In Part 1 of this blog entry I made the case that American society has finally accepted the proposition that at least basic health care should become a right. By definition this means that health care distribution should not be determined primarily by the marketplace, and that the federal government has a necessary role to play in guaranteeing the universality of the right. It’s tempting now to jump right to the obvious policy question, i.e., what is the best public policy model to employ to achieve universal and affordable health care? Sorry, but that’s the topic for Part 3! In order to consider that question intelligently it’s first necessary to review briefly the nature of the US health care marketplace and the insurance that dominates its transactions.
Let me start with the bottom line – the marketplace for health care in the US, or any other nation for that matter, is not and cannot become meaningfully competitive. This proposition was established convincingly more than a half century ago by Nobel laureate economist Kenneth Arrow in his immensely influential 1963 paper entitled Uncertainty and the Welfare Economics of Medical Care. We’re all familiar with the basic economic principle that competitive markets benefit both consumers and society by meeting buyer needs, encouraging efficiency, spurring innovation and lowering prices. For these competitive forces to be truly effective, numerous powerless buyers and sellers who all possess relevant market information must interact in a free marketplace uninhibited by restrictions on entry, exit or resource mobility. No one, including Arrow, disputes this principle.
But it’s also widely accepted that market imperfections in the real world frequently lessen or even eliminate these beneficial effects. Arrow, and many other commentators who followed, argued persuasively that health care delivery deviates in fundamental ways from effective competition, and that therefore government intervention is necessary to improve results. In brief, some of the most significant health care marketplace imperfections identified by Arrow and others are:
- Market Power – Instead of ‘numerous powerless buyers and sellers,’ big hospital chains, provider groups and insurers dominate many local markets (economists call this phenomenon bilateral oligopoly). A common result is fewer patient choices and higher prices.
- Asymmetrical Information – The buyers of medical services (patients) know far less about medical care than the sellers (physicians, PAs, nurses, etc.). Beneficial competitive outcomes require that buyers possess the relevant information to make an informed consumer choice. Ironically, at the same time patients know much more about their own health than do insurers.
- Idiosyncrasies of Payment – Because patients don’t see the bill until after the non-refundable medical care has been provided, and because they are often given little information about costs or prices, patients are typically unable to shop around for a medical service based on price or value. Sometimes, of course, the urgent nature of the care need also precludes comparison shopping.
- Unpredictability – Unlike our need for food, clothing or most other commodities and services, our health care needs are largely unpredictable. But when needed the care can be urgent and very expensive.
For these reasons health care cannot be bought and sold like milk or tennis lessons. These fundamental characteristics of the health care marketplace violate almost every requirement for effective competition noted earlier. And permeating them all is a further complication. In health care markets there is a third major player besides patients and caregivers that also frequently possesses market power and asymmetrical information. As a further payment idiosyncrasy, this third party actually ends up paying most medical bills. And the uncertainty and risk inherent in health care create the classic conditions for this third party to emerge. Of course I’m referring to health insurance and its providers.
The basics of all insurance are pretty straightforward. Insurance is a form of risk management or risk sharing used to hedge against an uncertain loss. It involves pooling funds from many insured entities (the risk pool) to pay for the losses of a relative few. Insured entities assume a relatively small but certain loss (premium payments into the fund) in return for promised compensation for a larger uncertain loss. With health care insurance the uncertain loss is the cost of medical treatment for the covered array of illnesses and injuries (ignoring preventive care coverage).
Health Insurance may be provided by private insurance companies, either directly to insured individuals or indirectly through e.g. employers, or by government programs. Unfortunately, many of the same imperfections such as market power and asymmetrical information that pervade the health care market also exist in the marketplace for individual health insurance. And there are others, such as adverse selection, free rider, biased selection and moral hazard problems. The curious reader can read up on these imperfections in private health insurance (see e.g. The Economics of Health Insurance and the Health Care Market: Econ 101 at aneconomicsense.org 1/27/14). For our purposes it’s sufficient to note that all these imperfections permit a major market player or players (patients, medical professionals, insurance providers) to game or exploit the system.
So we return to the bottom line – the US health care marketplace is not and cannot become meaningfully competitive. It follows that this marketplace cannot generate the many private and social benefits that a more competitive environment would assure. Is there evidence to support this? Absolutely, in abundance, and widely reported even if selectively comprehended. Here’s just a brief sample. According to the International Federation of Health Plans the 2012 average daily hospital room (not treatment) charge in the US was $4,287, while the comparable rates for six other developed countries (Canada, Spain, Switzerland, South Africa, France and Chile) ranged from $429 and $1,472.
This same report did similar comparisons for 28 different health care services. For example, the average US charge in 2012 for an angiogram test was $914, while the other countries’ averages ranged from $35 to $378; US average angioplasty charge = $61,649, average range for other countries = $2,851 – $14,636; US average charge for hip replacement = $87,987, average range for other countries = $3,365 – $27,810. And so on. The US ranges from high to low were also much greater than the counterpart nations. These are not cherry-picked examples, as you can see for yourself (see International Federation of Health Plans, 2012 Comparative Price Report at static.squarespace.com).
Of course it’s possible that, instead of market failures, our health care costs are so high because our health care quality far exceeds that in other countries. Possible, but not true. For instance the Organisation for Economic Co-operation and Development (OECD) compiles measure for health care quality across nations for many medical conditions. In their most recent compilation the US ranked 5th for colorectal cancer, outside the top 25 for breast cancer, 19th for cervical cancer, 7th for heart attacks and 16th for hemorrhagic strokes. According to the World Health Organization the US life expectancy in 2015 (79.3 for both sexes) ranked 31st in the world, behind such pinnacles of health care innovation as Iceland, Luxembourg, Malta, Slovenia, Cyprus and Chile. But we did beat Cuba by one slot in the rankings!
So our current private-public health care distribution patchwork, still based even with Obamacare on the erroneous assumption that market forces will deliver superior outcomes, in fact currently results in pretty much the worst case scenario – exorbitant costs and disappointing quality. Surely there must be a better way!? There is but not in this post, which I’m certain has already exceeded some attention spans. Stay tuned for Part 3 – the long-awaited public policy discussion!
Garygrams 