Michael Rotheschild in his book, Bionomics, reported that researchers had yet to find a single private industry in which costs and prices did not drop over time. The increase in efficiency occurs because, as Michael Rotheschild pointed out, economies, businesses, industries are living systems of exchange and as such learn and adapt in their behaviors over time. This institutional learning produces greater efficiencies, better products, and more diversification.
However, the same is not true for areas dominated by government agencies, government controls, and government funding such as the post office and public education. In those industries costs either rise over time or remain about constant. They never decline. The idea that having a single provider produces increases rather than decreases in costs over time seems counter intuitive.
Having a single provider would seem to be more efficient than allowing multiple providers to offer the same products. But the difference is that learning organizations "feed" off their increases in efficiency, product quality, and consumer satisfaction whereas government agencies "feed" off a guaranteed revenue stream of public funding regardless of consumer satisfaction. Consumers don't control the purse strings of government agencies with their choices, and so government agencies have no incentive to respond to their needs. They can, and almost must, take their customer gor granted.
Furthermore, since government agencies have no market in which consumer choices discipline their products and cost, even if government agencies had the incentive to do so, they cannot be given free use of funds. They must by law be directed in how to spend the funds; they simply cannot conduct R&D processes even if they waned to.
Economists found the principle of the learning organization produced a 20% increase in efficiency of production for each doubling of production. Some industries are higher, others lower, but for all industries, whatever their rate, the rate remains constant per doubling of production.
We should assume this economic principle would hold true for health care services as well. To test the idea, we would have to look at some sector of health care that is not currently controlled by government regulations or funding.
There are some sectors that still remain relatively free from domination by government. What economists find in comparisons among free and unfree sectors is that the private, relatively free sectors do indeed decrease their costs over time whereas the regulated sectors with third party funding always produce increasing costs over time. One such sector is cosmetic surgery which is almost never included in employee insurance or government funding.
Health economist Devon Herrick testified before Congress regarding these trends in the cost of health care services for cosmetic surgery. Since these are generally not paid for by government controlled payment plans, they provide a comparison between the free market and government controlled systems.
 clipped from www.theobjectivestandard.com[D]espite a marked increase in demand between 1992 and the present, cosmetic surgeons’ fees remained relatively stable. The average increase in prices for medical services from 1992 through 2005 was 77 percent. The increase in the price of all goods, as measured by the consumer price index (CPI), was 39 percent. Cosmetic surgery prices only went up about 22 percent. Thus, while the price of medical services generally rose almost twice as fast as the CPI, the price of cosmetic surgery went up slightly more than half as much. Put another way, while the real price of health care paid for by third parties rose, the real price of self-pay medicine fell.
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This Testimony for Submission to the House Education and Labor Subcommittee on Health, Employment, Labor and Pensions, March 15, 2007 by Devon Herrick makes other comparisons to answer the question, “Why Are Health Costs Rising?” In another example he reports on costs over time in the area of corrective eye surgery:
In 1999, only a few years after LASIK was approved, the price was about $2,100 per eye, according to the ophthalmic market research firm MarketScope. Within a short time, competition drove the price down to slightly more than $1,600. The cost per eye of the standard LASIK is now about 20 percent lower than six years earlier. Competition held prices in check until a new innovation arrived for which patients were willing to pay more. By 2003 surgeons began to perform a newer, more-advanced custom wavefront-guided LASIK procedure.
For some reason, ideas for having the government directly provide or pay for health care seem to hold considerable appeal to citizens and politicians. But for economists, these ideas aren't valid. They understand that systems of third party funding cannot and do not work either in theory or in fact. It is possible that if the public understood how to recognize in a policy proposal a design based on third party funding so they could compare it to free systems, they might be able to recognize its long run dangers.
If we want to help certain classes of people, the principle should be to entitle them directly so they are empowered as consumers. Entitling the needy directly is far more cost effective than blanketing everyone with a system of third party funding for health care. Entitling the needy preserves the incentives and drive for increasing efficiency, expanding consumer choices, and increasing quality. Systems of third party funding do just the opposite. Costs cannot be controlled over the long run without some form of rationing, quality cannot be maintained, and consumers' choices must be restricted. As a result, they harm the good of society and are immoral even though they may be promoted on the best of intentions.
