October 21, 2010 Leave a comment
Cheap Talk examines the Justice Department’s lawsuit against Blue Cross Blue Shield of Michigan over a “most favored nation” clause that stipulates providers must give BCBS a discount over other insureres.
This kind of contract has several effects. Most obviously, it deters entry by other health insurance companies that automatically face higher costs than BCBS Michigan because of the most favored nation clause. BCBS then has more monopoly power and can charge higher prices for its products. Second, a competitor is going to have a hard time negotiating a low price with a hospital as any low price they negotiate also has to be passed on to BCBS to maintain the 40% difference.
This is a prime example of how barriers and inefficiencies can emerge from unfettered free markets. Although these kinds of episodes are important philosophically for heated “free market vs. government intervention” debates, they’re even more important for figuring out how to get our economy to perform at its peak level. It seems to me that we should have a lot more graduate students and professors researching these issues of “emergent inefficiencies.”