Free market mechanics and healthcare…
by Michael Halasey
Free market mechanics and healthcare…
Now, I hear something all the time in my work in the health policy realm, and that is that the “free market” could lower prices.
I even recently had someone approach me after I mentioned that the PPACA had resulted in an extra million people aged 18-25 having health coverage this year. His statement? “That’s exactly the wrong direction, we need to have less people, far less people with health insurance.” I asked him his reasoning…of course, already knowing what his response would be. He reasoned that it would force people to compare prices, shop around, and would dramatically lower prices through the mythical, magical “free market”….
Of course, this ignores some rather real problems with this line of thinking. For starters, healthcare does not behave like normal commodities for a variety of reasons.
To start with, healthcare does not lend itself to price comparisons, and comparison shopping. The high costs are often related to trauma and emergency care/hospitalizations. It is simply not practical to ask which hospital in the area offers the best rates on cardiac catheterizations while you are being rushed to the hospital in the midst of an MI.
This impracticality also lends itself to probably the biggest problem. That is irrational behavior. Any of us who have taken even undergraduate economics remember the discussions of rational actors, and how prices were sensitive to rational behavior. Much of health care involves emotionally charged, heated, and oftentimes difficult decisions. Most patients and families can hardly be expected to act in a rational fashion about receiving the news of a terrible diagnosis such as cancer. Real world experience reveals this to be true. I wish I could count how many times I have presented various treatment options to patients, only to hear “Do whatever it takes”.
Hayek once wrote that spontaneous order was a result of market economies, and that it was “a more efficient allocation of societal resources than any design could achieve.” This of course, assumes rational behavior, and assumes that a market can be symmetric.
Because of this behavior, and because people view healthcare not as optional, but as a necessity, price elasticity scores generally trend around 0 or -1. This indicates an inelastic market.
Of course, the next time I have a 21 year old kid who comes in after a farm accident without insurance, and is badly injured, I’ll make sure to tell him that perhaps he should have shopped around.
Nice post, by the way, did Hayek write that before or after he applied for Medicare?
Of course, in the libertarian free market, everyone has perfect information and knows not only the odds that they might have an accident, but also the odds that it might result in being brought to your hospital v. the odds of being brought to other hospitals. Thus, they’ll have made arrangements (i.e., will have prenegotiated) with each of the potential hospitals where the might be brought for each of the reasons they might be brought. Simple.
“a more efficient allocation of societal resources than any design could achieve.”
Is there an economic and clear definition about what is meant as “efficient allocation” in this context? It seems to have something to do with “spontaneous order” and market economies? Sadly, that sounds like gobble goop to me. This is because if I attribute my own definitions and substitute something else for “market economies”, I could make the same blunt claim.
I recently broke my arm and began immediately to contribute to the skyrocketing cost of health care in this country. I didn’t know what to pay for a pin the length of my humerus until I got the bill from the hospital–$1200 plus bucks, screws not included. Next time I’ll demand to see the thing before they put it in, ya know, just to make sure I couldn’t get it cheaper elsewhere.
Same with the two units of blood they gave me. (B Positive–not a common blood type.) I need to check the quality. And, maybe I shoulda asked for a discount on the bood drawing done by students–hurt like hell. Actually, the local hospital has the worst stickers in two counties, but they charge the same for good stickers elsewhere. Gonna turn ’em in to the BBB. Right. 😉 NancyO
Anna, I would agree with you. The problem with Austrian economics is that they take the somewhat difficult stance of attacking other schools of economic thought (ESPECIALLY econometricians) by stating that human behaviour is impossible to quantify and therefore impossible to predict….
Than they go ahead and make predictions……..I’ve never really understood that stance.
Zero out the “defense budget”, the US is not worth killing for.
Hayek was selling “social utility”.
Koch wanted him here because “social utility” is German for “social Darwinism”.
US health insurance thrives on the fit bettors’ money.
That all ended in Europe before Hayek moved to the US.
“No country for old men……………”
in fairness to your friend, he was talking about shopping around for insurance, not emergency rooms.
but he was wrong anyway. just ask our friend Buff Pilot. He wants the most expensive Doctor he can find. Because expensive is good, right?
More than that, it is not “irrational” for people to choose other values besides “lowest price.” Only people who have free market related brain damage believe that consumers are “rational” or that rational is necessarily good.
What people would like from health care is certainty that they can get the treatment they need when they need it. As far as I can tell from here, the free market simply cannot do that. A modified free market…. the government takes bids from suppliers and monitors the quality of the treatment under those bids… because the government has the resources to do that, people don’t… would, I think work better than a pure government solution, but that is because I believe in the principle of balance of powers. Heck, “efficiency” is no more reliable a guide that “rational.”
NancyO, Goodness, have fun but be careful.
So, I’m a bit strange and a born experimentalist. I recently was told by a specialist that I needed an expensive procedure that was a matter of life and death. He was surprised when I told him I would get back to him. Last week I went in and told him that my evaluation of the risk and benefit led me to decide that it wasn’t worth the cost. He didn’t negotiate price with me but asked my husband. My husband told him that he doesn’t ever tell me what to do. So looks like I might not get a bargain price and, since all the local specialists in this area are part of the same shop, I guess I either pay the price or decline the purchase.
Following up on what Coberly said, just because the topic was not buying health care, but health insurance, questions of rationality and market value don’t work in the same way in the insurance world as they do for buying bread. You WANT more people to buy insurance, to get into a bigger pool, so that the cost is spread out amongst a higher number of people. It’s the exact opposite of the concept of supply and demand.
Where markets come into play with insurance is the games they play with pool sizes. If a company with 10 employees and a company with 10,000 employees both want a company-specific pool, it will be much, much, much more expensive for the small company to have the same benefits as the big pool. On the flip side, private insurance companies want the pools to be as small as possible while still being profitable. That is the point of exchanges in the Affordable Care Act, so that folks can shop around for larger pools (e.g. higher shared risk, lower price) and buy into them, and to keep the insurance companies from having total control of the information asymmetry.
since it’s only a matter of life or death, you have lots of room to negotiate. me, i have been defying death that way for fifty years. before that my mother paid the bills and she was easier to scare than i am.
one of these days it’s going to kill me, and then all the doctors’ll say, “see, we told you so.”
Yes. And that’s why you don’t want to let them game you with all this identifiable risk, or pre existing condition stuff. We all have preexisting conditions, we just don’t know what they are. And their game is to play us off against each other.
My own entirely irrational view is that their game is to make us hate each other… one against all is the Libertarian vision, and the ethics of hell.
How does one “shop” for health insurance coverage? What is the basis for comparison of one policy against another? The price of the policy is not fully disclosed until some form of coverage is denied to the policy holder. have you read a health coverage policy lately? Can it be written in any more complexity? You don’t know the details of your health coverage until you use it and discover what you didn’t expect. Those of us fortunate enough to have good coverage through an employment situation should not look to exclude those who do not share that good fortune. The only reasonably well understood health coverage is Medicare and those who are covered generally know that they can spend a bit more to have that so called add-on for the other 20%. Virtually all care is covered up to 80%. Nice and easy to comprehend. It should be the basis for universal coverage.
No one needs to control medical services through government intervention. It’s only the cost of those services that needs attention. Some seem to forget that difference.
Michael-can you tell me where you got the, “as a result of the PPACA 1,000,000” people ages 18-25 that have “health coverage” this year? I hadn’t seen that number.
Oh, Anna, dear lady. I certainly hope your situation improves. I’m lucky it was only an arm I broke. Could have been much worse, as you should know better than anyone. Do accept my best regards and wishes your health improves soon. NancyO
yes. what nancy says. i’m just a smart ass teenage boy and i never know what to say.
But wait a minute – how many of us actually get to shop for health care insurance. It is more often the company that employs the insured person that does the shopping and their criteria for what is “best” is very different from that of the insured.
Two surveys released Wednesday – one by the government, another by Gallup – found significantly fewer young adults going without coverage even as the overall number of uninsured remained high. The government’s National Center for Health Statistics found that the number of uninsured people ages 19-25 dropped from 10 million last year to 9.1 million in the first three months of this year, a sharp decline over such a brief period.” http://www.huffingtonpost.com/2011/09/21/obama-health-care-law_n_974039.html
and this also:
“Gallup found that the share of 26- to 64-year-olds uninsured rose from 18.1 percent in the fall of last year to 19.9 percent this summer.”
Additionally Medicare costs continue to drop as shown by the S&P indices.
A simple Google shows a decrease in uninsured 18-25 year olds from 2008 to now from 27.6% to 24.2% even as the 26-64 crowd going from 15.0% to 19.9%. The link I found was to Jon Walker at FDL but he was linking back to Gallup survey data.
However you set your baseline either in straight out coverage numbers or by adjusting for overall trends in combined 18-64 rates that combination based on a population of 300 million plus clearly supports the claim that at a minimum a million more 18-25s are covered today than were or would have been except for ACA.
iPads don’t lend themselves to copying URLs not actually embedded in the text of the post rather than the address window, but the Google search and subsequent arithmetic isn’t hard
exactly. and if you only wanted to run a business making and selling gizmos to happy customers, you really don’t want to have to become an insurance expert as well. bette to give a percent of payroll to the bad old government and ask them to do it… wait, wait,… that’s … socialism!
NO, he wasn’t. He meant that he favored getting RID of health insurance altogether. I hear this more than you might think. Usually from younger, libertarian types, but he meant, “Abolish health insurance, and pay out of pocket in total for everything”.
No, it wasn’t.
He wants to get rid of health insurance altogether. See my response above to Coberly.
It wasn’t intended as a remark about shopping around for health insurance, but getting rid of insurance, and shopping around for healthcare directly….
Like I said, it is actually quite scary how often I hear this sentiment. This had nothing to do with purchasing insurance, he wants to abolish health insurance…..
I suppose he might have meant that, but I would think most people would think that was insane.
What is more insidious is that the various “fixes” for Medicare are in fact “getting rid of insurance.”
Instead of letting the people pay for their eventual health care needs though a reasonable premium they pay over a working lifetime, the proposals by Our Leaders all say “let’s cut the premiums when people have the money to pay and hit them with increased “out of pocket” charges when they are old, sick, and no longer working.
Because you see, otherwise we would have to tax the poor young to pay for the greedy old.
Young people will never get old, so there is no reason for them to think ahead. Or think at all.
Your post puts immediate care as the umbrella of all healthcare. What about preventative care? Behavior changes back to rational. People already shop for doctors based on location, specialty, etc.
You mention price elasticity, but is that just for immediate care or a generalization of all healthcare. Even if price elasticity is 0, is that because of the healthcare system or the healthcare insurance system.
Your argument seems to be just as faulty as the one your trying to counter. I’d argue that there is nothing wrong with our healthcare system. The problem is our healthcare insurance system. Doctors charge what they want because they can. Consumer are not price sensitive due to deductibles, premiums, etc. Giving (socialized) more people insurance results in the ‘Gremlin Effect’; meaning more of the same problem. That’s not healthcare reform, because it’s not fixing anything. Just adding to the problem.
I could go on but this topic has been beaten to death.
beaten to death perhaps, but not so as you’d see anyone changing their mind or thinking outside their own boxes.
you appear to suffer from what i would call high level abstraction. you have “rules” of “economic behavior” which explain everything to your satisfaction. and the fact that people do not behave according to your rules is either denied entirely, or just an excuse to say “to hell with them, then.”
you could at least note the experience of other countries with something approaching true “socialized” insurance. I would not expect you to understand my own case for using the government to manage a very large insurance pool, which the people “pay for themselves.”
but here is another clue for you. most people are not very smart (this is not an insult). they simply cannot understand in any “rational” way the “health care problem.” And of those who could, perhaps, the problem they face is far too complex for any “rational” decision under real time constraints. Exactly the kind of situation people invented government to help them with.
But if we outlawed health insurance it would not be a free market. If we allow health insurance, it is not a free market since we have two different types of consumers competing for the services of the health care providers each with a different set of “rational” criteria.
“could at least note the experience of other countries with something approaching true “socialized” insurance”
Recognizing the fact that every such country is far better at controlling costs than the US would be very inconvenient to Christian’s argument.
Of course not. But preventative care is not the cost driver in healthcare. Emergent care, and hospitalizations are. If you want to break down the health marketplace, there is some price elasticity for elective and cosmetic procedures, such as Lasik and plastic surgery.
There is some income elasticity in healthcare with those earning higher incomes consuming a greater portion of healthcare resources.
My point was that the mythical invisible hand cannot solve the healthcare marketplace problem.
You can argue that there is nothing wrong with the system, but you would be wrong. Our outcomes are not as good as elsewhere, and quality metrics are often not met.
Look, we have the best medical technology on the planet, we also have the best medical education on the planet. Yet we pay more, and get worse outcomes than other places.
There was a study a few years back that looked at diabetes, CHF, and COPD ouctomes…comparing the POOREST UK residents with wealthiest American residents. Theoretically, the wealthiest americans could afford whatever healthcare they needed….however, using outcome measurements, our wealthiest citizens compared poorly to the poorest UK residents.
So where is the disconnect? Well if the technology is good, and the education is good, then it must be system. It’s broken, fragmented, disjointed, etc. You could not sit down and say “I want to design the worst healthcare system possible” and come up with something as bad as the US system.
That’s an entirely separate discussion, and I could keep typing for hours…but I have another meeting now.
“Why not move there instead of trying to promote here?” Because my family and other loved ones live here, and don’t have it, and I can maybe help them by promoting it here. And because my own beloved country is falling behind other Western democracies and I’d like to help with that, rather than running away from it. OK?
i sure hope you don’t use that “reasoning” process in your work.
Christian, excellent points, but what I am saying is that the DELIVERY of the healthcare is the problem, this goes far beyond access.
1. Physicians have no interconnectivity, I see patients all the time who are placed on multiple sometimes contraindicated medications, or medications that react with each other.
2. Fragmented delivery.
3. I have written here in the past on Prometheus, which basically, it’s no accountability. We have a system built for volume not value. Physicians don’t get paid on quality measures, but on the number of patients they see and the number of procedures we do….
That has nothing to do with coverage….that is a dysfunction of the delivery system.
I have said for years, consistently, that healthcare reform is a 3 part process, and all 3 parts need reform.
1. Insurance reform…this addresses access, and let’s be honest, that was what the ACA was about.
2. Delivery system reform….this is the hardest of the three and will take a complete overhaul in how we deliver care.
3. Finance reform…..HOW do we pay for healthcare….employer based? VAT? Etc.etc.etc.
ALL 3 need to be addressed, addressing one only make a lopsided monster….
I believe we are on the same page. I just think the delivery system is a product of the insurance system.
We see these Progressive Insurance commercials where they tell you their price and the price of competitors. It works for auto/home/life insurance so the infrastructure is there. Healthcare is more complex than the ones mentioned, but that doesn’t mean it couldn’t be successful in the same system (generalization).
Financial reform is a different beast. Making the consumer price sensitive is key. Also removing the tax bias and employer bias. The list goes on and on.
There just doesn’t seem to be any political will to tackle the real problems. Instead, every administration adds new things to the problems. Like you said, we get this lopsided monster. Same with SS, Medicare, etc.