A legendary Defense Department “Whiz Kid” taught my Analytic Methods class at Harvard Kennedy School. Professor Bill Hogan’s analytic prowess often left us in the dust. During one class, we all raised white flags (note cards stapled to tongue depressors) to signal our awe and confusion.
Hogan is a market fundamentalist. He sees beauty in the way prices create supply-demand equilibrium. Hogan’s background is relevant because he is the principal architect of Texas’ unregulated power grid.
In Texas’ freewheeling energy marketplace, 220 electric companies sell electricity directly to consumers. Monthly rates for variable-rate contracts are low, but rates can spike when power supply dwindles. That happened last week.
With power supply eviscerated by a raging winter storm, variable electric rates skyrocketed. Some jumped to 70 times normal levels. For market-loving Bill Hogan, Texas’ energy marketplace worked as expected. The higher prices “were inconvenient,” but they incentivized both energy production and conservation.
However logical, these “surprise” energy bills enraged Texas consumers. They are demanding regulatory intervention to address this injustice.
Ironically, healthcare routinely exposes consumers to similarly high bills without experiencing the populist blowback. The reason is that healthcare consumers rarely pay these “surprise” bills directly.
Instead, health insurance companies largely cover the costs. Ever-increasing premiums fund insurer payments to providers. In this way, health insurance premiums have become a hidden tax that suppresses workers’ incomes.
Whether in electricity or healthcare, higher prices increase supply. Unfortunately, more healthcare services promote overtreatment, not lower prices. That would make Bill Hogan very unhappy.
Read all dispatches from Dave Johnson here.