Sigh...

There are many things wrong with Rick Santorum's latest foray into healthcare economics analysis:

“People have no problem paying $900 for an iPad,” Santorum said, “but paying $900 for a drug they have a problem with — it keeps you alive. Why? Because you’ve been conditioned to think health care is something you can get without having to pay for it.”

Well, iPad's are luxury consumer electronics with a very high elasticity of demand and numerous substitute options, whereas "health care" as a whole is a product of which we are all consumers at some point in our lives, most notably at birth and death. To whit:

The mother said the boy was on the drug Abilify, used to treat schizophrenia, and that, on paper, its costs would exceed $1 million each year.

Because when your child has an incapacitating mental illness like schizophrenia (my condolences for the poor woman), your elasticity of demand for treatment is very very low. This allows companies to change very high prices, and enjoy healthy profit margins on their product. Part of this is used re-coup R&D costs, but it is not a particularly big secret that a large part of the healthcare industry's business model is based on their consumers inability to alter their demand based on price.

Apple's business model is also profitable, but for very different reasons. Mostly, they've created brand that breeds consumer loyalty, which in turn has a similar inelasticity-of-demand effect. Also, the company has aggressively worked at maintainting a self-contained development and manufacturing/retail ecosystems, which prevents competitors from cutting into their margins with low-price/high-volume gambits.

I would like to also state that market specifics aside, the fact that Mr. Santorum seems more concerned with the balance sheets of Bristol-Myers Squibb rather than a mother and her sick child, is uniquely abhorrent coming from a man with a sick child of his own.

Market Structures

Markets need a variety of factors to work in concert in order to be a "free market" that we lionize so well in everyday political discourse (e.g. "market-based solutions"). In short, they need a "structure". Academic economists tend to use the word “competitive” as a short hand for the confluence of factors that are needed to keep a market economy running smoothly as our 101 textbooks promise. On the microeconomic level, a “competitive” market structure has enough consumers and producers so that no one market actor can influence the market overall, has reasonably few and minimal barriers to entry and exit to the market, and both consumers and producers have the voluntary choice whether or not to enter a transaction or contract.

There are more wrinkles that what I've outlined above, of course, but they're not particularly pertinent to the issues raised by the Altarum Institute Center for Consumer Choice in Health Care latest survey comparing how much effort we devote to shopping for doctors versus shopping for appliances or cars. As the Washington Post's Sarah Kiff explains “appliances and cars, it turns out, get a lot more attention.”

This is at the heart of why the healthcare market in the United States (or to my knowledge, anywhere for that matter) is specifically unsuited for purely “free market-based solutions”; consumers do not have the ability to make “rational” decisions.

First, a few qualifiers: I use quotes because I mean rational in the economic sense. I do not mean to imply that people cannot be rational when they consume healthcare, but that the inelasticities of demand for essential care, combined with lack of pricing transparency, makes forming a “rational” choice while shopping for healthcare “products” - like a heart surgeon or hearing aids - an unrealistic expectation for consumers. I also don't mean to say that there's no space at all for market forces in healthcare policy. Quite the opposite, markets are have an excellent track record on decreasing costs and increasing availability of elective treatments and techniques (e.g. Lasik , gastric bypass procedures, Viagra). But these market success are constrained to a specific basket of medical procedures and goods that we would consider elective. This gives consumers time to compare prices, quality and alternative treatments. Consumers don't have this luxury at the onset of a heart attack or the outbreak of an infectious disease.

As Kiff elaborates:

Shopping for a doctor is a lot harder than shopping for a dishwasher. There’s no price tag for what you’ll pay, or a Consumer Report to reference on quality.

Representatives and pundits who spend their air and ink extolling on the the virtues of markets often have little understanding of their composition. This does damage to both our country and policy discourse.