Alex Tabarrok points out how government ends up paying too much for pharmaceuticals.
in some areas, Medicaid accounts for a large fraction of the market...In this situation it makes sense for pharmaceutical companies to raise prices - they lose customers in the private market but this is more than made up for by the increase in prices that they can charge to Medicaid. As a result, average prices for HIV and antipsychotic drugs are higher than for any other drug categories.
Tabarrok cites a paper by Mark Duggan which claims that Medicaid chooses the most expensive antipsychotic drugs without any apparent improvement in outcomes over less expensive medications.
Recently, Indiana Gov. Joseph Kernan canceled a $15 million contract with a firm in India for processing state unemployment claims. The next highest bidder was a U.S. firm that would have charged $23 million. Because of this potential 50 percent price increase, there would have been $8 million fewer state dollars for schools, hospitals, law enforcement, etc.
These examples are consistent with the argument that Government is the high-cost producer. According to that view, transfering responsibility for a service from the private sector to the government raises the cost of that service. In health care, of course, the costs may be hidden in the form of longer wait times or less treatment.
A recent study found that private insurance companies spend 11.7 cents of every health care dollar on administrative costs, mainly advertising and underwriting, compared with 3.6 cents for Medicare and 1.3 cents for Canada's government-run system. Also, our system is very generous to drug companies and other medical suppliers, because — unlike other countries' systems — it doesn't bargain for lower prices.
...What would an answer to the growing health care crisis look like? It would surely involve extending coverage to those now uninsured. To keep costs down, it would crack down both on drug prices and on administrative costs. And it might well cut private insurance companies out of the loop for some, if not all, coverage.
For Discussion. Would getting rid of private health insurance and subsituting government as the orovider lead to lower costs, as Krugman implies?