of a unit of it given its efficient production and consequent supply.

For example, a person suffering a migraine headache will not have to pay all the money he owns to have it relieved. The price of relief will reflect the drug’s (or whatever service is rendered for its relief) marginal utility, i.e., the least-valuable use of the drug to all migraine sufferers. In the same way, a man dying of thirst does not have to pay all the money he owns to buy a bottle of water at Wal-Mart. He pays the same price as everyone else, a price which results from the efficient production of bottled water. The consequent enormous supply means that a bottle of water has a reasonable price.

The genius of the market economy is not that it keeps prices low to benefit consumers or keeps them high to benefit producers, but that it allocates the efficient amount of resources for society at large into each line of production, including “necessary” and well as “unnecessary” lines.

[joseph.aman]

I see what you mean in principle, but aspirin and bottled water? Their price in pennies would not, it seems to me, be good examples of the monstrously expensive ‘healthcare apparatus’ that has taken on an inflationary life of its own in the last 30 years. The same market principles may apply to a degree but there must be additional forces at work to drive the price of a sector of goods and services through the roof.

How much is a ladder worth to a guy who has fallen into a pit and can’t climb out? If you were to equate getting sick with falling into such a pit and suppose that all the ladders in the society were controlled by ‘highly trained professionals’, then wouldn’t the price of a ladder be subject to forces of inflation beyond what would be the case if they were only used for house-painting and gutter-cleaning? Isn’t it ‘natural’ that in a free market the supplier of ladders would take advantage of his customer’s predicament and charge him more… and more… and more? Isn’t this what is happening in fact in our society as the free market is allowed to be ‘in charge’ of delivering healthcare to people? And isn’t that why there needs to be a way to get ladders to people that puts the human-natural tendency to ‘gouge’ one’s fellow man out of play?

[marcosportillo]

Wouldn’t competing hospitals and physicians still put downward pressure on prices just like any other good or service?

Your example can be said of food. Everybody needs food. Essentially a farmer could withhold his supply and jack up the prices since the consumers absolutely need food to survive. But all that does is drive those consumers to other food producers who charge less just as a patient/consumer would be driven to another physician or hospital.

The past 30 years have seen inflationary prices in the medical industry but not because of the reasoning you’re pointing out. Could it not be traced to the distortions caused by third party intrusions (insurance/government regulations) and/or monetary inflation?

What was free market medical care like before government got so involved in the industry?

[jmherbener]

Aman, you started by asking how the market can provide necessities. Surely it is relevant to the question that when the market is allowed to work it does, in fact, provide things even more necessary to life than health care: food, water, shelter, and so on in significant amounts at reasonable prices.

It doesn’t matter at all that some of the producers are highly trained professionals. This is true in the production of some aspect of almost every good in the division of labor. If the wage is high for highly trained professionals, then it gives people monetary incentive to enter these fields, which draws more people into them, which moderates their wage. In the market, the efficient number of people are drawn into every occupation.

The (subjective) value a man in the hole places on the ladder is very high, but the price of the ladder in a market economy is low. For every good, some people will place high subjective value on it, others a moderate amount, and others even less. But the price is the same for everyone. It must be low enough to clear to the market given past production based on what entrepreneurs anticipated the profit of production would be.

If people think they will be in a position to be ripped of because of unfortunate circumstances, then they can contract with suppliers before they get into trouble. They buy a rope ladder and carry it with them.

Entrepreneurs will even accommodate people in their attempts to avoid having to make trades under duress. Insurance companies permit people to pool their risk..

You say, “Isn’t this what is happening in fact in our society as the free market allowed to be in charge of delivering healthcare to people?” In our society, there is massive and increasing government intervention. Rising prices in health care come from the government increasing demand through the spiraling federal expenditures and the special privileges given to third party payments and restricting supply through licensing and other restrictions.

There are lots of resources. For example:

http://www.independent.org/publications/books/book_summary.asp?bookID=33

[joseph.aman]

>Aman, you started by asking how the market can provide necessities.
Not just ‘necessities’ but ‘absolute necessities’ of the sort that are unique to medical services and the goods that support them.

Indeed, food, water, housing, clothing are necessities that can gently find their reasonable prices based on normal market forces. They are for the most part in ‘enormous supply’ from a vast array of suppliers. Of these ‘necessities’ we can take our pick in a developed society. We are awash in the ‘necessity’ of food to the point of obesity. We dine at the ‘Heart Attack Cafe’ every day. But the necessity that I’m talking about is of a qulitatively different sort. It’s what happens when the ‘consumer’ of all this food does indeed have the inevitable heart attack. At that moment, a different sort of ‘necessity’ comes into play that requires a different economic reckoning than the ‘normal’ one that determined price of his burger, from grassland to fuel to the wages of the person that served it to him. At that moment this poor consumer enters an economic twilight zone where aspirin sells for $1 a tablet, band-aids cost $3 and a room rents for $1500 per night. He and his family are going to become acquainted with a whole new economics in the days and weeks to come. And I would say that the price of the goods and services that he is about to ‘consume’ are determined, driven, at least in part, by the absolute necessity of his ‘demand’. A completely unique demand.

In this rather typical scenario, this consumer has no particular choice in physician or hospital or set of services to be received, at least insofar as it concerns his bill. When was the last time anyone saw an advertisement for medical services that touted their ‘low price’. Can you even imagine it?… “Come to Northern General, the cheapest hospital in town”. No. In fact, it’s quite a violation of the etiquette of medical care to even discuss its cost. After all, isn’t health ‘priceless’? Indeed it is. And ‘priceless’, it seems to me, is a very interesting economic idea.

[rt]

In a free market the price of goods and services are determined by supply and demand and tend to decrease due to competition. Why should the Health Care sector be different?
In the case of a heart attack, you’re talking about a unique demand but do not ignore the supply side. In a free market supply and demand tend to equal each other. Thus in the case of a heart attack you could still choose between different hospitals offering different services.
Let’s say the price to treat someone with a heart attack is indeed very high. In that case an entrepreneur might think that he could make a profit offering the service with a lower price. This is happening automatically all the time in the absence of government interventionism. In fact it works so well that we often do not recognize it!
Take mportillo14’s example with the farmer withholding food. Immediately another farmer comes along and drives the first one out of business before food becomes an ‘absolute necessity’.

You’re talking about the ‘Health Care’ sector. Isn’t it a coincidence that the sector with most government interventionism is one of the worst? Through licensing the government reduces the supply of physicians. Through third party payment the government artificially increases demand. Rising prices are the consequence. Half of the medical care costs in the US are payed by the government. If the government pays for your medical cost you aren’t interested in the price and hospitals can charge higher prices. Instead of eliminating the artificial demand, governments tend to cry for more money (more demand) driving the costs even higher.
The student loans crisis is very similar. Due to student loans, students have a higher purchasing power than without them. The universities react to this higher demand and raise their prices…

[rt]

Aman, you might be interested in this book:
http://www.amazon.com/Priceless-Healthcare-Independent-Studies-Political/dp/1598130838
I haven’t read it yet but it has got excellent amazon reviews!

[joseph.aman]

Spot on book. Thanks for the reference. I’ve not read it but just reading the few pages that are available at Amazon gives me the impression that this guy has the great good sense to suggest that cost should be a very strong, even a central consideration in decisions about healthcare… etiquette be damned. After all, resources are limited. Since when are they not.

[jmherbener]

Aman, a heart attack is not a “rather typical scenario” in health care. Situations in which a person faces an unexpected and life-threatening event which incapacitates his choice are a small fraction of health care events. In most situations of receiving health care, a person can choose among the different providers. My sister suffered breast cancer, but she choose her doctor and hospital from among many alternatives. My other sister had a thyroid operation, but she choose her doctor and hospital. When I had a colonoscopy a few months ago, I picked my doctor and hospital. (In routine health care events, like visits to the doctor for blood work or annual physical exams, the chooses of doctors are if anything even more plentiful.) But in all these instances of receiving health care, which are much more common than unexpected and life-threatening instances where a person is found incapable of choosing and has made no prior arrangements for his treatment under such circumstances, my sisters and I were all billed the same outrageous fees as heart attack sufferers are for things like hospital rooms, anesthetics, and so on.

The reason for the outrageous prices is not some unique circumstances of the service provided. If it were, then prices without those circumstances would not be outrageously high. But, prices are outrageously high across the board in health care. Instead, the cause of outrageously high prices across the board is government intervention in health care which has mandated third-party payments while restricting production. Medicare, medicaid, “health insurance” and so on drive up demand. Then the government limits supply by licensing and other restrictions on production. It is the limitation of our choices by government mandate that generates the ill-effects across the board, not the, thankfully, rather rare occasions you postulate. (Even many heart attack victims drive themselves or have a loved one drive them to a hospital for treatment or have made prior arrangements for treatment under such circumstances.) As government intervention becomes more extensive, prices are pushed ever higher year by year. The economic twilight zone you describe does exist but is caused by government intervention, not the market.

[joseph.aman]

Well, we agree completely that outrageous fees can be expected from healthcare providers, regardless of the extremity of a person’s need or the array of choices that he has in the healthcare ‘marketplace’. So you’re certainly right… there is nothing special about my example. As you say… “prices are outrageously high across the board in health care.” Whether it’s for a sudden, severe heart-attack, a necessary colonoscopy or an entirely elective knee-replacement, the consumer of healthcare (or his designated ‘third-party’) can expect to get screwed. It’s unique to the sector.

And I also agree with what you say about insurance… “Medicare, medicaid, ‘health insurance’ and so on drive up demand.” The fact that most people are insulated from the price that they are paying both drives up demand (by which I assume you mean that it makes people more likely to go to the doctor) AND I would say, allows the medical provider to steadily increase prices without anyone noticing. Better, it seems to me, that all services be simply paid ‘out of pocket’ like nearly every other good or service that we buy. Fat chance of that. People would be forced to make very hard choices and it would not be a perfect world, but at least it would be imperfect in a real way. This idea would seem to go against my original premise that prices will naturally rise in this sector if free market conditions were present. But this market would not be entirely free because what would need to be missing from this ‘out of pocket’ scenario would be insurance. Insurance is the most distorting influence on prices and for this idea to work, the government would have to make it a crime to cover inevitable medical costs in a ‘risk-pool’. Unlike a house-fire, illness is not a ‘risk’ but a marginal certainty. Another fat chance.

Certainly there are many factors at work to make healthcare prices consistently and increasingly ‘outrageous’. And the government certainly adds its poison to the mix. But it seems to me that the most important and basic force bearing on these prices is not an economic one at all. In nearly all cases except childbirth (no picnic), at the core of the ‘demand’ for these services is pain, suffering and fear. This is a very unique transaction in that way. On the one hand you have a ‘priceless’ commodity (health and life) and on the other an ‘ultimate’ demand (‘Free me of my pain’. ‘Save me from death’). Such ideas and factors are not part of the normal economic calculus. But a true understanding of healthcare inflation needs to take these forces into account, it seems to me.

In any case, it appears that some handle needs to be put on the issue soon, because the impression I’m getting from UTubeU is that healthcare costs are doing their serious share to bankrupt the greater Western world. So where’s the ‘outrage’?… I suppose it’s covered by Medicare.

[rt]

Aman, check out the Health Care Reading List on Mises.org:
http://mises.org/daily/3737
I recommend you to read all the articles (there are over 20) and tell us afterwards if they could answer all of your questions.
You’re right about the fact that out-of-pocket payment would result in lower prices instead of insurance coverage. Some of the articles deal with the fact that government policy in WW2 led to third party payment… Good luck

[joseph.aman]

The page is packed with relevant ideas. Thanks. I’ll be doing some computerless travel in the next days, so I printed some of these articles to read. I especially liked what Hoppe, Block and Berdine had to say on the subject of insurance. When misapplied to healthcare, it seems that insurance creates a vicious economic circle. First it drives up prices for services to the point where even fairly common medical procedures can spell economic ‘catastrophe’ for a family. Then, as this happens, of course people naturally feel that they need to protect themselves from catastrophe by buying insurance… and so on… until the government feels the need, as it now does (and aren’t we late to this party, every other advanced economy having already done it), to step in and protect everyone equally. It’s a complete mess.

Government forms of insurance might be the worst and most extensive case of this, but isn’t private insurance just as much to blame here? Shouldn’t ‘health insurance’ itself be outlawed as encouraging the abusive squandering of resources? Rather than mandate insurance, outlaw it! That would be a welcome and appropriate role of government, it seems to me. Or would a free market economist insist that the business of insurance should be allowed to freely operate in the the health sector as it does now?

[rt]

Well, I think that in a pure free market, most medical costs would be paid for out-of-pocket. A person would pay the physician and the pharmacist just like the baker. This would keep costs down and reasonable.
To cure a disease or to cure a person who had an accident is of course a lot more expensive and might not be paid for out-of-pocket. Hence, insurance coverage is needed. But notice that you might live a healthy life and the insurance company needs to step in. Insurance payments will be rather rare. Demand and thus prices stay low.
A free market economist would undeniably support a free market in the Health Care Sector. He knows that it works pretty well throughout the economy, why not in Health Care?

[joseph.aman]

It’s certainly understandable to want to keep insurance for the more catastrophic (and therefore expensive) health issues that might arise. But it seems to me that insurance of any kind is poison when applied to healthcare and that there is no place for it at all in a free market economy. It will drive up costs wherever it’s allowed to operate.

Healthcare is full of difficult choices, often with life and death importance. Insurance simply maintains the grand illusion that those choices are not necessary. In a free-market economy, each person and family should have the freedom to finance their own healthcare with services available at a reasonable cost or on reasonable terms if ‘out of pocket’ payment is not possible. Simple as that.

Any and all insurance applied to healthcare is already socialism, it seems to me, even if it is provided by a private, for-profit enterprise. State-sponsored insurance like ‘Obamacare’ simply takes this ‘free market socialism’ of private insurance to its logical conclusion…. genuine socialism. And this may probably be even better than the half-baked ‘private’ version that we have now. The rest of the ‘socialized’ developed world can’t be completely wrong.

It’s simply not possible in the matter of healthcare, it seems to me, to have our insurance and a free market, too.

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