Reinhardt responds to Socoalar on price disparities
Uwe Reinhardt responds to Deborah Socolar on her comments about price disparities:
In connection with price disparities in health care, I wonder what Deborah Socolar means when she uses the term "free market" in her sentence:
"If it were a free market, competition would mean prices would tend to converge (as happens with, say, prices in pizza parlors)."
A distinguishing characteristic that sets pizzas apart from, say, coronary bypasses is that the former can, in principle, be resold among customers while a CABG cannot. Absent a resale market for CABGs (and most other health services), the stage is set for price discrimination, that is, charging different customers different prices for the same thing.
Now, if CABGs and other health services were perfectly standard commodities that are purchased in a national market (i.e., Jones does not care whether his or her CABG is procured in Holy Mercy in San Diego or Apex Hospital, Inc. in Dallas or Womens and Brigham in Boston), then there might still be price convergence. That is why hotel rates quoted to conventions tend to converge across areas with similar climatic and other characteristics.
But CABGs and other health care are not at all perfectly standard commodities and they are not traded competitively over large national markets. Price convergence in a "free" (unregulated?) market would be unlikely to obtain.
Only in highly regulated market with either administered prices set more or less unilaterally by the buy side (Medicare, Medicaid) or uniform prices negotiated by large bodies representing individual buyers and seller, respectively, (Germany) would price discrimination disappear. Even then price might or might not reflect costs.
Uwe Reinhardt