The Free Market Does Not Work In Health Care
The Free Market Does Not Work In Health Care
The recent trickle of so-called consumer-driven health care “principles and recommendations” are a preview of the likely Republican alternative to comprehensive health care reform. Earlier this month, the Health Policy Consensus Group, headed by the conservative Galen Institute, published “a vision for consumer-driven health care reform” and today, Ramesh Ponnuru of the National Review pens a New York Times editorial in which he explains that the quest for “universal coverage” is “misguided.” Policy makers should focus on giving Americans “more control” of their coverage instead:
The existing tax break for employer-provided insurance could be replaced with a tax credit that applies to insurance purchased either inside or outside the workplace….Insurance would be more affordable, especially for people who cannot get it through an employer…More important, people would own their insurance policies and thus be able to take them from job to job.
Sen. John McCain (R-AZ) proposed a similar plan during the campaign, but he never convinced Americans to abandon their employer-provided insurance for the promise of cheaper coverage in the individual market. Part of the problem rests in the fallacy of the theory and the other is the burden of experience. After all, Americans are routinely denied coverage in the unregulated individual health insurance market and small businesses are “frequently finding health policies too expensive and are dropping coverage, sending even more people shopping for insurance.” Healthy Americans who do find coverage enroll in bare-bone plans that offer little substantive protection.
As the Miami Herald recently reported, insurers deny coverage for patients with “diabetes, hepatitis C, multiple sclerosis, schizophrenia, quadriplegia, Parkinson’s disease and AIDS/HIV.” Moreover, “some insurers will automatically reject applicants who are using certain prescription drugs. Wellpoint denies anyone who within the past year has taken Abilify and Zyprexa for mental disorders as well as Neupogen, which is used to treat the side effects of chemotherapy. Vista lists the anticoagulant Warfarin and the pain medication Oxycontin. Both companies list insulin.”
And why not? Competition without meaningful regulations incentivizes companies to only offer insurance to the healthiest Americans. How else could they beat the insurer across the street? Offering coverage to sicker Americans would attract a sicker pool of enrollees and serve as a competitive disadvantage. In fact, free market health care fits the definition of a failed market. A market fails if:
1. Monopoly — occurs if a single buyer or seller can exert significant influence over prices or output: In health care, “insurer and hospital markets are increasingly dominated by large insurers and provider systems.” “The increased concentration has made it difficult for the nation to reap the benefits usually associated with competitive markets.”
2. Negative Externalities — occur if the market does not take into account the impact of an economic activity on outsiders: In the ‘wild west’ environment of the individual health market place, companies leave the sickest patients without coverage. Health care costs increase for everyone when patients are forced to forgo early and appropriate care or visit the emergency room once a condition becomes unbearable.
3. Asymmetric Information — occurs when one party has more or better information than the other party: Americans looking for coverage in the individual market have no way of comparing different policies or rarely know what the plans actually cover.
Conservative health proposals double-down on this broken marketplace. They: 1) eliminate the employer tax exemption for health benefits, 2) provide everyone with a refundable tax credit to go out and purchase individual coverage, and 3) loosen the already lax insurer regulations. The results are predictable. Not only will Americans with pre-existing conditions go without coverage — or, at best, be offered very expensive plans — but as healthy Americans with bare-bones policies fall ill, they’ll discover that their insurer has little enthusiasm for paying claims.
16 Responses to “The Free Market Does Not Work In Health Care”
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It’s the same strategy business used the last few decades to shift defined benefit pension plans to 401k’s and 403b’s. They shifted the cost of retirement saving to the employee. What was cut first when companies cratered last fall? Retirement matches.
The game is on for health care coverage. Business wants to dump the cost onto employees. Even Larry Summers used U.S. Chamber of Commerce lingo on health reform in his remarks today at the Economic Club of Washington.
Summers said health care reform was needed to address the “most rapidly rising component of labor costs.” It’s for the competitiveness of American corporations. That means dumping the cost onto the employee.
April 9th, 2009 at 7:27 pmBravo for laying out in such simple terms the conditions of failed markets. The primary lie of the right, in economic terms, is that markets *never* fail. Adam Smith recognized this as sheer idiocy. Markets do fail, and the Health Insurance market is a primary example of that.
Even basic college textbooks on Health Insurance recognize that fact. But you’d be hard pressed to find a movement conservative who has ever read one of those.
April 9th, 2009 at 7:37 pmI’m generally sympathetic to this point of view, but let me point out that buying individual health insurance is not as difficult as it used to be. I would much rather see a health insurance industry tilted to individual plans than employer-based plans.
Ehealthinsurance.com allows side-by-side comparisons. I actually wrote about how I obtained my own insurance here . You generally have 4 or 5 choices, with some differences in coverage.Keep in mind that the state insurance boards usually set minimum standards of coverage for ALL plans.
I haven’t really considered all the edge cases (because I am a healthy person), but one core problem is that people let their insurance policies lapse, either because they switched jobs or had some financial disruption. That means you need to reapply, and those introductory medical qualifications tend to be rigorous and even brutal. But once you’re on, chances are, you’ll stay on –even though your rates will go up. Perhaps an argument can be made that switching plans can be overly difficult, I don’t know.
I find it humorous that those who protest the inefficiencies of the insurance market turn to employer-provided insurance as the ideal. In fact, in my experience employers choose more generous health plans that I as an individual ever needed; the prices are not cheaper but the same or probably even more expensive than a comparable individual health policy.
Two things that hide this is: 1)employer contributions to the health plan and 2)the tax subsidy. Luckily, the feds have finally started allowing individuals to deduct health care costs, but I would be completely comfortable with tax benefits for employer plans be removed; that makes it possible for individuals to compare employer plans and individual plans more fairly.
One problem with individual health plans is that many individuals can’t appreciate what insurance they “need” and understand how to dispute an insurance decision effectively.
Individuals (even educated individuals) find it hard and time-consuming to learn the ropes.
Another problem is that the conservative solution often don’t include mandates on individual insurance. So in essence you may be injecting a dose of rationality into health insurance decisions, but you are not producing a higher percentage of coverage.
April 10th, 2009 at 9:31 amIn the‘wild west’environment of the individual health market place, companies leave the sickest patients without coverage. Health care costs increase for everyone when patients are forced to forgo early and appropriate care or visit the emergency room once a condition becomes unbearable.
April 10th, 2009 at 10:17 amThe conservative talking points about health insurance appear to be yet another plank in George W. Bush’s vaunted “Ownership Society,” by which he really meant, “You’re on your own.” Caveat emptor uber alles!
April 10th, 2009 at 11:26 amTake the example of fire protection –
1) Firefighters don’t check insurance records before they go to a fire, because everyone realizes that you can’t allow fires to spread just because someone’s home is uninsured – that will lead to the nearby insured home burning down as well.
Similarly, epidemics cannot go untreated, or the overall health burden will wipe out the entire economy (as in the plagues of medieval eras). Fighting epidemics, like fighting fires, calls for a coordinated society-wide effort – socialism in action – yes, most people don’t realize that tax-financed fire, police and other emergency services are examples of socialism – really.
2) Consider the preventative health care industry, involving everything from personal trainers to alternative medicine to getting vaccinations – should this be viewed as a personal benefit or a social benefit? It’s really both – you are healthy, and you’re also not taking up space in a hospital bed. Notice that the purely free market/GDP-oriented viewpoint would argue that if hospital beds are full, that means profits are high, so the more sick people the better.
Similarly, there are many steps that the individual homeowner can take to protect against fire – all on the free market – such as buying a chainsaw to clear brush back from the edge of the home, installing a fire hydrant or sprinkler system – some of which may be mandated by local building codes. In this case, the government is playing a role in creating demand via insisting on building codes – but the homeowner or developer can find the best deal on the free market. Here, you have a mixed approach – part government mandate, part free market.
The fundamental conflict between making money off of sick people and curing people of their illnesses is what has led most industrialized nations to go with a national health care service, not a for-profit private medical service. Far too often, the advice given by for-profit medical services has more to do with maximizing corporate profit than it does with looking after the patient’s best interests.
April 10th, 2009 at 11:43 amThe fox is in the hen house on health care reform:
http://stateofthedivision.blogspot.com/2009/04/health-care-reform-hen-house-officially.html
April 10th, 2009 at 12:07 pmto Robert Nagle who states : “The problem is -
that people let their insurance policies lapse, either because they switched jobs or had some financial disruption.”
Let me tell you what happened when I lost my job and became disabled. I couldn’t afford the cobra payment while waiting for the disability claim to be deceided. I called many “Health Care Providers”, I was told by everyone of them that because rates are always changing I had to wait until I was closer to cobra running out before they could quote me a price. Everyone of them stalled me. When it got close to the time my cobra insurance was ending I sent in the applications – only to have every one of these companies hold them until AFTER the expiration date of the cobrs policy. This was all done by design so that my medical problems would then become pre-existing conditions. The health of the American citizen is all a game to them – one in which the cards are clearly stacked against us.
April 10th, 2009 at 1:00 pmThe proposals being considered by Congress and the White House on health care are merely bailouts for the insurance companies, in trouble because of a combination of excessive greed and the depressed job market.
They want mandated insurance in return for eliminating “pre-existing conditions” (with loopholes). Mandates, underwritten by the government are a profiteers wet dream, yet will do nothing to assure that EVERYONE gets good health care.
A single-payer program, such as H.R. 676, would guarantee equal, fair, high quality universal coverage, at a far lower cost than any program which includes insurance profiteers.
Medicare is an example of this – it works.
We need to forget about insurance – and concentrate on health care.
April 10th, 2009 at 2:03 pmSaying the American healthcare “system” has even the slightest relation to a “free market” is, well, a lie. Fully half of all insured American have government insurance that is rife with price controls among countless perversions. Worse still, the bizarre system of interactions, incentives and tax breaks for insurance companies and corporations amounts to nothing short of a fascist model.
No, a “free market” in healthcare would involve direct payment for services, instead of the fatally flawed third party payment scheme. It would eliminate the enormous price inflation that comes from the outcomeless over-use of the system by people who have no incentive in place to personally ration.
Going even further toward a European model will simply result in tragically, and often terminally, long waits for important procedures as users completely unrestrained by any price mechanism further swamp providers.
And pointing to Medicare as successful, sustainable model willfully ignores that it is moving rapidly toward a national bankruptcy according to every honest account to the tune of +30 trillion in unfunded liabilities.
Try again with some intellectual honesty.
Single payer = rationing by an elite group of “experts” and funded by inflation.
April 11th, 2009 at 8:07 amFree Market = hasn’t existed in the USA for 40 years, but would be light years better for everyone.
The American healthcare system has NO relationship to a “free market”. It hasn’t since government regulation replaced doctors and patients in determining what constituted “reasonable care”, and since insurance companies became part of the equation. If you go back before 1950, you find a healthcare system that worked well for all parties.
April 11th, 2009 at 11:02 pmWe all know our current system is unsustainable. The U.S. is seriously behind other countries in health care delivery. We spend much more – about 16% of GDP – and get less. (and if the “wait” times are so terrible in other countries, people would be flocking here for health care. Instead Americans now travel to India for medical procedures and to Mexico for dental care!)
April 13th, 2009 at 5:33 pmWe have lower life expectancy and higher infant mortality than many other nations. Even allowing for other factors, the lack of affordable and adequate coverage for health care is a major cause of these disappointing statistics. Let’s stop pretending that for-profit health insurance provides anything in the way of health care, and get busy creating a national plan that either eliminates private health insurers, or returns them to the not-for-profit status that was the former Blue Cross/Blue Shield before all the braniac MBA’s came up with this competitive marketing nonsense. Health care is not a product like Coke or Pepsi. It is a basic human need. And if we don’t have it, we can hardly exercise our right to life, liberty, and the pursuit of happiness.
Guess whose stock soared today? For-profit hospitals! Nancy-Ann DeParle will deliver for her followers.
April 14th, 2009 at 4:59 pm“and if the “wait” times are so terrible in other countries, people would be flocking here for health care.”
That does, in fact, happen. I can only provide anecdotes from my father, who is a surgeon and has performed procedures on Canadians that were terrified they wouldn’t survive the months of waiting for a diagnosis. Or my close friend, whose father died in Germany of cancer while waiting for full diagnosis. This isn’t even waiting for treatment. This is waiting for DIAGNOSIS.
Is that widespread? I don’t know.
But economics teaches us that price controls lead to shortages. You can’t make services cheaper without driving up the demand for them beyond what the supply would naturally allow. You can’t make healthcare less profitable and still attract the same amount of resources to the industry to meet that increased demand.
Government healthcare “reform” and “cost controls” is nothing more than coercive price controls that deliver poor allocation, coordination and shortages in every other instance of their use. This has played out in precisely this fashion in housing, education, energy and food.
All that said, healthcare is weird. The cost/benefit of preventative medicine is not obvious for people, especially when they’re struggling financially, and yet delaying checkups can lead to terrible illness that is both a human tragedy and very expensive.
It’s a tough issue, which is why an intellectually honest discussion is so important. Strawman arguments about “free market healthcare” is not helpful.
April 15th, 2009 at 5:33 pm@ John Papola: If Canadians and other non-US-citizens were “flocking” here for diagnostics & procedures, one could most certainly find more than anecdotal evidence. And I’ve seen NO evidence — anecdotal or statistical — to show that Canadian citizens or those of ANY other nation clamoring for adoption of the US system…
April 17th, 2009 at 10:39 pmD’oh! [Post-Submit Edit]: “nation clamoring” should, of course, read “nation ARE clamoring”. Proof-read early. Proof-read often…
April 17th, 2009 at 10:47 pm