--> Getting It Right: Why competition is good - even in healthcare

Monday, March 20, 2006

Why competition is good - even in healthcare

Came across this today on one of my favourite blogs:

Brian Ferguson at A Canadian Econoview (bolding is my emphasis):

The Wall Street Journal ran a little editorial piece the other day which you might have thought had something to say to the public-private health care debate in Canada. And it does, but not in the way you might have thought.

No link, since the WSJ keeps these things well hidden behind a subscription wall and I read it in a paper copy of the Journal, but it ran on Friday, 10 March, and was headed LASIK Lessons:

The gist of the piece is that the reason health care costs so much in the US is that health insurance, as presently structured, makes everybody but the insurer insensitive to the price of care (and if the insurers try to do something about the cost of care they're accused of putting profit ahead of people's health, so they settle for passing the cost on in the form of higher premiums). The WSJ points out that LASIK laser eye surgery is generally not covered by insurance, meaning that most patients having it have to pay the whole shot out of pocket. The result is that the market is open and competitive, in the microeconomic textbook sense, and that competition has been driving the price of the procedure down - one of the few cases in which the price of a medical service has actually fallen.

It's not entirely unique. For example, a few years ago, Germany changed the way it covered prescription drugs under its national health insurance system, shifting from a system in which the patient paid a flat prescription fee regardless of the cost of te medicine to one in which the state set a maximum price that it would pay for individual categories of drugs, leaving the patient to pay any excess out of pocket.

Nina Pavcnik of Dartmouth College's Economics Department wrote a National Bureau of Economic Research Working Paper on the effect of the change (abstract here) and concluded that .......... producers significantly decrease prices after the change in insurance. Price declines are most pronounced for brand name products. Moreover, branded products that face more generic competitors reduce prices more.

There's also evidence on the same point from the Netherlands (this paper really is the one I mean, even though the abstract doesn't look it).

The Dutch have used a reference pricing system to determine how much the public system will pay for drugs. Basically the reference price set for a class of close substitute drugs is the maximum price the public system will pay for any of the drugs in that category - if a patient wants a more expensive one, the or she has to pay the difference out of pocket. A few years ago the Dutch cut the reference price on a whole range of drugs, so that, if the price of the prescription remained unchanged, the amount the patient had to pay out of pocket would increase. In fact, drug companies cut their prices, something they would only do if the market was very competitive.

So there's evidence from around the world that, when patients are faced with making a significant out of pocket payment for care they become very price sensitive, and, importantly, that suppliers respond to that price sensitivity by cutting prices. Sounds like textbook intro microeconomics because it is textbook intro microeconomics.

Now, one of the loudest claim made by opponents of increased market involvement in Canadian health care is that increased market involvement will drive the cost of health care up - just look at the US, right? So does this evidence give them a moment's pause? Of course not.

I won't name names, since I wouldn't want to embarass the University of Toronto by pointing out the type of logic employed by faculty in their medical school, but anti-market types have been faced with the LASIK evidence before, and their response has been that the fact that competition drives the price of care down is bad because it encourages people to have unnecessary care (by which, of course, they mean care that the individual patient thinks is worth sacrificing purchasing power to obtain but which the experts think he should just do without). So, markets are bad because they drive costs up except when they drive down costs in which case markets are bad because they drive costs down. Got that?

It's much clearer if you start from the premise that whatever markets do must be bad.

My goodness - if people keep writing this stuff, we won't have any sacred cows left in this country.


At 11:20 PM, Blogger Scott Rogers said...

You should see him in the class room. . . . .


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