Thursday, December 09, 2010

Showing that even smart guys can get it wrong sometimes, Daniel Mitchell is wrong in arguing that third party (employer) paid health care is the reason prices for medical care are rising so much faster than the CPI.

While prices for medical services (typically paid for by 'someone else') have risen at a faster rate than prices for cosmetic medical services (which typically are paid for by the patient themselves), this doesn't establish that such third party payers are THE reason medical care costs are rising at a much faster rate than the CPI.

First of all, it is inconsistent for (most) conservatives to make this argument as they traditionally argue that costs incurred by the company are passed on to and ultimately paid by the company's customers (as in the case of corporate taxes and other expenses that increase the cost of the company's products) and/or the employee (through reduced compensation). If this is the case (and I agree that it is) then the employee does pay, albeit in a different way, for all of their health care and thus there shouldn't be any difference in the rise in prices for the two categories of care.

So if that can't explain the difference, what can?

Well, how about the fact that cosmetic services are not considered (at least by most people) to be as critically needed as medical services incurred for dealing with sickness or injury. Cosmetic medicine is optional, a luxury, and as such, prices are thus constrained by the high elasticity of the demand curve. If prices rise too fast, people simply do without that particular good or service.

This isn't the case with the rest of the medical care bucket. People don't feel they can put off or do without care for sickness and injury, so the demand curve is much less responsive to price hikes... thus, the price hikes. If price hikes aren't going to lead to people demanding less of a service, just as we can count on the sun rising in the east, we can count on providers of that service raising their prices.

In other words, the rise in prices is largely due to the simple fact that when it comes to fixing a broken bone or treating pneumonia, the price just doesn't matter.