Conservatives frequently argue that the solution to our health care problems lies in consumer power. If only we could free the system of government interference, consumers would shop more aggressively for medical care, forcing the providers, producers, and third-party payers of such care to compete for the business. The result would be a vibrant market with lower prices, higher quality, or some combination of the two.

Paul Krugman today points out the fatal flaw in this theory: Medicine isn't just another consumer good:

There’s something terribly wrong with the whole notion of patients as “consumers” and health care as simply a financial transaction.
Medical care, after all, is an area in which crucial decisions--life and death decisions--must be made. Yet making such decisions intelligently requires a vast amount of specialized knowledge. Furthermore, those decisions often must be made under conditions in which the patient is incapacitated, under severe stress, or needs action immediately, with no time for discussion, let alone comparison shopping.
That’s why we have medical ethics. That’s why doctors have traditionally both been viewed as something special and been expected to behave according to higher standards than the average professional. There’s a reason we have TV series about heroic doctors, while we don’t have TV series about heroic middle managers.

Conservatives frequently cite the example of Lasik eye surgery, in which an ophthalmologist uses a laser to reshape an flawed cornea, thus eliminating the need for glasses or contact lessons. Lasik is both highly unregulated and, generally, not reimbursed by insurance. It's the closest thing you'll find to a market in medicine and, sure enough, the price has come down over the years. But Lasik is hardly representative of medicine as a whole, because the procedure is totally optional. As Liam Yore, who blogs under the name "Movin' Meat," notes:

Health care is generally not a refusable or elective service. By this, I mean that in most cases, the health care costs are driven by medically necessary procedures. You get pneumonia. Your knees wear out. You find a lump in your breast. You notice blood in your stool. Barring the denial/self-neglect approach that some people take, when you develop a medical problem, you need to spend money to remedy it. While the timing of your knee replacement may be elective, whether to do it or not generally is not, if the alternative is being disabled and non-ambulatory. ... the demand for medically needed care is not going to be terribly price responsive. When your doctor tells you that you need chemotherapy, you don't make the decision to proceed based on the cost, but on the need. And the number of recreational colonoscopies performed is actually very low.

To be clear, again, I think there is some element of truth in the argument conservatives make, particularly when you are talking about shopping for insurance plans as opposed to individual medical services. Even many liberal economists would agree that competition can have some beneficial effect both on the cost and quality of health care. And you can see that thinking behind the Affordable Care Act, which attempts to create a more vibrant market for people buying insurance on their own, so that they can shop intelligently among plans and make the best choice. 

But conservatives take this way too far, apparently oblivious not only to the differences between medicine and regular consumer goods but also the extensive evidence showing that people shopping for medicine frequently make poor choices. Conservatives who want to see more "skin in the game"--i.e., higher out-of-pocket costs, forcing consumers to be more choosy about what treatments they get--also don't account for the fact that it's a very small, very sick group of people who generate the bulk of medical costs. Yore explains why that's a problem:

You can make 80% of consumers highly price sensitive, but they can only affect a tiny fraction of healthcare spending. And for the generally well, their costs are probably those which are least responsible for the spiraling inflation. They're not getting $30,000 stents or prolonged ICU stays, or needing complex chronic disease management.
Conversely, those who are high consumers of health care simply cannot be made more price sensitive, since their costs are probably well beyond what they could pay in any event, and for most are well beyond the limits of even a catastrophic health insurance policy. Once you are told that you need a bypass/chemo/stent/dialysis/NICU etc, etc, etc, the costs are so overwhelming that a consumer cannot possibly pay them out of pocket. Since, by definition, these catastrophic costs are paid by some form of insurance, the consumer cannot have much financial interest in cost containment. For most, when they are confronted with a major or life-threatening illness, their entire focus shifts to survival, and they could care less about the cost. Further, many who are in this sick/expensive category have some diminished capacity with regard to their information gathering and decision-making. I'm thinking particularly of the elderly and those who have had strokes or any one of a multitude of illnesses which impact cognitive function or other functional capacity. These patients struggle with their activities of daily living -- getting dressed, bathing, transportation, housing, taking their meds. Their ability (let alone interest) in price-shopping their doctors is minimal to nonexistent, even if they had an economic incentive to do so. Taking someone who has a serious illness and making them have more "skin in the game" would represent a cruel additional hardship, but would be ineffective in creating an economic environment in which consumer behavior brought down spiraling health care costs.

By the way, Yore knows a thing or two about the subject. He is an emergency room physician and, as he mentions towards the end of his item, he's recently gained a more personal perspective on the issue:

As I have blogged, my wife is under treatment for stage IIb breast cancer. We are pretty highly functional and informed consumers, and we actually have the financial resources to pay for more of our care than most would, so if, hypothetically, we had a stronger incentive to seek out more cost effective care we would be in a position to do so.
So, in our case, would we? No, of course not. My wife's chemo is going to cost >$100,000. I am sure that we could cut down the cost. Herceptin is pretty expensive--are there less expensive alternatives? Turns out there are not. We spent a lot of money on Neulasta to keep her immune system operational during the intense chemo. Maybe we could have gone without it and just risked neutropenia? Maybe saved some money and used neupogen instead? That would have been quite a risk at minimal savings. Maybe we could have skipped the expensive anti-nausea meds? Not a chance! Chemo is miserable enough that those meds were worth every penny. (not to mention that all these meds might actually be cost-saving in keeping her out of the hospital with complications of chemo.)
What other options do we have in deciding how we treat the cancer? Radiation is non-negotiable, but maybe we could shop between facilities for the best deal. Of course there may not be much price flexibility on radiotherapy given the huge capital costs required. We will be interviewing half a dozen surgeons to determine who will do the mastectomy and reconstruction, and we are 100% focused on quality in making that choice.
So, in the end, if we had the proverbial "skin in the game" in making treatment decisions for my wife's cancer, I doubt it would make one iota of difference in the actual cost, or at very best only a small marginal difference in a very very expensive course of treatment. Bear in mind, we are the perfect test case! I can afford to pay $20,000 or more out of pocket if I need to, and it STILL wouldn't make a difference. If families with more limited means were obligated to pay the same $10-20K, if would mean financial ruin, or inability to access the lifesaving care, but it wouldn't allow the invisible hand to guide the market towards cheaper, more efficient care.

Update: With a few additions to clarify the different meanings of consumerism in health care.