Tuesday, July 15, 2014

Sticky Economics

Years ago, Bob wrote a fascinating post on price"elasticity:"

"The economics of goods and services can be reduced to simple demand and supply. Health care is no different. It follows economic theory just like every other consumer good.At either extreme you have inelastic price curves and elastic curves. Most consumer items track a bell curve but some things are totally elastic or totally inelastic."

In this case, "elastic" means that the price of something will almost directly influence the demand for it. Take, for example, sugar. As Bob explained:

"Sugar has price elasticity. As the price of sugar rises, demand decreases since there are substitutes for sugar. If sugar suddenly rose to $10 per pound sales would drop to almost zero."

As long as there's an acceptable substitute for a particular good or service, the price will reflect the demand.

But healthcare's different: short of just living (or dying) with the pain, one will seek help:

"Consumers want to be healthy and the way most of us deal with it is through medical services."

And so we come to the challenge of how to pay for that care, which we call health insurance. When someone else is footing most (if not all) of the bill, then demand for health care is going to remain high, even as the number of providers of it remain stable (or subside).

And this is the fallacy of the ObamaTax. When folks who were previously uninsured needed care, they sought it only for the most serious of conditons (or through the most expensive provider: the ER). But with so many newly-minted insureds, it's like opening the door to the newest all-you-can-eat buffet:

"Researchers in Michigan compared the prevalence of surgery in Massachusetts, New Jersey and New York both before and after Massachusetts went to universal insurance in 2007. They found that expanding coverage was associated with a more than 9 percent increase in discretionary operations and a 4.5 percent increase in nondiscretionary ones. They estimated, based on their results, that the A.C.A. could lead to more than 465,000 additional discretionary surgical procedures within a few years."

This makes sense, of course, when one stops and considers Bob's point about elasticity. And it also poses a parallel problem, which we addressed last week:

"Sick enrollees may be more likely to stick with their QHPs, even if prices rise, because they are in the middle of courses of treatment and need to keep their doctors and hospitals"

Now, we fisked this point on its merits, but the larger issue is that, once these people have insurance, and especially subsidized policies, it doesn't really matter to the system whether they're with (for example) Anthem or Aetna or UHC or, well, you get the picture. The demand for services is going to continue, unabated, regardless of which carrier is actually paying the bills at the moment.

So how does this "bend the price curve" down?

You tell me.
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