In America, government fixes all Prices (called “fee schedules”) for health care devices, drugs, services, and procedures that are provided with public money (Medicare, Medicaid, Social Security, the VA, etc.) The private insurance market also uses these government fixed prices, but usually at a discounted rate–still price fixing, just at a discount.
Health care price-fixing happens at the political nexus where interest groups and lobbyists meet legislators and regulators. These politics do not yield the sort of equilibrium you get with the market forces of supply and demand. No one involved in establishing these price points actually has to pay for what they’re pricing. Therefore the demand element of this health care pricing mechanism is a fiction. Prices that come out of this process will only randomly reflect what real supply and demand would, and will only randomly be rational.
Meanwhile, legislators and regulators do not operate in a vacuum. They get ALL of their demand side pricing information from a) providers and b) insurance companies. They get ALL of their supply side pricing information from a) providers, b) insurance companies and c) manufacturers.
No inputs to health care price-fixing come from the actual consumers of health care, and the consumers of health care are the ONLY element in the health care market who are CAPABLE of providing real demand information–because they are the ones who actually pay for it!
To summarize, providers want higher health care prices because they earn more money that way. Insurance companies want higher health care prices because they earn more money on more expensive products and services. Manufacturers want higher health care prices because they earn more money for their goods. And legislators and regulators are disinterested third parties who exist to be persuaded to control price points, where all the persuasion comes from parties who have an interest in higher price points.
This is the debate we should be having. Any proposed structural change to our health care market that does not address what fundamentally controls the price of health care in America will not materially improve matters.
Our current system of health care pricing is disconnected from consumers and can only result in a poor allocation of health care to meet real needs. This is what we have today. If we don’t change this, we will never optimize the provision of health care, with the cost of health care, and with a rational price for that health care.
Government price fixing causes shortages–an economic fact of life whether the object is gasoline or health care.