When we buy clothes, food and anything else, we want to know the price. If it is not sent by the seller, we ask the seller. Knowing the value helps us make better decisions.
Purchasing medical services is another matter. Despite the “dramatic changes” in health insurance over the past decade, consumers still make decisions in the health care market with limited information.
Economic theory and history show that when prices are scarce or distorted, they cannot do their important job of distributing scarce goods. That is, our limited resources are misused without knowledge of value.
People respond to price incentives. When the price of a good or service rises, consumers buy less. Higher prices give producers an incentive to move more resources to produce a good or service.
Subsidizing or controlling prices undermines this important work.
For many years
Although the share of workers’ compensation and deductibles has increased, consumers covered by employer-sponsored plans do not know the full cost of their health care. Also, people covered by Medicare and Medicaid do not see any part of the cost of their services.
The supply side of the market is also disrupted. Like the rest of us, insurance companies and health care providers respond to incentives. With more people with insurance, these dealers increase the service and charge higher rates. The Affordable Care Act years ago, and the recent expansion of Medicaid during the COVID-19 pandemic, brought more people into the market with subsidized health insurance, thereby increasing the potential for overuse.
Two simple policy changes would change incentives and allow prices to work.
Removing the insurance tax deduction will force insurance companies to sell directly to consumers, thus increasing competition. We would all be better off buying health insurance the same way we would buy life or car insurance.
Simply allowing insurance to be purchased in all states would also increase price competition and lower costs. Under current law, insurance companies have to set up separate companies with different laws in each state. Central competition has succeeded in raising consumer prices for a variety of products, but health insurance consumers are being denied these gains.
Only when we start letting prices do their job will we have control over the use of health care.
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