Failing To Understand How Markets Work:

One of the most interesting articles I have read on the health care cost issue was this one in the New Yorker that I read over the summer.

Overall, I thought it a pretty interesting insight into the issue.  But that’s not what I’m concerned about here.  What I thought was interesting about it was what an example it provides about the difficulty that people often have in understanding how markets work.  The author, Atul Gawande, is a doctor, not an economist.  At the end of the article he turns to proposals for reform.  And he has this discussion with a doctor:

The third class of health-cost proposals, I explained, would push people to use medical savings accounts and hold high-deductible insurance policies: “They’d have more of their own money on the line, and that’d drive them to bargain with you and other surgeons, right?”

He gave me a quizzical look. We tried to imagine the scenario. A cardiologist tells an elderly woman that she needs bypass surgery and has Dr. Dyke see her. They discuss the blockages in her heart, the operation, the risks. And now they’re supposed to haggle over the price as if he were selling a rug in a souk? “I’ll do three vessels for thirty thousand, but if you take four I’ll throw in an extra night in the I.C.U.”—that sort of thing? Dyke shook his head. “Who comes up with this stuff?” he asked. “Any plan that relies on the sheep to negotiate with the wolves is doomed to failure.”

One thing that is peculiar about the author’s inability to visualize this is that this is exactly how the market for comparable services works, such as for lawyers.  Consumers every day choose a price-quality tradeoff in legal services.  If I want a lawyer to help me prepare my will, I don’t call up Skadden and ask to negotiate my fee.  I compare a couple of lawyers and then choose the price-quality package that is best for me.
In fact, it is my understanding that this is exactly how it works in the various areas of health care that are not covered by insurance–Lasik surgery, fertility treatments, and I’m sure there are others.  Dentistry and veterinary care also have posted prices and consumers can shop among different suppliers of medical services.  Perhaps there is some reason why consumers can’t shop for medical services (especially elective services) the same way they shop for lawyers and for, well, a bunch of other medical services already.  But Mr. Gawande’s flawed imagination about how such a market might work is not one of them.