THCB has a new contributor today; Dr Andrew Ribner, a cosmetic surgeon who wrote to me originally in praise of my opinions about a piece I wrote about Regina Herzlinger a while back. After a bit of back and forth, Andrew figured out that despite my call for an intellectually honest backer of health care consumerism, I wasn’t a true believer in the power of the market. Cosmetic surgeons know something about the role of the free market in health care, so Andy sent me this: Free markets are the most efficient mechanism for exchange of goods and services because they promote the features and price at which willing sellers and buyers agree to exchange. When free markets are present, the price and features of goods or services offered respond to the desires of the aggregate of buyers. Knowledge on the part of buyers as to what sellers are offering and on the part of sellers concerning what buyers want is necessary. Perfect knowledge is desirable but rarely present. Completely free markets are difficult to achieve, and perhaps not necessarily desirable or practical under all conditions. Government controls and laws often limit the complete freedom of the market place. We have laws against fraud, age requirements to purchase certain products and certain guarantees concerning product quality which protect consumers. We even intervene with the evolution of markets to keep them from being under the excessive control of a single seller in a market monopoly. Rarely, we do protect sellers when the purchase in a market is dominated by one buyer, as in monopsony. At the present time there is not a free market in the purchase of health care. This is the consequence of several factors. First of all, the user of the service in most cases is not the purchaser of the service. During the period of wage-price controls in World War II, companies devised a new way to compete for scarce labor by introducing employer purchased health insurance as a benefit of employment. This continues to the present day. When the buyer of a product or service is not the end user, this creates non-alignment of incentives between buyer and user. The market cannot respond to the preferences of a user who is not a payer. Only the flow of dollars will modify the features of goods or services offered. On the other side of the coin, a buyer not pressured by the constraints of price or budget will have an unlimited demand for goods or services. This was the fatal defect of a third party payment system. This was further exacerbated by years of labor union demand for "first dollar" coverage of medical care. The health insurance industry response to rising costs was first to increase premiums. However, payers preferred reduction in coverage to increasing costs, and thus managed care (read reduced care) was born. Health care users predictably resented gatekeepers and denial of care which has become a mainstay of insurance company strategy. Although HMOs have begun to disappear, insurance companies are still active participants in treatment decisions through their approval process. Free markets also cannot exist in the presence of a single dominant seller or small group of sellers who have so much leverage that they can control market price and features offered. "Trust busting" was the solution to that problem when it was identified under President Theodore Roosevelt. Monopoly may be more common, but monopsony, the situation of a single powerful buyer distorting a free market, is equally as destructive to free market function. Today, huge health insurance companies have become monopolies (more accurately oligopolies) as sellers of health insurance. With competition so diminished it is no wonder buyers can no longer get the features and price they seek. In addition, these same insurance carriers exercise monopsony power in the purchase of health care services, controlling price paid and scope and nature of services covered. Hospitals have joined together in ever larger groups in order to maintain market power in negotiation with insurance companies. Physicians, on the other hand, have not been permitted to negotiate as large groups with few exceptions. Consequently, during this time of double digit health care cost increases, physician reimbursements have been flat or gone down. Medical practice has become a high volume exercise just to keep up with overhead. Adam Smith would predict that as you pay less and less for a service, the motivation to be available at all hours to provide that service disappears. What to do? Some have suggested "managed competition" to create agreement between insurers, doctors and government would control costs and improve quality. "Managed competition" is an oxymoron right up there with jumbo shrimp and would more likely result in the insurance industry using its considerable political clout to influence government decisions to the detriment of both patients and physicians. The best prescription for a responsive and responsible health care system is a free market. Medical Savings Accounts (MSAs) are a good first step toward market discipline. MSAs would be funded by pre-tax earnings and would be used to pay the high deductible of a catastrophic or stop loss type of health insurance policy. Money placed in MSAs could be used to pay any health expense and would be a less painful way to meet a high insurance deductible. By allowing the individual to roll over money in the plan from one year to the next, it would provide a motivation to spend the money carefully and shop for price as well as features of service. Tax treatment of health insurance premiums would change. Health insurance premiums would no longer by tax deductible to employers, but would be either a tax deduction or tax credit to individual purchasers. An employer could pay its employees in salary what it had spent on health insurance. Overnight, employers would stop providing insurance to its employees, and the purchasers of health insurance would be the end users. Portability of insurance coverage would no longer be an issue because health insurance would be individually purchased. In the scenario of individually purchased health insurance would force insurance companies to at least respond to buyer preferences for features. Change in tax treatment to individuals would certainly maintain price responsiveness on the part of buyers, but it would allow the working uninsured to purchase insurance as individuals. We can encourage healthy lifestyle and reduce overall health care costs if we permit underwriting of risk factors as is done in automobile insurance. The current argument against this practice is that it would make insurance unaffordable for those who are chronically ill and likely to incur high expenses on an ongoing basis. That group of patients would be eligible to receive federal subsidies for their insurance premiums. This is by no means a perfect solution to our health care problems. But, it is a step in the right direction to encourage the free market to find the solutions to our current dilemmas in the provision of health care. Those of you looking for an alternate view of MSAs/HSA’s may be interested in Paul Krugman’s views in his NY Times op-ed last week. I’ll reply to Andrew later this week, but my concerns about the consumer directed health plan movement have been voiced in THCB before.
Leave a Reply