Join 3,418 readers in helping fund MetaFilter (Hide)


Why isn't free market best solution to US healthcare crisis?
March 1, 2010 4:14 PM   Subscribe

What are the best arguments (links to articles/sites appreciated) that government regulation and tax code distortions are not the primary causes of the American healthcare crisis? Why wouldn't a more free-market approach (i.e. remove the obstacles to far more vigorous competition between insurers for individual premiums) be the solution? If adverse selection is a reason, how is that any worse for health care than for other insurance markets (e.g. life insurance)?
posted by shivohum to Law & Government (16 answers total) 7 users marked this as a favorite
 
Paul Krugman has a nice discussion of this on this blog: Why markets can’t cure healthcare. He includes a citation to a paper from The American Economic Review, if you're looking for something more scholarly.
posted by serathen at 4:25 PM on March 1, 2010 [1 favorite]


how is that any worse for health care than for other insurance markets

Because when poor people make suboptimal insurance decisions and get in a car accident, it is immoral not to offer them treatment, even when you know you will never collect a dime from them. If someone dies with lousy life insurance and their widow has to sell the house, the widow's life may be ruined, but it doesn't have the moral culpability of someone bleeding to death at your feet.

A completely free-market healthcare approach has to let people die due to lack of insurance.
posted by benzenedream at 4:36 PM on March 1, 2010 [4 favorites]


Krugman gives a lucid and--to me--persuasive theoretical argument.

One very simple empirical argument is that countries that spend far less money per person and get better aggregate healthcare outcomes than the US--France, the Netherlands, Germany and many others--do not take a free market approach. They have plenty of government regulation relating to health insurance (not sure about "tax code distortions") and they still do much better at healthcare than we do.

Benzenedream's point is also very well-taken: you could have a highly efficient free market health insurance system with disastrous consequences from the point of view of anyone with a social conscience.
posted by col_pogo at 5:00 PM on March 1, 2010


How American Health Care Killed My Father

Welcome to the Vast Right-Wing Conspiracy: A team of NPR reporters unearths the truth about health care.

Much of the criticism of current health care reform proposals echos yours: That the laws of supply and demand describe a natural phenomenon, and cannot simply be legislated away or dismissed by hand-waving.

Also just note, contra benzenedream, above, that before we evolved our current health-care-provider/insurer industrial complex, patients were not routinely turned away at the hospital door.

- AJ
posted by Alaska Jack at 5:08 PM on March 1, 2010


In an article in the NY Review of Books last summer, Arnold Rehlman, a long-time editor of the NEJM, makes a compelling, thorough and informed argument that it's the extent of the free-market approach in both our healthcare insurance system and our healthcare delivery system that's led to America's unique problem of runaway medical costs.

Put simply, when governed by market forces, the ultimate goal of a healthcare system isn't the treatment of patients, but the making of profit. Our hospitals, pharmaceutical companies, medical practices, insurers, et al. have become streamlined and efficient at getting more money from their patients without spending any more on the product, viz. healthcare.

Just one fun example of this -- every year you see a dozen new medications for hair loss, allergies, depression and erectile dysfunction -- drugs you can convince large numbers of more-or-less health Americans they need, as opposed to drugs to treat actual illnesses, which are less profitable because you are frustratingly limited to marketing them to the small number of people who actually have said illness.
posted by patnasty at 6:03 PM on March 1, 2010


Oh, also:

If you want something strictly from an economics perspective, way back in 1963, Nobel laureate Kenneth Arrow predicted that market forces would not function normally in the healthcare market, and would instead lead to runaway costs in medical care.
posted by patnasty at 6:14 PM on March 1, 2010


PatNasty -

The question as phrased is not a model of clarity, but it appears as if the poster is asking for articles and other evidence *favoring* a free-market approach to health-care reform.

shivohum, please clarify.

- AJ
posted by Alaska Jack at 6:40 PM on March 1, 2010


(piggyback)

AJ: before we evolved our current health-care-provider/insurer industrial complex, patients were not routinely turned away at the hospital door.

What was the American health care industry like in the past? For instance, before employers started offering health insurance (the Depression, I hear). And what was it like in, say, Britain or Norway at comparable times? Is there a nice historical book on the development of the healthcare industry, in one or more countries?
posted by jacalata at 6:42 PM on March 1, 2010


The Planet Money podcast answers jacalata's questions in detail. I'll summarize: In the past, health care didn't work, here or anywhere else. Before antibiotics and anesthesia, hospitals were basically a place to go to die. Because medicine was essentially dysfunctional, no one was clamoring for care and paying for it wasn't much of an issue.
posted by chairface at 7:11 PM on March 1, 2010


U.S. healthcare spending compared with other OECD countries

The U.S. spends 16% of GDP on healthcare and leaves millions with no coverage. Other developed nations in the group spend 7% to 11% and do not leave huge chunks of their population without coverage. The outlier is the U.S., which combines the most privatized model with the most outstanding combination of bad outcomes.

Conversely, if "government regulation and high taxation" were the cause of poor coverage and high costs, one would expect bad outcomes in Sweden or the Netherlands, for example. Instead, the opposite is the case: countries with higher regulation and taxation consistently have better healthcare outcomes than the U.S.
posted by gimonca at 8:28 PM on March 1, 2010


The question as phrased is not a model of clarity, but it appears as if the poster is asking for articles and other evidence *favoring* a free-market approach to health-care reform.

Sorry for the confusion -- I was in fact asking for the opposite.

Put simply, when governed by market forces, the ultimate goal of a healthcare system isn't the treatment of patients, but the making of profit.

Isn't this true of all business, period? What's supposed to keep this in check is competition. Insurance companies might ideally compete to inform the consumer, to show how they offer better quality care at better prices, just like every other industry. But for various reasons, there isn't a healthy amount of competition.

There isn't, as you would think there would be, a Southwest or Jetblue-style insurance company that tries to make things super-simple and easy and cheap for the consumer. Consumers don't care about how efficient different insurance plans are, or how good their customer service is (though they care about that when it comes to cell phone plans and cable bills). Is it all because plans are chosen by employers? If so, what would happen if the tax subsidy to the employer were paid to the consumer as a voucher that they had to spend?
posted by shivohum at 8:31 PM on March 1, 2010


Nthing the Arrow paper, which is really pretty amazing, given that it was written almost fifty years ago. He has several bullet point lists pointing out differences between health care and ordinary competitive goods (Krugman's short article does not do it justice).

You will note that some of those points describe existing market distortions by the government (licensing of physicians is a big one) and through traditional ethics (doctors are not _supposed_ to act as profit-maximizers).

Politically, however, it seems that getting rid of these distortions is not on the table (and it might not even be a good idea, given the uncertainty and information asymmetry), so a comparison between the current situation and a libertarian health care utopia is probably not that relevant for the current debate.
posted by themel at 10:53 PM on March 1, 2010


There's a reason most health insurance is purchased by companies not individuals: it reduces risk, which increases predictability. A company is going to get a better deal on insuring 10,000 employees than an individual will, because the pool of employees is less risky.

As for competing to offer "better quality care at better prices"... the usual rule in capitalism is that if you want more quality, you pay more. And unfortunately, insurance companies try to get their edge by cutting costs. Their costs being our coverage, their motivation is always to pay less on claims and to reduce their risk by dropping customers most likely to make claims.

I don't have numbers on this, but I imagine house and car insurance are much more predictable than health insurance. There's a fixed limit to how much damage your house or car can suffer, people aren't constantly inventing new types of claims, and the overall risk is a lot more predictable. So it's easier to sell directly to consumers in these areas.
posted by zompist at 1:37 AM on March 2, 2010


Insurance tends towards natural monopoly or oligopoly simply due to how it works. You can't really spread risk (or cost) if your pool is very small.

And health care is pretty extraordinarily inelastic. To put it into perspective, gasoline has a short-run elasticity of -.26, and a longer-run elasticity of -.58. So for every 10 percent you increase the price of gas, people buy 2.6 percent less. If the price increases lasts - say a year or more - gas consumption decreases by 5.8 percent.

Healthcare has an estimated price elasticity of somewhere between -.17 and -.1.
Health Insurance estimates range from -1.8 to -.1.

(Elasticity of Demand for Health Care, Ringel et. al)
Sidenote: First google hit. Sorry, but I refuse to trawl for papers and journal articles at 5 in the morning!

Add to the fact that humans are not rational creatures, especially not when it comes to the survival of themselves and their loved ones.

Well - my favorite way to describe it is:
"We rarely count the cost if it'll keep Grandma among the living."
posted by handle_unknown at 3:41 AM on March 2, 2010


There isn't, as you would think there would be, a Southwest or Jetblue-style insurance company that tries to make things super-simple and easy and cheap for the consumer. Consumers don't care about how efficient different insurance plans are, or how good their customer service is

This is the key point. Health insurance cannot be compared to a (relatively) normal good such as air travel. Consumers do not have full information about health care services, because there is a WIDE information gap between the consumer and the professional.

I can reasonably figure out any differences in service between JetBlue and Southwest, and determine whether it's worth paying $X more to fly JetBlue from NY-LA than Southwest. There is no chance I can competently compare a triple-bypass surgery at St. Mary's by Doctor Leibowitz to a triple-bypass at St. Joe's by Doctor Patel. (And furthermore, if I am in the position to need a triple-bypass, I don't have the time to make a choice, let alone a reasoned comparison).

So consumers of health care have to rely on the providers of health care to make qualitative judgments. In theory, this is what an HMO should do. However, because insurance companies are strictly for profit, it is in their best interest to give you the least expensive care, period. Your care is their cost; as a business, they rationally seek to minimize costs.
posted by jckll at 11:50 AM on March 2, 2010 [1 favorite]


If adverse selection is a reason, how is that any worse for health care than for other insurance markets (e.g. life insurance)?

Part of the problem is that we do not want people with useful information (eh, juvenile diabetes) to be selected against and have to pay the full marginal cost of their disease. There's a social aspect as well as casualty insurance. Unless you buy insurance for life prenatally, eventually those people get screwed. Accurately priced "insurance" stops acting like insurance for long drawn out expenses. This also impairs insurers giving good incentives to reduce cost via preventative care. Given that people turn over so fast either a) they get stuck with you being on a group plan or b) they can price you out. In both cases the actual overall benefit to avoiding long term problems is minimal.

Why wouldn't a more free-market approach (i.e. remove the obstacles to far more vigorous competition between insurers for individual premiums) be the solution?
The one time that insurers tried to control costs, consumers revolted. They have a collective action problem and no incentive to control the overall level of cost.
posted by a robot made out of meat at 7:11 PM on March 2, 2010


« Older I need suggestions for woodwor...   |  A publicist wants to use my ve... Newer »
This thread is closed to new comments.