Health Prices & Irrational Incentives

Published October 1, 2014

Prices in health care are a mess, and the discussion about why that is the case is often even more so. Today John Graham of the National Center for Policy Analysis sheds some light on the issue:

Kaiser Permanente’s Former Chairman Might Not Understand Why Healthcare Prices Are Different

Consumer Reports has published an article demanding that we get “mad about the outrageous cost of health care.”

Hey, I’m all for that. The article goes through the usual list of subjects, e.g. $37.50 for a single Tylenol, having two or three MRI scans when one will do, etc. The article also asserts that “health care works nothing like other market transactions. As a consumer, you are a bystander to the real action…” I could not agree more. However, I was a taken aback by a statement from George Halvorson, the former Chairman of Kaiser Permanente:

“There is no such thing as a legitimate price for anything in health care,” says George Halvorson, former chairman of Kaiser Permanente, the giant health maintenance organization based in California. “Prices are made up depending on who the payer is.”

It is the last sentence that is so wrong that I thought it deserved a blog post, especially as it came from one of the most accomplished healthcare executives in the United States. Prices made up depending on “who the payer is” is not unique to health care. It is a characteristic of almost all markets.

John is right, of course. The problem with prices in health care (well, one of many problems) isn’t that different payers have different prices, it’s that those different prices aren’t set in a free market but instead result from the health care system responding to the bizarre incentives created by a highly-bureacratic third-party payment system. Create an irrational system, and actors in it will rationally respond by acting irrationally.

John’s whole piece is worth the read, click here for the full thing.

Consumer Reports has published an article demanding that we get “mad about the outrageous cost of health care.”

Hey, I’m all for that. The article goes through the usual list of subjects, e.g. $37.50 for a single Tylenol, having two or three MRI scans when one will do, etc. The article also asserts that “health care works nothing like other market transactions. As a consumer, you are a bystander to the real action…” I could not agree more. However, I was a taken aback by a statement from George Halvorson, the former Chairman of Kaiser Permanente:

“There is no such thing as a legitimate price for anything in health care,” says George Halvorson, former chairman of Kaiser Permanente, the giant health maintenance organization based in California. “Prices are made up depending on who the payer is.”

It is the last sentence that is so wrong that I thought it deserved a blog post, especially as it came from one of the most accomplished healthcare executives in the United States. Prices made up depending on “who the payer is” is not unique to health care. It is a characteristic of almost all markets.

– See more at: http://healthblog.ncpa.org/kaiser-permanentes-former-chairman-might-not-understand-why-healthcare-prices-are-different/?utm_source=newsletter&utm_medium=email&utm_campaign=HA#more-39145

Consumer Reports has published an article demanding that we get “mad about the outrageous cost of health care.”

Hey, I’m all for that. The article goes through the usual list of subjects, e.g. $37.50 for a single Tylenol, having two or three MRI scans when one will do, etc. The article also asserts that “health care works nothing like other market transactions. As a consumer, you are a bystander to the real action…” I could not agree more. However, I was a taken aback by a statement from George Halvorson, the former Chairman of Kaiser Permanente:

“There is no such thing as a legitimate price for anything in health care,” says George Halvorson, former chairman of Kaiser Permanente, the giant health maintenance organization based in California. “Prices are made up depending on who the payer is.”

It is the last sentence that is so wrong that I thought it deserved a blog post, especially as it came from one of the most accomplished healthcare executives in the United States. Prices made up depending on “who the payer is” is not unique to health care. It is a characteristic of almost all markets.

– See more at: http://healthblog.ncpa.org/kaiser-permanentes-former-chairman-might-not-understand-why-healthcare-prices-are-different/?utm_source=newsletter&utm_medium=email&utm_campaign=HA#more-39145