Lessons From Basic Economics...

Let's do some quick economics review. Let's say that you are traveling across the country for a business trip. You go to McDonald's real quick to get breakfast on your way out. You get there and realize the prices have all doubled since the last time you went! You are appalled and drive off to the Chick-Fil-A around the corner and get your breakfast there instead. If this were to happen in real life, McDonalds would likely see a huge decrease in the number of breakfast sandwiches they sell. Seems like common sense, right? You have the ability to choose between various fast food places, so you don't ever really feel threatened by McDonalds jacking up the price. This suggests that the demand curve looks like this:

As McDonalds increases the price of their food by just a few dollars, they will see a pretty significant drop in sales.

After a delayed departure and one layover already underneath your belt, you are stuck in the airport later that night. You realize you are really hungry again so you drag all of your baggage to the food court area. Again, there is a Chick-Fil-A and a McDonalds. You've decided you hate McDonalds now so you go to Chick-Fil-A again (you're now in a different state, nobody knows you already had it for breakfast!) For the same type of meal you had earlier in the day, they want you to pay nearly 3 times as much! There's no difference in sales tax or the availability of meat between the two areas. The price is more expensive at the airport for a great reason... You're stuck there and don't really have many substitutes! Your options are either to buy something expensive or remain really hungry until you arrive at your destination. In other words, the demand curve looks like this:

That is, people aren't going to drastically change their behavior for a change in price of just a few dollars. Can you see that happening? Compare the two graphs and see what happens if you jump in price a few bucks. The quantity consumed barely changes in the airport, but greatly changes in normal real life. If you are a seller, what kind of product do you want to have? You want a product that everyone "has to have" and will pay obscene amounts of money for! (e.g., the iPad) The steeper that curve, the better for the seller. The slope of that curve is dependent upon the consumers ability to substitute. If it was easy to get other sources of food at the airport, it would not be so expensive at the fast-food places.

What does this tell us about healthcare in America? Well, after all of that Chick-Fil-A you are now in the market for some bypass surgery. What other options do you have? None. Your choice is to either go to the doctor and have the surgery, or you can die. Very few people will choose the latter, so what kind of prices do you think you will be paying? "Normal prices" or "Airport prices"? The demand curve for healthcare is essentially this:

What makes this even more difficult is the lack of information about pricing. With fast food, the prices are displayed on the menu right in front for the world to see. If you don't like the price, you can go to another fast food place. It doesn't work that way with bypass surgery. Even if your town has two hospitals, the prices you will actually pay are very difficult to even come close to estimating. What does that do? It removes the highly-praised "market virtue" of competitive pricing. Hospital A is not going to price slash in an attempt to get more marketshare from Hospital B. What does that mean for prices? Well, the hospital essentially has no reason - from the market alone - to reduce the cost of care. I love markets just as much as the next guy, but the normal assumptions made about the behavior of markets simply do not apply here.