Girl Economist Explains Health Care Costs To Dear Old Dad

Maxine Udall, girl economist - (I understand this is actually a pseudonym for a university professor) — does an amazing job in her blog post here of breaking the health care cost conundrum down into terms an elderly businessman can understand.

Here's a taste, but it's really worth reading the whole thing. I've often asked researchers to explain complex subjects as if I were an eighth-grader. From now on, I'm going to ask economists to explain health care as if I were an old-style businessman...

How, I asked myself, do I explain health and health care to him? The information asymmetries; the third-party (insurance) payment that insulates purchasers from prices and prices from accurately reflecting resource costs; the agency problems; the pharmaceutical industry that capitalizes on taxpayer financed research and retains the apparently unfailing profits for itself; the other large, wealthy interest groups that work daily to undermine any effort to rein in health care, I thought, do I make this sector understandable to him?

"Dad," I said, "imagine that you're in a business where the more you sell, the more money you make. Only imagine that you're in a business where the customer believes that you know way more about what she needs than she does. In fact, you do know more than she does. She comes to you and asks your opinion about what you should sell her and what she should buy. And she trusts you to recommend only what she needs, that you will not be influenced by any conflicting incentives you might have to make more money or publish more papers or bring in more research grants.

"Gee, Maxine, that's not much different from my own business. What's your point?" said dad.

"OK. Let's talk about the differences between your business and health care," I said. "Your customers are usually not feeling fear or desperation about their symptoms or their need to make a purchase. In addition, your customers can comparison shop on quality and price all over town and the internet. If you were a physician or hospital selling medical treatment, your patient won't be able to comparison shop because it's nearly impossible to find out what different providers charge for the same procedure. There's another difference, too. If she's insured, she'll pay out of pocket only a fraction of whatever you charge her. The combination of ignorance about price, quality, and whether or not something is even marginally beneficial to her combined with desperation and someone else picking up most of the tab is a potent demand enhancement mechanism. In the absence of a fee schedule or strong market or moral constraints, you could pretty much charge her whatever you felt like charging. The reasons you wouldn't do that are that there are still some weak market forces constraining you and you are trustworthy and moral and insurers won't pay you any price you like."

This program aired on December 16, 2010. The audio for this program is not available.

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Carey Goldberg Editor, CommonHealth
Carey Goldberg is the editor of WBUR's CommonHealth section.



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