Health Care and Markets

More on the question of health care and free markets.

One of my gripes in terms of the way some people talk about health care reform is not, per se, that that are opposed to the PPACA, but rather that they pretend like we had a free market in terms of the health care industry prior to its passage.  This is demonstrably not the case.

To wit:  do any of the readers know what they pay on a monthly basis for their health insurance?  Do they know what share their employer pays?  I am sure that the self employed and those who run small businesses either know the exact number or a close approximately thereof.  However, most of us, if we are honest about it, would have to look at our paystubs to know the answer beyond a vague idea.

Further, most of us have a binary option when it comes to our health insurance:  accept what our employer offers or refuse it.  We are unlikely to be able to legitimately ship around for comprehensive coverage.

How can we talk of markets in such a situation?  This is not a case of rational economic actors weighing choices and making decisions.

Further, most of us likely know off the top of our heads the co-pays we pay to see our doctors or what he pay for a prescription.  However, we have no clue what the doctor’s visit would cost if we paid a straight up fee.  The same is true for the drugs we take.

No exactly a free market with supply and demand setting price.

We know how much an iPad costs or a new car costs.  We don’t know what fixing a broken arm costs, however (and nor do we care:  we just want it fixed).

What’s worse is that even if we were to go the fee-for-services route instead of filing a claim for payment with our health insurance company, the price the doctors charges is thorough distorted by the fact that it was calculated not based on pure  market logics, but rather based on maximizing what the insurance companies will pay.  If one looks at one’s insurance statements, one will typically see that the doctor submits one price for her services while the insurance company invariably pays some lower amount.  Sometimes the amounts in question are quite close, sometimes they are wildly divergent.  The same is true when it comes to the price paid by consumers for prescription drugs vice what the insurance company eventually pays.  There is an utter discontent between price and payment in terms of what the consumer sees and pays.   This odd price structure if the result of the health insurance processes that have been institutionalized for decades, not on market logics.

Indeed, one could argue that patients do not directly figure in shaping the health care market at all, but rather it is a nexus of large employers who purchase insurance for their employees, the insurance companies that negotiate fee schedules with physicians and hospitals, the pharmaceutical companies and the government.

As such, the notion that we have had a free market in health care prior to the passage of PPACA is simply incorrect (everything described above was true both before and after the passage of the bill).  Indeed, I am not sure when there was a pure free market in health care.  It was some serious number of decades of ago, to be sure.  Probably back when doctors still made house calls (or maybe when we went to the barber for medical care…).  Yes, there are some market logics and pressures at play here, but they hardly dominate the situation, but are rather one factor amongst many others and, again, it has been that way for decades and decades.

I recognize that none of the above addresses the question of whether it is possible to apply full market logics to health care.  That is a topic for another post.

A concluding statement:  none of what I have written has much of anything to do with whether the PPACA is good, bad or indifferent.  Indeed, the PPACA simply further entrenches the already highly entrenched system described above.  My point is fundamentally that we have not had a free market system for health care for a very long time and it would take a truly radical restructuring of the system to produce such a system.  We can wish all want as to how we want things to work, but reality is reality.

FILED UNDER: Health Care, US Politics
Steven L. Taylor
About Steven L. Taylor
Steven L. Taylor is a Professor of Political Science and a College of Arts and Sciences Dean. His main areas of expertise include parties, elections, and the institutional design of democracies. His most recent book is the co-authored A Different Democracy: American Government in a 31-Country Perspective. He earned his Ph.D. from the University of Texas and his BA from the University of California, Irvine. He has been blogging since 2003 (originally at the now defunct Poliblog). Follow Steven on Twitter

Comments

  1. Eric Florack says:

    One of my gripes in terms of the way some people talk about health care reform is not, per se, that that are opposed to the PPACA, but rather that they pretend like we had a free market in terms of the health care industry prior to its passage. This is demonstrably not the case.

    You’re OK are quite correct, Stephen, when you point out that we did not have free markets before this nightmare of Obamacare came along. Yet, unwittingly, perhaps, you have nailed the problem. The problem has always been governmental involvement. The problem has always been that the market has never been given a chance, following Johnson’s “great society. ”
    Run the numbers yourself, Stephen, I’m sure you have greater access to such matters than do I. I’m sure you will find as I have over the years many times over , that the cost of health care has increased in direct proportion to the degree of governmental regulation in it.

  2. This seems a lot like an argument against a strawman; going back to Suderman’s original post he never argues that the pre-Obamacare system was a free market, only that it’s disingenuous to argue (as Polifact did) that Obamacare is based on one.

  3. john personna says:

    Unfortunately Eric, there are two choices:

    1) Accept a government role in regulating health care, as in things like the Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA), etc., or

    2) Accept that people will die for lack of it

    (We can push foes of government involvement through various scenarios, and when it ends, they’ll always say of the poor, sick, or unprepared: “that’s their problem.”)

  4. The main drivers of health care costs are things like technology and the aging population.

    We all want to live longer and healthier and there are myriad ways to do that, whether it be more complex tests or more medications to take. All of that costs money.

    Plus, we live longer and the longer we live, the more medical care we want and need.

  5. john personna says:

    I agree Chris, the original quote has fun with the phrase “relies largely on the free market.”

    “Relies largely” being a pretty rubbery phrase (rubbery enough to not be totally disingenuous 😉

  6. john personna says:

    “The main drivers of health care costs are things like technology and the aging population.”

    Well, there you’re assuming that we have to help all those old people!

  7. @Chris:

    My main source of inspiration was not Suderman (although I did address a few posts ago) but rather to a lot of the comments that my posts on this subject have received (amongst other sources).

    The bottom line is that the PPACA does not alter the fundamental nature of our health care system. This is the point.

    I must confess that I did not find Suderman’s critique of PolitiFact to be unconvincing.

  8. @Chris:

    Put it this way: I get the impression (which may be incorrect), that a lot of people actually do think that we had a free market in health care (or near to it) prior to the passage of the PPACA.

    Even if that impression is incorrect, I am throughly convinced that most people (even those who argue about health care policy) don’t think about the things I discuss in this post.

  9. @Chris/JP: I will confess to being a bit fast and loose on the Suderman quote in that post.

  10. Steve Plunk says:

    Okay we get the idea it was never a truly free market. The government has help limit the number of physicians for years. It was however a more free market than where we are headed to. As with most economic activity more government involvement will most certainly lead to higher costs and less efficiency.

    There are other drivers of increasing costs besides technology and increased lifespan. Ask health providers and they will talk about paperwork requirements and the cost of practicing defensive medicine. The problem of costs has not been addressed seriously. Obamcare is all about covering everyone at the expense of everyone else. Mostly the younger generation covering the costs for the aging boomers who are also leaving them a huge national debt. Thank you most selfish generation ever.

  11. Trumwill says:

    Put it this way: I get the impression (which may be incorrect), that a lot of people actually do think that we had a free market in health care (or near to it) prior to the passage of the PPACA.

    Your impression is largely correct. It’s a point of frustration that I face with people both to my left (who assume that our current system is failing due to the market) and to the right (who want to protect a free-market system that doesn’t exist).

  12. john personna says:

    You make me chuckle, Steve P. You manage to lay all trouble at the feet of Obamacare, while forgetting all those OECD countries with universal care, at lower cost. (link)

    Oh, I forgot. We loves our cheezburgers, so of course our healthcare is more expensive, and we still die!

  13. @Steve: The problem is that it is not so simply as you (and Eric) want to make it: i.e., just blame the government. This is a complex system that has evolved over decades and government is only one of several actors that have affected that evolution.

    I do agree, btw, that the issue of cost has not been adequately addressed.

    @Trumwill: Exactly.

  14. Pete says:

    I agree with EF. If Medicare has in fact distorted the free market for medicine, then what will Obamacare bring? If this is a realistic presumption, then I suspect many others are fearful of it. Wouldn’t you be?

  15. Eric Florack says:

    1) Accept a government role in regulating health care, as in things like the Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA), etc., or

    2) Accept that people will die for lack of it

    That seems to ignore the question of how many people will die because of government involvement. The death boards, that Obama and company are just now getting around to admitting actually do exist in his plan, or only one aspect of that. How many deaths of been caused by FDA approved drugs? Approved, only because the commissioners involved are looking out for their own will being after their short stint with the FDA?

  16. wr says:

    So EF, if all these people are dying because the FDA insists on approving drugs but sometimes — through accident or malfeasance — lets a bad one through, how many people would die of bad drugs if there were no one to approve or disapprove? Or would the magic market fairy protect us all?

  17. Steve Plunk says:

    Dr. Taylor, I make no claims that the government is the only problem. Our expectations are a problem, our lifestyles are a problem, there are many problems but since the government is forcing the issue I point out their role as a problem. It is much too complex so we take an issue at a time.

    John P, Those countries with universal health care deliver a lesser product. We are the envy of the world when it comes to care. Our problem is we demand something we can’t afford. The choice is force people to pay through the individual mandate or seek ways to lower the costs. We have not looked at costs enough before taking the drastic step of forcing people to buy insurance.

  18. Russell says:

    EF: next time you see a physician feel free to offer to pay the balance of what the visit costs that your insurance doesn’t pay. In the “free market” of health care the “consumer” gets the product and then decides what to pay for it while the “producer” is left to like what they get.

  19. anjin-san says:

    > The problem has always been governmental involvement.

    Really? No problem with private insurance carriers just screwing their customers who have been paying premiums in good faith for years? That’s amazing because it has happened to us more than once. I guess I am the only person in American who has had this experience.

    > The death boards, that Obama and company are just now getting around to admitting actually do exist in his plan

    Thats amazing. I must live a very sheltered life. Can you sent me a link to the video where Obama or a member of his administration admits the plan has “death boards”

    Of course you can’t, because you are simply a liar.

  20. anjin-san says:

    > We are the envy of the world when it comes to care.

    Not really. We probably do have the very best doctors, hospitals and technology, for those that have access, though we are fooling ourselves if we think that Japan, Germany, Switzerland, Norway and so on are not at least right on our heels.

    The problem is access. A very significant portion of our population has little. A lot of people in the world think we are borderline barbarians because we allow this situation to exist when our society as a whole is so wealthy.

    A more accurate way to put it would be to say that the fortunate folks who have access to the Mayo Clinic, Cedars Siani and Stanford are the envy of the world.

  21. Pete says:

    Anjin, unless the defense department budget is cut in half, do you honestly believe health care won’t be rationed? You know as well as anybody that the death panel label refers to this inevitable outcome of necessary rationed care. You even admit you are now refused treatment. So, death panels already exist in private insurance. The term is used partly to irritate people like you.

  22. Trumwill says:

    The death boards,

    Which is different from how insurance companies and the like make these determinations how? To the extent that health care funding gets rationed, they are not saying “you must die now” but rather “we will not pay to fix you” which is what insurance companies and the like do right now. Understandably so, because at some point somebody has to say “no” if we don’t learn how to grow money trees.

  23. steve says:

    1) read Paul Starr’s book. We did have something approaching a free market in the past. Medicine was horrible. People sold snake oil. Once the market figured out it did not work, months or years later, it would be taken of to be replaced with new snake oil. Few standards. Care was very spotty.

    2) Medicare pays for a lot of teaching. It also indirectly helps to boost research. Is it just a coincidence that we developed CT scanners,, MRIs and ICUs once we were able to pay for the care of the elderly, the ones who mostly get sick.

    3) Private insurance pays more, often much more than Medicare. It may be the real cost driver in the system.

    4) While not a pure free market, insurance companies do negotiate fees for their clients. If you want to make this market pure, you would have each individual patient negotiate fees for each procedure. That would be chaotic. Also, the information asymmetry is huge, especially when dealing with real patients and not with internet know it alls.

    5) There is no free market model anywhere in the world. That should tell one something.

    6) That said, there are some areas where markets should work. We can use them there. In most areas, I do not see a practical way to make them work.

    Steve

  24. Trumwill says:

    While not a pure free market, insurance companies do negotiate fees for their clients. If you want to make this market pure, you would have each individual patient negotiate fees for each procedure

    Not necessarily. You can still use insurance companies. The difference is that you would have more than one (your employer’s choice) to choose from without foregoing employer contributions.

    That’s not to say that I like this model as I am not a free marketeer. But if there was one thing our current system is lacking, it’s the ability to choose between insurance companies. I would prefer a system where the government (I know, I’m a socialist) picks up the portion of the tab currently bankrolled by employers.

  25. Davebo says:

    “John P, Those countries with universal health care deliver a lesser product. We are the envy of the world when it comes to care.”

    Do yourself a favor and get sick in France.

    It will blow your mind! Imagine a single page hospital bill. Because you’ll never see one here.

  26. Stan says:

    The only death panels in the US I know of are in the state of Arizona, which seems to have fudged data on the usefulness of certain kinds of transplants to exclude them from coverage under Medicaid. I wonder what Eric F thinks of this.

  27. Zelsdorf Ragshaft III says:

    If you were intending to reform health care, where was the tort reform? I have lived long enough to have seen the cost of healthcare go up not because of technology, but rather the cost of indemnifying aganst law suits. As far as insurance is concerned. If the insurance co. could do business across state lines and not have to offer million dollar packages when 10K packages would do, costs would come down. If a beaurocrat were to tell me or mine they were not eligible for treatment due to age or some other matter, I would make them an offer they cannot refuse. You tell me I am going to die because you will not treat me, I will tell you, you are going to die because I am going to pull the trigger on this shotgun. Seems fair to me. I want a doctor to advise me not a bean counter. I thank God we have more people in this country who have some sense as opposed to the majority of commenters here who are as empty as Anjin.

  28. Stan says:

    What would you do, Zels, if you were an uninsured resident of Arizona first on the list for a life or death transplant, and you were informed a) that Arizona’s Medicaid program wouldn’t pay for it, b) the hospital wouldn’t proceed with the operation unless you gave the hospital $200,000 in partial payment of the operation, and c) you didn’t have $200,000?

  29. anjin-san says:

    > You even admit you are now refused treatment

    I never said that. I said I have been screwed by insurance companies, who have more than once made an upward “adjustment” to a cost for a procedure that was agreed upon ahead of time. Please don’t put words in my mouth. I once had an insurer try to totally deny me a benefit, but that was a fight they lost 🙂

    > the death panel label refers to this inevitable outcome of necessary rationed care.

    It’s rationed now. Just ask 40 million uninsured Americans..

    > The term is used partly to irritate people like you.

    And in the sense that stupidity irritates me, it is working. But you are not fooling anyone “death panel” is simply a right wing scare tactic.

    > do you honestly believe health care won’t be rationed?

  30. floyd says:

    One point that has occurred to me is that anything that could be properly called “Health Care” is certainly not as old as the” indusrtrial revolution”. In fact it can easily be argued that it is less than a century old. The explosion of procedures and capabilities in the profession has caused an explosion of cost and, Historically at least, we are still experimenting with how to fund and supply it.
    I think a measured approach is best, with a limited role for government, others would prefer to trust them entirely with the task. Everyone knows, that once the latter path is chosen, it will be impossible to extricate ourselves from it’s grip if it proves to be less than the best choice.
    Discretion is the better part of valor.

    Bear in mind that we have stumbled along, making great progress, while limiting govermental control, aware that too much of it stifles innovation.If we turn it over to them now we can only take solace in the fact that we did not do it earlier.

  31. @floyd,

    This is clearly true. “Health care” as we understand it is, at best, perhaps a post-WWII phenomenon. In many ways it is younger than that.

    I think a measured approach is best, with a limited role for government, others would prefer to trust them entirely with the task

    In the interest of accuracy, I know of very few that would argue that we entirely trust health care to the government. To me that would mean something like the British system, which no one of any consequence is arguing for.

  32. Stan says:

    “To me that would mean something like the British system, which no one of any consequence is arguing for.”

    You’re right, but do you know anybody in British public life who’d like to scrap the National Health and go over to an American style system?

  33. You’re right, but do you know anybody in British public life who’d like to scrap the National Health and go over to an American style system?

    A fair point.

  34. george says:

    Health is rationed one way or another everywhere – there simply aren’t enough resources in any society to give full out health care to everyone. Whether its done by governments or insurance companies, its rationed, and will be until there’s some cheap, magic pill which can cure everyone of everything. So if you call the people who determine the rationing ‘death panels’, then you’re just arguing whether those panels should be gov’t or private panels.

    “We are the envy of the world when it comes to care.”

    Actually its usually seen as one of the systems to avoid, much like the British and Canadian systems. What’s interesting is that Americans use Canada as an example of what to avoid, while Canadians use America as an example of what to avoid. Arguably they’re both right, as both are better in some aspects and worse in others – which you prefer depends on how you weigh outcomes. Interestingly enough, the Canadian system costs only half as much.

    Probably the most efficient systems currently are the hybrid systems such as France or Switzerland.

  35. floyd says:

    “Health is rationed one way or another everywhere – there simply aren’t enough resources in any society to give full out health care to everyone”
    “””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””
    This is the same facetious argument used with food and population control a generation ago. It is also commonly used, by those on the left claiming finite wealth, in the argument for redistribution.
    While all things might be viewed as finite, it is presently true that we have not come close to exploring our limitations on any of these fronts as yet. To date , “scare” is as far as we have progressed toward “scarcity”.

  36. anjin-san says:

    > Switzerland.

    Don’t you know the Swiss are hardcore commies? They must be, they have (gasp) socialized medicine.

  37. floyd says:

    Steve;
    In the interest of accuracy, and to dispell any illusions, perhaps my word “others” should have read “many”. There can be no doubt that the health care bill as passsed is a great disappointment to “many” in this country who would have preferred a single payer system, run entirely by the government.
    Another “many” are suspicious, and for good reason, that the present law is only a stepping stone to that end.

  38. Eric Florack says:

    So EF, if all these people are dying because the FDA insists on approving drugs but sometimes — through accident or malfeasance — lets a bad one through, how many people would die of bad drugs if there were no one to approve or disapprove? Or would the magic market fairy protect us all?

    I’d say that’s pretty much the CURRENT situation. And we see how well it works. And by the way, the FDA’s foul-ups are far greater in number and scope than you make them… doubtless because the FDA does so very well at covering it’s own cheeks.

    Really? No problem with private insurance carriers just screwing their customers who have been paying premiums in good faith for years? That’s amazing because it has happened to us more than once. I guess I am the only person in American who has had this experience.

    That’s as a direct result of the costs being raised by means of governmental involvement. Tell us, Anjin, how much a problem was such prior to say, 1965?

    It’s rationed now. Just ask 40 million uninsured Americans..

    Who, absent the price supports in health care from the government, would lmostly be able to deal with their own medical costs.

    In the interest of accuracy, I know of very few that would argue that we entirely trust health care to the government. To me that would mean something like the British system, which no one of any consequence is arguing for.

    May I suggest a quick chat with Anjin on the matter? And even absent that, a look at the pattern of progression….(Not a word of idle choice) it’s kind of hard to deny that’s the way we’re being driven by the government.

    And by the way…. can anyone where show me where the system over the last 40 years has left anyone who as really destitute, without healthcare? Absent that, I suggest the ’40 million uninsured’ line is a sympathy ploy… and a weak one, at that.

  39. anjin-san says:

    > May I suggest a quick chat with Anjin on the matter?

    Sure. The British system is pretty seriously flawed. France and Switzerland are much better models.

    > doubtless because the FDA does so very well at covering it’s own cheeks.

    And then there is the degree to which they are influenced by the very industry they are intended to regulate. You forgot that one.

    > That’s as a direct result of the costs being raised by means of governmental involvement

    No, its the result of being the kind of businesspeople who are willing to screw their customers to make a few extra bucks. My former HMO used to send me untimized bills. When I would call to complain, they would say “you can always call and request a bill with line items”. Problem is, that takes 30-45 minutes each time because they have set up customer service to provide very little service indeed. When I pressed them as to why my bills did not tell me what I was being billed for, I was told “that is illegal because of HIPPA” which is a bald faced lie.

    I requested written copies of their billing polices a number of times, but strangely, they would not provide them. Once they overcharged me and I did not realize it and I paid. Then they sent me too collections on a bill that was both paid and excessive. I could go on for a while about this crew. They have been found guilty of fradulently over billing their customers more than once.

    Please tell me how the government caused all this.

    > can anyone where show me where the system over the last 40 years has left anyone who as really destitute, without healthcare?

    If you don’t get a colonoscopy because you are uninsured, and those little, treatable polyps become colon cancer, and you end up in the ER, where you will get at least some treatment, well, what do we call this? Are you arguing in favor of providing expensive treatment after someone is seriously ill as opposed to a much less expensive treatment that can prevent one from getting sick in the first place? That does not sound like very smart business to me.

  40. anjin-san says:

    > it’s kind of hard to deny that’s the way we’re being driven by the government.

    If your intellectual universe is confined to “the American Thinker” sure…

  41. anjin-san says:

    You know bit, on one hand you are constantly telling us the Obama is a helpless, ineffectual empty suit. A joke. Now you are telling us how Obama is reshaping America to his own liking, changing our entire way of life. For him to be able to do that, he must be a pretty formidable guy.

    So which is it? Or is this like all of your arguments, where you reach a conclusion first based on your ideology, then shape an argument to support it based on whatever happens to be handy at them moment?

  42. just me says:

    I think more than government one of the real problems with health care in the US is that it is attached to employment. Have a good, union or large company job and you have really good insurance. Work for a smaller company or small business and you may not even have insurance or it comes at a huge cost.

    I would also add that healthcare now pays for almost everything to the point that the real cost of a procedure isn’t really known to the consumer.

    I do think another problem is that most Americans are insulated from the real costs.

  43. george says:

    “You know bit, on one hand you are constantly telling us the Obama is a helpless, ineffectual empty suit. A joke. Now you are telling us how Obama is reshaping America to his own liking, changing our entire way of life. For him to be able to do that, he must be a pretty formidable guy.”

    Yes, but he’s changing our entire way of life in a helpless, ineffectual empty suit kind of way …

    I agree, the charge that he’s changing our way of life and that he’s ineffectual are mutually contradictory.

  44. Stan says:

    Eric and Zels still haven’t responded to my question about the denial of Medicaid coverage for organ transplants in the state of Arizona. The facts, as I understand them, are a) that the Medicaid coverage board in Arizona decided that a certain class of organ transplant operations are ineffective and should therefore be eliminated from Medicaid coverage, b) that over 100 patients are now facing death as a result, and c) that Arizona’s medicaid coverage board was wrong about the effectiveness of the transplants, perhaps inadvertently. To my mind this board is exactly the kind of death panel we heard about all summer from opponents of Obama’s health reform bill. I note that the individuals and groups making the death panel accusation have lost their tongues when it comes to Arizona, no doubt because Arizona is a solidly red state and can do no wrong. To me, they’re hypocritical and Arizona’s state government is heartless. But I’m willing to listen to the other side of the argument, and nobody represents the other side better than Eric and Zels. Where are you, guys? Cat got your tongue?

  45. john personna says:

    As we’ve seen in this thread, many aren’t just mistaken about a free market for health care, they have a genuine fantasy when it comes to free market health care.

    As in many things, it’s hard here for reality to compete with fantasy.

  46. matt says:

    The amount of money that medicare pays for a treatment is always lower then what insurance companies pay which is also lower then what you would pay if you chose to pay in cash. So if anyone is driving a higher price it’s the uninsured followed by the insurance providers..

  47. ChristineWithRegence says:

    “This is not a case of rational economic actors weighing choices and making decisions.” — Exactly! Why is the cost of health care procedures and treatments so mysterious? How come I don’t know the cost of a test or an office visit? This video is an amusing look at the situation:
    http://whatstherealcost.org/video.php?post=45-seconds-to-share