Competition, Markets, Innovation and Freedom

You’ll see here, and in my twitter feed, from time to time some strong opinions on economics.  I believe in a free market, though some of my libertarian friends would say that I have exceptions to that.  Compared to today’s economy, which is a hodge podge of socialism, mercantilism, capitalism and several other “-ism”s, more freedom in the marketplace would be good.  Sometimes it’s hard to compare the effects of varying influences, though.

Consider this article comparing 1991 technology to today’s:

There’s no basket of 1991 gadgets that exactly duplicates the functionality of a modern iPhone, so deciding what to put into that basket is an inherently subjective enterprise. It’s not obvious that the average customer really gets as much value from his or her iPhone as a gadget lover in 1991 would have gotten from $3,000 worth of Radio Shack gadgets. On the other hand, iPhones do a lot of other things, too, like check Facebook, show movies on the go and provide turn-by-turn directions, that would have been hard to do on any gadget in 1991. So if anything, I suspect the way we measure inflation understates how quickly our standard of living has been improving.

via Today’s iPhone is more useful than $3,000 worth of gadgets from a 1991 Radio Shack.

That $3,000 in gadgets in 1991, adjusted for inflation is over $5,000 (depending on whose inflation numbers you use).  That $5,000 2013 dollars buys a lot more in tech than you ever could in 1991 with ten times that much cash, because a lot of today’s, affordable tech didn’t exist.

Contrast that with health care, which has had some technological advances, but at great increase in cost.  And the advances are nowhere near as huge as in the broad tech market.  Why is that?  There’s a number of reasons here (not exhaustive):

  • health care is more heavily regulated than personal technology
  • the largest health care purchaser (48% of the market) is the federal and state governments
  • only about 11% of health care is paid for by the patient (the actual consumer of the products)
  • there’s a level of duress at the purchase point for health care (at least some of it)
  • there’s a sense of entitlement on health care that doesn’t exist for personal tech.  You’ll rarely find the people think they deserve to have a brand new iPhone 5S the day it comes out, but for some reason, culturally, people think they ought to have access to whatever the latest health care tech or drugs whatever their personal level of wealth.
  • knowledge gap:  there are lots of sites giving reviews of new technology that make it more accessible but people feel lost on health care decisions and so are likely to do whatever a doctor suggests without question.  People with no education feel like experts on mac vs. PC, iOS vs. Android, etc.  Not so in health care.

The middle one, who pays for most of it, is the key point today.  Consumers, informed and free, are what drive innovation, price and quality.  No restaurant that charges $50 per plate for a fast food quality burger will stay in business a week.  It just won’t happen.  But if you charge $50 per plate for something that people value at $60?  You’ll be turning people away at the door.

The same with technology.  What drives prices down is that most users wait for them to drop before buying.  Could Apple sell the iPhone for $1,000 without a contract and produce sales?  Certainly.  Would they sell as many as they do now?  Extremely unlikely.

“That’s too expensive!”

Much of the furor over health care in the past few years has been over cost.  Cost and price are functions of the market.  They are always symptoms.  You cannot affect a market by trying to affect price directly.  When someone says “that’s too expensive” that’s the market working.  When a product price goes too high, demand drops drastically.  There are some products that are more immune to price affecting demand, of course, like food and energy.  If I’m buying eggs, I’m buying eggs, whether at $1 or $2 per dozen.  But even in those product lines “more immune” is not “completely immune.”  At $3/dozen I’m considering different protein options for my family for breakfast.  At a certain energy price I’ll turn down my thermostat.  And even in the small price bumps which don’t affect my demand for energy or food:  it does affect my demand for other products because my discretionary income shrinks.

Back to technology vs. health care:  what would improve it from this perspective?  Higher deductibles or bigger coverage gaps with insurance or even more people being uninsured for “basic care.”  (By basic care I mean the health care versions of gas, tires and oil changes.  No auto insurance company pays for that, nor for problems you cause by not taking care of the car)  Putting the patient in the driver’s seat will force them to be informed consumers, and therefore more careful consumers.

Careful consumers drive price down and quality up.  That’s they way the market works.  And the free market hasn’t failed in health care.  It’s been kept from helping by more and more insulation between patient and price.  A quick way to force this kind of change would be to remove the tax exclusion for employer-provided insurance so that all health care costs are treated the same under the tax code.  Then the market can start to affect decisions again.

Certainly the other differences need to be addressed, but this post is long enough as it is.  {And if you’re considering health care further, I encourage you to check out Samaritan Ministries as a patient centered health care option for you if you qualify to be a member. )

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