Thursday, March 09, 2006

Trust the Customer!

Vernon Smith explains the simple economic reasons for the "problems of rising health care costs":
"Here is a bare-bones way to think about this situation: A is the customer, B is the service provider. B informs A what A should buy from B, and a third entity, C, pays for it from a common pool of funds. Stated this way, the problem has no known economic solution because there is no equilibrium. There is no automatic balance between willingness to pay by the consumer and willingness to accept by the producer that constrains and limits the choices of each.

In the U.S., you go to see your physician, who says you need to buy X from her. You pay a part of the price, and, if you are employed, your health-insurance company reimburses the physician for the remainder. Next year all rates in the insured pool have to be increased to pay for the rising cost. In most foreign countries you wait in line for the provision of the service (surgery, an MRI scanner, etc., if they are even available), and after the service is delivered, the government reimburses the provider. Next year the government increases taxes on the pool of taxpayers."

No comments: