Posts Tagged ‘Moral Hazard’

Health care market failures or a lack of demand?  You decide.  From Mark Perry:

“Next time you want a blood test, you could get it at a strip mall. A store-front lab firm is now open in Plymouth. It is the first business of its kind in Minnesota, but it will not be the last.

53-year-old Elaine Warren came to Any Lab Test Now to get her cholesterol checked. “I had an annual exam. It was up just a little bit so I thought I’m going get ahead of the game,” says Warren. Her insurance covered her annual exam back in January, but to have her cholesterol checked now at her regular clinic would cost her $57 for the test, and a $45 co-pay for a total of $102. Her visit to Any Lab Test Now cost her $49. She was told she would get her results in about two days.

Too often we underestimate the power of markets.  If this business proves successful, I could see this model spreading quickly for those looking to cut their health care costs.  Even if the business fails due to an unreliable product, regulations that do not allow it to effectively compete on price with other care providers, and/or limited access to important markets.

Unfortunately, demand for such business is artificially suppressed because publicly subsidized health care creates a moral hazard by incentivizing the pursuit of convenience, customer service, etc. disproportionate to each quality’s natural, marginal utility.

For example:  Suppose a complete stranger comes up to you one day, informs you that he is a multibillionaire, and tells you that he will pay for any health care costs you ever incur.  Because your health care carries no monetary cost, you do not care about price as much as you otherwise would when shopping for health care.  Meanwhile, the other characteristics of health care becomes more valuable to you.  This drives you to more often pursue costly treatments featuring great customer service, aesthetically pleasing offices, or whose marginal benefit decreases dramatically with increases in price.

Thus Any Lab Test Now is more prone to fail, despite providing great value within a free market, because consumers are desensitized to price discrepancies due to government intervention in health insurance markets.