Friday, November 9, 2012

Price Check on Aisle Three, Please

Imagine, for a moment, grocery shopping where everything is (nearly) free.  You casually peruse the aisles of your favorite store loading up on anything and everything.  You pick more expensive name brands over cheaper generic brands, and fill your cart with more than you need.  But who cares?  It’s all free.  At the checkout, you plunk down $20 dollars and your membership card.  That’s it!

This scenario would, without question, lead to the overconsumption and decreased supply of food.  Without the price system to guide you into making wise choices, you over-consume.  You have no incentive otherwise.  This is our healthcare system.

In the absence of the price system, Americans over-consume healthcare.  Most of us pay an annual premium and then a small co-pay at the doctor’s office.  It matters not if I have one test run or 100 – my co-pay remains the same.  And because my premium adjusts only once per year, any correlation between usage and costs is vague at best.  In fact, my premium continues to rise despite my consumption of healthcare.

So, despite everyone’s constant lament that we spend 15% of GDP on healthcare, this fact is no surprise to me.  Incentives matter, and without the price system to shape our choices, we will continue to over-consume and pay ever higher premiums.


  1. Good analogy. Will be using in discussion with my more hard-headed/dense friends.

  2. Thanks. Please let me know if it works. I have a few hard-headed friends too.

    Why are prices of healthcare services so opaque? The last few times we visited the doctor, we asked and probed about the costs, but we failed to get any straight answers. Why are prices such a big secret? A little transparency would go a long way.