Why Third-Party Payer Health Insurance Will Never Contain Costs

Health care costs will never be contained as long as we rely upon a tax-subsidized third-party payer health care system (regardless of whether that third party is private or public). In a great article, Sheldon Richman explains why:

This artificial stimulus of demand (other things equal) must then cause the real prices of medical inputs to rise, with multiple rippling consequences: the price of insurance goes up; the government’s health care budget rises, requiring higher taxes now or later (because of the debt); and resources and labor flow into the stimulated health care industry and away from other valued purposes, raising the prices of other goods and services. Higher insurance premiums in turn prompt demand for more government subsidies, higher taxes, and more debt. The less that consumers need to be cost-conscious, the more distorting their decision-making and the more disruptive their actions. Individual rationality under deceptive pricing leads to social irrationality.

Spiraling costs are natural bug in the third-party payer system, even if that’s not the intent of policymakers. Doubling down on the third-party payer system will continue the upward spiral, as Milton Friedman showed years ago.


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