Sunday, November 08, 2009

Different Prices for Different Folks

"Reefnetter" asked a question about the justice/injustice of charging different people different prices for an important service like health care, or even basic products like food.

This does raise some interesting questions. Right now in health care, there are at least four levels of price, in order of high to low: The "rack" or "list" price; the negotiated price for insurance plans; the government/Medicare rate; and a price of zero. Who pays the rack price? Not too many people, would be my guess, but I am not sure. If you are self employed and buy health insurance in the marketplace, that policy could still have a negotiated rate with suppliers. Some people who pay the full price are actually the rich uninsured; others would be medical tourists. Who pays the "zero" price -- well, that would be the destitute who get care and cannot pay. This might also end up being a negotiated rate, greater than zero but less than maybe even the Medicare rate.

Do these price differences concern me, especially given that the well-to-do will generally receive the negotiated rates rather than the list prices? Not, not really.

One of the benefits of these price differences is that they serve to put pressure on the service providers. Suppose we had a law saying that health care providers had to charge everyone the same price. Do we think that would result in higher or lower prices overall? I am sure it would result in higher prices, because it would prevent any one insurance plan from being able to ask for and receive a lower price. It is that process of insurance plans going to service providers (e.g., large hospitals, doctors' clinics) and negotiating lower prices that gives us some relief from unmitigated price escalation. Does this process of competition mean that some plans will negotiate lower prices than other plans? Yes -- and that is exactly what we need to give the plans incentives to put pressure on the service providers. In the new world of health care about to emerge, this will be one of the main ways for different insurance plans to get a competitive advantage. We should celebrate it -- how else will we get the health care providers to put a lid on their prices?

Note also that generally the larger plans will be able to negotiate the best prices. Why? Because they will be able to promise (or withhold) large amounts of business from the providers. Bulk purchases generally do get better prices. This is true for electricity, food, cars, name it. Reefnetter, I bet you give your largest customers some kind of volume discount, right? In health care, it is valuable for a hospital to be able to count on business from a large pool of insured people. This gives the hospital enough confidence in its volume to expand facilities, invest, etc.

Another side benefit of the high list prices is that it induces people into the ranks of the insured. There is a real problem in health insurance caused by people "gaming" the system: being uninsured when healthy, then getting into insurance just when you need it. This is one of the problems that the health care reform is dealing with, this time with penalties for not being insured. If the uninsured can get the same low rates as the insured, then there is even more incentive to game the system.

Interestingly, I have always thought that the lack of price differences for some goods and services has created some distortions in our society. For instance, the postal service charges the same rate for rural service as for urban service, even though the cost of rural service must be higher. Similarly, AT&T always charged the same rate for home service, no matter how few people were in an area. These prices entailed low-cost, urban customers subsidizing high-cost, rural customers -- was that fair, or good?

No comments: