Peter Orzag, former director of the Office of Management and Budget under President Obama, says, to quote the title of his recent article on Bloomberg.com, the “private-market tooth fairy can’t cut Medicare cost”. Perhaps it is fairer to quote from Mr. Orzag’s article itself:
“The vast bulk of health-care costs arise from an extremely small share of patients, whose insurance will inevitably bear a substantial share of their expenses.
That’s why competition in health care doesn’t work as well as in other sectors, and it’s also why the key to keeping costs to a minimum is to encourage providers to offer better, less costly care in complex cases.
Unfortunately, proponents of moving Medicare to a private ‘consumer-driven’ system, including Republican vice presidential hopeful Paul Ryan, seem to instead believe in a health-care competition tooth fairy -- that if we just increase the patient’s share of costs and bolster competition among insurance companies, the expense will come down.”
After a lengthy argument, Mr. Orzag concludes, once again bringing up the “tooth fairy”:
“We don’t want to put all our chips down on the health-care competition tooth fairy.”
I think, however, Mr. Orzag misses the point of Representative Ryan’s argument. Mr. Ryan is not counting on some “competition tooth fairy”. Rather, Mr. Ryan wants to use the free market as a way to get at and use the maximum amount of information and knowledge in order to deal with the question of health care costs.
Mr. Orzag would, it appears, do what President Obama wants to do: Get a group of people together, put them on boards and panels, make them heads of government agencies, and tell them to figure out the best way to get health care costs under control.
The problem is that even the smartest people only know what they know. The only knowledge that they can take into consideration in making their decisions is the information that they themselves know or can find out. The free market, however, can take everybody’s knowledge and information into account and can use all of it to come up with the best ideas and solutions. No government board or agency can harness even a fraction of the knowledge that the free market has available to it.
The key to solving the health care cost problem is to figure out a way to use as much information as possible. And the process or mechanism that can use and consider the most information is the free market.
Mr. Orzag has obviously thought about this issue a lot. And I am sure he has talked to a lot of smart people about how to solve the problem. But the ideas these people have come up with are only a small part of the ideas that the market can come up with. Because the free market can take into account so much more information than Mr. Orzag’s group of experts.
Mr. Orzag can’t see how the free market can solve the health care cost problem. But that’s because, or at least it appears to be because, Mr. Orzag doesn’t seem to fully appreciate the information processing capability of the free market. He doesn’t see this information processing capability as the best way to find solutions to our health care cost problems. No expert or even any group of experts has available to it all of the information that the free market has. That is why the free market can come up with ideas that no one person or one group could come up with – or even imagine coming up with.
The way to solve the problem of health care costs is to use the information processing capabilities of the free market. It’s not the a “tooth fairy”; it’s information. And the free market does it best.
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Update (8/24/12 8:22 am): For some reason (probably blogger error), when I first saved this post, the first quote from Mr. Orzag's article was omitted. I have now included it.
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