There were many really excellent comments on Bonddad's diary yesterday, about
why the market, and the standard economist mantras, don't really apply well to health care, which is a public good rather than a private good. I had some fresh insights yesterday, and I felt it was worth some time to consolodate them and to continue the discussion.
Healthcare is a public good
Once upon a time, in early Britain, if you wanted the fire department to protect your property, you had to privately enroll with them. Each fire insurance company had their own fire department. If your property was not enrolled, they might not put it out. Of course, there is a tiny problem, which is that if one building in a neighborhood starts to burn, it endangers not just that property but every other property in the vicinity.
So it is with healthcare. If my neighbor has tuberculosis, or fails to vaccinate his children, my family is at risk. If, His Noodly Appendage help us all, he has Ebola, I sure don't want him bleeding to death on the streets, with his bodily fluids being washed into the water supply.
More subtly, if my neighbor injures his hand, and can no longer work in the same career for the same money, his earning ability will go down, along with his share of tax payments. If he becomes seriously disabled, taxpayers have already decided that we will care for the very indigent. If he becomes disabled because of an accident, that is terrible. If he becomes disabled because he didn't qualify for the right medical care, that's an abomination - not to mention penny wise and pound foolish.
So Uncle Sam is on the hook for the "free market's" - or my neighbor's health insurance company's - failure to foot the bill, but we won't allow him to intervene until it is too late.
Markets are very good at allocating private wants, like clothing and automobiles. They are terrible when part of the costs and benefits are spread over the entire society.
Free Markets require perfect information
If you ever took physics, you were introduced to the Land of Perfection - Frictionless World - where all chickens were spherical and everyone went around shooting each other on ice skates.
Economic theory has its own form of friction, which is information. To have a free market, you must have willing buyers and sellers who each have perfect information about the competition. When buying a car, and comparing the Booster to the Comet, you get to inspect each one; you know the retail price; you know the location of all the dealers; and you have access to reams of free or nearly free information comparing the two, objectively and subjectively. You can even take them for a test drive yourself.
On the other hand, when considering medical services, there is almost no information available. Few doctors will tell you even the price of an office visit up front - depends on your insurance, you see; we have to call them. If you're going to pay cash, they may not agree to see you at all. If you're in the hospital, they barely pause to say, "Here is some morphine, you'll feel strange for a moment" before they plunge the needle in the line; I have never heard a nurse or doctor say, "Here is some morphine; it will cost $75.43 - should I give it to you?"
There is no free way to comparison shop for doctors or medical services. Lawyers provide a free initial consultation; doctors don't. Nowhere will you find a guide showing Dr. Smith and Dr. Templeton, how many patients they have, mean wait for a nonemergency appointment, mean satisfaction level among patients, etc. I can get that kind of information for a restaurant serving a $7 sandwich - generally not a life altering purchase - but not for even a hospital, let alone an individual doctor. The best I can do is their location, whether or not they take my health plan, and whether they speak languages other than English.
So you would spend a lot of money meeting doctors if you really wanted to do your due dilligence. And if you're sick, you probably don't know what you have or you need. Even if doctors and hospitals would tell you their price list, a phone description of "intense pain in the abdomen" isn't enough for a pricing code. You have to go in to the hospital, get hooked up to the machines that go ping, get various specialized scans and tests, and THEN they know what treatment might be in order, if any. It is absolutely possible to go into the ER with serious and urgent pain, to receive medically appropriate monitoring and imaging, and to walk out with a $10,000 bill and a prescription for Vicodin and a few weeks of rest.
So the good news is, you didn't really need any medical care. The bad news is, it took $10,000 to find out. And obviously, as a layperson you couldn't know that you didn't need care... because the medical professionals couldn't tell without their tests either.
Free Markets require willing buyers and sellers
The sellers in healthcare are generally willing, but the buyers are almost always under duress. They don't want to spend their money on health care - but at the same time, their demand is almost totally inelastic. If I have broken my arm and I am at the hospital, I will agree to pay whatever you demand. What else can I do? I need my arm. I can't even drive myself to another hospital without it. If you tell me the price is $100,000 and I can have 30 years to pay it, I'll agree to that. I have no alternative.
Moral Hazard is revered out of proportion in Health Care economics
"Moral Hazard" is the idea that insurance will cause you to be careless. That, for example, you are less likely to clear the brush around your property or inspect your electrical system because you have fire insurance. Believe it or not, "moral hazard" was used by the auto industry when they fought Ralph Nader and others in their crusades for seatbelts and for padded surfaces inside cars - that is, that if people had a pointy dashboard in front of them that would impale them in a 10 mph crash, that obviously they would drive more safely and carefully than if there were a smooth, padded dashboard. (Really! This is true!)
Read this excerpt from an excellent article from the New Yorker about health care and Moral Hazard:
Policy is driven by more than politics, however. It is equally driven by ideas, and in the past few decades a particular idea has taken hold among prominent American economists which has also been a powerful impediment to the expansion of health insurance. The idea is known as "moral hazard." Health economists in other Western nations do not share this obsession. Nor do most Americans. But moral hazard has profoundly shaped the way think tanks formulate policy and the way experts argue and the way health insurers structure their plans and the way legislation and regulations have been written. The health-care mess isn't merely the unintentional result of political dysfunction, in other words. It is also the deliberate consequence of the way in which American policymakers have come to think about insurance.
The moral-hazard argument makes sense, however, only if we consume health care in the same way that we consume other consumer goods, and to economists like Nyman this assumption is plainly absurd. We go to the doctor grudgingly, only because we're sick. "Moral hazard is overblown," the Princeton economist Uwe Reinhardt says. "You always hear that the demand for health care is unlimited. This is just not true. People who are very well insured, who are very rich, do you see them check into the hospital because it's free? Do people really like to go to the doctor? Do they check into the hospital instead of playing golf?"
Economists seem to believe that the only disincentive for using healthcare is money. They also frequently believe that money can be exchanged for anything - that there is nothing without a value or a price. But let me ask you this: if your doctor offered you free vaccinations for every tropical and rare disease known to man, would you walk in and get them, just because it was free? How about Rabies shots? or insulin? or knee replacement surgery? dialysis? All big fun, eh?
No. You have better things to do with your time, and needles hurt. There's also the risk of side effects.
If I take my child to the doctor, the fee for the visit is actually the least of my costs. I have to find time to make a call to the office and schedule an appointment. And then I usually have to block out 3-4 hours, including travel time, waiting room time, and the time of the actual appointment. For the average worker, the time off of work probably costs more than the doctor's appointment, especially if he has health insurance.
But here's the next, and more damning point:
For that matter, when you have to pay for your own health care, does your consumption really become more efficient? In the late nineteen-seventies, the Rand Corporation did an extensive study on the question, randomly assigning families to health plans with co-payment levels at zero per cent, twenty-five per cent, fifty per cent, or ninety-five per cent, up to six thousand dollars. As you might expect, the more that people were asked to chip in for their health care the less care they used. The problem was that they cut back equally on both frivolous care and useful care. Poor people in the high-deductible group with hypertension, for instance, didn't do nearly as good a job of controlling their blood pressure as those in other groups, resulting in a ten-per-cent increase in the likelihood of death. As a recent Commonwealth Fund study concluded, cost sharing is "a blunt instrument." Of course it is: how should the average consumer be expected to know beforehand what care is frivolous and what care is useful? I just went to the dermatologist to get moles checked for skin cancer. If I had had to pay a hundred per cent, or even fifty per cent, of the cost of the visit, I might not have gone. Would that have been a wise decision? I have no idea. But if one of those moles really is cancerous, that simple, inexpensive visit could save the health-care system tens of thousands of dollars (not to mention saving me a great deal of heartbreak). The focus on moral hazard suggests that the changes we make in our behavior when we have insurance are nearly always wasteful. Yet, when it comes to health care, many of the things we do only because we have insurance--like getting our moles checked, or getting our teeth cleaned regularly, or getting a mammogram or engaging in other routine preventive care--are anything but wasteful and inefficient. In fact, they are behaviors that could end up saving the health-care system a good deal of money.
The problem turns out not to be moral hazard, that people consume health care unnecessarily because they don't pay for it, but imperfect information - they have no idea when they need medical care and when they can benefit from it, without going to a doctor and asking for care.
Finally, Perfect Markets require tight feedback loops
For this idea, I credit a comment by RandomSequence, which stated something I kinda knew in the back of my head maybe, but so succinctly and perfectly that it hit me with a big, "Of course!"
The problem of market based health care is the basis of the market. The great beauty of the market is feedback. As a member of the market, I screw up and fairly soon a corrective action occurs, informing me and other members of the market that my action was incorrect, in the context of the market.
But health care has a massively delayed feedback. Say I don't buy health care. Years or decades later I get sick without any insurance, and die. No useful feedback to me, and a very attenuated connection for others.
Or I buy health insurance that doesn't cover my needs. Once again, by the time I have accumulated the needed info, it is too late for corrective action on my part, and the connection for others is highly attenuated. In the meantime, the insurer has profited mightily.
For a negative feedback mechanism to work (such as a market), there must be a close temporal link between stimulus and response (or at least the time scale of stimulus and response must be comparable). Imagine a thermostat that only responds to a temperature change with a three month time lag. Less than useful, and actually positively damaging, as your heater turns on in the spring, and turns off in the fall.
One corrective force that happens over time is that government funded research projects help create "evidence-based medicine" - ie, verify that what we think works really does. That screening or treating patients with a certain profile really does benefit that population more than it costs them in both money and in risk. But, this takes years, and worse, it applies to communities more than individuals, so there are individual exceptions to these rules as they are developed. And then, that information needs to be disseminated both to doctors and to patients.
One force that is missing, because we so accept, even revere, the idea that each person may respond differently to a treatment, is any kind of warranty. If I acquire an infection in the hospital, that's a mistake by someone at the hospital. But typically, the hospital pays no penalty, and indeed, gets to provide additional service to that patient. Hospitals have little market incentive to provide perfect care - because no one really knows if they do well or poorly. If a drug causes me harm with a known side effects, there's no refund, nor, in general, does anyone but the patient (and possibly his insurance company) bear the cost (financially or in pain and suffering) for correcting the problem.
But usually the problems are more simple. I am sick, I feel miserable. At some point I make a decision, to call the doctor or not to call. Most of the time, however, we don't really know whether that was the right decision. Would I have gotten better just as fast if I'd just stayed home? If I chose not to go, did I miss out on some treatment that would have saved me misery now or in the future? I don't know and I may never know - this incident has probably not given me any useful information for future illness, even if it were to present exactly the same way.
If my doctor prescribes a long term preventative, like Lipitor, even if I am convinced that for the population as a whole that it prolongs healthy life, there's no way to know if it provides that protection for me. Hopefully I can tolerate the side effects, but I don't really have any way of measuring the benefit I get from the drug.
For vaccines, the benefit to any one person is nearly zero - but the benefit of having the whole community vaccinated is enormous. The market, particularly with its long feedback, says that I should keep my $100 and avoid the needlestick. Maybe I'll be sorry in 5 years, or maybe by then I'll be posting smugly on the Internet that I bought an iPod with the money instead.
But similarly, even if we know for a fact that taking action A at a cost of $X today will most likely save the need to take action B at $10X in 10 years, it's such a long feedback loop that whoever is paying for that patient may not be the person paying in 10 years. It could be a different insurance company, or it could be a different family member. The patient may not have $X and may simply hope to have $10X in 10 years.
By comparison, if I buy toilet paper, or clothes, I know right away how much it cost relative to the competitors. If I take it home and it's scratchy and gets used up absurdly quickly, I'll know not to buy it again. Information has been gained permanently.
So when you add that all together, it's another nail in the coffin holding the "health care is best served by a free market" argument. It simply doesn't meet any of the Econ 101 basics for being a free market.