Thursday, April 03, 2008

Is There Anything Special About Health Care?

Here is David Freddoso in The National Review on Wal-Mart’s success in providing cheap prescription drugs:

In January 2006, the federal government began implementing the controversial Medicare Part D program, which pays most or all of the cost of most senior citizens’ prescription drugs, regardless of income level. The program has basically been successful at what it set out to do, providing drugs through competing insurers at low premiums. Between 2005 and 2006, the taxpayers’ burden for drug payments shot up by 35 percent, from $55 billion to $74 billion. American consumers’ out-of-pocket prescription-drug spending dropped only $1.2 billion, to $47.6 billion.

In September of 2006, Wal-Mart rolled out its $4 generic prescription deal, which promised to provide a month’s supply of some 300 drugs (now 361) for less than the cost of a pint of beer. Several other chains — Target, Costco (which is now offering 100 drugs for $10), and Kroger’s, among others — lowered prices in order to compete. Wal-Mart announced last month that its program alone, enacted without any government compulsion, has saved consumers $1.03 billion in less than 18 months. If the other firms’ price reductions are included as well, the total savings could easily be twice as great.”

The market for Wal-Mart prescription medicines is functioning as most do. A producer is producing a thing as long as the cost of doing so is less than what consumers are willing to pay for it, and consumers are buying it as long as the price is less than their willingness to pay. Wal-Mart fully takes account of the cost to society of making the medicine available, and consumers fully take account of the cost to society of their decision to consume a drug. (The argument would be identical if Wal-Mart ran cash-based clinics, as it is contemplating.)

Contrast this to the way most health care is delivered in advanced countries. People consume health care and not only pass off much of the cost to others – to other policy-holders and insurance-company employees for those with private insurance, taxpayers for those in a government health-care program, here or elsewhere - but struggle to make others bear most of these costs. Patients want insurance companies, employers and their fellow taxpayers to do it, drug companies want patients and taxpayers to do it, employees want their “employers” (i.e., owners and other workers) to do it, etc. This is completely unlike how most markets, even for such vital goods as food and housing, function. No one expects third parties (the poor occasionally excepted) to pick up the tab for these items; rather, we are fully expected to feed and house ourselves. Yet for medical care this cost-shifting is taken for granted. Veterinary medicine and some human medicine (Lasix and cosmetic surgery, e.g.) function too in the cost-bearing rather than cost-shifting way.

Leave. aside the gains to be had from jettisoning the extraordinary amount of government control over the health industry, more innovation in particular. If employer-based and taxpayer-funded comprehensive health insurance (i.e., insurance not just for catastrophes but for routine medical expenses) were ended at midnight tonight, would this market, after a few months’ adjustment, function any less well than these others?

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