Who is a Customer? The Person Who Pays The Bills!

A year ago, I was talking to my very intelligent brother-in-law and mentioned that I was going to start writing about what things are worth.  He said, quite simply, ”Things are worth whatever someone will pay for them.”  And he is absolutely right.  And in that very simple sentence, he summed up why the free market is more productive, efficient, and moral than any other mechanism for distributing scarce goods and services.  Not only that, it’s the one that delivers that best results for consumers of goods.  But then there are certain areas where, within free market societies, the consumer of goods/services is different from the entity that pays the bills.  Not coincidentally, those are the areas where there’s often rotten customer service and economic inefficiencies. 

Here are a couple of bullets that I think will simplify my thoughts here, then I’ll expand:

-In situations where an individual is the consumer of the product / service being purchased and that same individual is the one paying the bill, the seller of the goods has every reason to make the consumer happy.  This is particularly true when the seller is a small-ish entity when every consumer is important.

-In situations where one individual is a consumer of the product/service but a different entity is paying the provider, cracks in the service, satisfaction and pricing emerge.  The bigger the provider, the less the consumer matters.

From a servicing and satisfaction standpoint, the provider is not as concerned with satisfying the consumer, becasue the consumer’s not paying the bills.  To the degree that retaining the consumer is significant, that helps somewhat.  But it’s not enough.  Example: I bought a washer at Lowe’s 14 months ago and purchased an extended warranty.  Lowe’s outsources their extended warranties to a national servicing company called A&E Factory Service.  Lowe’s was the one who paid A&E’s bills, so A&E clearly wasn’t all that concerned with my service.  A&E scheduled 5 appointments (if you can call them appointments as each had either a 4 or a 9 hour window); they showed up for only 3; they finally fixed the washer after 10 days.  Maybe Lowe’s is concerned about whether I’ll ever buy another appliance from them; maybe they’re not.  But A&E – no concerns whatsoever.  Lowe’s is paying their bills.  So unless thousands of individuals like me are vocal enough with Lowe’s that Lowe’s cancels its agreement with A&E, then A&E need not worry about rotten service.  I wasn’t their customer because I wasn’t paying their bills. 

From a pricing standpoint, when the payer is not the consumer, certain inevitabilities emerge.  These inevitabilities simply reflect the interplay of supply and demand as price always does.  Prices begin to rise at first.  Why?  Because the consumers of the goods are divorced from the costs.  So they consume more than they otherwise would if they were bearing the true price of the services.  As demand goes up, the prices rise.  But the entity paying the bills doesn’t want that to happen forever.  The payer is left with only a few choices – either find ways to collect additional dollars to cover increasing costs; or find ways to discourage demand; or begin rationing services. 

So what’s a major industry that comes to mind that fits this mold…one where there’s a major disconnect between those who pay for the services and those who consume the services?  I will not pretend to be an expert on health care.  I’m not one.  But I do know this: health care may be important human need, but its importance does not repeal the laws of economics any more than it repeals the laws of gravity.  

The U.S. health care system is not perfect.  It suffers from a magnified verson of the flaw I’ve described above: consumers of health care are divorced from its true costs.  The actual failure goes deeper (actually due to a prior government intervention in the marketplace).  In the U.S., it’s common for health insurance to be provided by employers – this emerged as a “fringe benefit” during WWII when government mandated wage/price controls were in place and tax benefits associated with employer-provided insurance were put in place.  In order to attract the most talented workers, companies, which could not offer higher salaries due to wage freezes, instead offered health insurance.  After 60+ years of consumers of health care being three steps removed from being true customers (health care provider > paid by insurance company > hired/paid by consumer’s employer > consumer), we’re finally facing up to the fact that we’ve got a suboptimal system. 

But the solution is not to be found by inserting the ultimate, unresponsive bureaucracy – government –  into the equation.  The solution is found in letting consumers be customers.  Let them pay for basic services.  Utilize insurance to cover catastrophic, big health care issues.  And then eliminate state-by-state restrictions and regulations on competition and the mandatory levels of coverage so that insurance companies must innovate and compete by offering combinations of coverage options and prices that are attractive to individual consumers.  The plans combining high-deductibles and tax-advantaged health savings accounts (HSA’s) that have gained popluarity with employers and individuals over the last several years are a step in the right direction. 

If we really want to fix what ails health care, we need to continue to take steps to strengthen the tie between those who receive services and those who pay the bills.  What will be the results?  The same results that occur in EVERY industry and where voluntary transactions  among consumers and providers rule: prices will drop, customer service will improve, and excess profits by participants will disappear except when justified by innovation.