Juliette Sellgren 

Science is the great antidote to the poison of enthusiasm and superstition. Hi, I'm Juliette Sellgren and this is my podcast, the Great Antidote- named for Adam Smith, brought to you by Liberty Fund. To learn more, visit www.AdamSmithWorks.org.

Welcome back. We've talked about healthcare a few times on this podcast, but today on May 13th, 2024, we're going to be talking about what on earth is going on with prices in the healthcare system. While you don't know anything about how much anything costs, how that comes about and how we should even think about prices and healthcare and our dealings with it because every person who has health, which is people who are alive, deals with this. And so it's really important, but we don't talk about it all that much and I like talking about it. Obviously my guest likes talking about it, at least a little bit, so I'm excited to get into it Today. I'm excited to invite Michael Cannon back to the podcast to provide some clarity on all of these issues. He is the Cato Institute's Director of Health Policy Studies. It's his third time on the podcast, and he's been the Washingtonian's top list of influential people in DC for four years in a row. He's also the number one libertarian healthcare scholar named by someone you could let us know who said that. I don't remember off the top of my head, but welcome back to the podcast.

Michael Cannon 

Great to be back.

Juliette Sellgren 

Alright, so we're trying some new second, third, fourth time guests’ staple questions. So this is going to be different from what I usually ask, but what is one piece of advice that you would give your younger self?

Michael Cannon (1.59)

Someone asked me that question recently. It was a magazine asked me that question recently, and the answer I gave them was that recognize that you are a unique, rare, magnificent creature and just enjoy that.

Juliette Sellgren 

How might one do that?

Michael Cannon (2.24)

Oh, it's much easier to say than to do so. Let's see. I think the way I put it was you're a wondrous creature. Feel it and enjoy it. There's never been another organism, creature thing anywhere in the universe, exactly like the odds of your existence are so astronomically, cosmically, mindbogglingly, small, that it is a wonder and a marvel that you exist at all. And the universe must have wanted you a lot because so many things had to happen exactly right for you even to be here and you're only here for a short time and no one else could is you or could be you, and you're carrying around inside of your skull the most complex thing known that humankind is aware of, which is the human brain. And I would want to instill in younger Michael a sense of marvel and wonder and appreciation for what he is and how amazing and marvelous he is, and just encourage him to feel that more than he did and enjoy his life more than he did.

Juliette Sellgren (4.03)

I like that. Speaking of how rare and unique and honestly unlikely human existence is, we want to protect that as best we can. And I guess that's kind of what health is all about. Healthcare and focusing on that sort of thing. And we were kind of talking about this a little bit before, but there are a lot of people that call healthcare special. They say that it's so important to protect human life, it's so rare. All of that stuff, which is true, that prices don't work or that prices even if they did work, shouldn't be applied to something like health because if it's important to survival, it doesn't make sense to put a price on it because it's so unlikely for humans. Your take on the last response, how do you respond to that sort of thing and what role do prices play and is that wrong?

Michael Cannon (5.08)

So everything that I said about younger Michael and how unique and marvelous he was is it applies to you, Juliette, it applies to your mother, my dear friend, Veronique. It applies to my wife and children. It applies to every one of the 8 billion people on this planet and each of them is unique, even the identical twins in ways that the universe will never replicate. And my political philosophy is we call it a libertarian political philosophy. I think that it's fundamental core is a belief, it's bedrock. Foundational principle is a belief in the high and equal value of all humans. And there's a lot of goods and services out there that keep, if you value humans, you want to care about all the goods and services out there that, as my father would say, allow humans to keep body and soul together. They keep us alive.

Some of those food, clothing, shelter, these are basic necessities and are other goods and services as well. A lot of them fall into the category that we describe as medicine or healthcare. And some people say that healthcare is special relative to all those other goods and services. I'm one of those people actually because I think that there is something special and wondrous about healthcare because it has allowed us to bring back from the brink of death, the millions or billions of people. I dunno if we're the billions yet. I mean that food, clothing and shelter stuff definitely in the billions. Healthcare definitely in the millions and probably hundreds and maybe even billions. But there's something special about healthcare because the stuff, it is the area of the economy to which we turn when we are at our most vulnerable. Eventually a small number of people are at their most vulnerable when they're trying to obtain food.

That's because we've been so successful with making food more abundant and the show are people on the brink of starvation in the world, but that is a much smaller share of humanity than it has ever been before. But when we turn to the health sector of the economy, the medical sector, it's because we have felt a lump or we have other troubling symptoms or we get a diagnosis that we didn't know was going to hit us and our demand for these, all of a sudden we're facing our own mortality or facing serious limitations on our ability to function as humans. And we are afraid. We are afraid of the loss of connection to our families and our friends. We are afraid that we're going to lose our lives. We're afraid that we're not going to be able to enjoy life as much as we have. And in that moment of vulnerability and fear, we turn toward healthcare providers with the hope that they'll be able to heal us and make us whole again and allow us to enjoy this wondrous thing, this wondrous gift of life and all the connections that we have with others that come with it. And so it really is, healthcare really is a special sector of the economy because your demand for food doesn't skyrocket in an instant the way your demand for healthcare does.

And I talked about food insecurity and the vulnerability associated with that. It can be an even starker kind of vulnerability when you're talking about patients who require lifesaving medical care. You got started talking about or you worked in the role of prices, and that's an incredibly important part of providing people the medical care that they need of making healthcare more universal so that we are able to save as many people as possible from the limitations that diseases and disorders impose on them. And one of them being premature death. If you want to make healthcare as universal as possible, really you need to focus on getting the prices right because the prices are what determines, who gets what determines where the resources go. And if you want those resources to match the need that exists, those prices have to be just right because when they are off, you get a mismatch between need and resources and that could be calamitous, it can result in loss of life, it can result in a lesser quality of life for vast, vast numbers of humans.

Juliette Sellgren (10.19)

Something that I was thinking about while you were talking is that I think for a lot of people we don't even realize how many times healthcare has come to our rescue. I always joke that I used to have this autoimmune paired with a childhood disease and I had trouble walking because the skin on my feet. I don't know, it was this whole thing. It wasn't that I couldn't move my legs, it was that I couldn't really stand on my two feet of my skin. I don't know, it's a weird thing. Too complicated to explain, kind of gross, but I'll leave you to imagine I guess. But I used to always joke that when I was 12 I'd be like, well, if I was a deer or if I was a cat, my mom would've eaten me. I would not be alive right now because I couldn't walk. I could, but it just sucked. Or even babies who are born and I had to be vacuumed, that sort of thing we kind of take for granted. We tell it jokingly and yet the fact that so many of us are alive walking around and sure we have minor health problems, sure, you got to get a tooth pulled, you have a cavity, whatever. We kind of take it for granted, I think, and…

Michael Cannon (11.39)

I don't know. That's right. I mean every diabetic a hundred years ago, 200 years ago probably have lived to the age that they are right now. I use the example of a schoolmate, the younger brother of one of my classmates in elementary school when we were in fourth, fifth, sixth grade, we would do these fundraisers for cystic fibrosis research- bowl for breath is what we called it. We give people to pledge money for every bowling pin we knock down. And at the time, his name was Brian is Brian, Brian's projected life expectancy was something like 30 years. Now when you're in fifth grade, that seems like a good run. That doesn't seem very old. I mean, that seems plenty old. That doesn't seem like you're being cheated of life or anything like that because when you're 10 years old, 30 year olds, is there any difference between 30 year olds and 60 year olds? You didn't really comprehend that.

Juliette Sellgren 

Not as a 10-year-old.

Michael Cannon (12.46)

And so we thought that stinks for our classmates and her younger brother, but he'll be an adult when that happens. Brian is going to turn 50 I think next year. Brian has vastly outlived the life expectancy that we all had for him when we were kids because of pledge with citizens that have been keeping him alive 20 years, 30 years beyond what we thought was possible. And every time you walk down the street, every time you're in a crowded place, you're around people who probably would not be alive, but for vaccines against smallpox, measles against all sorts of other things. So I still don't think that innovations in medicine probably saved as many lives as innovations in food production and distribution because I think that that is the main thing that is allowing us to keep 8 billion people alive on the planet right now.

Juliette Sellgren 

And we need that to have brains to create things that save lives.

Michael Cannon (13.59)

And every one of these lives that we saved is a creative, productive brain that could come up with the next innovation in medicine or in food production and distribution that could save even more lives or produce even more beautiful art than we've seen before, so forth. And so this is all just to echo your point, that sometimes the role that medicine plays is invisible and it could be easy to lose sight because it's invisible. It could be easy to lose sight of the importance of things like getting the prices so that all the right resources go to all the right places where the need exists.

Juliette Sellgren (14.49)

I was just thinking when you mentioned diabetes, I fostered a diabetic cat this past semester and usually cats that are diabetic, if you don't treat them, they'll die within a year, which is sad and it's not a human, but this cat was kind of cute. Sure it would wake me up at five in the morning, but cat, and it is wild that there was a foster shelter system that provided insulin for me to provide insulin to this cat that was diabetic and that the innovations and methods we use in healthcare can extend to other things we care about.

It's crazy because this cat would've just died a few months ago probably, and it's still alive and it's getting better. It's almost not even a diabetic cat anymore to become post diabetic. I don't know. But kind of along these lines. So then what does the price system look like in a regular market compared to healthcare? Obviously you have some weirdness about putting prices on things, but doesn't it sound like it might flow better if we just decide, oh, well this many people have this disease so we need to distribute. That sounds like it might work. And yet that's kind of the system we have in a lot of ways.

Michael Cannon (16.23)

So you asked about the importance of prices in things where they need to go or how prices work in your typical market, maybe either you're hypothetically perfectly competitive market, the columnists draw on a blackboard, your supply and demand graph or in reasonably competitive markets in the real world, the way that prices come to exist and move around in a market where people are just going out there, what they want to purchase, the prices that emerged and that's sort of a system is what one economist called a Marvel. The economist is Friedrich Hayek. He had his piece in the American Economic Review, [The Use of Knowledge in Society] prominent economics journal back in 1945, where he described basically how that guides people, the invisible hand of the market, guides people to help others even if that wasn't their intention. And prices are, what I said is prices are not only an essential component of that. They are a wondrous, amazing, mind blowing component of that, that are a marvel on the order of the existence of humanity or the human brain.

The way that prices emerge when people go out into the marketplace and just sell things for whatever price they can get and buy the things that they need to eat the lowest price they can get, the prices that emerge from that decentralized activity where known as planning for prices to play particular role produces this thing we call the price system where the prices end up not through human design, but just almost by accident, playing this role where they make sure that the resources get to the most to where people need them the most. Because the people who have the greatest need, or at least the greatest ability to express a need, bid up the prices so the prices rise and that tells people who produce those things that people need. Oh hey, there's a lot of money we can make by providing more of that stuff.

And so they increase production to meet that need. And then if the need, then when they do that, that bids the price down. But when you have more suppliers providing whatever it is, that means that they're bidding the price down. So price decision then makes that stuff more affordable, not less. And the producer's desire an ever increasing share of the market, leads them to try to make food and other things more universal by eliminating unnecessary costs and getting the price down as low as they can, consistent with the level of quality that consumers want so that they can profit, they can gain market share, they can earn more money that makes the producers better off, but it also makes the consumers better off by making food or whatever. It's that we're talking about more universal and all of that happens, all of that happens without anyone planning.

All of that happens without anyone sitting down and saying, Hey, it would be great if we had this thing called a price system that made sure resources go where people need them to go. It all just sort of emerges and that was the marvel that Hayek was writing about. And that's what happens in not just on the blackboard where you adhere to all of the assumptions of perfectly competitive markets. Those forces are at work in any reasonably competitive market and they're constantly making adjustments and no individual or group of individuals could if they tried about where to invest resources in order to best meet human needs. And so it really is a marvel, I think the way it works, the function they perform and how well they perform that function in even a reasonably competitive market. And when you something is preventing prices from performing that function, which is what I think happens in healthcare, then that creates a lot of problems and you end up with a lot of unmet need and a lot of avoidable human suffering. I think that's why it's, we can talk about examples, concrete examples of that, but that's why I think it's so important to get the prices right. 

Juliette Sellgren (21.16)

Healthcare, I think what's so confusing is that we do have on the surface a price system. You can say, well, how much does a hip replacement cost? And there is a dollar value that is generally associated, even though we can talk about this, how it differs by where you get it put in, what type of building it is, crazy things like that and by who, but it looks like it functions like any other market because we measure it in the same way. But that's just kind of economics. So what are these problems? How is it different? What is getting in the way of that and why is it so hard to see?

Michael Cannon (22.08)

So there are prices in healthcare. Obviously anytime you have someone exchanging this economic good or this thing with value for another thing with value, you've essentially got a price. And it's a good thing you do because if people weren't exchanging value for value, then they would only be producing consuming the things that they themselves produce or they'd be enslaving people in order to get them to produce things that you want. And neither of those options is an attractive one because they leak that massive deprivation. And there will always be prices as long as you have economic exchanges, but that's not the same. And so there are prices for hip replacements and so forth. But that's the same thing as saying we have a price system. The way that economists use that term, there will be systems, there may be other systems for determining prices, but when economists say the price is, and what they're talking about is that market mechanism that operates without anyone planning it or trying to control it.

The Cato Institute is releasing, my employer is releasing a book, the title of which is The War on Prices, the editors, my colleague Ryan Bourne. And it talks about all the different ways that that governments interfere with the price mechanism in all sorts of sectors of the economy that prevent that process that I've been describing from working. And I contributed a chapter to this book on all the ways that government in the United States prevents the price system or the price mechanism from doing the sort of things I'm describing matching resources to need. And as I suggested in the United States, because government does countless things that distort those priorities, that prevent them from sending the information and the incentives that are necessary to match resources to need, we end up with a lot of human deprivation and deprivation in people's the most vulnerable moments of people's lives when they need that procedure or they need that medicine or else they're going to die.

And those distortions of the price system or those distorted price signals end up leaving people without the medical care that they need. And I argue in that chapter that if we want to make healthcare more universal, we need to use that mechanism to allocate resources according to need. And that doesn't mean you don't subsidize it, doesn't mean you don't help people who require help. If you want the government to subsidize people who would have a hard time finding medical care, then you can still do that. You can still subsidize 'em the way the US Social Security program does. You can give them cash, but don't interfere with the price mechanism's ability to match resources to need. Because if you do that, then you will, as we are in the United States, as I say, increasing the amount of deprivation rather than reducing it. If you subsidize people with cash, then not only will you keep matching, allow the price system to match resources to need, but that price system will also make healthcare more universal by sparking price competition that brings healthcare within the reach of people who cannot afford it right now.

Juliette Sellgren (25.57)

And I think part of the reason why there's this confusion about the US being the most free healthcare system is because it's not obvious where government is intervening. So on one hand you have government kind of, and I might butcher this, so obviously let me know if I'm getting this descriptive part wrong. But from the way I understand it, the government is orchestrating not only the payments and the amount of payment and the way that we measure the payment between, so for Medicaid people in poverty and the government or Medicare, elderly people and the government, but also on the other side, they're dealing with the suppliers of things.

And then in addition to that, they're dealing with your employer and your health insurance and they're seemingly minor and maybe even unrelated interventions that maybe look like they have nothing to do with prices, but even if they, and sometimes it's more explicit, but there are so many different places where the price mechanism is messed with. So can you kind of maybe give us some examples of ways that the prices get distorted and I don, I don't know, help us understand all the different places where we're kind of getting in the way of this marvelous, almost unimaginable flow of information?

Michael Cannon (27.36)

Sure. So there is this myth out there that the United States has a free market and that the prices that we see in healthcare, and so the prices that we see in healthcare in the United States reflect the sorts of prices that free markets produce. If you look to The Economist, the magazine, they once published the claim that this is a quote, United States is one of the only developed countries where healthcare is left mostly to the free market and other publications like the Los Angeles Times will say that the US health sector has largely unregulated prices. And these claims do not withstand even the slightest bit of scrutiny. If you do look at the forces that determine that, the systems that determine prices in the US health sector, you end up agreeing with former Clinton and Obama administration economist Sherry Glied, who has said that there's, and this is another quote, there is no reason to believe that current prices provide incentives that reflect either underlying costs or consumer preferences end.

That is, there is no reason to think that the prices we see reflect market prices. And so that's a democratic economist from Clinton and Obama administration. So this is not a controversial claim among economists. Economists will agree what we have in the US health sector is not market prices. So what are some of those interventions you ask that just short prices in the health sector? Well, there's the real obvious stuff and then there's the really, it runs the gamut from really obvious stuff to really subtle ways that the government distorts those prices, distorts the signals that both producers and consumers get and ends up with a lot of excess consumption of healthcare in some places and under consumption in other places, much to both them to the detriment of people's health and happiness. So what's sort of the obvious stuff? Well, the US government, the federal government or a number of decades now has prohibited people from buying and selling human organs for transplant.

So even if you have two kidneys and you are a match for this stranger who's going to die unless she gets a kidney and you are on the fence about letting that stranger have your kidney, that stranger cannot give you money for it. There are ethical concerns for that. There are federal penalties if you do exchange a human organ for cash that way. There are ethical concerns about that. I get those ethical concerns. But one very important concern that everyone should have is that what that policy actually is, is a price control. The federal government is putting a price ceiling on transplantable organs of $0 and 0 cents. You can still give your organ to that person, they just can't give you any money for it. So they can give you other things in kind. So there's kind of a price, but the cash price is $0 and 0 cents.

And when you impose a price ceiling, a binding price ceiling like that, what the economists tell us is you will get shortages. And for decades there has been a shortage of transplantable organs in the United States. There are waiting lists for these products just like there are waiting lists for healthcare maybe in corners of the United States, but definitely in other countries where the government controls the prices and sets those prices too low to meet demand. And so that's a very obvious example. Other governments setting a price at zero and the deprivation that results, there are people on waiting lists for organs in the United States who are there for years. They die on the waiting list. People who could have been saved if we were able to use prices to increase the supply of transplantable organs. Again, there are ethical concerns that you would've to deal with, but we can't deny that that's a price control and that is causing deprivation and loss of life.

Then there's more subtle price controls. One that is particularly vexing to me are price controls that government imposes on health insurance, the Affordable Care Act or what people have come to call Obamacare, which Congress passed in 2010. It took full effect in 2014, imposed a system of price controls on health insurance without government intervention. Health insurance companies will set higher prices for people if they're already sick or if they're older, if their expected medical expenses are higher. Because what you're doing with health insurance is you're transferring the risk of at least part of your medical expenses to an insurance company. And if you want to transfer more risk, the insurance companies reasonably want to charge you more for that. And if you are healthier and transferring less risk than they will charge you a lower premium. And what Obamacare says is no, you can't do that for two people.

If you're selling the same plan, the same health plan to two people at the same age, you have to charge them the same premium regardless of their health risk, which acts as a binding price floor for healthy people because the insurance companies that are going to charge them the same premium, it has to be an average sort of a weighted average between the healthy and the sick in that people who enroll in that plan, that means if there are low risks, healthy people, their premiums are going to go up because that's a binding price floor. The price can't go below what the insurance company charges to those sick folks over there. And for those sick folks, those price controls impose a binding price ceiling. The price can't go for the high risk folks cannot go above what the insurance company charges the low risk folks.

So it's a combination of binding price floors and binding price ceilings. And what you get is you get, when you increase prices for health insurance for the low risk people, fewer of them buy health insurance. So you're depriving them of health insurance that they could otherwise afford and they would otherwise purchase. And with regard to the sick folks, you end up creating quality problems and deprivation just like you do with the binding price ceilings on organ purchases. And for the same reason a binding ceiling results in lower quality, a lower quality product. And the evidence for that comes from actually another democratic economist, Michael Caruso, who's an economic advisor to President Joe Biden, who has done empirical research showing that Obamacare’s health insurance price controls are resulting in not just lower quality health insurance for sick people with multiple sclerosis and other medical conditions. But he had said that even healthy people can't get adequate insurance because of Obamacare as a result of these price controls because they can't buy adequate insurance against getting multiple sclerosis and other diseases against which these price controls end up discriminating.

And then it gets even more subtle from there, the fact that the federal government taxes your cash wages that your employer provides you, but not the employer sponsored health insurance that they provide you is in effect a distortion of the after tax prices of employer sponsored health insurance versus everything else that you might purchase, anything else you might purchase with cash, including health insurance that you choose. And that ends up distorting the prices for, first of all, health insurance. It increases prices for employer sponsored health insurance, but it also ends up distorting the prices for health insurance because then people demand more employer sponsored health insurance when they have more health insurance that insulates them from the price of medical care. They demand more medical care that increases claims against health insurance plans, which increases health insurance premium even further. And then because the patients don't care about or care less than they would otherwise about the prices of medical services because they have more insurance than they would've otherwise, you get higher prices for medical care.

So this thing doesn't even seem like a price distortion. It seems like a tax break for people who have employer sponsored insurance ends up distorting insurance and healthcare out of reach for millions and millions of people, including many vulnerable people. And we're still, Juliette, only scratching the surface here of all the ways the government has sourced prices, we haven't talked about government purchasing of medical care, which accounts for about AFF and health spending in the United States and all the ways that the government gets those prices wrong. So you get a mismatch of resources to need.

But the net result is, and we haven't talked about insurance mandates that require coverage of particular services that end up distorting prices upward. But the net result of all this is that government exerts tremendous amount of control over prices in the United States as Sherry Glied, the Clinton Obama economist said, those prices do not reflect either underlying costs or consumer preferences. So these are not market prices that we're getting. And that does result in dramatic deprivation often because not just because sometimes like with organs, the prices are too low and either goods and services are not available or the kids with Obamacare, the quality degrades, but just as often government intervention results in prices that are too high and we get a lot of deprivation as a result of those higher prices. And that's so pervasive that when we see in the news stories about how this person was just in the emergency room for a couple of hours and got a bill for $83,000 or the price of this drug is astronomically high, it's a thousand dollars a month, and how are people going to be able to afford it? It's often because the government has intervened to either set directly or otherwise influence prices and then we end up not with market prices but sky high prices that are the result of government intervention.

Juliette Sellgren (38.29)

So you mentioned that because of Obamacare, insurance companies have to basically average out what they charge people, right? And you explained well the implications of that, does that apply to all insurance?

Michael Cannon (38.45)

Yes. In the United States, prior to Obamacare, there was only one market where you could have market prices for health insurance. That's what we call the individual market where people purchase insurance directly from insurance companies. The insurance companies could vary the premiums that they charge you based on your individual health risk, the amount of risk you were transferring to them, but that was only about 10% of the private market and maybe even less because in some states, states banned those sorts of market prices for health insurance. Obamacare banned those market prices for health insurance even in that 10% of the private market. Now, what's the other 90% you might be asking? Well that's employer sponsored health insurance. And there the answer is complex, but it's still basically the government banned market prices for health insurance. It is unlawful for employers to charge different workers different premiums for the same plan based on health related factors.

So that on the surface it is a prohibition on market prices and health insurance. And it appears, if you just look at what the law says, that this would be a binding system of price controls like we see in Obamacare. It's a funny thing though. It's actually less binding than you might think because the market defeats it. The labor market defeats that price control. So it doesn't really work in employer responsive insurance the same way it works in Obamacare. The way the labor market defeats it is the labor market adjusts cash compensation downward to accommodate to account for the higher medical expenses that high risk employees and their dependents impose on the company health plan. So Juliette, you're a young woman in your twenties. I am a middle-aged dude in my fifties. If we worked for the same company and bought the same health plan from that company, we would pay the same nominal premium.

But my employer, or I should say the labor market, it would be both my employer and me would contribute to this effect. Probably my cash compensation would adjust downward to compensate for the additional costs that I would impose on the company health plan if my health risk is higher than yours so that I would be paying a higher premium. In fact, I would be paying more for the company health plan even though you and I are paying the same explicit premium, but I would be paying more in the form of lower cash wages. So like I said, it's complex, but on the surface you do have, and I would say even functionally, you have price controls on just about every form of health insurance in the United States with really just two exceptions. One, and they're both very small markets. One of the markets for health insurance in a couple of US territories where Obamacare's regulations don't apply and they haven't banned those market prices themselves. And the other is the market for short-term health insurance, which Congress explicitly exempts from those Obamacare price controls. 

Juliette Sellgren (42.08)

So, what you're telling me is that, but effectively we're getting worse outcomes. Even if you buy into this, this idea of, well, it doesn't seem fair to charge unhealthy people more because need, whatever your reasoning is for thinking that this might be a good idea. What you're saying is essentially the outcomes are worse for everyone because people who don't need it as bad don't get it when honestly having access to healthcare for a healthy person is like having access to Netflix. Why the hell not? And then for a sick person, they actually are worse off in what they end up receiving and how much they are compensated basically in this way. So it sucks for everyone.

Michael Cannon (42.59)

If what you want is to make healthcare more universal, then not only do you want market prices for medical care so that you can, among other reasons, get these resources where they need to go. Oh, it sparked price competition that will lower air prices overall so that healthcare becomes more and more universal over time. That's how we make things more universal. Lower prices, I'll have more to say about that in a moment, but you even want market prices for health insurance. You even want, as awful as this sounds at first, you even want insurance companies to be able to discriminate against the sick because it is the ability to price health insurance according to risk that leads people to purchase insurance while they're still healthy and contribute then to the medical bills of strangers who end up getting sick because if you tell them you don't to, we won't charge you more if you wait until you're sick to buy health insurance and everyone's going to wait until they're sick to buy health insurance, why waste money on it now when I could buy it later and that no higher premium, but the ability of insurance companies to say no if you waited until you were sick to buy health insurance is a powerful incentive for people to start buying health insurance when they're healthy and do that very compassionate thing of contribute voluntarily, contribute other people's medical bills.

And that also then sparked competition among insurance companies to make health insurance more secure for people after they get sick. And health insurance companies were doing this before Congress enacted the Medicare program in 1965. Insurance companies, and this is again Clinton, Obama economist, Sherry Glied testified coverage that did not disappear when you changed jobs that did not disappear when you retired. And they were doing this with innovations that allowed you guaranteed you to be able to keep your health insurance even after you got sick, guaranteed you could always renew at the end of your contract term. And they guaranteed that you'd be able to keep paying healthy person premiums no matter how it got sick. You got, so if you got a cancer diagnosis, you wouldn't pay cancer patient premiums, you'd pay healthy person premiums.

Those in further innovations are only possible if you have market prices for health insurance and in case you doubt the value of market prices for health insurance. Lemme tell you one more thing about not just Obamacare, but also a part of the Medicare program for the elderly ban underwriting, a risk rating of premium. So you cannot charge sick people more than healthy people after they do that and say that the premiums that the enrollees have to pay are going to be the same for sick and healthy. The government then comes in after imposing those price controls and tries to undo those price controls. They try to undo them with subsidy programs that they call risk adjustment. It's not really important what they call it, but what those programs do is they give extra money, additional money to insurance companies based on the health risk of the sick people that they attract.

So if an insurance company enrolls someone with multiple sclerosis who costs $61,000 a year but is only paying a $10,000 premium, the government tries to top up that $10,000 premium with a risk adjustment payment to the insurance company that matches that person's expected medical expenses. Now why do they do that? Because if that insurance company only got a $10,000 premium from MS patient for each MS patient they enrolled and each MS patient costs 'em $61,000, then every MS patient they enrolled would be a $51,000 loss and they would compete to provide worse care to MS patients so that the MS patients would go sign up for their competitors' plans rather than their own. And that is actually, that is what Biden's economic advisor Michael Guso found is that even after those risk adjustment payments to the Obamacare insurers, those price controls are still penalizing the insurers who provide quality coverage for MS patients.

And so the insurance companies are still are making their coverage for MS patients worse in a way that harms all patients, not just MS patients, because the risk adjustment payments are not doing what they are supposed to be doing and offsetting the harm of those price controls. So remember when you think about whenever it seems unfair that insurance companies would be able to set premiums according to risk, the government itself acknowledges how important it's to set premiums to risk. That's what those risk adjustment programs are trying to do. They're trying to mimic market prices because market prices for health insurance minimize the insurance companies incentives to shortchange the sick government bank controls maximize those incentives and that's why they're trying to undo them. So those risk adjustment payments, I like to say those risk adjustment programs are the homage that government price controllers pay to market prices for health insurance.

Juliette Sellgren (48.24)

And on past episodes, you've kind of described all of the history of American healthcare policy as this patchwork system where basically they do something, then they try to reverse the bad effect, but keep the good things and whatever. And basically it just is this amalgamation of a mess. And it's weird that they acknowledge, well, it's funny is what it is. They acknowledge the importance of prices when it comes to risk, but there are places where they're really bad at acknowledging or even putting in place these sorts of things. For example, the different prices that you pay for a given service, the fact that you don't even really know what you're paying is a whole other thing also kind of problematic. How much does anything cost? I know how much my allergy shots cost, nothing else, which is weird, makes it hard to actually know what you're getting yourself into. But what are some of the price discrepancies that come out of this? Things aren't even being priced at the value they should be at.

Michael Cannon 

I'm sorry, can you repeat the question?

Juliette Sellgren 

Yeah. So in this chapter I read some of how different services will be charged, different amounts depending on where you get the thing done, for example. And you mentioned earlier that government actually overestimates the value of certain services and basically inflates the prices. Can you give us some examples and talk us through how that works? How is it that on one hand they can acknowledge the importance of prices and risk even if they don't leave it to a market mechanism, but then on the other hand, they're kind of messing with these prices in a way that's not even consistent.

Michael Cannon (50.17)

So I think the way to understand how all this works is really the framework that you just mentioned as not a coherent set of goals and coherent strategy to meet those goals. That's not what government does in healthcare, at least not in the United States. I think the much more useful framework model assumption for understanding what's happening is that the government intervened in this one way and then it caused a bunch of problems, a bunch of unintended consequences that were really big problems. And to deal with those unintended consequences, the government intervenes again to try to not to undo the thing that created those negative consequences, but to deal with just those negative consequences. But then those additional interventions lead to more unintended negative consequences. And lather, rinse, repeat, it just keeps on going. And the federal government and state governments have been doing this for about a hundred years now and intervening in all sorts of ways that distort prices either directly or indirectly, and then try to deal with those distortions not in constructive ways, but in ways that end up distorting prices and making healthcare less universal and accessible.

You mentioned, and let's talk about just one of the examples. You mentioned that you can't find out the price of anything. Now why is that? I mean, that's weird. You can find out the price of most anything that you're going to be buying, be it a computer, a car. Cars are a little tricky. I mean, they try to hide the actual price, but most people know how that works and that the sticker price is not necessarily the final price and you can't find those prices when it comes to healthcare. Well, it turns out that this problem of price transparency is really only a problem when the consumer doesn't control the money. Price transparency is not a problem. When the consumer controls the money, you're the one who has the money. You want price information, you get that information, be it about the car or about the computer or about groceries or what have you.

And that's because if they don't provide you, the producers don't provide you that information. They don't get your money. And healthcare, it's different because government has done so much to reduce the amount of control that the patient has over the money involved in these transactions that the patient is first of all, doesn't care what the price is and because it's someone else's money that they're spending. So what do I care if the price is high? If I'm spending what appears to be either insurance company's money or the government's money or what appears to be my employer's money?

And I'm certainly not going to shop around demand price information and shop around when 90% of the savings is going to go to someone else other than me. So multiple government interventions have created this situation where consumers in the United States have so much insurance that on average they're only paying 10% of the cost of their medical care directly out of pocket. And when that's the case, they're not even going to demand price information much less act on it because the savings would go to someone else and not to them. And the producers know this. They know that their customers don't care about price. So they're not focusing on providing price information to their customers. They're focusing on getting the highest price they possibly can out of every payer. Now, if it's the government, the way they do that is by lobbying the government to increase their prices, and they're actually very effective at that.

But when it comes to people who have private insurance, what they try to do is they hide their prices. They might both what they call a charge master price. Hospitals are notorious for doing this. Even doctor's offices do it, drug companies do it. They set out what is the sticker price on a car, the price point at which all negotiations begin, which is usually ridiculously high. And then they negotiate as small discount as they can for each payer based on that payer's willingness to pay different insurance companies. And you as the consumer are almost an afterthought in this process, an afterthought because you don't really care what the price is first of all. And so the market doesn't penalize them for keeping the actual prices hidden and providing phony price numbers wants to know what the price actually is because maybe this consumer is paying with their own money.

Then the producers, they have no clue what the price is because the person the consumer is talking to might be the nurse, might be the doctor or the clerk at the reception table, the doctor's office for the hospital. They don't know what the prices are because the medical group or the hospital all negotiate that behind closed doors to the insurance company. So they have no clue. They are not set up to help this person, this rare patient who wants price information. Because the government has created this game by encouraging excessive levels of health insurance that guarantees all that information is going to be that the producers are not focusing on providing that patient what she needs. They're focusing only on getting the maximum price they can out of all of these third party payers. And yes, that upsets the rare patient who wants that price information, but that patient is so rare that that's not going to move the market. That's not going to budge these producers off of their current pricing strategies.

And so that's why you can't get information, transparent information about your prescriptions, about prescriptions are actually a little bit better than hospitals. It could be a nightmare to find out how much you're going to pay at a hospital or even at a physician's office. But there is reason for hope. There is reason for hope. I think that when we were here last we talked about my, we were talking about the latest Cato Institute book, The War on Prices, where I contributed a chapter about healthcare prices. There's another book that I published through the Cato Institute previously, but it contains the same data that I included in my chapter in the war on prices about a series of experiments where insurance companies made their enrollees price conscious when receiving various services like MRIs, CT scans, shoulder and knee arthroscopy, hip and knee replacements, cataract removals, colonoscopies, lab tests made them price conscious because the insurance company couldn't get the prices down.

These producers playing these labs at the hospitals playing these games. And the patients were price insensitive, so they didn't back up the insurance company on their negotiating strategies. So the insurance companies made their enrollees price sensitive so that they would be paying 100% of the cost of the marginal cost of their hip or knee replacements. So the health plan said, we'll pay $30,000 wherever you go, but anything above that, you're paying a hundred percent of the cost. An amazing thing happened, the patients, all of them, not just the rare patient, but all of them because they were now on the hook for a hundred percent of the marginal cost of their procedures, they demanded price information. All of them did. And when all of them did, they got that price information from the hostages and they changed their behavior based on that price information, punishing the high price hospitals by switching to low price hospitals.

And then those high price hospitals changed their behavior by reducing their prices. And in that chapter I mentioned, and in my book recovery, which came out last year, I've got the results of those experiments and it shows that for hip and knee replacements, the high price hospitals drop their prices by 37% over two years, which shows you the power of price conscious consumers to spark price competition that reduces healthcare prices and makes healthcare more universal. Nobody in any of these experiments went without the medical care that they needed the price, just Ted making healthcare more by expanding access and reducing health insurance premiums from what they would've been otherwise because the insurance companies weren't paying so much in claims for all of these procedures. And so there is hope to be had out there that we can get transparent prices as we can get price competitions, but we've got to let the consumers control the money so that they will be price sensitive.

Juliette Sellgren (59.44)

You hear that listeners, next time you're at the doctor, demand the price, even if it doesn't change anything, because we're changing a culture here. If you put the fear of God into the doctor because every single patient asks, maybe something will change.

Michael Cannon (59.58)

And they might demand control over the thousands of dollars of their own compensation that their employer now controls and uses to choose their health plan. Because if they control that money, and that's like $17,000 for the average worker with family coverage, if they control that money and choose their own health plan, they'd be price conscious from choosing a health plan. So they'd choose less health insurance that either with higher deductibles or with more utilization controls by more care management that would exert more downward pressure on producer actual medical prices that would make healthcare more universal. But to get control of that $17,000 that your employer now controls would require changes to the federal tax code. So that would have to be a message they would've to direct toward their members of Congress.

Juliette Sellgren (1.0048)

Well, thank you so much for coming on the podcast. Sorry for keeping you so long. Thanks for coming again and sharing all your wisdom and your knowledge and your, I don't want to say righteous outrage, but your passionate outrage at what this is doing to people all over the place because it really is awful, right? It makes being healthy inaccessible. So sometimes I hope you enjoy.

Michael Cannon 

Just as every day you walk down the street, you pass someone who's alive today because medical care made that possible. You are also passing by people who are struggling to afford the medical care that they need. And you might not see it, but it is happening. And it's happening because of these interventions that have, among other things, throwing market prices out the window,

Juliette Sellgren (1.01.37)

And that's why you do what you do. So one last question. What is one thing that you're currently working on to improve yourself or to improve your skills?

Michael Cannon 

Oh, to improve myself. To improve my skills. Does therapy count, so well then there's that. I'm a big believer in that I've spent decades of my life in therapy, and it's to tie this all back to the advice I give to my 18-year-old self. A lot of what I would teach my 18-year-old self or lessons that I learned in therapy, both working just with therapists, but also with groups of other patients.

Juliette Sellgren 

Once again, I'd like to thank my guests for their time and insight. I'd also like to thank you for listening to the Great Antidote Podcast. It means a lot. The Great Antidote is sound engineered by Rich Goyette. If you have any questions, any guests or topic recommendations, please feel free to reach out to me at great antidote@libertyfund.org. Thank you.