Consumer Level Competition Fixation

Economists and policy makers often seem to be unaware that competition can occur at a level other than with the end consumer. The economic idealization that market decisions are made by perfectly informed and rational actors cannot be translated to the real world in many cases. I just heard a ludicrous example today when an economist called for all patients to directly control the money spent on their health care, so they could make their own decisions and put price and quality pressure on the industry. Having a populace that's largely ignorant make the majority of their medical spending decisions is a recipe for conditions to go untreated and worsen (and frequently balloon in cost). Competition between medical institutions themselves is a much more appropriate arena for competition to occur. Just to choose one simple way this could work is that a medical company could be given a premium to keep patients healthy (adjusted perhaps by pre-existing condition). Anything they spend less than that premium, they get to keep, and over time the premiums could be reduced, using data on the actual costs as a reference. The way we handle financial products currently is another example of unrealistic ideas of end user competition being the deciding factor and is something I've blogged about previously.