Responding to a Nobel Laureate’s article in the WSJ

Posted by Jason | Posted in Economics, Government, Health Care | Posted on 17-10-2009

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After reading the following editorial in the Wall Street Journal this morning, I had to send in a letter to the editor. While I doubt it will get published, it will here. That’s another lovely thing about the free market! Here’s the editorial followed by my response.

By VERNON L. SMITH

There is widespread agreement with the principle that our health-care system needs to be reformed. But our representatives and our neighbors have much trouble in reaching agreement on the particulars. There have been many legislative bills offered and hundreds of amendments with no clear path to a resolution.

Health-care systems everywhere encounter cost overruns and rationing devices, like queues, in their diverse attempts to deliver products for which demand has long grown faster than other economic sectors. Why is it so difficult to find the private and public means, the combination of markets and government assistance, that enables a preferred outcome to emerge?

This question has a simple answer that plagues health care everywhere.

The health-care provider, A, is in the position of recommending to the patient, B, what B should buy from A. A third party—the insurance company or the government—is paying A for it.

This structure defines an incentive nightmare. You do not have to be an economist to realize that, when phrased in this way, nobody knows how to solve this problem. Hence the many experiments, all of which have been deemed less than satisfactory.

I don’t know whether this problem has a solution. If it does, I think it requires us to find mechanisms whereby third-party payment is made to the patient, B, who in turn pays A, supplemented with any co-payment from B for services. Hence, from the moment B seeks services from A both know who is going to be paying A for what is delivered. A and B each has need for what the other brings to the table, and this structure carries the potential for nurturing the relationship between A and B. B is empowered to become better informed about the services recommended by various A’s that he might choose among, and the A’s might find it particularly important to build good reputations with B’s.

Mr. Smith, the 2002 Nobel Laureate in economics, is a professor at Chapman University.

via Vernon L. Smith: The ABC Dilemma of Health Reform – WSJ.com.

Subject:  In response to “The ABC Dilemma of Health Reform”

Leave it to the intellectual to turn the simple into the complex. Mr. Smith, a Nobel Laureate, says “I don’t know whether this problem has a solution.” Is he serious? Any economist knows the disaster that ensues when price signals are not available to the purchaser.

The entire system can be fixed by addressing third party payer in respects to the purchase of medical services and the purchases of the insurance. Instead of further incentivizing the distortion of the market via the tax code’s promotion of employer purchasing of insurance, we should incentivize the individual. When the individual purchases his own insurance, he’ll make better puchasing decisions, such as buying a catastrophic plan instead of a plan that covers everything down to teeth cleaning. The individual will also make better purchasing decisions when the doctor tries billing him $10 for a band-aid.

When the accumulative effect of millions of these first party payer transaction kick in, you will see prices come back in line with the rest of the market. You will see entrepreneurs battling it out for the consumers dollar.

Sincerely,

Jason Vanzin

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