Organization: Penn State University
Date: Mon, 5 Oct 1992 15:21:33 EDT
From: <DGS4@psuvm.psu.edu>
Newsgroups: sci.econ
Subject: Re: Deficit - can it be corrected?
 <92276.131416DGS4@psuvm.psu.edu> <1992Oct05.141904.151197@watson.ibm.com>

In article <1992Oct05.141904.151197@watson.ibm.com>, platt@watson.ibm.com
(Daniel E. Platt) says:
>
>In article <92276.131416DGS4@psuvm.psu.edu>, <DGS4@psuvm.psu.edu> writes:
>|> In article <1992Oct02.141437.160192@watson.ibm.com>, platt@watson.ibm.com
>|> (Daniel E. Platt) says:
>|> >
>|> >If you go to a hospital, it becomes obvious why costs are so high.  There
>|> >is no incentive to keep costs down.  People can go get health care at any
>|> >institution regardless of the rates charged.  Most people never really
>|> >have to look at their bills; that's all handled for them by the hospital,
>|> >who bills the insurance companies directly.  Medical costs are hard to
>|> >control because there is effectively no market.
>|>
>|> It's quite a leap to say this implies there is no market.  The insurer has
>|> to pay the bill.  That bill has to be covered by the premiums.  Those
>|> premiums are charged to employers and employees who certainly have an
>|> incentive to keep those down.  The market is certainly there.  It just
>|> doesn't work in this case, just as it doesn't work for national defense
>|> (although for different reasons).
>
>It isn't a market in the sense that there's no market forces, no incentives
>to control costs, and the agents actually doing the shopping and making
>the contracts often don't know what the costs will be and have no incentive
>either way anyway.  You can call it a broken market rather than saying it's
>no market at all (after all, resources are exchanged).  While there's market
>forces involved in buying equipment (such as NMR), and there's forces involved
>in determining the costs of using this as a diagnostic tool (how much do you
>need to charge clients if you have such and such coming through the door in
>order to pay the debt and make a profit on top), the actual end-user of the
>product (the patient) doesn't see the effects of cost.  Otherwise, I don't
>see any real disagreement except for quibling over terms...

In fact, economic theory doesn't require that the actual end-user of the
product see the effects of cost, as long as he/she can structure a contract
with an agent to represent his/her interests, he/she can, under certain
assumptions reach a second best solution.

As far as quibbling over terms,
in my experience, if you say the problem is that "a market doesn't exist"
people respond, "Get government out of the way and let competition rule"
If you state "Markets are not working", then the typical response is that
government may have to impose additional structure to get markets to work.
I would argue that a lot of empirical work in health economics and a lot of
theoretical work in micro-economics indicates that "markets are not working"
and in fact, do not work well under the characteristics found in health
care, is the more correct statement.  I don't see that as a quibble.

Dennis G. Shea, Penn State
<<DISCLAIMER>>
Ain't nobody's bizness but my own. I'll be happy to accept all
the credit for anything I've written.  It's funny, however, how
employers only acknowledge the profitable ideas.
Newsgroups: sci.econ