While doing research for an upcoming video, I found an excellent study from the National Center for Policy Analysis that explains how “third-party payer” is largely preventing markets from operating in health care. Government policies (including tax distortions) are the cause of the problem, yet the polticians want to expand third-party payments. Here’s an excerpt from the paper, and I also reprint below a key chart from the paper that shows how most medical prices rise faster than the overall price level, but the opposite result occurs when consumes are in control (for things such as cosmetic surgery):
Long before a patient enters a doctor’s office, third- party bureaucracies have determined which medical services they will pay for, which ones they will not and how much they will pay. The result is a highly artificial market plagued by problems of high costs, inconsistent quality and poor access. …Can the market for medical care be different? Interestingly, in health care markets where patients pay directly for all or most of their care, providers almost always compete on the basis of price and quality. And because they are not trapped in a system that pays for predetermined tasks at predetermined rates, providers are free to repackage and reprice their services — just like vendors in other markets. It is primarily in these direct-pay markets that entrepreneurs are creating many innovative services to solve the very prob-lems about which critics of the health care system complain. …Cosmetic surgery is rarely covered by insurance. Because providers know their patients must pay out of pocket and are price sensitive, patients can typically (a) find a package price in advance covering all services and facilities, (b) compare prices prior to surgery, and (c) pay a price that has been falling over time in real terms — despite a huge increase in volume and considerable technical innovation (which is blamed for increas- ing costs for every other type of surgery). …In 1960, consumers paid about 47 percent of overall health care costs out of pocket. …In 2006, consumers paid only 12 cents out of their own pockets every time they spent a dollar on health care.