Wednesday, February 11, 2009

Does competition and a free market really reduce medical costs ?

The standard teaching in economics is that free markets encourage competition, as a result of which manufacturers and service providers will constantly try to reduce their costs when competing for customers, as a result of which customers will benefit.

This is partly true in medicine as well. Thus, bypass surgery has become much less expensive after being offered by multiple corporate hospitals, who do compete on price.

However, there are many interesting anomalies, which mean that competition can actually result in increased costs, in some situations, where there is a lot of demand and price is not a constraint. Let's take the example of an expensive elective procedure like a facelift. Now, there are only 2-4 leading cosmetic surgeons in any city. They compete with each other; and since patients often perceive that the cost of a procedure equates with the quality of the surgeon, when one surgeon raises his prices, others will often follow suit, to maintain parity , to show that they are equally good, and can command top dollar !

This is not unique to top doctors, of course, and does apply to other professionals - for example, Supreme Court lawyers, who take pride in charging more than each other !

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