August 18, 2004

One of the reasons why economists like market solutions is because alternative solutions usually provide wrong information.  Ultimately, that incorrect knowledge leads to errors that undermine the best results for an economy. 

Of course, there are exceptions.  A monopoly prices goods and services much more highly than can be created by the resources used to provide those activities in an alternative use.  Indeed, students usually are surprised to discover that monopolies provide less of their goods and services than would be available in a competitive market environment. 

I am outlining these basic principles to suggest that private initiatives in allocating resources, such as pension services and medical services, require that the decision maker have good information about market choices.  Thus, President Bush’s “ownership economy” cannot succeed if decisions are shifted from those with knowledge to those with market ignorance. 

While I think some allocation problems might develop with those self directed social security accounts the President is championing, I am not going to be too worried there.  Even today, more than 70 percent of all payroll taxes collected must be immediately distributed to retirees.  Thus, the maximum amount of payroll taxes than can be diverted without undermining the current social security system is only a small fraction of what each worker and his employer is paying into the system.

Certainly, I believe that the social security system should follow sound fiduciary direction.  By that I mean that the current surpluses should be isolated from other government resources and be invested by its administrators in a sound, risk adjusted pattern.  That means equities, real estate, and other investments should be as much a part of the invested resources as government bonds. 

However, we cannot allow workers to fully opt out of social security without hurting the current benefits of existing retirees.  That is an economic reality that is not made clear by the President’s proposals. 

More significant is converting medical decisions to private decision makers.  At least financial managers can be hired, through mutual fund management for example, to provide advice at modest expense. 

In medicine, so much of the purchase decision is personal.  Moreover, it is infrequent.  I am not sure how much I should pay for a colonoscopy or an echo-cardiogram.  However, I know that my third party purchaser has seen a lot of these procedures and knows what is “ordinary and customary.”  Any person who reads their explanation of benefits from their medical insurance company knows that the gap between the doctor’s price and what my medical purchaser pays is substantial. 

Indeed, I believe that doctors sometimes feel abused by the pricing decisions of providers and try to eke out a little more by demanding a much higher price.  Doctors know the provider will beat back most of the increase, but might allow a slightly higher payment than if the office visit was charged at the true $30 cost rather than the $75 charge that ultimately will be trimmed. 

OK.  In theory, any patient could spend time to test transactions until they found what the market clearing price for the doctor’s office visit is.  Indeed, the internet is a wonderful instrument for establishing market prices.  Some economists, including myself, believe that some of the higher productivity and lower prices we are experiencing throughout the economy is caused by the low cost information about market prices and availability provided by the internet. 

But where are the web sites for pricing customary medical procedures that correspond to the customary prices for clean used cars.  Without that knowledge, I must fall back upon the information gathered by my insurance company.  I realize, an alternative would be a medical information base managed by a company that only distributes information.  I could then go into the billing department of my hospital with a set of charges that are “ordinary and customary” in my area without needing to also use my insurance company as a disbursing agent. 

Maybe the Edmunds of hospital fees will develop over time. (Edmunds is a web site that distributes the base price for autos.)  Then I could effectively use my self directed medical savings account to purchase medical services at reasonable prices.  Indeed, we might actually see doctors quote the internet price for services, just as some auto dealers are beginning to do today. 

Moreover, I am seriously disturbed by the ethics of the current system.  Those people without third party providers may be paying much more for medical services than they would if they had insurance.  Why should the least knowledgeable and most economically distressed, for that is who most of these people are, be further impoverished by paying the most for medical services?

Before we remove third parties from medical decisions, either private insurance companies or the government’s insurance version, let us solve the medical pricing problem.  Otherwise, privatizing medicine will lead to terrible resource misallocations because of pricing information problems. 


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