Sea of Noise

Fri, 09 Dec 2005

Moral Hazard in the Market for Health Care

Austan Goolsbee has an excellent discussion of moral hazard problems in the health care market in yesterday's Slate.

The moral hazard problem that everyone talks about is patients' incentives to purchase too much care when their costs are subsidized. But Goolsbee summarizes recent research by Mark Duggan and Fiona Scott Morton suggesting that consolidation among pharmaceutical companies has led to higher drug prices:

They found that drug makers gamed the government procurement rules that forbid companies from billing Medicaid more for a drug than they bill private consumers. When private-sector demand for a drug is small compared with the demand of Medicaid patients (as is the case, for example, with antipsychotics), drug companies massively inflate the price of the drug for private buyers. Sure, they lose some business from that part of the market. But they more than make up for that loss by being able to bill the government at a vastly higher price for the Medicaid patients. Similarly, as the Wall Street Journal reported last week, some drug makers are donating money to charities that help patients make their co-pays for expensive drugs. The donations help ensure that the patients will be able to keep taking the drugs--and also keep the official prices high when the bill goes out to insurance companies.

Don't miss this article!

The paper appears to be forthcoming in the Quarterly Journal of Economics. An NBER working paper is also available.

[via Marginal Revolution]

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