Monday, July 28, 2008

The Health Care "Market"

Paul Levy, the President and CEO of Beth Israel Deaconess Medical Center, has some great insights to problems facing health care:

The problem with the health care "marketplace" is that it is not a real market. There are so many intermediaries that the usual connection between buyer and seller that we see in other fields does not exist. Thus, the incentives for suppliers (doctors and hospitals) to engage in efficiency improvements and value enhancement are extremely slow to emerge. Also, the incentives for consumers to seek greater quality and lower costs likewise are very weak in this field. (This is aggravated, of course, by the lack of transparency about relative quality of providers.)

Then, we overlay on that the fact that government sponsored programs, Medicare and Medicaid and other state subsidized insurance plans, are ruled by administrative fiat and competing political agendas, and we see that over 40% of the delivery of health care is not subject to market influences at all. One result there is the focus on quick fixes that have headline value (not allowing payment for "never" events, for example) that only cover an infinitesimally small portion of the problem but do not address underlying structural problems. Another result is political battles focused on splitting the pie differently but not making the pie the right size or more tasty.

The whole post is worth a read.

Prononents of socialized medicine love to frame health care as a market failure. As Levy points out though, we hardly have a free market in the health care industry. Before we go on adding even more regulations, it would be best to examine the effects of the ones we have in place now.

An actually move toward a free market in health care, like the utilization of market forces in just about every other industry, would bring us much better services at much lower costs.


Anonymous said...

"There are so many intermediaries that the usual connection between buyer and seller that we see in other fields does not exist."

It seems that these intermediaries will stay, even in a free market, as private insurance will still be a major payer. (AKA I don't see people wanting to pay out of pocket each time, but deciding not to 'gamble' and pay the monthly fees to help prevent the single huge bill).

What are some examples of markets that operate this way, and what solutions have the found that works well in the free market?

Josh McCabe said...

As it stands, tax breaks are one of the reasons third parties play the role they do (Wages are taxed, benefits are not). We would need to eliminate this distortion to see something close to a real market.

My guess is that it would look like your Home-owners insurance. It would cover catastrophic events, but you would be in charge of keeping yourself healthy.

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