Controlling medical costs, kind of

Posted by Marc Hodak on April 19, 2009 under Unintended consequences | Be the First to Comment

A WSJ story begins with two facts that appear in tension:

Hospitals and pharmaceutical companies have been pushing through hefty price increases aimed at bolstering earnings, even as government and private insurers are struggling to rein in healthcare costs.

And includes a fleeting nugget about how they are apparently related:

Credit Suisse’s Catherine Arnold said that drug companies have increased prices so aggressively in recent months to wring sales out of products before any healthcare cost-cutting efforts eat into profits.

“When the government is talking about more aggressive discounts, your start price is going to determine your end price,” she said.

The article is otherwise full of examples of price increases, the problems they cause, and what people think about it, including the obligatory denunciation by a “consumer advocate.”  The above quote is one of the few clues about why they are happening.

Maybe it’s just me, but I believe that economically relevant facts help a story.  I think it’s informative to look at the underlying causes and not just the effects of things like price increases.

Instead of talking about “hospitals” or “drug companies” as unitary agents, it would be interesting to see how these institutions comprise of thousands of economic agents doing what comes naturally–gaming the system they are familiar with to their personal profit.  I think its important to show how most of the counterproductive gaming is driven by increasingly complicated rules established by various third parties, including government agencies.  I think it’s relevant that as health care costs get more constrained by public policy, they diverge from costs that would be dictated by supply and demand, and that the market will react accordingly.  A story could illustrate this in the form of threatened negotiations from an agent positioning itself to be a monopoly buyer, and how dispersed sellers will react with preemptive price increases or, to the extent they can’t implement them themselves, price increases somewhere else along the chain of treatment delivery.

Of course, all we see are the price increase, and that’s all the average journalist sees, too.