Health Care and Socialist Calculation
By Arnold Kling
Soviet label notwithstanding, the relative fee structure underlying the Medicare fee schedules imposed in 1992 — the so-called “resource-based relative value scale” — has by now been widely adopted by many private health insurers in the United States as the basis for negotiating fees with physicians. The scale values procedures relative to a base unit that is given a monetary value by Congress and adjusted every year.
Pricing a medical service can be thought of as two problems. First, come up with the measurable unit of output. Second, set a price for that service. What I believe Reinhardt is saying is that insurance companies have copied Medicare’s method for defining the measurable unit of output. That does not necessarily mean that insurance companies are just as socialist as Medicare. The ability to negotiate different prices still gives insurance companies a degree of freedom that Medicare does not have. At least if I understand correctly what is going on.
In any event the socialist calculation problem is something that I worry about a great deal in the case of medical services. The insurance company is the socialist planner in this case. How does it know how much the consumer values a given medical service at the margin? How does it know the opportunity cost of the medical service?
I can see the problem being solved more easily in the context of a competitive market in HMO’s. Each HMO guesses what combination of medical services at what price will maximize profits, in the same way that an automobile company guesses what combination of features at what price will maximize profits. No one solves the problem perfectly, but they keep groping for better answers.
In my mind, each HMO can produce its services using whatever combination of inputs it chooses. It can have physicians trained in medical schools, or it can train doctors internally. All forms of practice regulation and licensing have disappeared, and HMO’s compete in part on the basis of reputation. Some medical services will be bungled, but that happens a lot in today’s system, also.