The Economics of Food vs. the Economics of Healthcare by Dan Mitchell

The health care system in the United States is expensive and inefficient, and both of those problems are caused by government.

More specifically, politicians have enacted laws (everything from the tax code’s exclusion of fringe benefits to programs such as Medicare and Medicaid) that have produced a system overwhelmingly based on third-party payer.

And with so many people using (what they perceive to be) other people’s money to buy healthcare, we shouldn’t be surprised to see perverse results.

In a genuine free market, buyers and sellers directly interact. Both sides of the transaction have an incentive to get the best-possible outcome, and this process promotes efficiency and low prices.

In America’s healthcare system, however, government policies have saddled us with intermediaries that weaken, distort, or even eliminate normal market forces.

Which explains high costs and inefficiency, which is how we began this column.

To understand why third-party payer plays such a pernicious role, let’s look at a column that Dr. Ryan Neuhofel wrote for the Foundation for Economic Education.

He imagines a world where we buy food at the grocery store the same way we currently buy healthcare.

You enter the grocery store parking lot at 4:15 pm, having taken off work early because this particular store closes at 5:00 pm. This FoodMart wasn’t your personal preference based on quality, service, amenities, or price. You choose it, like all of your previous food choices, because it was included in your new food management plan’s network. …You are first greeted by a few women sitting behind a glass-enclosed desk. By greeted, I mean they ask you for your photo ID and food plan card and hand you a clipboard with a stack of forms to complete. The lobby is crowded, but you manage to find a seat… You have completed these types of forms dozens of times previously but dutifully do so again. (You still prefer 2 percent milk, don’t like more than four vegetables, and your peanut allergy is unchanged.) Forms completed, you check back in with the receptionist. After 20 minutes of waiting, she assigns you a cart, and you start to shop with your list in hand. …As you scurry up and down the aisles, you see there are no prices listed on anything, nor labels telling you what is a Bronze-Select item. …During check-out, the cashier rings up the items and asks you for a $30 copay. You are given a six-page receipt with indecipherable codes and then asked to sign a few other forms because some of your items will be billed to you later. …Several months in the future you get a bill for $276 from FoodMart. Although vaguely suspicious that you’ve been taken advantage of somehow, you are happy that you got a big discount on your $18 box of Tasty Flakes cereal.

He also imagines a world where our restaurant visits are akin to the current healthcare system.

…you are saddened to learn that Lola’s Cocina is not part of your GCGS plan. You decide to go down the street to Burrito King, which prominently displays “Proud to accept GCGS Bronze-Select members” in its window. …Upon checkout, you present the waiter your GCGS card, and you are asked to pay a $10 copay. (The billing statement weeks later reveals that the “plan discount” did reduce the initial charge from $64 to $37 and that GCGS paid Burrito King another $27 a few months later, which was applied to your deductible.) You question how a simple burrito can cost $37… Burrito King, a small restaurant, employs four cashiers out front and seven people in their business office in addition to the usual staff to cook and serve food. Their head chef, Bob, spends much of his time completing forms to justify why the Deluxe burrito you ordered included black beans instead of the standard pinto.

Dr. Neuhofel paints a dystopian vision, but can anyone doubt this is what would happen if government intervened in the food market the same way it does in the health market?

I’ve previously engaged in the same exercise, asking people to imagine what would happen if the market for homeowners insurance and auto insurance worked the same way as it does in the health sector.

Needless to say, the result would be higher costs and inefficiency.

I’ll close by pointing out that free markets work in health care when they’re allowed. Consider how we see rising quality and falling prices in the market for cosmetic surgery. Why? Because people are paying with their own money.

P.S. I strongly recommend this video from Reason.