King Solomon really nailed it on the head when he wrote “What has been will be again, what has been done will be done again; there is nothing new under the sun.” One of the “old” things under the sun, is health care costs. Related to that are other “old” things, like how to control them. In this country, generally, people tend to fall into three camps–one of which is quickly disbanding: health care costs are not a concern (that’s the disappearing group), health care costs can be controlled through market forces, or health care costs can be controlled through government intervention in the market. Certain aspects of the latter two positions are valid, but neither camp has it exactly right.
But more to the point is the need for understanding how market principles fail to operate in the world of health care. Chances are, if you follow the debate closely enough, you will have heard one or both of the following claims:
“What we need is to get consumers to have some skin in the game. If we provide them information about the various plans and providers and require them to pay a more significant portion of their health care costs, then people will start making responsible decisions about how to spend their money. At the same time, this will have the effect of making insurers and providers compete on the basis of cost and quality. This sort of healthy competition is the basis of the American economy, the strongest in the world.”
“Americans want to buy health insurance, but many of them cannot afford it. Others who have insurance often don’t know if the insurance that they have is as good as they think that it is. No one really knows what their health care actually costs or what they need. Doctors are busy being paid on the basis of what they do, rather than the outcomes that they produce, and patients have no idea whether or not they are receiving high quality care. Insurers are denying claims to make record profits, and Washington needs to do something about it. The status quo is unsustainable.”
Now, neither of those statements are actual quotes from any one individual, but they offer a flavor of the two competing camps for how to tackle the issue of health care costs. There is a great deal of truth in both positions. We know, for example, that if people are made to pay for more of their care, they will tend to use less of it. The trouble is, they don’t often make wise decisions about which care they stop seeking, meaning they continue to seek unnecessary care while foregoing many necessary services. It’s also true that people have little understanding of the true value of the insurance coverage they currently have. Both accounts underscore people’s lack of information on quality, and both suggest that insurers are exploiting this weakness to make money.
What is missed, unless you dig a little deeper, is that health care does not adhere well to market principles. This, too, is an “old” idea. In fact, the issue is discussed beautifully by economist Kenneth Arrow in an article that was published in…..wait for it…..1963. That’s right. Knowledge of these problems pre-dates Medicaid and Medicare. If you have the time, you should read it, but in case you don’t, here are the takeaways:
- An individual’s demand for health care is not steady–like that for food or clothing–but rather is irregular and unpredictable.
- The product (delivery of health care) and the activity of production (delivery of health care) are identical, meaning that potential patients cannot “test” the product before consuming it (i.e., becoming actual patients). Therefore, you take your decision to seek care on faith that your provider will do right by you.
- Related to point 2, and complicated by the uncertain nature of illness and the patient’s lack of medical knowledge, it is very difficult to judge the quality of health care provided.
- Entry of suppliers into the market is limited by licensing. Of course, we license providers as a means of ensuring that quality care is being delivered–or at least signaling that to the public, but the fact remains that licensing restricts supply and reduced supply–holding demand constant–increases cost.
- Providers practice a great deal of price discrimination, ranging from providing free care to the indigent to reduced fee care to the insured to full-price care to the uninsured with means to pay.
Let’s take these 5 points and apply them to a more standardized good: Pizza. With some variation due to regional cost of living, restaurant preferences, etc., we can imagine that a large pizza might cost roughly $15. If it were, say, $3, we might be a bit suspicious as to why it was being offered so cheaply. Perhaps it is terrible pizza? On the other hand, if it were, say, $30, we would likely decide against purchasing it, because we would think to ourselves “No pizza is good enough to cost $30.” That’s the result of a well-established market. We inherently know what pizza should cost.
Now, imagine that about 3 or 4 times a year, you suddenly had to have a pizza. I’m not talking about a craving, but a literal need. If you didn’t get your pizza, you’d risk missing work for a week or maybe more. Imagine that you had just moved to a new city, and the only pizza place in town was a locally-owned spot you’d never heard of and had never previously tried, so you’re hoping it’s good. To make matters worse, when you call the pizza place, you find out that they use a whole bunch of ingredients with which you’re unfamiliar. After all, they’re the pizza experts, not you. Finally, imagine that they tell you their weekly specials, and you learn that the same pizza you need costs as little as $5 on Monday, but as much as $50 on Friday. Fortunately, it’s Saturday when you get your debilitating craving, and you’re told that the pizza will only cost you $30. Would you order the pizza?
I’m guessing that how you answer that question depends on several factors, including: how bad your condition will get if you don’t get the pizza, how much you trust the particular pizza parlor, and whether or not you can wait until Monday to place your order. Or, you might think, I need this–now–and at least it’s not going to cost me $50. That $30 may be worth it or it may not, but you won’t know that until you take your first bite. Of course, if you’re lucky enough to have pizza insurance, you won’t even realize that it cost that much. You’ll just pay your $5 co-pay and get your pie. That’s what life would be like if buying pizza was like buying health care.