Monday, April 22, 2013

Ezra Klein's $1200 toenail

I saw a TV commercial the other night for the Kindle. It was a side by side comparison between the Kindle and iPad and the the key differentiator between the two, per this commercial, was price. The Kindle was much lower-priced than the iPad. Google "Kindle v iPad." The first link that appeared for me was from labeled, appropriately enough, Kindle Fire vs. iPad.

In Apple's fiscal 2012 it generated $32.4 billion in revenue from iPad and related products and services. This was up from $20.4 billion in fiscal 2011 and $5.0 billion in fiscal 2010. Unit sales were 58.3 million, 32.4 million and 7.5 million respectively in fiscal year 2012, 2011 and 2010. Revenue divided by units yields average selling price, ASP of $556, $630 and $666 for fiscal 2012, 2011 and 2010 respectively. Quite a ride.

That kind of volume attracted competitors, like Kindle and Samsung and others. New products were introduced, prices came down, new features were offered. I would argue this is a market that works rather well. And by "work rather well" I mean consumers have many options, competition is intense and excess profits (in an economic sense) are temporary.

A few days ago I checked on airline prices from JFK to LAX. If I wanted to travel two days from the date I looked, and stay just one day, the fare was about $1,000. However, if I elected to fly on the exact same flight numbers, same time of day, but booked one month in advance and stayed over for one week the fare was about $200. Despite prices that are vastly different for the exact same service-flying to and from LAX, same day of week, same time of day-I would argue this market too, works rather well.

My daughter is graduating from college next month. When we were choosing colleges we knew there was a list price and the actual price we would pay. The actual price was the list price net of scholarships, work/study, possible loans, etc. I think this market, despite many distortions, works rather well also.

Which brings me to Steven Brill's "A Bitter Pill," the longest article Time Magazine ever published, and Ezra Klein's $1,200 toenail. Both complain the market for health care is flawed and point to many examples to prove their assertion that the market for health care is flawed. I agree completely, the market for health care is flawed. 

But think about the context when they complain about pricing in the ER and the $1,200 toenail. What are they implicitly comparing health care pricing to? I would say they are looking at functioning markets, like iPads, airline flights and even colleges and saying healthcare pricing isn't functioning properly because it doesn't look like pricing in any of those markets. Again, I agree.

That's when they take the leap I wouldn't take. Since the health care market isn't working like the markets for iPads, air fare, or colleges, the viable solution, they say, is a single-payer. For Brill that single payer is Medicare. But wait a minute. WHY is the market for health care not like the market for iPads and airfare and colleges? Has something happened to introduce the distortion that makes the health care market look and act differently? I think the answer is employer-sponsored insurance, government mandates of coverage and Medicare itself. 

I won't push that argument because I don't think it matters to Brill and Klein why the market for health care is different than the market for iPads and air fare and colleges. For them, any market in health care is immoral. That is, there shouldn't be a market at all in health care. For them, the government should determine what health care its citizenry should have and then set about delivering it. For them, ANY market would be objectionable because ANY market would be immoral.

Now that's not a position I take. But it is futile for me to try to argue to them the best way to make the health care marke work is to remove obstructions. I could point to the removal of obstructions in the air fare market as evidence this could work. Or I could point to the deregulation of natural gas. Or I could point to the deregulation of the US economy post WWII. I could point to a mountain of evidence this approach has worked in other markets time and again. But I would be wasting my breath, because the objection isn't the type of market, it's the market itself they object to.

Brill wrote the longest article in Time Magazine's history telling me what everyone already knows: the price incentives we see everyday in the market for iPads, air fare and colleges are highly distorted in the health care market. He does this, I presume, so he can then claim, "Market Failure. Government must step in." 

I think it would be much more honest for him to say, "Markets in health care are immoral." I don't agree with that either, but at least we would have a basis to interact. 

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