The Healthcare Market Conundrum

In a few weeks, the Supreme Court will rule on subsidies for the Affordable Care Act (ACA or Obamacare to most, Obamanationcare to opponents). However the ruling turns out, we will still be faced with how to provide Americans, all Americans, with healthcare. Do we keep the ACA, amend it, replace it, or just scrap it and revert to what prevailed before (the best healthcare in the world for most and a Third World system for the rest)? Whatever is decided (and we really should decide the issue and not blunder about) we need to take into account some of the attributes of healthcare that make it a unique market before determining its structure. Without addressing those aspects, we will be destined for failure in whatever form our healthcare system takes. Most Americans’ impulse is to put their faith in the Free Market System to deliver us the best system. Free markets are a wonderful thing. They are better at providing a wide variety of goods and services than any other system. They move resources to those areas most in demand and which provide the highest returns. They do it automatically and swiftly, far faster and better than even the most advanced computer could possibly do. Markets have provided us with a standard of living that even Kings just a short time ago would envy. One meddles in markets at grave risk of reducing their effectiveness in providing us with wealth. But one thing markets have not provided us with is universal healthcare. Markets are not perfect and, more to the point for healthcare, they do not meet all demands for a product or service. Nor are they meant to. Markets exist to allocate and ration resources, not to see that everyone gets whatever they want but may not be able to afford. Resources are finite and there is a cost associated with them that rises as more are provided. Thus, there is a point at which no more will be provided because there is no one left who is willing to pay. And, there is a point below which no one is willing to provide the good. Inevitably, there are some sellers who cannot sell and some buyers who cannot buy (recall your Econ 101 Supply and Demand Graph). This exists as certainly as any law of nature. So what does this mean for healthcare in America? It means that, under the present system, some percentage of Americans will always be unable to buy healthcare in a free market. Others will only be able to afford partial coverage, while most will be able to enjoy the best medical care in the world. The bottom line is that there will be those who will continue to suffer from treatable conditions, who delay treatment for less serious problems until they turn into serious ones, and who die prematurely because they could not get treatment or got it too late. No matter how you set up a free market healthcare system, you will have these negative outcomes. It is locked into the system as surely as the sun will rise tomorrow. It is more difficult in healthcare than in other markets to meet everyone’s needs because healthcare is a unique market with attributes that no other markets possess, except in limited ways. These unique attributes are why no purely market-based solution is possible to provide universal healthcare. The first attribute is that there are few if any alternatives for many medical procedures, such as a heart transplant. The second is that there is no continuum of products that can be provided at various price levels. The third is that a consumer may become involved in the market without their consent in emergency situations. The fourth is that providers are mandated, either by law or by professional ethics, to provide their services free of charge if necessary. The last is that there are no secondary markets or ability to provide the service by oneself for most medical care. For most markets, there are alternative products, producers, or services that can fulfill the needs of a consumer. The alternatives may be less efficient, more expensive, or less attractive, but they can usually fit the bill. Or, something else can be used that is totally different from what was originally desired and make the consumer just as happy – you want new shoes, but settle for a new pair of gloves. In healthcare, those substitutions are usually limited or non-existent. There may exist several forms of treatment for a medical condition, but the choices are limited and often only one is appropriate. You cannot just decide to forget about your ailing heart and decide you would rather have your stomach treated or just forget it all together if you want to live. In most markets, there is a price continuum that consumers can avail themselves of to buy a product at the price they wish. One can spend a few bucks to thousands of dollars for a pair of shoes, but almost everyone can buy them. For most of medical care, especially that required for serious problems, there is no price continuum or not a meaningful one to most consumers – a heart transplant will cost too much regardless. Worse, there is no transparency on prices to allow comparison, even if there is time to do so. It is also difficult to compare offerings for quality. Unique to healthcare is that a person can become a consumer of the product and be responsible for paying for it without giving consent. In many emergency situations a person is not capable of giving consent, but the standards of the industry is to treat them and worry about payment later. Often the consumer is still liable for the cost of the treatment even without agreeing to do so. You also do not get to pick the product at the price you want to pay, that is dependent on your medical situation. Medical professionals and hospitals, unlike any other economic sector, are obligated to provide their services for anyone who is in urgent, life-threatening need, regardless of their ability to pay. Because of this requirement, medical providers must charge their paying customers a higher price to cover non-paying or low-paying patients. Many hospitals, doctors, and other care providers charge above market prices to those who can pay to cover the costs of those who cannot. This is possible because of the fragmented nature of the current health system and limitations on competitors. A move to a free market system, ironically, will remove the ability of healthcare providers to subsidize nonpayers. They will only be able to charge at cost because other competitors will do so and payees, such as insurance companies, will not pay more. The only way for providers to help non-payers is for them to achieve excess returns by charging above average costs. That can happen only when they have pricing power, such as a monopoly or oligopoly. In a free market, there will be no excess returns. Free markets will lower costs and expand treatment somewhat, but that will be offset by fewer non-insured patients being treated and some higher cost providers dropping out. A free market could thus end up with less care provided rather than more. As a result, there cannot be a truly free market in healthcare; it is a prisoner to ethical requirements. Lastly, there does not exist any secondary or used markets for most medical care and most care cannot be provided on your own. The only secondary markets that can be said to exist are actually not markets at all, but services provided by various governments, such as local clinics or county hospitals. Even privately run clinics are mostly financed by the government, so that, in effect, there is no secondary free market. Moving them to a free market basis would make them unaffordable for the very people they are designed to help. Again, a free market would provide less health care than we now have, not more. And certainly not universal coverage. Overseas treatment is another option, but still for a limited few who can afford the trip. Used markets are limited to some medical devices, but do not exist for most of the system. You cannot recycle an operation, consumers are forced into the primary market. In addition, consumers cannot provide most medical services themselves or through the informal economy, the procedures are just too complex or dangerous. The next closest example of such a market, education, is still way ahead of healthcare because it is possible to teach oneself many things or become educated in a variety of ways. Self-treatment in healthcare is rather limited. Why is universal healthcare our preferred outcome to the current system, which means some do not get sufficient healthcare and others are locked into place by fear of loss of access to healthcare? Beyond the moral imperative of providing for our fellow Americans, there is an economic cost to the current system and potential economic benefits from expanding coverage. People who do not have access to healthcare are less productive due to not being treated. Workers cannot change jobs or start new enterprises for fear of loss of access to healthcare. In a free economy, many workers are stuck in place and unable to maximize their contributions to the economy. Universal healthcare, available to all regardless of where they work, will increase the economic efficiency of the US. If our goal is universal healthcare, as it should be, then a free market system alone will not suffice. There must be a significant non-market component or even a totally non-market system. A free healthcare market cannot cover everyone, regardless of how low the insurance or how high the deductible. This is true of every market to some extent, but when a person has a serious ailment, the consequences of not being able to afford the product can be deadly. When the situation is serious enough, such as failing kidneys, a consumer has no choice but to seek treatment if they are to live. If our goal is to make our medical system into a free market and to not “socialize” it, that can be done quite simply by doing nothing – unless, that is, we dismantle Medicare and Medicaid and make them free market programs, too. (Reducing the amount of care provided in the process.) Whoever chooses this way, however, must justify the unnecessary suffering and premature deaths, which will result as acceptable outcomes. This is not some abstract capitalism versus socialism debate. It is literally life and death for a significant portion of our society. Total dependence on the free market may, perversely, prove even more intrusive than a government run model, since it would require a degree of transparency in information to make it work effectively, such as doctors’ patient results or hospital costs, that many would find intolerable. There are any number of different approaches in countries around the world that could be adopted – some more market-oriented than others. All have a major non-market component of universal provider, universal payer, mandated coverage, regulated operation, or a combination of these approaches. How would I do healthcare? We can see the beginnings of a more rational system already, one that stratifies delivery of services by the level of medical need – clinics that provide screening, well-being care, and low level emergency care that are primarily staffed by nurses and physician assistants; patients needing greater care then can move on to a doctor for further examination and referral for treatment; major emergencies and treatment are handled at hospitals. It is a system that maximizes resources by allowing non-physicians to perform much of the primary care and doctors to concentrate on treatment of more serious concerns. In a rational system, the most valuable resource, the doctor, would not be the front line of care. The doctor-centric system is the system we have developed over time and Americans like it, but if you were to design a system from scratch, you would not put doctors on the front line. How to pay for it? First, there should only be one system not the hodgepodge we have now. That only raises costs. Second, it makes no sense to buy individual policies or make businesses provide health insurance because the cost is too high for individuals and the disincentives too great for businesses. Everyone should be automatically enrolled. Third, even with portable insurance there is a cost to moving around, providing disincentives to do so. In the end, the best way to finance healthcare is through the tax system with a single payer providing the funds to care givers (directly as in Medicare or through private insurance companies as in Germany). We do not need a government run system, but we do need a government financed one. To choose we need an honest debate and open minds. The current debate has descended into some kind of Boschian Hell that has terrified many into total opposition to any change. We can provide healthcare for all Americans if we are willing to address the gaps created by our current market-based system. That will require an acceptance of a role for non-market-based programs to provide care that the market cannot. Given the current level of the debate, though, that appears to be an uphill climb. Getting to a common starting point on the problem, that the current system cannot succeed as structured, would at least lay the groundwork for a solution.