A common refrain that you hear from plenty of Republicans on the health care debate is that we need a free market for health care. Deregulate the sector and open it to the "magic of the market", they claim, and health care costs will fall while the quality of service will rise. Steve Forbes ranted for awhile about this at a "motivational" seminar I went to with my office yesterday. Look how well the markets for couches and haircuts and computers work, they say. You can get a nice leather couch for $5000, or a crummy Ikea version for $300. You have plenty of options, and you can choose the one that suits your needs. Same with haircuts. John Edwards can get a presidential haircut for $400, and someone who wants to cut costs can go to Chinatown and get a trim for $8. Magic.
The irony, though, is that none of the people claiming that markets will fix health care understand how markets work at all. Their argument falls apart more or less instantly. The first thing they don't understand is that markets aren't inherently efficient. The argument isn't even technical-- it's intuitive. Think about the market for couches I describe above. Why is that market efficient? You can divide it into a few crucial points. The first crucial point is symmetry of information. The couch seller knows what he's selling, and you know what you're buying. If you want information about how other people found the couch, you can get online and look up people's reviews. You can sit in the couch and test it. You know what your needs are, and how much you're willing to pay for a couch that meets those needs. And you know when you're satisfied with what you got.
Now think about the health care market. Say you've got a stomachache. The doctor puts you through 5 different tests and gives you a diagnosis, prescribes you medicine, and a week later you feel better. Great. Your insurer gets a bill for 5 procedures and your prescription drug plan picks up the bill for your medicine, with you paying $50 out of pocket for the whole thing. What do you really know? That your stomach hurt before and it doesn't hurt now. What's more crucial is what you don't know. Were those 5 tests necessary? Were they redundant? Did you need the medicine? Would you have felt better even if the doctor hadn't done anything? If a second doctor had ha a different opinion about your condition, how do you decide which doctor was right and which doctor was wrong?
The answer to all of these is that consumers DON'T know. When it comes to medicine, the doctor has all the information and the patient has none. Which means that there isn't the kind of quality control that you have in a functioning market. If your Ikea couch falls apart, you return it to the store. If it's uncomfortable, you don't buy a couch from there again. With medicine, how do you know if you got unnecessary or harmful procedures? Unless the doctor visibly screwed up, again, you don't. So, unless doctors have an incentive to control costs, they won't (and right now, doctors get paid not holistically, but per procedure. And the more expensive the procedure, the bigger the payout, regardless of whether the procedure is necessary or more effective than a cheaper alternative).
A second crucial point is that health care is a market in which everyone participates all the time, whether they like it or not. A Constitutional issue arising out of the recent health care reform asks how Congress can force Americans to participate in a market. Well, the answer is that health care is the one market in which everyone participates no matter what. Say, hypothetically, I don't take medicine and I don't buy health insurance. Say I'm 23 years old and healthy and don't think I need it. But, true story, last Saturday I was riding my bike, popped a tire, and tore up my hands pretty badly. My wrist took a knock, and I was lucky I didn't break it (I've broken that wrist before). Had I broken my wrist, if I didn't have insurance, I would have had to go to the hospital. When I got there, I would have gotten my wrist X-rayed, they would have put it into a cast, and I would have gotten some Vicodin. Without insurance, they would have handed me a bill for a few hundred dollars. Maybe more. Now, I'm 23 and haven't held a full-time job in my life. I have... less than a few hundred dollars in my bank account right now. There's no way I could pay for that treatment without insurance. I'm also pretty much judgment-proof: without a job or any assets, there's no way the hospital is going to end up collecting on that bill until I finish school (read: ever). So who picks up the tab? Well, you do, if you pay taxes. My refusal to buy health insurance is subsidized by your tax dollars, and costs are passed on to those who do have coverage by higher rates for those who are able to pay. Put simply, here's another difference between the health care market and the couch market: if you don't like any couch, you don't have to buy a couch. If you don't want health insurance, your participation in the health care market is subsidized by others. And your refusal to participate drives up everyone else's rates
The third crucial point about the health care market is that it's necessarily an insurance-based market. Last year, I was 22 years old. My health care consisted of a checkup with the doctor and a trip to see the dentist. I consumed maybe $300 of health care services that year. My health insurance made good money treating me. But say I'd gotten into a car wreck and needed 3 surgeries and six months of rehab. I would have consumed $300,000 of health insurance, which is almost $300,000 more than I have in the bank. I would have been one of the brokest people of all time (alright not really, but I would have been SUPER broke). That kind of accident is an inherent risk that everyone faces. And there are two potential solutions. Every person in America could put aside $500,000 to hedge against the risk of getting cancer, getting in a car wreck, or any number of tragic catastrophes. Now multiply that $500,000 by 300 million Americans. That's $150,000,000,000,000. $150 trillion dollars. Ten times the size of the economy. And that's dead money-- if it's reinvested somewhere other than in the safest investments (cash or Treasuries), there's a risk of losing it. And it's also ten times the number of outstanding Treasuries in the market. So what do we do instead of suggesting that all Americans save twelve times the country's median pre-tax income so they have it around for a rainy day? Well, you have them buy insurance. That way, insurance companies will make a profit on healthy 23 year olds, lose money on those who have tragic accidents, but come out relatively ahead in the end. So there's really no practical way for Americans to buy health care outside of insurance. And, if relatively healthy young people aren't forced to buy insurance, it drives up rates for others. Which brings me to the next point.
The fourth crucial point is that the health care market has a huge adverse selection problem. Insurance companies are eager to pick up customers. But not all customers are created equal. Health insurers love signing up people like me who consume $300 of health insurance a year, pay out $500-1000 in premiums, and sign up again. But people like me are also the ones most likely to forego that health insurance altogether and skip their appointments. So who IS in the market? The answer is sick people and old people. It's a sad reality, but old people are sicker and need more health care than young people. If you're blessed enough to have grandparents who are around, you know that they take an alphabet soup of pills with every meal. They go to the doctor pretty regularly. If I fall down, I dust myself off, put on a band-aid, and curse. If a 75-year old falls down, he breaks his hip. Insurers aren't interested in insuring those people at prices that aren't astronomical because they know that those people are going to be consuming a whole lot of health care services. But old people are also retired. They might have some disposable income, but even with a paid-off house and car, chances are they're consuming more in health care than they have in cash coming in. So if one of those people is lucky enough to convince an insurer to cover them, either their premiums will be through the roof, or insurance that agrees to cover them will cover two trips to the doctor and a tooth cleaning at the dentist's. Unleash the magic of the market, and the market will run screaming away from old people. Health insurers are about as eager to provide old people with comprehensive health insurance as fire insurers are to provide someone living in Hell with fire insurance- it's not a winning proposition.
So how do we make that market work? Well, short of the government providing health insurance itself, doing research on what does and doesn't work, and restricting what it will and won't cover, there are really only a few possible steps. First, you have to make health insurance available to old and sick people. In effect, that means not rejecting people on the basis of pre-existing conditions. But if people can't afford health insurance, you can't force them to buy it. That leads to the next step. So second, you provide old and poor people with subsidies to buy insurance. But if insurers can't discriminate on the basis of pre-existing conditions, people are going to wait until they get sick, then run to the insurers and say, "Give me insurance!" Which inevitably gets you to the third prong. Third, you mandate that everyone buy health insurance. That way, people pay premiums while they're healthy, and their premiums subsidize the higher cost of treating the old, which drives down those old people's rates.
So, essentially, we end up with a three-legged stool. If everyone gets health care, we have to make sure they pay something into it and aren't freeloading. So we end up with a restriction from discriminating against those with pre-existing conditions. To make it affordable, we get subsidies for those people. And to prevent people from signing up only when they get sick, we get a mandate for everyone to buy insurance. And that looks... a lot like the Affordable Care Act.
Of course, there are still the cost-control issues, but those are likely best resolved by doing studies on which procedures are effective and which are not, paying doctors who get better results more (in any single case, it's hard to determine whether a doctor did a good job; in the aggregate, it's easier to track a pattern), and allowing those who can save money in the process to keep their savings. Once doctors are paid for results and not for procedures, their incentives shift, and they start focusing on controlling costs rather than on doing lots of profitable procedures. This part of the argument is actually borne out by the evidence. The reason we pay more than any other country for health care (without getting better results) is that we consume more health care than any other country. Obviously without getting much bang for the buck.
So I wrote this pretty much stream-of-conscious, so I doubt it all makes perfect sense, but I think it reflects my thoughts on the issue.
No comments:
Post a Comment