Austan Goolsbee is smart

Try this:

The evidence shows that companies are particularly likely to raise
prices when the government is footing the bill. Economists Mark Duggan
at the University of Maryland and Fiona Scott Morton at Yale studied
the prices of the top 200 drugs in the United States from 1997 to 2002.
They found that drug makers gamed the government procurement rules that
forbid companies from billing Medicaid more for a drug than they bill
private consumers. When private-sector demand for a drug is small
compared with the demand of Medicaid patients (as is the case, for
example, with antipsychotics), drug companies massively inflate the
price of the drug for private buyers. Sure, they lose some business
from that part of the market. But they more than make up for that loss
by being able to bill the government at a vastly higher price for the
Medicaid patients.

And this:

As the moral-hazard problem for medical expenses becomes a corporate
rather than individual matter, the solution that economists currently
favor–Health Savings Accounts–will fail to rein in costs. The HSAs
won’t fix things because they change the incentives of individuals, not
companies. Indeed, as more people get HSAs, we may very well see the
companies raise prices even further to capture the tax-free savings in
people’s accounts. That would be exactly analogous to what has happened
with "529" college savings programs. In 2001, Congress passed a tax
break for college savings accounts. As I wrote three years ago,
the plans were "supposed to be an enormous federal tax subsidy for
education." But the small number of financial firms that are approved
to manage the 529 accounts have basically captured that subsidy by
raising their investment fees to levels well above those in the regular
investment market.

I believe the argument, although it remains a puzzle why these markets do not behave in a more competitive fashion…


From his Slate article:

The moral-hazard problem is more and more about corporations rather than individuals.

The evidence shows that companies are particularly likely to raise prices when the government is footing the bill.
The moral hazard problem is caused by government intervention, whether it's subsidizing
a drug company or an individual healthcare consumer.
The only way to solve the problem is to separate government from healthcare

Re: 529's, there are 50 plans, each a state monopoly, so if you want state income tax breaks, you have to choose the plan approved by your state. Thus, there is no competition for people who care about state taxes. Furthermore, since the states have to approve the plan sponsors, you have high potential for rent-seeking.

"we're always being told that the drug companies have to keep prices high in America because all the foreign governments are forcing low prices in their countries. Are we really expected to believe that governments abroad are uniquely effective and the American government is uniquely ineffective?"

Governments abroad aren't uniquely effective - they're free riding. They want the US to pay for all the research and development, while they rake in benefits from that R&D. I don't mind poor countries free riding,as long as they don't make the drugs ineffective in the process (for instance by misusing antibiotics in a way that speeds the development of resistant strains). But I agree that the American government is ineffective in allowing relatively wealthy countries (Canada and much of Western Europe) to free ride also.

just to second the first post - Goolsbee has been the most dynamic teacher i have had at the GSB. his economics of TMT class is an absolute must, costing thousands of points in the market based bidding system and packing every seat in hyde park in the dead of the chicago winter at 8.30 in the morning. he very carefully draws students in to discussions, forces them to take a stand, and express opinions based on sound economic reasoning - then with the stinging wit of an improv comedian demonstates the errors in the argument. best weekly 3 hours of education/entertainment i've ever had.

Couldn't you attempt to offset the cost-inflation problem by say, only issuing vouchers for the 20th-percentile level of costs for a particular service? Then an insurance company kind of gets screwed if it charges even the median, because health care is extremely expensive. (But they don't get screwed if the median is really close to the 20th percentile)

Of course, we don't want a "race to the bottom" in terms of quality of care. So perhaps the "percentile" is computed among a sub-population of insurance carriers which is deemed to have acceptable quality care?

You may want to create a "two-tier" system which does this for all Americans, and also allows private insurance to cover the above-20th-percentile costs. I'm not sure how the details would work, but the concept is to allow acceptable care for all, and especially high quality care for those who can afford to pay private insurance.

I tracked down the paper. Links here:

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