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National Institute for Health Insurance Reform

One little guy - one big goal - fix a broken system. mailto:rereason@hotmail.com

Friday, August 19, 2005

PRICES, PRICES, PRICES

News: Costs not falling.

Okay, so maybe the rising costs of drugs is not news. But the fine folks over at the AARP think it is. They recently released a study covered by webMD and The Mercury News showing the costs of prescription drugs rose by about 6.6% over the last year. The consumer price index increased by about 3.1% over the same period.

A spokesman for the drug industry disputed the findings, saying that people don't actually pay the prices measured by the AARP survey.

When we can't agree on the facts, it's always helpful to look to personal experience and the experience of our friends and families. If anyone out there has seen a decrease in the price of prescription drugs, I would appreciate a comment about it. In the meantime, I tend to believe the AARP.

Of course, pricing data in the medical field is notoriously hard to come by. There are some sophisticated rationalizations for this state of affairs, but they seem to miss the economic bottom line. People cannot shop around when they don't know how much things cost.

Aetna insurance company announced a plan to address this very problem. In a story covered by The Wall Street Journal they said they will post on the internet the actual prices they pay physicians in Cincinnati for most services. Apparently Aetna figures they can cut their costs if people shop around for lower prices. If Aetna can offer good insurance at a lower price than the competition, they should get more business.

Folks, in a real free market, prices are common knowledge. The grocery puts the price of every single item on the shelf for all to see. Many businesses spend large sums of money advertising prices. So why are prices in the health care industry usually kept secret? Economists have a term for the advantage that knowing actual costs confers when the market does not have price data: "information asymmetry." In a condition of information asymmetry, service providers can inflate prices and reap huge profits because the consumer remains in the dark.

Aetna and the AARP are doing what they can to bring light to the market. Aetna hopes to expand their program from a single city to the rest of their markets at some time in the future. This is definitely a positive step.

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