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The market and healthcare
Back in November, I posted a 3 part interview with a European health expert who discussed with me some of the reasons why American healthcare is crippled. Our last interview focused on why market regulation of healthcare doesn't work. My blog had a remarkably short life on the TPM site because I posted on the day of the election (November 4). Suffice it to say, we had other things on our mind that day!
The subject is receiving new attention now and I'd like to re-post parts of the intervew here. My health expert and I have modified and essentially updated the information so as to make it a nearly brand new interview. It's an incisive look at American healthcare from a reasonably objective outside expert.
Blevins: Why hasn't market regulated private healthcare worked in the US?
François: The big problem with private healthcare is that it not comprehensive enough, so it is ineffective.
Take the pharmaceutical industry for instance, its money is just like Wall Street's money, and just like what happened to Wall Street, speculation has driven prices up to artificially high levels. By this I mean the price that consumers pay is absolutely not justified by the cost of drug production, or by the return investment shareholders can reasonably expect, not even by the risks tied to production (i.e. for every drug you produce you have others that fail so you have to include this in the price of the successful drugs).
These factors do not really determine current prices at all. Rather, they are fixed by the demands of stockholders who, driven by a desire for profit, push the company to determine its prices based solely upon the material desires of the shareholders and the company's stock market value. So prices skyrocket because the real factors that should determine their value are discarded for the volatile and fabricated values of stock market demand.
Blevins: Some would argue that the market hasn't done so well lately but that it still has the capacity to regulate the price of medecine properly, if the market itself is regulated properly.
François: In the healthiest market in the world, with all the right regulations in place, this is still impossible. Let me explain. In order to do it, I must go back to something that happened during the campaign. McCain wrote in a medical journal that healthcare should be deregulated (like the markets). He got a lot of flak for that but if I understood him correctly, what he meant was that he wants healthcare policies to compete across state lines.
On the surface, this isn't a bad idea. Private healthcare does have a real benefit and McCain knows this very well. When you have identified a risk for the individual, say smoking for instance, only private insurance has the flexibility to force its policy holders to improve their health habits (i.e. if the individual continues to smoke the insurance company has the right to raise his or her premiums). McCain's desire to let insurance companies compete would seem to provide the necessary market competition (thereby reducing premiums) while allowing insurance companies to more or less motivate healthy behavior. So McCain (and other politicians like him) are making a point that seems valid, but upon inspection it doesn't hold up or even make sense in this industry for one very big reason: these cases of identifiable medical illnesses with 100 percent prediction of risk (the only ones that can be effectively controlled by market regulation of healthcare) are statistically insignificant.
The vast majority of health problems result from causes that are not known and thus not measurable by any objective criteria (accidents, genetic problems that are currently undetectable before adulthood, most cancers) all these health risks are not measurable like you can measure the risks of smoking. So it makes absolutely no sense to promote a healthcare plan based upon criteria that apply to less than 10 percent of your country's medical problems. You have to provide some kind of minimal coverage that does not depend upon individual behavior if you want to avoid a massive breakdown in healthcare. This is precisely what the US is now experiencing. So even though you make great technological advances in medecine, your actual performance has been effectively blocked by market considerations, causing you to invest large amounts of money, even while your avoidable death rate rises at an alarming rate. It's very simple. Most health risks are not measurable and any market regulation will assume that they are measurable and thus controllable.
Let's hope your faith in the free market, which isn't entirely missplaced, can be tempered enough to allow you to implement an effective healthcare system.
The subject is receiving new attention now and I'd like to re-post parts of the intervew here. My health expert and I have modified and essentially updated the information so as to make it a nearly brand new interview. It's an incisive look at American healthcare from a reasonably objective outside expert.
Blevins: Why hasn't market regulated private healthcare worked in the US?
François: The big problem with private healthcare is that it not comprehensive enough, so it is ineffective.
Take the pharmaceutical industry for instance, its money is just like Wall Street's money, and just like what happened to Wall Street, speculation has driven prices up to artificially high levels. By this I mean the price that consumers pay is absolutely not justified by the cost of drug production, or by the return investment shareholders can reasonably expect, not even by the risks tied to production (i.e. for every drug you produce you have others that fail so you have to include this in the price of the successful drugs).
These factors do not really determine current prices at all. Rather, they are fixed by the demands of stockholders who, driven by a desire for profit, push the company to determine its prices based solely upon the material desires of the shareholders and the company's stock market value. So prices skyrocket because the real factors that should determine their value are discarded for the volatile and fabricated values of stock market demand.
Blevins: Some would argue that the market hasn't done so well lately but that it still has the capacity to regulate the price of medecine properly, if the market itself is regulated properly.
François: In the healthiest market in the world, with all the right regulations in place, this is still impossible. Let me explain. In order to do it, I must go back to something that happened during the campaign. McCain wrote in a medical journal that healthcare should be deregulated (like the markets). He got a lot of flak for that but if I understood him correctly, what he meant was that he wants healthcare policies to compete across state lines.
On the surface, this isn't a bad idea. Private healthcare does have a real benefit and McCain knows this very well. When you have identified a risk for the individual, say smoking for instance, only private insurance has the flexibility to force its policy holders to improve their health habits (i.e. if the individual continues to smoke the insurance company has the right to raise his or her premiums). McCain's desire to let insurance companies compete would seem to provide the necessary market competition (thereby reducing premiums) while allowing insurance companies to more or less motivate healthy behavior. So McCain (and other politicians like him) are making a point that seems valid, but upon inspection it doesn't hold up or even make sense in this industry for one very big reason: these cases of identifiable medical illnesses with 100 percent prediction of risk (the only ones that can be effectively controlled by market regulation of healthcare) are statistically insignificant.
The vast majority of health problems result from causes that are not known and thus not measurable by any objective criteria (accidents, genetic problems that are currently undetectable before adulthood, most cancers) all these health risks are not measurable like you can measure the risks of smoking. So it makes absolutely no sense to promote a healthcare plan based upon criteria that apply to less than 10 percent of your country's medical problems. You have to provide some kind of minimal coverage that does not depend upon individual behavior if you want to avoid a massive breakdown in healthcare. This is precisely what the US is now experiencing. So even though you make great technological advances in medecine, your actual performance has been effectively blocked by market considerations, causing you to invest large amounts of money, even while your avoidable death rate rises at an alarming rate. It's very simple. Most health risks are not measurable and any market regulation will assume that they are measurable and thus controllable.
Let's hope your faith in the free market, which isn't entirely missplaced, can be tempered enough to allow you to implement an effective healthcare system.
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There are several reasons why markets fail when it comes to health care:
1. The cost of not receiving health care when you are ill is (potentially) death. That means sick consumers don't and can't make ordinary trade-offs between utility and price when choosing health care. The price of refusing needed health care approaches infinity, which means people will pay just about anything for that care, even if they have to go bankrupt doing so.
2. Consumers of health care (at least those who aren't MDs) have little knowledge of what they need or don't need. They are completely dependent on the provider (seller) of the services to tell them what they need. This means they are not able to make normal consumer decisions: instead they are forced simply to accept what the seller tells them they need to buy.
3. Sick consumers often are too sick to shop around or have no time to shop because they need care fast. And once you're in a hospital, you have little ability to get up and leave if you think the price is too high or the service not what you want. Sometimes, you're not even conscious. Again, normal "consumerism" is impossible.
4. With new medical technologies (new equipment, new drugs) there's often very little competition, which means the sellers of those technologies can command almost any price.
5. When purchasing new technologies or offering expensive services, providers (hospitals, doctors) have little reason to push back on suppliers to get lower prices or reduce the costs of their own services. Consumers, as we said above, are willing to pay anything. And since most consumers are insured, they actually are able to pay quite a bit. While insurance companies are frequently criticised for limiting access to care, the reality is that their ability to refuse care (or to limit reimbursements to providers) is itself quite limited and they do accept far more expensive claims than they deny. When providers know they can get paid for expensive care, they have little incentive to try to reduce the cost of that care. While the insurance companies are often criticized for reaping large profits on care (and they have been profitable), the pharmaceutical companies, the technology manufacturers, and, in some cases, the for-profit providers of care often make even larger amounts.
The above reasons for market failure are inherent in health care and require a solution to the health care problem that isn't a pure market solution. The biggest challenge for health care reform is figuring out a way, where there can be no real market, to set prices and make trade-offs between costs and benefits of particular health care services. In a single-payer system the government would set prices and also decide what would and would not be paid for. Single payer, therefore, requires an extremely competent and extremely independent government health care agency to act like a market and make choices. If we go with single payer (and that may be the best solution) the effectiveness of this agency will be the key determinant of whether the solution is a success or failure in my opinion.
February 27, 2009 7:43 AM | Reply | Permalink