Reducing Healthcare Costs Requires Good Market Design

One sensible way to reduce healthcare costs is to harness market forces, where practical, to nurture competition and innovation. Lower prices and improved services should follow. However, the switch to market pricing is not an easy one. Medicare’s experience with medical supplies illustrates the challenges and offers some important lessons. The key lesson is that government programs can benefit from introducing market methods, but doing so requires good market design—something that may not come naturally to the implementing agency, especially in light of political forces and organizational inertia.