by Mitch Kokai
Senior Political Analyst, John Locke Foundation
The Trump administration is considering a rule that would require doctors and hospitals to disclose the rates they negotiate with insurance companies, a step toward establishing something that is sorely wanting in the U.S. health-care market: prices.
Milton Friedman famously described the four ways you can spend money. You can: 1. spend your own money on yourself; 2. spend someone else’s money on yourself; 3. spend your own money on someone else; 4. spend someone else’s money on someone else. No. 1 is usually the most efficient model, because when you spend your own money on yourself you have powerful incentives to monitor both cost and quality.
But when it comes to health care, we almost always use one of the other models, which creates different incentives, often bad ones: We love spending other people’s money on ourselves (No. 2) and don’t pay much attention to the cost when doing so, hence the difficulty of reducing Medicaid expenditures and other medical benefits. (In Finland, the Centre party government of Prime Minister Juha Sipil has just resigned after failing to pass reforms to control the rising expenditures associated with the country’s aging population — that’s our future, too.) Politicians love spending other people’s money on other people (No. 4) even when the costs are high and the quality is low. We don’t like paying taxes (that’s No. 3) and so we sometimes underfund programs for the vulnerable and the needy; the same incentive often means that employer-based insurance plans reflect the employer’s priorities more than those of the purported beneficiaries.
Ideally, our health-care policies would shift more medical spending toward No. 1 — people paying their own expenses out-of-pocket, especially for routine, predictable medical costs incurred by people who are neither poor nor elderly. But it will be nearly impossible to do that in an effective (and politically palatable) way without real prices.