The Market Can't Cure Medicare

Why competition won't lower prices

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    Prices are often influenced by things beyond pure competition. Look at oil. In this case the market is--what's the technical term for it?--rigged. OPEC bosses the supply, lest the market actually be allowed to work properly. In luxury goods, a nonrigged market, the price of leather has little to do with the price of a Gucci belt. You pay a premium for the brand and the privilege of branding yourself as one of those special people.

    Health insurance too defies conventional pricing inputs. It has experienced double-digit inflation for a decade. (Would you rather run a hospital or be the health insurer that collects premiums and pays the hospital?) The industry has enjoyed pricing power that ought to be pulling companies into the business. Instead, there's been consolidation, which is one of the reasons prices have gone up.

    In health care, the consumer is at a disadvantage. The issue is called substitutability. We're really good at picking out the most suitable of four available cereals or cars to meet our needs. We're not good at substitution when it comes to health care. How qualified are you to evaluate the thousands of doctors in the area where you live? It's also hard to shop for an orthopedic surgeon after you've just broken your leg.

    Under the Ryan Plan, price could play a completely unintended role: it could ration demand rather than expand coverage. "This Republican plan is not solving the problem," says Morton, an expert in competitive strategy. "It's solving the problem of the cost of government's health care. You'll have people who can't afford it. They'll just die." Economists call that demand shedding. That too is a market-based solution.

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