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December 19, 2005

Moral Hazard, Soft Budget Constraints, and Health Care

Marginal Revolution quotes Austan Goolsbee on health care, and says:

Marginal Revolution: Austan Goolsbee is smart. Try this:

... [C]ompanies are particularly likely to raise prices when the government is footing the bill. Economists Mark Duggan at the University of Maryland and Fiona Scott Morton at Yale studied the prices of the top 200 drugs... drug makers gamed the government procurement rules that forbid companies from billing Medicaid more for a drug than they bill private consumers. When private-sector demand for a drug is small compared with the demand of Medicaid patients (as is the case, for example, with antipsychotics), drug companies massively inflate the price of the drug for private buyers. Sure, they lose some business from that part of the market. But they more than make up for that loss by being able to bill the government at a vastly higher price for the Medicaid patients....

And this:

As the moral-hazard problem for medical expenses becomes a corporate rather than individual matter... Health Savings Accounts will fail to rein in costs... they change the incentives of individuals, not companies. Indeed, as more people get HSAs, we may very well see the [drug] companies raise prices even further to capture the tax-free savings in people's accounts. That... has happened with "529" college savings programs... "supposed to be an enormous federal tax subsidy for education." But the small number of financial firms... approved to manage the 529 accounts have... rais[ed] their investment fees to levels well above those in the regular investment market.

I believe the argument, although it remains a puzzle why these markets do not behave in a more competitive fashion...

Posted by DeLong at December 19, 2005 11:29 AM