Thursday, December 31, 2009

Pricing Transparency in Health Care

Matt Yglesias, normally super intelligent blogger, has made a breathtakingly stupid argument against the potential efficacy of pricing transparency in health care:

"I went to the Maine version of this idea and decided to pretend that I was living at my dad’s summer house in North Brooklin, ME and was considering my hospital options. It turns out that the closest place to get a knee MRI costs $1,550 and is a 40 minute drive to Ellsworth. There are two slightly cheaper options in Bangor—$1,159 or $1,160—but that’s more like a 75-80 minute drive. So the competition in this market is not very fierce. Bangor is the second-largest city in the state; it’s not convenient to get there from Brooklin, and even there you only have two options. Possibly not the best test case for these ideas."

An additional hour of driving would save the hypothetical patient $350. How many jobs pay you $350 per hour? Unless you work for Goldman Sachs, work for KPMG fudging Goldman Sachs books, or are a lawyer helping Goldman Sachs fudge their financial statements, very few. The problem is twofold: 1) Most people lack the information to comparison shop (health care reform should remedy this), and 2) people largely lack the incentive to use that information to economize (health care reform will not remedy this, rather it will exacerbate this trend). Presently people do not have the incentive to economize as they are not directly paying for the procedure. Rather, the insurer is paying for the procedure and then passing on the additional cost in the form of higher premiums. If people were exposed to the additional cost then they would have an incentive to economize it would drive prices down and also premiums.

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