I think the argument that we can’t treat health care services exactly like other consumer goods makes sense. If someone makes some questionable decisions and hits a run of bad luck and can’t afford a television, then he goes without television and it’s fine. If there’s a car crash and there’s an injured man on the side of the road, then letting him die because he has no savings isn’t an ethically acceptable option. So that’s a big difference.
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.
Thus, “the demand for medically needed care is not going to be terribly price responsive.”
I think this is the wrong way to think about the issue. “Knee replacement surgery” doesn’t denote a single unique thing. Our methods for doing it change and improve over time. And there are multiple dimensions along which they might improve. One kind of improvement might be to develop a way that’s 10% “better” and twice as expensive. Another kind of improvement might be to develop a way that’s 90% as good and half as expensive. In the economy as a whole we see lots of improvements of both kinds. HDTVs are better than conventional TVs, but when they first came on the market they were very expensive. Ikea, by contrast, was all about making furniture cheaper even while compromising slightly on quality. In a universe where knee replacement surgery was universally paid for out of pocket, then we’d see lots of innovations of both sorts. But in the universe we have, innovation in the health care sector almost always drives us in the “more and better” direction.
Thinking about this is further complicated by the fact that in the USA, health care programs are a major means of income redistribution. Try imagine instead a country with a single payer health insurance system funded by a VAT, and, separately, a progressive income tax to redistribute income. In that country, it’s clear that “higher income tax and more redistribution” would always be the authentically left-wing posture. It’s much less clear that “higher VAT and bigger health insurance budget” would be.