Trust the Customer!

Cite this Article
Joshua D. Wright, Trust the Customer!, Truth on the Market (March 09, 2006),

Nobel Laureate (and GMU Prof) Vernon Smith has a must read column in the WSJ on the growing costs of health care and education. The problem?

“[I]f third-party deep pockets pay whatever is the price B charges A this year, the effect is to reinforce the incentive to raise the price next year. Spending escalates, which leads to a demand for cost control.”

The solution?

“[C]hanging the incentive structure: empowering the consumer by channeling third-party payment allowances through the patients or students who are choosing and consuming the service. Each pays the difference between the price of the service and the insurance or subsidy allowance. Since he who pays the physician or college calls the tune, we have a better chance of disciplining cost and tailoring services to the customer’s willingness to pay.”

How about some evidence?

“[I]n Lancaster County, Pa., an Amish and Mennonite delegation, whose people pay cash for medical services, negotiated discounts up to 40% with their hospital for services. If they can make it work, surely we can as well.”

The punchline:

“Would some one please just trust the customer?”

(HT: Cafe Hayek).

UPDATE: Here is an interesting WSJ column on the Amish and Mennonite negotiations.