As mentioned in prior posts, AOR are fierce capitalists. Free market solutions are nearly always preferred, except when there is a market failure. Despite phony protests from Republicans, the U.S. health insurance market exhibits two characteristics of a market failure: 1) certain segments (elderly and poor) are neither profitable nor well-served and 2) the market lacks sufficient competition.
Anonymous Liberal aptly summarizes the first form of failure:
The bottom line is that, when it comes to health care, all the market is really capable of doing is providing reasonably affordable care to the young and healthy, people for whom the risk profile is essentially random and therefore the economic model more closely resembles that of other major types of insurance (car, home, life). But a system that only covers the young and the healthy is, by definition, a failure. That’s why every other industrialized country has long since adopted some sort of government insurance system.
Local health insurance monopolies represent another failure. The American Medical Association, a traditional opponent of health reform, reported that in 2008, 94% of commercial markets were “highly concentrated” according to standards set by the Federal Trade Commission and Justice Department:
Market shares and concentration (HHI) measures are presented for 314 metropolitan areas and 42 states. This study finds the vast majority of markets are highly concentrated and are dominated by one or two health insurers. These findings, coupled with higher insurance premiums, higher profits, lower scope of benefits and high barriers to entry, leads to the conclusion that health insurers are exercising market power in many parts of the country.
More evidence of a failed system of incentives is found in Dr. Gawande’s excellent New Yorker article. He concludes that the incentives to overuse medical care explain dramatic cost differences across regions and markets for equivalent care.
In a 2003 study, a Dartmouth team, examined the treatment received by a million elderly Americans diagnosed with colon or rectal cancer, a hip fracture, or a heart attack. They found that patients in higher-spending regions received sixty per cent more care than elsewhere. They got more frequent tests and procedures, more visits with specialists, and more frequent admission to hospitals. Yet they did no better than other patients, whether this was measured in terms of survival, their ability to function, or satisfaction with the care they received. If anything, they seemed to do worse.
To Republicans alarming the public about the imminent rationing of health care, I submit that any health care system rations care. The U.S. just does it indiscriminately and insufficiently. It’s irrefutable that we prescribe and pay for too much unnecessary health care. Let’s move beyond the debate about whether we need a public insurance option. We do. Let’s debate the most relevant and most difficult question: how should we pay for comprehensive health reform?
- SF
Heath care isn’t expensive because the market is failing. It’s expensive because we don’t really have a free market for health care.
Insurers are highly constrained in what they can offer by zillions of state regulations. Also, the tax deductibility of employer health care expenses (a remnant of WWII era wage controls) means that almost no one pays with his own money for his own health care.
In the areas that are not reimbursed by insurance — teeth whitening, fake tans, botox, breast implants, etc. — you see a mostly normal market based system. Providers advertise, consumers shop for price and quality, prices go down, quality goes up, and no one complains.
It is only in the areas that are reimbursible where we have the current odd situation in which providers don’t advertise, consumers don’t shop for price or quality, prices go up, and quality doesn’t necessarily improve, and lots of people complain.
The main thing a public option will do is put even more decision making power in the hands of the government — the last thing you need in a complex, rapidly changing, highly personal system like health care.
M.C.
M.C.– Thank you for your comment. Your argument ignores the market failure. Deregulation will not make high risk individuals (sick, elderly, poor) profitable to insure. If you accept that some minimal level of health care is a public good, then the market will not achieve this public policy objective. Insurers act rationally, underwrite profitable risk and deny coverage for pre-existing conditions.
We agree that many health care purchasing and treatment decisions are not governed by normal price discovery mechanisms. However, your examples (botox, fake tans, teeth whitening) obscure fundamental differences between elective and non-elective care. Demand for elective aesthetics is elastic. Demand for trauma plastic surgery is not. At the time of care, acute care patients (e.g. heart failure) are price takers and impervious to advertising and price comparisons. Non-elective procedures are primarily performed in hospitals that have enormous fixed costs. Elective botox injections are delivered in strip malls and office buildings that do not.
An employer based benefit system is a foolish administrative and cost albatross for American enterprise. WWII tax deductions and wage freezes did expand employer sponsored benefits. However, this is not the complete story. It was actually American businesses that introduced welfare capitalism in the late 1800s and early 1900’s in order to halt the threat of government expansion to the public safety net. Unfortunately, corporate America still clings reflexively to its role of providing pension and health care benefits at the expense of its own competitiveness and needed health care reform.
- SF
The private insurance market is a classic example of market failure. Competition will drive all insurers, no matter what their intentions, to provide high out of pocket plans that leave consumers unprotected from the financial risk of illness.
Sick people and older people like comprehensive coverage but it is expensive. Young people think that they can get by with less and plans that cover little or nothing are cheap.
As young people go to the high out of pocket plans they improve the risk pool in these plans. Cheap plans get cheaper and the price of comprehensive insurance goes out of reach.
Insurance Exchanges and all the Baucus plan stuff only make this worse:
http://wonksanonymous.com/2009/08/17/health-insurance-exchanges-1-a-free-market-fable.aspx
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