There’s a worthwhile op-ed on how the absence of price discovery in healthcare limits the effectiveness of centralized healthcare reform from Bill Frezza at RealClearMarkets:
Healthcare prices are fake, inflexible, and inflated because they are set not by the repeated interactions of buyers and sellers but by opaque acts of collusion between government bureaucrats and special interests. Even if this system were run by a benevolent genius who happened to set prices exactly “right” – whatever that means – these prices would be obsolete the moment they were published.
This state of affairs has turned the healthcare industry into a staggering zombie. It took several decades for Medicare price setting to swamp the price signals required to keep the market in balance, but we have clearly passed the tipping point. Lacking these signals and the constant corrections they engender, 16% of our economy is flying blind.
That’s only part of the equation. In many localities the authorities have orchestrated a lack of competition by disallowing the construction of competing hospitals and clinics. Additionally, healthcare providers are reluctant to publish prices and, even were they to do so, published and itemized prices have little relationship with actual costs. Whether a hospital charges $5, $7, $9, $58, or $.12 for a Tylenol tablet has little to do with its cost to the hospital. Most of the charge is comprised of the hospital’s labor costs bundled into the individual items. If the price of an individual item is driven down, the bundled costs will merely be moved elsewhere, presumably to something for which it’s harder to comparison shop.
There is no excuse for the fact that healthcare providers resist publishing the prices charged for all procedures. Every procedure carries a CPT code which the provider has to provide to insurance companies and to Medicare and Medicaid when it seeks payment. These prices should be posted on the internet for all to see, just as Walmart, Lowe’s and Home Depot do for their products.
I see what you are saying here, but IMO, it is a bit clumsy. The price of a good is not determined by its cost. It is determined by the intersection of supply and demand, of which cost is but one component. Thus, in a competitive market you could have a tylenol tablet tha costs $0.02/tablet, but the market clearing price is $3.00.
That’s only true when there’s a functioning market. When those making the purchase decision have little idea of prices (as is the case in healthcare, for example), there are other mechanisms.
Over time cost does determine price based on dictionary definition 3. However, I understand what you mean.
Oddly, I’ve got quite a bit of experience with how real live companies set prices in real live environments. Although I’ve been a part of the process in dozens of companies, I haven’t known one that operated according to the principle you articulated. I’ve known lots that applied a mark-up to their costs, though.
So, for example, it’s a commonplace for restaurants to take the number of seats times the turns per meal and divide that into the total costs of operation to figure out how much they must realize per diner to stay in operation. That definitely determines prices by establishing a floor.
Yes, but why get hung up on costs then?
That is because nobody knows what marginal cost really is, or what the marginal revenue is. So they pick prices and see what happens. If the necessary go back and move the price around.
“because they are set not by the repeated interactions of buyers and sellers but by opaque acts of collusion between government bureaucrats and special interests”
This guy is an idiot if he believes this. Dont take him seriously.
Steve
You mean it is a well functioning market?