When shopping for clothes, food and just about everything else, if we don't see the price marked on the package or the shelf, we ask someone in the store. Knowing the price allows us to make good decisions.
Health care is another story. Despite the "major reforms" to the health insurance and health care industries over the past two years, consumers still make decisions in these markets with limited information. When prices are missing or distorted, they cannot perform their needed function of allocating scarce resources.
People respond to price incentives. When the price of a good or service rises, consumers buy less of it. Higher prices give producers an incentive to move more resources to the production of the good or service. The process works in reverse when prices fall.
Subsidies or price controls distort this.
For decades the U.S. government has subsidized health insurance through tax deductions. Since the 1940s, employer-provided health insurance has been excluded from taxable income. Most consumers simply choose whatever service their doctor orders expecting insurance to cover all or most of the costs.
Although the employee portion of premiums and most deductibles have risen, consumers covered by employer-sponsored plans do not know the total cost of their health services. Patients in the government-run Medicare and Medicaid rarely see any part of the price for their services.
Producers in these markets experience price distortions. Insurance companies and providers are responding to an incentive - more insured people - with higher prices and more services. The Affordable Care Act brought more people into the market with subsidized health insurance, thereby increasing the likelihood of overconsumption.
In 2012, researchers from Boise State University made a presentation to Gov. Butch Otter's Medicaid Expansion Workgroup suggesting that by increasing the number of Medicaid recipients using federal funds, Idaho would see an increase in state employment, reduced costs for small businesses, increased productivity in the labor force, and cost savings in health care expenditures.
The savings are expected to come from a healthier workforce. But as with previous studies of this nature, the statistical results ignore the higher demand and prices that result from more utilization of health care.
The Center for Medicare and Medicaid Services released projections this month that total health spending in the U.S. will grow at an average rate of 5.8 percent between 2012 and 2022, nearly twice the rate of overall economic growth forecasted by the Federal Reserve.
Reforming how health services and health insurance are purchased will change incentives and allow prices to work.
Beyond eliminating the tax deductibility of insurance, policymakers could change licensing requirements for providers so that consumers could purchase basic services from nurse practitioners or other low-cost providers. Lowering coverage requirements would also make it easier for employers and other organizations to provide group insurance. Simply allowing for the purchase of insurance across state lines would increase competition and lower costs.
Only when we start asking our doctors about the price will we get control over health care spending.
Note: This commentary/opinion was first published by the Idaho Statesman September 17, 2014. Peter Crabb is a member of Idaho Freedom Foundation’s Board of Scholars and is a Professor of finance and economics at Northwest Nazarene University in Nampa.