Paralyzed by Prices: An Analysis of Price Theory within the Context of Health Care

Abstract

This article examines the structure of pricing within health care. The price mechanism within health care does not function as it does in other sectors of the economy. The author examines the price theories of capitalism, socialism, and solidarism to illuminate the purpose of prices relevant to health care. Drawing points from each system, the author argues in favor of a solidarist approach to prices relying on principles set forth in Catholic social teaching, with the caveat that the capitalist natural price must first be determined. The unique features of healthcare pricing and prioritization indicate that moral principles must guide the economics of health care, not merely supply and demand.

Summary:

This article discusses the problems with creating useful prices in health care. It examines the price theories of capitalism, socialism, and solidarism to see which would be most useful for health care price formation.

In August 2017, the pricing scandal for Mylan’s EpiPen hit the news: a drug that cost US$100 in 2007 had increased to US$600 with no discernable shortage or inflationary cause. Mylan acquired EpiPen through a purchase, not through development. At the same time of the price increase, the CEO’s salary rose from US$2.5 million to US$18.9 million (Clarke 2016; Khazan 2016; Mukherjee 2016; Voyles 2016). The scandal triggered congressional hearings and eventually Mylan agreed to reduce the price of the life-saving drug, to stop the wave of bad publicity (Clarke 2016; Mukherjee 2016; Voyles 2016). Mylan’s CEO claimed that they had “struck a balance” between the company’s right to make a profit and the public’s need to have affordable access to the life-saving drug. A claim undermined by the US$1.1 billion in profits the company expected to make off the drug in 2016 (Voyles 2016).

The subtext of the scandal is something that is much bigger than the questionable pricing practice of Mylan. Prices overall in health care have been rising without much limit, and there is little understanding why this is happening. In the case of Mylan, the price rose on a single commodity. Healthcare prices set by medical providers (hospitals or physicians) are much more complicated, and healthcare costs and prices have been rising faster than inflation and threatening the stability our entire healthcare system for some time (Patton 2015; Lazarus 2016). Prices are not the same as costs, though they are interconnected and both rise simultaneously, although at different rates. Prices have risen much faster than costs in health care. Of the goals of the triple aim of the Affordable Care Act (ACA) (1) to improve the healthcare experience of the patient, (2) to improve the health of populations, and (3) to lower the per capita cost of health care, the goal of lowering costs is crucial because without some way of containing costs, the current system is not sustainable.

Prices in health care seem to be out of sync with the rest of economy and with good reason. Because the price mechanism in health care is confounded and does not function properly, it results in escalating prices disconnected from real costs. A new approach to healthcare pricing utilizing solidarist economic theory is needed, one that will support value equivalence between the provider, payer (government or insurance), and patient to achieve just prices for services rendered.

Problem of Prices in Health Care

The unique architecture of the US healthcare system needs to be examined to understand why prices in health care do not function as they do in other sectors of the economy. In health care, what is charged is not what is paid and that is not the case in other sectors. Almost all people in the United States have some form of insurance, due to the ACA and Medicaid expansion; the rate of uninsured in the United States is now 10.5 percent, “the lowest rate in decades” (The Henry J. Kaiser Family Foundation 2016). The elderly have Medicare, the poor have Medicaid and Children’s Health Insurance Program (CHIP), the working poor and lower middle class have some form of state and federally subsidized insurance through the ACA exchanges and Medicaid, and the military (active and retired) have the Veteran’s Administration and other related plans like TriCare. Most people who are employed have some form of commercial insurance through their employer. The remaining uninsured are generally people with low income but above the poverty line who do not qualify for insurance subsidies (The Henry J. Kaiser Family Foundation 2016). People who do not have insurance of some kind often receive some form of self-pay discount from the hospital or qualify for charity care as “medically indigent.” Some simply do not pay and charges are written off as bad debt.

What is paid differs from one payer to another, for the same service, even though the costs to perform those services are the same. When Medicare and Medicaid were first created, the government limited how much it would pay to “contain” its escalating costs by paying only what was “reasonable and allowable” (Pope 2013). This was justified on the basis that without such government-provided insurance, these patients would not pay anything; something was better than nothing. The government applied a volume discount, paying less per unit because of the increased amount of new patients that were now being seen. Commercial insurance plans soon followed suit.

Other innovations to contain government costs were subsequently implemented, notably the Diagnosis Related Group payment system, which is Medicare’s form of a price control, dictating how much is paid for an inpatient stay based on the admitting diagnosis. We have arrived at a system where what is paid by third parties is different from the price as well as from each other (Pope 2013; Williams and Saine 2015).

For example, if the price charged for a hospital service like an MRI on a knee is US$2,500, Medicare might pay US$1,000, Medicaid US$850, the VA US$900, commercial insurance US$1,350, and self-pay (hoping it actually pays) US$1,500 (Williams and Saine 2015). Other, nonmedical businesses might offer a senior discount, or a bulk discount to someone who buys a lot of volume, or discount prices for a sale increases customer purchasing. This is not the case with health care with discounts. For health care, these discounts, or “contractual adjustments” (the difference between what is charged and what is paid), are universal with all payers. Their intent is not to increase business but to control costs for the payer. They confound any sort of transparency or understanding because what is being paid differs from what is actually charged (Williams and Saine 2015). When hospitals are required to provide their prices to the state or to the consumer, they are stating their gross prices, but this bears little resemblance to the net payment that is actually going to be paid.

Further, hospitals frequently send statements to patients only after the insurance payer has been billed and the payment and contractual adjustment is applied. This adjustment is sometimes not reflected in the statement, leaving only a small patient portion remaining for the patient to pay. Thus, most patients are largely ignorant of how the pricing in healthcare works, adding to the confusion.

Hospitals may charge high prices, but that is not what they get paid. Sometimes they do not get paid at all because a service was not covered, was not pre-authorized properly, or was not billed in a timely manner. Government and insurance requirements, regulations, and pre-authorization rationales, which have increased overtime and often conflict, make it difficult for a provider to bill effectively and too often result in nonpayment for services already remanded. Conversely, the payers are frustrated with differing prices for the same service at multiple locations. Often the amount is quite large; what justifies a US$3,500 MRI at one hospital over one that is US$2,500 at another? The situation is like playing musical chairs with a bill no one wants to pay.

Additionally, instead of prices going up and down relative to supply and demand, prices in health care consistently go up. Prices go up because the hospitals are always trying to increase revenue in an unpredictable business. Most insurance contracts limit the rate of increase to a fixed percent, while the general practice of hospitals is often to increase prices across the board. These unusual underlying pricing practices are a surprise to people entering the field and are almost unknown to the average consumer patient. Regardless of how these practices came to be, such an abnormal pricing scheme confounds the purpose of the pricing mechanism to provide a level of predictability to both vendor and purchaser, and there are further structural issues with prices in health care that dramatically impede their usefulness.

Systematic Problems Affecting Prices in US Health Care

Too Many Players

Sometimes people remark about our system that there are too many players, too many insurance companies, too much confusion and no one can make any sense of it. Having many insurance companies is not the problem in itself. If there are too many players, it is just one too many. For price coordination to work effectively, the transaction must be between a buyer and a seller. In the case of health care, this would be the patient as the buyer and the medical provider, hospital, clinic, or physician as the seller.

However, when nearly everyone has insurance, a third party is imposed in the transaction; the insurance company that pays most of the bill directly and sees most of the cost for that care. Because of this, the buyer is both the patient and the payer. The patient experiences the care, although pays little directly, and is not in a position to judge the quality or fairness of the price charged. The insurance payer, whether a government payer or a commercial plan, is trying to lower its “costs” by paying as little as possible to the provider who cared for the patient. And all of this is done after the episode of care, unlike most exchanges where the buyer must pay before receiving the good or service. The fundamental issue is that the person (patient/buyer) who initiates the transaction, with rare exception, is not in a position to balance the service needed versus the price for that service and often cannot even get reliable price information in advance to make that decision.

Government Price Controls on Part of the Market

The next problem confounding pricing in health care is that the government payers impose price controls. Regardless of what the hospital charges, they will be paid according to the list the government payer determines is fair or reasonable and allowable. What is fair is determined by multiple factors, but the government is imposing price controls on only part of the market, their particular part. They do this to limit their own costs for the care they have legally obligated themselves to, but what happens when the amount they pay is less than what it cost the hospital to provide?

Of course, price controls can and do lead to government payers short paying or underpaying the hospital what it costs to provide for that care. This is especially true in the realm of long stays in a hospital ICU or NICU where the cost of care is exceptionally high. The result is that the hospital must make up the difference with the other payers that do not have price controls (“cost shifting”). The real costs incurred by a hospital for that care do not go away simply because the government will not pay enough. Because only part of the market has imposed price controls, the other part must make up for the underpayments by the price-controlled sector. If the whole system were under a uniform price control that underpaid the provider, we would quickly find most hospitals to be on the brink of closing or in the process of closing because of the low payment. Such a situation would not be tolerable, and the price-controlled system would be forced to increase payments or see the system collapse.

Rural versus Urban

Just as we have gas stations in urban, suburban, and rural markets throughout the country, so too do we have hospitals in these regions. And like gas stations, the prices fluctuate necessarily based on the remoteness and the volume of their market. We expect gasoline to cost more in a rural gas station because we know that they do not sell nearly as much volume in their station as an urban market and there is a higher transportation cost to bring the gasoline to that market. Likewise, a rural hospital must pay physicians as much, and sometimes more (to attract and keep them) than an urban hospital, despite having fewer patients. Lower volume and higher costs cause higher prices in health care in rural markets than in urban markets, and we should expect this.

Medicare has funding mechanisms for rural hospitals and clinics with the Critical Access Hospital (CAH), Sole Community Hospital, Medicare Dependent Hospital, Rural Health Clinic, and Federally Qualified Health Clinic designations. These provide higher Medicare reimbursement payment schemes to those rural providers to sustain them financially. This scheme recognizes the different financial and demographic dynamics between rural and urban markets (National Rural Health Resource Center 2017; Farley et al. 2002). However, cuts to these funding mechanisms, such as sequestration, have imperiled rural health care. Rural hospital closures have rapidly increased and account for half of all hospital closures in 2014 and 2015 with 673 rural hospitals financially unstable (Lemming and Wyland 2016; American Hospital Association 2016; MedPAC 2016, 2017). Although CAHs account for close to 30 percent of Acute Care hospitals and 23 percent of Medicare recipients live in rural zip codes, Medicare spending on CAHs account for only 5 percent of Medicare’s hospital payments (American Hospital Association 2016). Some of this is to be expected, as a rural market may not have the patients or the payer mix to support many specialties such as neurosurgery, cardiac and pulmonary specialists, oncology, or nephrology, thus forcing patients in rural markets to travel to urban markets for more specialized and complicated care.

Life expectancy in rural America is lower by two to three years than in urban America (Singh and Siahpush 2014). This is thought to be due in part to fewer healthcare choices (or no choices) in rural areas, leading to unmet health needs and shorter life spans (Depew 2016).

Given such differences between urban and rural markets, we should not expect to see a single price for any given healthcare service for a whole region or state. Prices must vary from place to place to reflect the differing underlying costs of providing care in radically divergent settings. Furthermore, any system that seeks to normalize prices in one state for all markets should be suspect; they will either be too low for a rural hospital to survive on or, if sufficient for the rural hospitals, will be excessively profitable for urban hospitals.

What Is Done Is Determined in the Moment

Patients are often frustrated when they call a hospital asking about how much a procedure or hospital stay will cost, only to find that the hospital will not tell them this information. There are two good reasons for this. First, a billing or admitting clerk at a hospital is not a doctor and cannot possibly know all that a patient needs to have done during their visit. Even something common, like childbirth, can differ for the same woman in different pregnancies based on what occurs during the birth. A good portion of medicine performed in a hospital is reactive care, they may plan and try to estimate how much it will cost, but what will be done to the patient and for the patient cannot be known until they are in the moment of actual care, and at that point, no party involved is thinking about the costs of the care being provided, but rather what needs to be done for the good of the patient. What the patient really wants to know is how much this will cost them; this is not known until the information is submitted to the payer, a process that can take weeks. Even within the same payer group, such as Blue Cross, there can be dozens of plans with differing reimbursement and varying patient portions due. Patients are thereby deprived of information critical to making astute financial decisions regarding their health.

Price Transparency

Price transparency has been a movement gathering steam for years within health care, and as of January 1, 2019, Medicare’s most recent final rule has mandated that all hospitals—urban and rural—post their prices online. It seems like a good idea, if patients/consumers are aware of the costs of healthcare services, they can shop around to find the best deal (Robert Wood Johnson Foundation 2016; Barkholz 2016). This is what generally happens in a price-coordinated economy. However, in order to do this, information from both healthcare providers and insurers must be correlated for each site because what is charged in health care is not what is paid. One of the significant impediments to this process is the reluctance of insurers to share this information because it eliminates a competitive advantage (Barkholz 2016). Really the hope is that patient will act as consumers and save the payers’, especially the government, money by shrewd shopping. Ultimately though, transparency is unlikely to make significant reductions in cost because the most costly services are due to a crisis in which getting to the nearest hospital as quickly as possible is more important than the price of that care. Hospitals are not shopping malls or discount warehouses; people want the best care for their loved ones in a time of need—not the cheapest. Furthermore, overtime prices will simply normalize between hospitals, but this will not address the underlying costs of providing that care, which will remain unchanged by price transparency.

Underlying Costs of Care Are Unknown

Perhaps the most complicating factor regarding pricing is that hospitals rarely understand their costs for care (Kolata 2015), and thus, pricing is not connected to their actual costs or natural price. Unlike manufacturing a car, where the costs of production are all easily known and the labor falls within an average time, health care is an individual experience: each patient is different, their needs are different, their treatments are often different, and, hence, the underlying costs to provide that care are different.

Two systems, the University of Utah Health Care and UPMC in Pittsburgh, have attempted to understand the individual costs of care relative to their prices (Kolata 2015; UPMC ²⁰¹⁶). However, these are large systems with numerous analysts dedicated to determining the costs; smaller systems, particularly rural hospitals, will have a great difficulty trying to master this kind of information without an additional rise in costs for the staff to make the analysis. Because costs change based on scale and volume, the work done by these systems is unlikely to be applicable beyond their own integrated health systems. Actual costs change per patient and per doctor (Kolata 2015).

Virtually no hospital understands its costs of care on an individual patient level the way that a car manufacturer knows exactly how much each individual vehicle with options costs to produce. This is perhaps the most crucial set of information that is missing. According to Smith ([1776] 1994), the natural price for a commodity is based on its capital investment and primarily its labor, plus a profit margin added in (pp. 53–72). Hospitals generally cannot know this information. At best, they will have a service line analysis: a cost analysis on an entire service line, like the NICU or Cardiac Care. In each of these service lines, there are multiple procedures and prices, as well as ancillary services that may be billed separately, and the costs of these services are largely unknown. The very basis for the natural price is nonexistent in health care. Trying to have a meaningful market price without a natural price to base it off of is simply not possible.

Capitalist Price Theory—Price Coordination

Theory

Capitalist price theory is best described by its modern term, the price-coordinated economy. Price coordination expresses the interaction that goes on between the buyer and the seller constantly to adjust the price accordingly for a good or service relative to the circumstances (Smith [1776] 1994, 53–72; Sowell 2004a, 7–40). Capitalist economist Sowell (2004a) informs us that, “Prices coordinate the use of resources, so that only that amount is used for one thing which is equal in value to what it is worth to others in other uses” (p. 10). Prices are set and reset by sellers trying to figure out how much they can sell their goods or services for in a way that will make them enough money to be profitable. In The Wealth of Nations, Smith ([1776] 1994) details that there is the natural price of a commodity, which is cost of production of the good—primarily labor in his estimation—and the profit required to maintain the business, but there is also the market price of the commodity, what the good can be sold for at the market (pp. 53–72). Goods can be sold at the natural price or above or below it (Smith [1776] 1994, 53–72).

Buyers use prices, in part, to determine whether a product or service is worthwhile for them or not. “Price changes guide people’s decisions through trial and error adjustments to what other people can and will pay as consumers, as well as what they can and will supply as producers” (Sowell 2004a, 16). When goods are in great supply and low demand, the seller may have a market price below the good’s natural price and can incur a loss, whereas when demand is higher than supply, the price will go up above the natural price (Smith [1776] 1994, 53–72; Sowell 2004a, 7–40). In the price-coordinated economy, prices are constantly changing to reflect the give-and-take between the buyer and the seller.

Prices inform the consumer of important information too, the value of a good or service, even one that we need, has to be evaluated against what we can afford, and in so doing, we individually balance our wants and needs against what is possible or necessary. Prices also inform the seller of goods or services, they tell them what can be sold at a profit and what consumers do not want to pay for or will only pay for at a loss to the producer/seller (Sowell 2004a, 7–40). When this price information is missing, or uncertain, the tendency is for the consumer to use more of a good or service than they would if the price information was available. The producer/seller does not know what people want, what they can afford to make to stay in business, or what causes a waste of resources because a good or service is sold at a loss (Sowell 2004a, 7–40).

Pros and Cons of Capitalist Price Theory

Capitalist price theory is really a theory of providing necessary information between buyers and sellers, so that a mutually beneficial exchange can occur (Gilder 2013, 19–27). Prices can fluctuate radically, even on the same good, based on its immediate utility, but this helps society to allocate resources efficiently without planning or effort (Sowell 2004a, 7–40; Gilder 2013, 19–27). When a hurricane strikes and the price of gasoline in an area skyrockets to a high level, the gasoline producers, who want to make as much money as possible, will prioritize their shipments to the affected area making sure to get it there as quickly as possible (Sowell 2004a, 7–40). “From the standpoint of the economy as a whole, this means that resources tend to flow to their most valued uses” (Sowell 2004a, 10).

What prices do then is to convey information about where and how to best use scare resources. Gilder (2013) puts it this way, “We begin with the proposition that capitalism is not chiefly an incentive system but an information system…information itself is best defined as surprise—what we cannot predict rather than what we can” (p. 26). What the best utilization of resources is, is something we do not know and rather than make decisions in the dark, businesses use prices to tell them the information they do not have and need to know. Because of this vital information provided by prices and the give-and-take interaction between seller and buyer, the price-coordinated economy is the most efficient with scarce resources (Sowell 2004a, 7–40; Gilder 2013, 19–27). Given that this is the case, we should expect that if we were to properly use the price-coordination mechanism in health care, we would automatically have the most efficient use of healthcare resources. Of course, this is not the case; we have the most expensive healthcare system in the world without having the best outcomes (Reid 2009, 8–10). This tells us that the vital information that prices convey either is missing or is not enough to be useful, we are missing the surprises that will tell us how to best use these scarce resources.

On the other hand, even if prices were functional within health care, we should have some pause about a purely capitalist approach in the sector. Prices can change with the market, at a pace more rapid than governments can budget for, and our health system, as well as most of the developed world, has a substantial government investment in health care. Governments cannot budget spending taxpayer dollars effectively if they cannot predict their expenditures; governments around the world have struggled with funding health care precisely because their expenditures go up faster than originally predicted and faster than their tax revenues can support (Pope 2013). Capitalists would respond that this is because of governments’ involvement in the first place (Pope 2013; Sowell 2004b, 69–95).

In a purely capitalist system, there would be no government intervention or government price controls and most likely a much smaller insurance market. Many would be uninsured. By doing this, some economists predict that prices for health care would return to some amount of sanity and would actually fall (Pope 2013; Sowell 2004a, 7–40; Sowell 2004b, 69–95). However, money would be the entrance ticket to receiving health care. The poor and the elderly on fixed incomes would have less access to health care due to the prohibitive cost. Middle-class people who go through a job loss would lose their health care along with it and might not receive the care that is needed. The system would be highly efficient, and prices would automatically regulate health care in terms of supply and demand, and according to the theory, prices would be much lower, offsetting some of the potential for the lack of access because of cost (Pope 2013; Sowell 2004a, 7–40; Sowell 2004b, 69–95).

Socialism and Catholic social teaching (CST) note that capitalism results in an unjust distribution of goods and services, and this would extend to a capitalist healthcare scheme (Marx and Engles 1848, 9–31; Pope Leo XIII 1891, 7; Pope Pius XI 1931, 56–58). Market price efficiency is cold comfort to a parent whose child is dying from a preventable and curable disease. The reality is that we already experienced this as a nation and decided in the 1960s to create Medicare and Medicaid to help those who were uninsured and vulnerable and were not receiving the care they needed (Social Security Administration n.d.; The Henry J. Kaiser Family Foundation 2009; Palmer 2003). Efficiency is not a moral value; caring for the infirm, who cannot care for themselves, is.

Socialist Price Theory—The “Real” Value

Theory

In socialist price theory, the “real” value is the price that is established—or should be. Socialism subscribes to the surplus value view of prices (Marx [1867] 1977, 320–39; Sowell 1985, 106–42). Prices, or exchange value, are derived from their commodity value, which incorporates the capital invested and the labor used in making the commodity. The surplus value, or profit margin, is what the capitalist can get in the market from the goods or services, which he keeps and does not share with the proletarian worker that added the real value to create the commodity (Marx [1867] 1977, 320–39; Sowell 1985, 106–42). In the socialist economy, the surplus value would be reduced or eliminated, as the state would control the enterprise, rendering profit unnecessary, and the wage of the worker would be increased, while the costs of goods and services would be decreased.

To Marx ([1867] 1977), money “is the measure of value as the social incarnation of human labour” (p. 192). Money itself was a form of capitalist exploitation as it commodified the labor of the worker (Marx [1867] 1977, 188–98). The prices of goods and services were set to the disadvantage of the worker (Marx [1867] 1977, 188–98). In Marx’s view, prices are a form of exploitation because they are an appearance of value for the good, not the true value of the good itself (Marx [1867] 1977, 188–339; Sowell 1985, 106–42). Marx’s view was that “The ‘law of value’ was a principle of resource allocation or the transfer of ‘socially necessary labor’ (value) from one sector of the economy to another—a necessity that was at any given point accidental in a capitalist economy…that value was an underlying ‘essence’ only imperfectly represented by the tangible ‘appearance’ of price or exchange-value” (Sowell 1985, 141). Moreover, “Value as defined by Marx cannot equal price, because goods produced by varying combinations of capital and labor cannot exchange in proportion to their respective labor if profit rates are equalized by competition” (Sowell 1985, 141).

This creates a problem for socialist economies: how does one set prices? Marx predicted prices would be set in the socialist state through a plan of the proletariat, who would now be in control, and who would now be able to deal honestly and freely with one another in setting prices (Sowell 1985, 126–29). How this would occur was vague and ephemeral (Sowell 1985, 126–29). In practice, socialist economies that followed Marx set prices arbitrarily by bureaucrats. Some mechanism was needed to replace market set prices, and this new mechanism is the price control (Sowell 1985, 126–29). Price controls are imagined or desired prices set by those not involved in the enterprise or the market in an attempt to approximate the labor value of the good or service. Socialism attempted to get at the real value, but in practice, prices became set by fiat, bearing no useful information to the buyer or the seller to allocate resources efficiently or effectively (Sowell 1985, 126–29).

Pros and Cons of Socialist Price Theory

The advantage of price controls is that prices are contained and kept steady, something very appealing to governments (Sowell 2004a, 7–40). The price of goods and services is generally low and affordable by all in the society. For Marx, the real value is determined and the exploitation of the worker, whose labor makes the goods possible, is eliminated. Goods and services will be distributed appropriately throughout the society according to need (Marx [1875] 1999). By doing so, the roots of class antagonism (injustice, envy, and exploitation) would be eliminated and a utopian state would be created. For health care, this would mean that the profit of those not involved in the care of patients would be eliminated and the costs of care would be free to the worker (as the state would run it) and inexpensive to the state.

Price controls ensure that the information provided by prices is lost; this increases waste, causes people to order what they do not need, and creates shortages on items they do need (Pope 2013; Sowell 2004a, 7–40; Sowell 2004b, 69–95). In general, price controls cause consumption to increase and unexpected scarcity of common resources to occur (Pope 2013; Sowell 2004a, 7–40; Sowell 2004b, 69–95). It may be that a good or service is inexpensive, but that does not matter if the good is so scarce that it is unavailable. Without prices to inform us of the demand for a good, the producer does not know how much to make and ship to a market. Overconsumption happens because at a lower price there is no barrier to getting the product or service, so most people will take advantage of the system (Sowell 2004a, 7–40).

Government imposed price controls on guaranteed care are at the root of this problem and are present in our current system. Acclaimed Economist Thomas Sowell (2004b, 93) puts it this way:

The negative consequences of price controls on medical care seen in various countries around the world are not just incidental mistakes that can be corrected by tweaking the healthcare system. They are the medical version of patterns seen in response to price controls on many sorts of goods and services, over a period of centuries. Four things have almost invariably followed the imposition of price controls to keep prices below the level they would reach under supply and demand in a free market: (1) increased use of the product or service whose price is controlled, (2) reduced supply of the same product or service, (3) quality deterioration, and (4) black markets. All these things have been found when the prices of medical care have been controlled—and all are particularly harmful in matters involving pain, disability, and death.

Solidarist Price Theory—Mutual Equivalence

Theory

World War I influenced Pesch’s ([1922] 1998) solidarist price theory heavily and the aftermath of the War in Germany in the 1920s; Germany was the crucible within which his ideas were developed (pp. 211–25). He witnessed skyrocketing wartime prices due to scarcity, and he also was a witness to the postwar inflation in Germany (Pesch [1922] 2003, 117–36). His approach addresses the abuses and misuses of capitalist price theory relying solely on supply and demand in the market.

Solidarist price theory is the medieval notion of the just price (Pesch, Heinrich Pesch on Solidarist Economics [1922] 1998, 211–25; Pesch [1922] 2003, 1–105). Because economic exchanges involve people, people made in the image and likeness of God, such exchanges need to be moral and just toward all parties (Pope Leo XIII 1891, 7; Pesch [1922] 1998, 211–25; Pesch [1922] 2003, 1–105; Pesch [1918] 2004, 80–89). A failure to do so will lead to injustice, which then will give rise to the class antagonism that socialism preys upon.

Pesch ([1922] 1998) first proposes that justice in such transactions forms a sort of equality between exchanging parties. “Justice of its nature requires such equality (adaequatio). What is just is what is equal” (p. 214). Accordingly, the just price must, “correspond to the value of the good offered in exchange. Secondly, the price must afford a return equal to the work and other costs incurred in producing the good offered in the exchange” (Pesch [1922] 1998, 214–15). Finally, he comes to a definition of the just price stating, “the just price will be determined, as a rule, by general consensus wherever there is no legally established price” (Pesch [1922] 1998, 221). This is very similar to the capitalist version of price theory achieving, in time, equivalence, or equilibrium in capitalism, between exchanging parties.

And like capitalism, in solidarism, prices are determined by the value of the good or service, its usefulness to people in the satisfaction of wants and needs, and the relative scarcity of the good or service in question (Pesch [1922] 2003, 1–105). However, supply and demand cannot simply determine the just price alone as the capitalists maintain (Pesch [1922] 2003, 29–30). “Commodities can be held back, just as fictitious wants can give rise to an unreal demand—both for purposes of profit” (Pesch [1922] 2003, 30). Artificial scarcity (created by the producer or distributor) and artificially induced wants (created by manipulation and advertising) done for the sake of increasing profits leads to a natural injustice because the buyer is then at a disadvantage and agrees to something without knowledge that they would not agree to were they to have complete knowledge (Pesch [1922] 2003, 1–105).

In such a transaction, there is not a mutual equivalence between parties. Equivalence achieves a justice in the exchange, for our most basic notion of justice is a balance between competing interests or parties. The just price, like the just wage, is conceptually different from the materialist capitalist and socialist theories, for it infuses economics with morality, claiming that the only stable and sustainable economics for people will be the one guided by ethics. To do otherwise is to miss the point of what economics is truly for: humankind, not profit, efficiency, or class warfare (Pesch [1918] 2004, 80–89). For Solidarism, it is justice that makes the economic system moral, as opposed to capitalism’s claim that it is freedom that makes it moral (Pesch [1922] 2003, 29–31).

Pesch qualifies the system very carefully, for the buyer and the seller need to be of equal knowledge about the good in question, and they must have a normal sort of give-and-take, not one where the other holds all the cards in negotiation, such as in an emergency situation of scarcity. But, when this prerequisite is not present, just pricing becomes impossible.

[W]here that prerequisite is lacking, where powerful forces and interest simply dominate the market in a one-sided manner, or where other unusual situation occur which stand in the way of normal price formation, that presumption ceases to apply. Taken by itself, therefore, the fact that price is actually asked and paid on the market does not yet add up to justice in pricing (Pesch [1922] 1998, 221).

According to Pesch, the reason that just pricing is not possible without the prerequisites is due to incomplete information; nothing restricts capitalism from providing misinformation that misleads the exchanging parties. Just prices must be reached by a free exchange between both parties about what the value of the good exchanged is. In times of crisis, the seller may hold back a good that is in high demand, like food or fuel, and charge an exorbitant price for the product, in such a case the buyer is no longer really free and is forced to pay an otherwise unsustainably high price due to the circumstances (Pesch [1922] 1998, 211–25). A free exchange is one where each party, buyer or seller, is not under duress.

Conversely, the seller forced to sell goods below cost due to a crisis is no longer has a just price either because they are under duress to sell goods at a price lower than what was paid for them or what it cost to produce (Pesch [1922] 1998, 211–25). While capitalism claims that it is supply and demand that determines the price, Pesch ([1922] 2003) argues that really it is price that determines supply and demand (p. 30). How prices are formed then is imperative to the creation of an ethical economy.

Pros and Cons of Solidarist Price Theory

The advantage of solidarist price theory is that it proposes that the most optimal price in society is the most moral one (Pesch [1918] 2004, 80–89). It may not be the lowest price or the most “efficient” price in capitalist terms, but it is the one where all parties agree on a price that balances the interests of each and is freely entered in to with knowledge. What solidarism does not allow are the exorbitant prices charged in times of crisis, monopolistic prices, or fire-sale prices that undervalue the labor and costs that went into the product.

Capitalism would regard such pricing practices as stagnant and preventing or inhibiting the market price that efficiently allocates scare resources. Although criticism of solidarism by capitalists is limited and revolves around property, it is easy to adapt the argument: any restriction on market prices is a step into socialism—for prices to remain free and useful, they must be left alone and unfettered by constraints (von Mises 1951, 263–66). In this view, any form of regulation or restriction of the market is like putting a foot into quicksand, it will soon lead to complete state control and socialism (von Mises 1951, 263–66). Moreover, without the incentive of high profits, innovation does not occur (Sowell 2004a, 7–40). Innovation is a product of people pursuing wealth, their own self-interest, and innovation improves the quality of everyone’s lives (Smith [1776] 1994, 53–72; Sowell 2004a, 7–40).

Pesch ([1918] 2004) acknowledges that modern man has a hard time with the concept of the just price, which ascribed a value to a good that reflected the work required to produce the good and allow the worker or craftsman a sustainable living (pp. 80–89). This is because capitalism has altered the idea of price, so that it is fixated on profit rather than on the satisfaction of wants (Pesch [1918] 2004, 83).

Capitalists would reject this argument, arguing that people act for their own self-interest regardless of any moral system (Smith [1776] 1994, 53–72; Sowell 2004a, 7–40). Only by allowing people to compete with their self-interests can we arrive at a price that truly reflects how people deem the good or service of value to them, and this distributes resources equitably, which is the aim of the solidarist (Sowell 2004a, 7–40; von Mises 1951, 263–66). Capitalism would also reject price floors or price ceilings on goods just as surely as it rejects minimum wage arguments and maximum wage arguments (Sowell 2004a, 7–40).

Yet health care differs from most other sectors of the economy; there is no cause for wild swings in prices in health care the way that we might see it in gasoline. It is not affected by those same external factors that cause supply and demand to swing as much as commodities do.

Socialists too would criticize the solidarist view, as retaining some portion of unnecessary surplus value that only serves to enrich the upper classes and still exploits the worker (Marx [1867] 1977, 188–339).

Discussion of Various Price Theories Applied to Health Care

Observations

Probably the most important observation that pertains to this discussion is that the price theories discussed all revolve around the prices of commodities, that is, objects that are tangible and require some amount of human labor to produce, harvest, or perfect. The EpiPen, other drugs, and medical implants are all commodities too, so their pricing, whether it is sensible or objectionable, is fairly easy to understand. By contrast, most of the prices in health care are services for work performed: tests, care, or treatments. Yet, unlike other services, such as legal or accounting services, they are not fully labor dependent either. In law or accounting, the capital outlay (buildings, machines) is relatively low, so the service fees or prices are really a type of wage. Services in health care are a mix of high capital outlay for buildings, sterile environments, machinery, and equipment—and they are high in highly skilled and expensive labor.

Moreover, the hospital also needs support departments like a cafeteria for patient meals, medical records, materials management, housekeeping, and so on. The environment is the one that is highly regulated, with dozens of different federal, state, and independent agencies all regulating different aspects of the hospital enterprise. Most importantly, the subject of the enterprise, the care that is performed is done to a person and for that person. It is not for entertainment, repairs on a car or machine, but the work done is on a person made in the image and likeness of God (Pope Leo XIII 1891, 57; Pope Pius XI 1931, 88–90; Pesch [1918] 2004, 39–51). What else is comparable in the economy?

Perhaps the closest enterprise that is similar to a hospital is the military. The military has high capital outlays, high labor, it is highly regulated, has many support departments (including health care), and the subject of the work is to defend and protect the population of the society from outside harm. What is missing in this analogue, however, are the prices for the service of defending the society. We have generally have abandoned the “military for hire” model because the result is a mercenary army that then seizes power for itself. Hence, the prices are missing.

Perhaps there are not prices for the military the way there are in other sectors of our social economy because security, like health care, is a universal need for all people. Indeed, in Catholic social teaching, both security and health care are rights, and moreover the subject of the work is the person and the work is between people (Pope John XXIII 1963, 11; Saint John Paul II 1981, 6). Food, clothing, and shelter are also considered human rights within the fabric of Catholic social teaching, but these needs clearly can be easily provided for nearly all through a price-coordinated system (Pope John XXIII 1963, 11).

Yet, there is a crucial difference in these necessary goods to human life, between parties there is a tangible good that is exchanged, one that both parties can make certain assumptions about the value and quality of the good being exchanged. In health care, a fundamentally different kind of exchange is occurring. Tangible goods are not the essence of the care being provided. In health care, the exchange is between the patient and healthcare provider and is rooted in service to heal another. This is a universal need that is not needed at a constant rate by all people at all times. Prices in our healthcare system are unique; there is no analogue in our economy to compare it to as a guide.

Resource Prioritization

In an emergency, the choices, priorities, and decisions about the best use of scarce resources is often very different than it is in normal conditions. When a natural disaster happens, such as Hurricane Katrina, or in a combat medicine situation where the healthcare resources are extremely limited by the circumstances and in very short supply, the priority becomes who is savable and who is not. A hurricane might severely injure hundreds, cause minor injuries to thousands, and leave tens of thousands cold and hungry, but in such a case, medical attention goes to the most severely injured first. Were we to allow prices alone to determine distribution of health resources, the risk becomes that the severely injured without money would be left untended. Socially this is not something we accept as moral and illustrates an underlying clue: price coordination cannot morally triage patients. Prioritization matters in the resource allocations of health care more than in other aspects of our economy, and it differs in kind.

Application of Price Theory to the EpiPen

Let us return then to the example at the beginning of our discussion, the EpiPen. The capitalist would respond is that the EpiPen is a scarce resource, and the fact that people still buy it at a high price indicates that they still view this scarce resource as valuable and necessary for their lives. If the price were too high, then people would stop purchasing the drug device, deeming the risks of going without it to be lower than the cost of the product (Sowell 2004a, 7–40). Consumers may balk at the price, but regardless of the cost to produce the drug device, its price reflects the idea of coordinating the use of scarce resources (Sowell 2004a, 7–40). Further, the profits from these highly priced drugs will be spent on researching new life-saving drugs that will benefit society, that desire for profit is what fuels the innovation that creates such drugs (Sowell 2004b, 69–95; Clark 2016). Finally, the high price is mostly due to Mylan being able to corner the market, and that has been caused by government inaction, specifically the bureaucracy and arduous regulations of the FDA (Clark 2016).

The socialist would claim that this is what happens when capitalism is allowed to act without restraint. It seeks in its final stage to purchase or eliminate competition, so that it can charge as much as it desires to maximize its profits (Foster, McChesney, and Jonna 2011). In the later stages of capitalism, the mergers and acquisitions and unfair competition eliminate competition itself, leaving only a few or one producer of a good standing, and monopolistic price practices begin (Foster, McChesney, and Jonna 2011). Competition—the force that supposedly lowers prices, which capitalism champions—is finally eliminated (Foster, McChesney, and Jonna 2011). Mylan was able to do this on a single product, but the process overall is inevitable (Marx [1867] 1977, 188–339; Foster, McChesney, and Jonna 2011). This is why the government must run health care, which is a public good, for the profit motive when applied to health care puts profits ahead of patients.

Solidarism’s answer is that because the drug maker has been allowed to capture the market through weaknesses in our healthcare system, they have been allowed to take advantage of the buyer of their product. There is an injustice here because the buyer is no longer free to make a decision but is compelled by their health needs. This is why supply and demand cannot be the ultimate determinant of just prices; since the supply is controlled by one entity, it can manipulate the price for its own benefit regardless of demand or need within the society. Like socialism, solidarism makes a moral argument against the price monopolization of the EpiPen; however, a government takeover is not necessary, inevitable, or desired.

Each system sees the cornering of the market by Mylan as the root of the problem. Solidarism maintains price coordination should be allowed to function as much as possible. It is really government inaction that caused the situation; in effect, the inaction allowed a laissez-faire opportunity where the real self-interest of the capitalist monopoly took hold.

The socialist remedy to a market monopoly is a state monopoly coupled with a naive faith that once government supervision is imposed, mankind’s fallen nature will disappear. In contrast, the problem with capitalism is that it refuses to take responsibility for the injustice of the high price and fails to prevent this injustice because any restraint to prevent an injustice is too much restraint and eliminates freedom (von Mises 1951, 263–66). Yet, it is only by restraining our selfish impulses that ethical conduct is possible and this is just as true of corporations as it is of individuals.

Analysis

The principle of subsidiarity within solidarism and Catholic social teaching leads to the notion that prices are best determined locally as much as possible because those who are closest to the specific markets are in the best position to see what the problems are and what the solutions need to be. This is not something that occurs presently and will not occur under any scheme that uses, or partially uses, price controls. Capitalism’s theory that prices coordinate scarce resources and provide crucial information is important, yet this too is not occurring in the healthcare sector. Nor would we want a purely capitalist price system in health care where the poor, elderly, and marginalized would be kept from accessing health care due to a lack of money.

Solidarism makes the case for prices guided by moral principles, which are absent in capitalist price theory. Particularly in health care, where the care of people is the object of the exchange, ethics must guide the access, structure, and practices because it involves the care of people at their most vulnerable, when they are ill. Unlike socialism, solidarism is not in favor of state control exercised through price controls. Its aim is at the just price of mutual equivalence in the exchange of this service, an exchange between healthcare provider, payer, and patient.

The most significant underlying problem with prices in health care is that providers like hospitals do not know their real, specific costs for the services they provide. Without the knowledge of the true costs of care on an individual patient level, the natural price is not known. It will take time and focus to accrue the knowledge throughout the entire national system.

We need to know the natural price, so that we can form a legitimate basis for all prices in the hospital chargemaster. Market reforms in health care are not viable because the natural price information and underlying costs are not known. Any supposed market price at this stage would be a guess, not really that different than the fiat price of the socialist bureaucrat. However, because this missing information can be found, capturing this information must be one of the highest priorities in healthcare reform. Without this information, hospitals really cannot truly effect long-term cost-saving measures.

Additionally, prices need to be agreed upon by hospitals or localities, payers (insurance and government), and patient representatives together. This probably will require some form of commission or board. The matter is too complex for a “market” because there are three parties that must agree and not just two, and further because the consumer of the service lacks the specific knowledge to judge the value of the service and cannot achieve the mutual equivalence Pesch describes.

Finally, prices need to be uniform to payers and patients (although not uniform by locality) regardless of basis; the price needs to be paid uniformly. Discounting or contractual adjustments must end because they shift the cost of care to other payers. This may challenge the government on how it pays for these scarce resources, and what portion the government pays and the patient pays, but only forcing each payer to bear the burden of the costs incurred by their patients can we balance scarce resources and their necessary allocation.

The Way Forward—Door Number Three

One of the major problems in modern US health care is with the price mechanism. The basic architecture of the system is abnormal, where the customer/patient only pays a small portion and a third party, government or private insurance, pays for the majority of that care. Additionally, what is billed, the “list” price, is really not what anyone finally pays. Peering deeper into the subject reveals that there are many other unique circumstances affecting pricing in health care, from price controls on part of the market, to cost shifting, to unknown costs of service (to base prices on), to price transparency, and more. All of these combine to confound and blur the price mechanism that works quite well in many other sectors of our economy.

Price theories are pitched in terms of commodities, which are easily understood, or refer to prices for services in examples like lawyers and accountants where the primary cost driver is labor. Healthcare services lack an analogue in our economy to help us understand what might improve the system. It is likely that not understanding the real costs of the services provided in health care is perhaps the deepest tip of the root problem.

Healthcare providers themselves lack the information they need to establish a basis for their prices, and this, in turn, hinders them from negotiating in good faith or understanding and knowing a natural price. If this problem can be solved, as two hospital health systems seem to have done, then perhaps there will in the future be a sound basis for healthcare providers to negotiate with knowledge instead of an ignorance.

At that point, when healthcare providers know their detailed costs, specific to their institution, then all three parties, patient, payer, and provider, can embark in the price coordination of mutual equivalence. This cannot be market based, as it is for commodities, but requires another method such as a local commission to achieve the back-and-forth negotiation that arrives at price coordination that provides every party the information they do not have and desperately need. Unless these problems are solved, prices and costs will continue to rise in our healthcare system, a situation that is neither sustainable nor desirable to anyone. Only solidarism, with its ethics infused economics, placing human dignity at the center, is poised to provide a third way into the future.

Biographical Note

Paul Babcock wrote an original article Paralyzed by Prices: An Analysis of Price Theory Within the Context of Health Care in partial fulfillment of a Doctorate in Bioethics (DBe) concentration in Catholic Bioethics from Loyola University Chicago. He graduated in December 2016. He also holds an MS in Health Care Ethics (2013) from Creighton University in Omaha, NE, and a BA in Liberal Arts (1999) from Thomas Aquinas College in Santa Paula, CA. Professionally he serves as the Chief Financial Officer for Forks Community Hospital, a Critical Access Hospital (25 beds) in Forks, WA, and has worked in various positions in hospital finance and administration for the last 15 years. Facebook: https://www.facebook.com/paul.babcock.10. LinkedIn: https://www.linkedin.com/in/paul-babcock-6285b823/.