Health Care: The One Market Where Keynesian Economics Actually Works

Versace does it. Louis Vuitton is doing it. The automakers do it. Walmart is even making a profit from it. All these companies are lowering their prices in response to sluggish demand.

Which brings to mind John Maynard Keynes, the British economist who explained the Great Depression by claiming that prices were not flexible downward. In response to reductions in consumer demand, he said, we can expect reductions in output rather than reductions in prices.

Economists have been hard pressed to find credible examples of Keynesian theory. But there is one market where it seems to work admirably: Health care.When prices do not change, people who pay something out-of-pocket are likely to reduce their consumption during an economic downturn, while people who pay nothing are likely to continue to consume as before. Here is Reed Abelson (New York Times) describing the dilemma this creates for hospitals:

Paying patients [are]….deferring treatments like knee replacements, hernia repairs and weight-loss surgeries – the kind of procedures that are among the most lucrative to hospitals….

[At the same time] there has been a steady increase in the demand for services by patients without insurance or other financial wherewithal, many of whom show up at hospital emergency rooms – which are legally obliged to treat them….Hospital executives and consultants say it is already having a profound impact on many hospitals' profitability.

Of course, there is no law that prevents health providers from lowering their prices. As we previously reported [here], they are doing just that, provided the bills are not paid by Medicare, Blue Cross, employers, etc., etc.

Comments (6)

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  1. Devon Herrick says:

    See today's Wall Street Journal, front page. When hospitals don't compete on price or on quality, some will apparently increase costs and lower quality to drive quantity. The story concerns an over-zealous doctor's attempts to increase volume of liver transplants at the University of Pittsburgh Medical Center:

    • To overcome a perennial shortage of organs, he used more livers from older donors. 
    • He transplanted some of these into relatively healthy patients for whom the risk-reward calculation was less certain.
    • He used partial livers from living donors, and then understated complications from the controversial procedure.

    Full story here.

  2. Bruce says:

    In regulation theory, when government arbitrarily sets a price, producers exhaust the potential rents in cost-increasing (usually wasteful) nonprice competition.

    I think the same thing happens in medical care, and Devon’s post is a perfect example of that.

  3. John Goodman says:

    Joint replacements are apparently lucrative procedures for hospitals. Although they are not lowering prices, they are advertising.

     “The growth in orthopedic medicine comes amid a debate in the health care community about whether many of these knee and hip replacements are being over-prescribed when other treatments, such as physical therapy or pharmaceutical injections, would work just as well,” said Dean Smith, a public health professor at the University of Michigan.

  4. David C. Rose says:

    There are many ways in which government artificially lowers prices (e.g., Medicare reimbursement rates). If the price of something is artificially low, there will be excess demand. A fall in the market price, if there is excess demand, works off unmet demand intitially so it does not translate into an immediate reduction in price. Only after the reduction in demand is great enough to produce a market price below the de facto ceiling will observed prices begin to fall. Indeed, the length of time it takes for observed prices to fall is good indicator of how badly government intervention has distorted the market.

  5. D H Leavitt says:

    It is a consumer decision. Absolutely. So called “elective” care is polluted thinking. Elective is a false label, because ALL CARE IS AND MUST BE ELECTIVE. Such is our real world, and not the J M Keyes world or other theories which are unreal and plain hogwash.

    Decisions for care must remain an individual responsibility and accountability. Example: When my father refused to go for the second and last round of cancer treatment, I was upset with him. It took a long time for me to accept the fact (after he died) that it was his decision and not mine or some government agency.

  6. Sandy says:


    I'm a frequent reader of your Health Alerts, and thought I would comment briefly on medical prices during recessions — our research has shown that medical prices increase during a recession. Our annual look at healthcare costs, Behind the Numbers, has a short discussion on this on p. 14-16.