Hypothetical grocery store illustrates health care “marketplace”

May 23, 2012 | By | 7 Replies More

In his new book, The Righteous Mind: Why good People are Divided by Politics and Religion, Jonathan Haidt compares the American marketplace for health care to a hypothetical grocery store run the same way:

The next time you go to the supermarket, look closely at a can of peas. Think about all the work that went into it—the farmers, truckers, and supermarket employees, the miners and metalworkers who made the can—and think how miraculous it is that you can buy this can for under a dollar. At every step of the way, competition among suppliers rewarded those whose innovations shaved a penny off the cost of getting that can to you. If God is commonly thought to have created the world and then arranged it for our benefit, then the free market (and its invisible hand) is a pretty good candidate for being a god. You can begin to understand why libertarians sometimes have a quasi-religious faith in free markets. Now let’s do the devil’s work and spread chaos throughout the marketplace. Suppose that one day all prices are removed from all products in the supermarket. All labels too, beyond a simple description of the contents, so you can’t compare products from different companies. You just take whatever you want, as much as you want, and you bring it up to the register. The checkout clerk scans in your food insurance card and helps you fill out your itemized claim. You pay a flat fee of $10 and go home with your groceries. A month later you get a bill informing you that your food insurance company will pay the supermarket for most of the remaining cost, but you’ll have to send in a check for an additional $15. It might sound like a bargain to get a cartload of food for $25, but you’re really paying your grocery bill every month when you fork over $2,000 for your food insurance premium.

Image by fotoruhrbegeit at Dreamstime (with permission)

Under such a system, there is little incentive for anyone to find innovative ways to reduce the cost of food or increase its quality. The supermarkets get paid by the insurers, and the insurers get their premiums from you. The cost of food insurance begins to rise as supermarkets stock only the foods that net them the highest insurance payments, not the foods that deliver value to you. As the cost of food insurance rises, many people can no longer afford it. Liberals (motivated by Care) push for a new government program to buy food insurance for the poor and the elderly. But once the government becomes the major purchaser of food, then success in the supermarket and food insurance industries depends primarily on maximizing yield from government payouts. Before you know it, that can of peas costs the government $30, and all of us are paying 25 percent of our paychecks in taxes just to cover the cost of buying groceries for each other at hugely inflated costs. That, says [David] Goldhill, is what we’ve done to ourselves. As long as consumers are spared from taking price into account—that is, as long as someone else is always paying for your choices—things will get worse. We can’t fix the problem by convening panels of experts to set the maximum allowable price for a can of peas. Only a working market can bring supply, demand, and ingenuity together to provide health care at the lowest possible price.

Haidt then compares the “market” for most health care products for the market for uninsured health care products, such as LASIK surgery, which highly competitive. More food for thought:  Think of any other type of insurance that we buy to cover ordinary and expected costs (I admit that most health care policies also cover unexpected high cost occurrences). Health care insurance is thus a rather strange creature compared to most other kinds of insurance. Imagine homeowners insurance that covered the cost of cutting the grass, or the cost of a carpet wearing out. I suspect that health insurance is treated differently because many of us sacralize health. We treat it as sacred, meaning that we refuse to negotiate it as though it were a commodity, even in some instances where we might be better off subjecting some health services to the open market (such as we already do with many over the counter medications and devices).

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Category: Economy, Health, Health Care Reform

About the Author ()

Erich Vieth is an attorney focusing on consumer law litigation and appellate practice. He is also a working musician and a writer, having founded Dangerous Intersection in 2006. Erich lives in the Shaw Neighborhood of St. Louis, Missouri, where he lives half-time with his two extraordinary daughters.

Comments (7)

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  1. Adam Herman says:

    I think the approach we should be taking is to have a single-payer system for all catastrophic health care costs, or possibly emergency costs in general. But all routine health costs should be paid for in cash, unless you’re poor.

    I think such a compromise could appeal across ideologies. And a future promise could be made to both conservatives and liberals. To liberals: if placing routine health care costs on the market fails miserably, we can expand the single payer program to cover more routine costs of an expensive nature. To conservatives: if the market portion of the system works well, we can reduce the services covered by the government(except for the poor, of course, who would be totally under the single payer umbrella).

    • Erich Vieth says:

      Adam: I’m tempted by the general contours you propose, but I would add that single-payer would also pay for all preventative care, the things that will prevent massive expenditures later. Colonoscopies, breast exams and immunizations come to mind.

      Haidt’s analysis is is provoking me to rethink this highly complex issue–The question he raises is whether there is a better way to get more health care services to more people more efficiently. Our present policy distorts the market to the point where we have $1,000 MRIs in the U.S. that cost $280 in France. http://www.washingtonpost.com/blogs/ezra-klein/post/why-an-mri-costs-1080-in-america-and-280-in-france/2011/08/25/gIQAVHztoR_blog.html Most everything insurance covers in the U.S., including pharmaceuticals, is massively higher here than in many other western countries. This does make me stop and think what we are doing to our poor and middle class. Those who can’t afford insurance are now faced with outrageously inflated costs for routine services. They go to the hospital with their broken arms and their flu and they come out with shocking debt that might have been a fraction of the cost had our routine services been subjected to the market. And then we watch them get sued, foreclosed and run into bankruptcy.

      I agree with you, that major medical should fall under single payer. I also think that we will need to have a sober conversation about what this country can sustainably afford over the long term (see this discussion about Oregon’s system http://dangerousintersection.org/2009/09/07/what-kind-of-health-care/ ). We need to talk specifics, and condemn name-calling (e.g., “death panels”). For those who want coverage for highly expensive experimental drugs, I would encourage them to seek supplemental insurance.

      I know that this comment is quite sketchy, but I think Haidt’s points constitute an important starting point for a frank discussion that is long overdue.

  2. Tony says:

    Two more links on this topic (my previous comment got eaten up in the ham filter, I guess – don’t ask to recollect the links again, it took me quite some time to gather the links)

    http://allbleedingstops.blogspot.com/2012/05/are-healthcare-providers-profiteering.html

    http://theincidentaleconomist.com/wordpress/what-makes-the-us-health-care-system-so-expensive-introduction/

  3. Adam Herman says:

    I can see expensive preventive care being covered, but we don’t want to get into a situation where we cover so much that anything non-emergency causes patients to go on a waiting list. That tends to make good preventive care impossible.

  4. Adam Herman says:

    Think Progress reports that Jim McDermott has sponsored a bill to allow states to use all federal health care funds to establish their own single payer systems.

    That works for me. I am against national single payer, but I have no problem with states going that route if that’s what works for them. That’s another potential area of compromise that should receive some bipartisan consideration. Democrats get single payer in some states, Republicans get what essentially amounts to block granting of Medicaid funds.

  5. Niklaus Pfirsig says:

    Adam,
    that sounds like the the old medicaid waver programs that lead to Romneycare, TennCare and other programs.

  6. Adam Herman says:

    I actually thought Tenncare and Romneycare were good ideas. My opposition isn’t necessarily to universal health care, it’s the way the federal government tends to approach such issues and the constitutional problems that bug me. Plus most states have balanced budget requirements so they have more of an incentive to make sure costs are kept down.

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