How is health care like electricity?

Reader Thomas pointed out a hole in my list of hypotheses as to why health care prices are high. Health care, he pointed out in a comment, could be considered to be somewhat like power (electricity), in that, when you need it, you need it now. You can't wait to see if prices drop, as they might for a model of TV or tractor. He suggested that such goods might follow different rules, that might make them more amenable to manipulation such as Enron practiced in the power market.

I found one useful overview of electricity pricing dynamics. Let me quote some of the mentioned features of electricity economics, which certainly parallel some things about health care:

In addition to supply and demand, the price of electricity reflects some of its unique characteristics.

• Electricity cannot be easily or cost-effectively stored.
   
• There are few substitutes.
   
• Generally, users cannot simply terminate consumption without significant disruptions in production. These unique factors magnify the impact on price of supply and demand imbalances.

The effect of price changes on supply and demand is called "elasticity." Broadly stated, elasticity of demand is the measure of how steeply demand goes down when prices go up. Elasticity is different for each commodity and reflects the particular characteristics of the commodity's use and markets.
In the short run, system-wide elasticity for electricity is near zero. There is almost no reduction in demand as prices rise on an hourly basis. This is because users do not have a stockroom full of spare electricity; they cannot use a substitute input; and, if they ceased their use while the price was high, many would suffer unacceptable disruptions in operations.

So how does the analogy with electricity help understand health care costs? Well, at a minimum it reminds us of the fairly obvious but still essential point that health care is a highly inelastic good. What this means is that it's relatively difficult to get the health care market to behave like the idealized free-market utopia, where consumers can "vote down" goods that are too expensive or too poor-quality. It also opens the intriguing question (which I haven't thought about in any detail yet) whether the market for health services could benefit from some of the hedging and risk-management tools used (or not, see the case of California as described in the above article) in the power markets.

But again, at a minimum, it reminds us that the health care market show significant insensitivity to price. By the way, another factor that it's argued makes demand for health care less elastic is the price-insensitivity induced by insurance plans, especially the more generous ones. A third contributor is the systemwide opacity around prices. Your doctor suggests you get a CAT scan. If you're like most of us, your first question is not "what does a CAT scan cost," but "what will it cost ME?" If the answer is acceptable, you're probably less worried about what it costs your insurance plan (a cost that's ultimately passed on in some form to all members in the pool, or, if the pool should fail in some way, to whatever entity bails out the insurer -- most likely the US taxpayer in the end).

Here's another post that compares health care to electricity, albeit in a very broad analogy concerning a mix of public and private sources for a good: http://demockracy.com/on-electricity-or-can-a-public-option-work/.