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…


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