Economics

A Libertarian’s Case Against Free Markets in Health Care

By ROMAN ZAMISHKA

In the final act of Shakespeare’s Richard III, the eponymous villain king arrives on the battlefield to fight against Richmond, who will soon become Henry VII. During the battle, Richard is dismounted as his horse is killed and in a mad frenzy wades through the battlefield screaming “A horse, a horse! My kingdom for a horse!” Richard shows us how market value can change drastically depending on the circumstances, or your mental state, and even the most absurd exchange rate can become reasonable in a moment of crisis.

This presumably arbitrary nature of prices should be the first thing about the US healthcare market that catches the attention of any student of economics. Prices for the same procedure vary greatly between hospitals on opposite sides of the street and even then appear to have no basis in reality. Further investigation reveals many other features of the healthcare market that economics teaches us will increase transaction costs and the misallocation of resources. The prices we discussed are generally not paid by the patient, but by a third party insurer. Often the patient isn’t even able to select the insurer but is assigned one by his or her employer. What the patient thinks of the insurer’s ability as a steward of his or her premiums is irrelevant. Further, contracts between providers or pharmacies and the insurer completely hide the true price from the patient’s view. In addition, anti-competitive certificate of need laws limit competition between providers and expensive regulations compel providers to merge to compete in a nuclear arms race with the insurers, although the real victim is the patient’s wallet over which the providers and insurers fight their proxy wars. The best way to explain the US healthcare system is if you took every economic best practice and then did the opposite. How does one get out of this mess?

Academics and physicians from places like Boston and San Francisco often argue that this situation is proof that free market healthcare has failed in America and that the only solution is to implement a nationalized single-payer model. Writing in Medical Economics, Dr. Anish Koka makes the above point that “labeling this “the free market” is about as pure as labeling the offspring of a Great Dane and a Chihuahua a purebred” and retorts that the way out of this quagmire isn’t towards a centralized single payer, but to normalize a price driven medical market. When presented with this argument the Boston types will usually profess their support of free markets in general, followed by a regretful proclamation that markets can’t work in healthcare because medicine is not a generic commodity and that people simply won’t shop.

But Dr. Koka is ready for this and preempts the argument by presenting the case of the Surgery Center of Oklahoma. Founded by Drs. Keith Smith and Steven Lantier in Oklahoma City in 1997, the Surgery Center does not accept insurance and operates on a cash basis directly with patients, or on a contract basis with businesses self-funding their employees’ healthcare. The prices for their procedures are available online and are binding; you won’t be surprised by unexpected items being added to your bill.  Their transparency and quality has earned the Surgery Center high praise from patients domestic and international, and their success is evidenced by their ability to survive for 20 years despite their unique model (unique for healthcare, that is, any fast food restaurant would be quite familiar with it, perhaps that’s why we’re more effective at creating COPD than treating it?) Dr. Koka proposes that making the Surgery Center’s price model the standard will reveal and remove all the bureaucracy, middlemen and inefficient practices that are making the American healthcare system so expensive.

However, despite the success of the Surgery Center of Oklahoma, there really are features inherent to healthcare that make an extension of the price mechanism to the rest of the market impossible or impractical. Every Russian schoolboy knows that one of the first criticisms of the market mechanics in medicine was the recently passed Nobel winner Ken Arrow’s “Uncertainty and the Welfare Economics of Medical Care“. From a libertarian perspective Arrow’s critique is a mixture of truth and opinion, but nonetheless, it is a good starting point. He himself wrote that the short paper is an “exploratory and tentative study”.

Arrow’s analysis is built around the ubiquity of uncertainty in the medical field and proposes that “virtually all the special features” of medicine come from this origin. The first unique characteristic of medicine is that demand for medical care is irregular and unpredictable. Although there are other industries where demand is irregular, there is a truth that relying on insurance financing schema would make a market less competitive as it adds a middleman between the patient and physician. This comment also shows the age of the analysis; written in 1963, when insurance was not as prevalent as it is today (although already a captured market with the employer-sponsored insurance tax benefit firmly in place) and medical care was still oriented around irregular acute cases rather than the reliable chronic diseases that are so common today.

Arrow next remarks that the physician has a responsibility for the patient’s welfare far above that of a typical salesman, such as a barber. While this is true of the profession in theory, in practice there is a robust medical malpractice industry that is a testament to the fact that ultimately physicians are still human and there are good ones, bad ones, and sometimes even evil ones. We have little reason to believe that physicians are more saintly than barbers.

Arrow then makes his best point, which is that medical care is inherently different from commodities because the success of medical care is uncertain. In particular, this point is most relevant to the Surgery Center of Oklahoma’s model. The Surgery Center performs procedures that are most commodity-like among healthcare services in their reliability and quality. Happy hip replacements are all like, every unhappy chemo response is unhappy in its own way.

Finally, Arrow concludes by pointing out that medicine is endemic with licensing restrictions on entry, uncompetitive pricing, and price discrimination based on income levels. This is a tautology that medicine can’t be a competitive free market because it hasn’t been a competitive free market. We’ve seen industries standardize (finance) and deregulate (airlines) as they mature. Healthcare is still a relatively young field (radical mastectomies were common not so long ago), so there’s no reason to believe medicine’s professional culture can’t change.

From Kenneth Arrow’s analysis, we can see that there are some concerns about the uniqueness of medicine that aren’t true, some that are irrelevant, and some that are legitimate. It is these valid impediments to free market function that need to be considered seriously before we propose that the price competition model should be extended to the rest of the market. Arrow’s most relevant point was that the success of medical services is uncertain, but in fact, there are many more.

The first set of problems is cases where patients shopping is either impossible or socially undesirable. This includes shopping for medical services and health insurance, since the unpredictable incidence of disease makes the two inseparable, as Kenneth Arrow pointed out. The most obvious example is emergency medicine, which has already been culturally recognized in America as a universal service with the passage of EMTALA. An unconscious person brought into the ER by definition can’t price shop for services. Similarly, we don’t want insurers to be able to price shop by keeping ERs out of network. When I have an emergency, I need the ambulance to bring me to the closest ER able to take care of me, not the closest one that my insurer decided is a good value. Similarly, physicians are correct to be outraged with insurers trying to not cover care performed in the ER that they deem inappropriate for the ER setting. It’s unreasonable and dangerous to expect patients to self-diagnose when deciding whether to go to the ER. Finally, even the bravest libertarian would be hard pressed to say that the woman who recently pleaded not to have the ambulance called should not receive emergency care if she can’t afford it. I certainly can’t say it, and there are some on Twitter who have been impressed with my lack of empathy. If we, as a society, agree that emergency care is a public good and that shopping for it is impossible, shouldn’t coverage of ER services be nationalized?

Emergency Medicine is only 2-5% of healthcare spending, but it does demonstrate that there really are parts of medicine where free market competition is impossible. It’s a cornerstone from which the rest of my critique proceeds. Healthcare decisions that have negative externalities on the public are another example where shopping is undesirable. Mass vaccination of the public was probably the most successful medical developments of the 20th century, accounting for 20-30% of the life expectancy gains made during that era. The public health benefits provide a good reason for not only vaccination but all infectious disease treatment to be nationalized and available to the public at no cost. Coughing patients not going to the hospital because they’re afraid of the cost is how Ebola epidemics and zombie movies start.

We also don’t want shopping to occur when the beneficiary of the medical care can’t shop for themselves. Here I am specifically referring to perinatal and child healthcare. Should infants have their entry into the world endangered because of women not being able to afford their prenatal care? Should children be required to not receive healthcare because their parents are not able to afford, or even worse choose not to purchase child insurance? There are arguments to be made against John Rawls’ theory of justice, but they usually are based on adults abusing their agency to take advantage of such a system, which children by definition of their minor status can’t do. The national insurance coverage rate for children is 95.2%, it should be 100%. It is in the public’s interest that all children can receive appropriate care until they reach adulthood and are allowed to start screwing up their health however they wish.

The next set of problems are related to the nature of disease. Unlike televisions and cars, we don’t choose to buy the bodies that we are born into. As the existentialists argued, we are thrust into existence without our consent. This absurdist nature of our lives comes with many equity and justice problems, the most Rawlsian of which are pre-existing conditions, whether genetic disorders such as cystic fibrosis or more nuanced diseases like Type 1 diabetes. Disease like these, especially so when they are progressive, are a permanent tax on individuals’ ability to operate on a daily basis and impede their physiological, psychological, and financial wellbeing. The part about financial wellbeing is most important in this discussion because these conditions directly decrease the patient’s ability to finance the healthcare that they need. Despite all the injustices and inefficiencies of cross-subsidization in healthcare, if we as a nation really are a unified community, then don’t the healthy among us owe it at the very least to financially support the healthcare of those who are sick since their youth as thanks for taking the bullet during the genetic Russian roulette at birth? We did nothing to deserve to be healthy and they did nothing to deserve to be ill; we can’t deny that we know this to be true.

The next problem is the mental health elephant in the room, which patients don’t talk about because of stigma and policy wonks avoid because there aren’t any clear solutions. In the past, we used to have thick family structures to keep us insulated from life’s shocks and priestly confession to keep us from going crazy of guilt. The world developed, and we became solitary atheists, but the problems of our minds remain.  Jordan Peterson often talks about how just about everybody either has or knows somebody with a mental disorder, but we still must get up in the morning and go to work. The result is a society that is increasingly addicted, depressed, and suicidal. Just like with genetic disorders, mental health disorders progressively decrease our ability to finance the healthcare that we would need, but to make matters worse they also inhibit our ability to even recognize that we need healthcare or to negotiate the prices for that healthcare, in a way that cystic fibrosis does not. There’s a perverse libertarian economic argument that an alcoholic with hepatitis who uses his money to buy more alcohol is making a welfare efficient decision because he is buying exactly what he wants. If we want society to remain even moderately functional, we must reject this argument. Mental health is yet another area where price mechanisms are untenable.

Finally, we need to discuss chronic disease management and the problem it poses to the medical field. When Kenneth Arrow was writing in 1963, the majority of healthcare was infectious disease treatment and low-probability surgeries, or conditions amenable to insurance financing mechanisms. Back then obesity affected 10% of the population and childhood overweight was virtually non-existent. Today 75% of the population is overweight and 40% is obese. 50% of the population has at least one chronic disease. The obesity, substance addiction, and e-cigarette trends all indicate that the problem is only going to get bigger. It is increasingly becoming not a question of whether somebody will get a chronic disease, but when they will get it. Conservatives correctly raise the concern that insurance covering a known adverse event is no longer insurance. This problem is further complicated by the fact that although there are behaviors that can significantly improve their outcomes, there are many smokers who won’t develop COPD and there are many exercise junkies who will get diabetes. These diseases have too many causal variables to attribute blame to any specific reason. But we can’t throw up our hands and give up just because insurance isn’t going to be a viable financing mechanism. Is price driven medicine a viable solution? It doesn’t seem to be. The problem is that chronic diseases are developed over decades from the accumulation of strain caused by daily living and normal aging, with most of the costs rapidly (and somewhat reliably) materializing in the last 1-2 decades of a person’s life. People don’t consciously factor in the cost of diabetes 30 years from now when they decide to eat a slice of pie, because they simply can’t forecast effectively over such a long horizon. The correct financing mechanism to solve this asymmetry is not an insurance (the outcome is known) or uninsured shopping (the cumulative cost is too high) but a long maturity bond, with the person paying into the bond over the lifetime and the bond paying out a large lump of cash at maturity. Sound familiar? That’s exactly how pensions work, which is something that has always been nationalized (the known problems with our pension schemes is a legitimate, but separate, discussion).

To conclude, this is not a critique of the Surgery Center of Oklahoma’s model, which I praise and admire, but a call for an honest analysis of its limitations. The broader problem that I see is that much of the health insurance market is already nationalized through Medicaid, Medicare and the VA. The reality is that it is politically impossible to reverse from this position. If we then add to this list emergency medicine, perinatal healthcare, child healthcare, genetic diseases, mental health and chronic disease management, all of which I earnestly believe have a legitimate case to be nationalized, then what are we left with for free market shopping? Surgeries and generic drugs? At that point, you might as well nationalize the rest just to simplify things and remove any regulatory asymmetries. I hate to say it, but it’s not clear to me as a conservative that single payer (or at least universal coverage + optional private supplemental insurance) isn’t the right solution.

Roman Zamishka is a healthcare policy student at NYU focused on comparative analysis of healthcare systems

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HealthViewXnilitha1tuliphospital7William Palmer MDPaul @ Pivot ConsultingLLC Recent comment authors
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HealthViewX
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HealthViewX

Well written and very informative. Today 75% of the population is overweight and 40% is obese. 50% of the population has at least one chronic disease. The latest obesity stats are alarming. Solutions like Chronic Care Management should be of great help here for the physicians to monitor their patients for any chronic illness and suggest care plans and monitor for better health outcomes.

nilitha1
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nilitha1

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tuliphospital7
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tuliphospital7

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William Palmer MD
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William Palmer MD

Money is pouring through the sector. Everyone who is getting rich, likes it. Everyone outside the system who has to use it, hates it. How do you change such a system that is frozen? Power is in the money. There is @20% of the GDP trying to keep the status quo. Any upsetting of the millions of stakeholders is going to unleash a torrent of lobbying and furious political effort, the likes of which we haven’t seen since Vietnam. The only way to change it may be to allow it to get sick and die. Allow the calamity and be… Read more »

William Palmer MD
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William Palmer MD

I liked your article, Roman. But single payer is essentially what Medicare is. It still has all the billing complexities and insurers and administrative costs; and mental health and rehab and long term care are still primitive. We have to try as an experiment somewhere making the inpatient care we receive in hospitals a public good. No billing; no billing records; no insurers. This way, we clean up all the sundry stakeholders in the entire billing apparatus. At the same time and in the same region, leave ambulatory care–roughly 40% of the health care dollar–up to the patient to do… Read more »

Barry Carol
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Barry Carol

Are other developed countries any better than we are at mental health, rehab and long term care? If so, at what cost? As I understand it, Switzerland finances about one-third of hospital operating costs with general tax dollars presumably so they don’t have to charge as much as they otherwise would and also, probably, to ensure the existence of surge capacity in the event of a pandemic. I could support a similar approach. I’m not very comfortable putting doctors who work in hospitals on salary. I fear that productivity would fall through the floor. America has a more entrepreneurial culture… Read more »

Paul @ Pivot ConsultingLLC
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Paul @ Pivot ConsultingLLC

Re “medical care is inherently different from commodities because the success of medical care is uncertain.” as an argument against markets in medical care is flawed. While it is true re commodities, markets work well in many domains where the outcome is uncertain: civil litigation attorneys, defense attorneys, lobbyists, psychics, and many financial advisors. …and probably dozens of others.

Barry Carol
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Barry Carol

Now that the hospital sector has consolidated into two or three large systems in most cities, regions and even states, I think insurers should be more willing to abandon their longstanding confidentiality agreements with providers that preclude disclosure of contract reimbursement rates. Think about how useful it would be if a referring doctor could pull up his patient’s insurance plan on the computer or have his assistant do it, type in the service, test or procedure he wants the patient to get, and receive a list of in-network providers within a specified distance from the patient’s home sorted by contract… Read more »

Steve2
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Steve2

” how the price for surgeries performed at Steve2’s hospital compare to relatively nearby well known academic medical centers like Penn and Jefferson. ” Good question. I know some of the outcomes data, but not the costs at these other places. I would also point out that there is a lot more than emergency surgery that is not really shopable. Look at any OR schedule at a hospital of decent size and will find “Add ons” in the surgical schedule. For the most part these are urgent cases that wold not be amenable to moving elsewhere. Not emergencies, so they… Read more »

Barry Carol
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Barry Carol

Doctors and other staff who work in ambulatory surgical centers presumably get paid just as much as they would for doing the same work in a hospital. Correct me if I’m wrong. The big economic advantages vs. hospitals include not having to operate around the clock as you pointed out plus a richer average case mix. They probably also mostly treat patients that are lower than average risk and those who develop serious complications get transferred to the hospital. By the same token, independent imaging centers don’t usually operate during nights and most of the weekend either. Finally, since these… Read more »

pjnelson
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pjnelson

After recently retiring from a 41 year, small Primary Healthcare group practice, I attended the most recent scientific meeting of Academy Health. Against my long-standing bias about the inherent waste involved in these events, I found myself in the vendor room talking with a representative from a University-based School of economics. It seems that they occasionally consult on Population Health issues. So, I asked if they would consider a conundrum. Suddenly, the elevator door closed and the lights went on at the top floor. So, assuming that the growth of our nation’s health spending in the last 50 years basically… Read more »

Peter
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Peter

“I hate to say it, but it’s not clear to me as a conservative that single payer (or at least universal coverage + optional private supplemental insurance) isn’t the right solution.”

You risk being kicked out of the Libertarian Club for that blasphemous stance. ;>)

Everyone who hates single-pay government run coverage somehow loves it when they reach 65 and get Medicare – even Libertarians, including Ron Paul.

zamishka
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zamishka

Libertarianism is the religion of freedom, but politics is the art of the possible. I’m willing to concede ground if I regain it somewhere else that I consider more important.

Steve2
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Steve2

Almost as if you believe in positive liberty. That will get you kicked out of a lot of libertarian circles.

Barry Carol
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Barry Carol

The reason why most seniors and eligible disabled people like Medicare so much is that they are only paying about $2,000 per year for combined Part B and Part D premiums (Part A is “free” to them) for a program that currently spends roundly $12,000 per capita. The other $10K is paid for by a combination of payroll taxes deducted from workers’ paychecks, a 3.8% tax on the investment income of high earners and general federal revenue paid by all taxpayers whether they currently have Medicare or not. If they had to pay anything close to the full actuarial cost… Read more »

Peter
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Peter

“If they had to pay anything close to the full actuarial cost of the program, they probably wouldn’t like it nearly as much.”

Barry, tell me that if everyone getting subsidized care, which includes just about everyone not paying cash, would not like their heath plan as much if they were paying the full actuarial cost.

Barry Carol
Guest
Barry Carol

People getting heavily subsidized employer coverage if they were paying full actuarial cost wouldn’t like it as much. People paying full cost for ACA exchange plans feel they are getting ripped off big time but most people in exchange plans are heavily subsidized. On the other hand, just about everyone who buys auto or homeowner coverage pays full actuarial cost and most of them like those policies just fine even if they never have a claim. With health insurance, anyone who pays more in premiums than they incur in medical claims think they’ve been ripped off. Go figure. .

Peter
Guest
Peter

“On the other hand, just about everyone who buys auto or homeowner coverage pays full actuarial cost and most of them like those policies just fine even if they never have a claim.”

Maybe it has something to do with not having to pay $15,000 per year for coverage.

Barry Carol
Guest
Barry Carol

Of course but even Medicare spends $12K per person. It probably costs about half that to cover the younger, non-Medicare population but that still works out to $18K per year for family coverage even at Medicare’s reimbursement rates. That would be pretty burdensome for most people if they had to pay the full actuarial cost out of pocket. Healthcare costs will always be significantly higher in the U.S. than elsewhere for cultural reasons, namely our litigious society which generates lots of defensive medicine embedded in physician practice patterns, our demands for lots of expensive though often futile or marginally useful… Read more »

BPierce
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BPierce

The 500+ patients chronic disease patients in my Direct Primary Care practice would find your arguments about nationalizing chronic disease management amusing. The sicker the patient, the better the value in DPC for them.

zamishka
Guest
zamishka

In retrospect, I should’ve emphasized more that I don’t support nationalization of providers, but specifically financing mechanisms. In principle DPCs would be unaffected since they for the most part exist outside the insurance system. I understand the regulatory concerns about whether DPCs would be left alone in such a system, but that’s no different from today; Congress could ban DPC today because their Big Insurance donors dont like patients operating outside the insurance system, and DPC wouldnt have the leverage to stop it.

Peter
Guest
Peter

“In retrospect, I should’ve emphasized more that I don’t support nationalization of providers, but specifically financing mechanisms.

Single-pay need not be “provider nationalization”, even though the government pays them. In Canada docs are independent professionals who can strike in contract negotiations, as I would suspect in most government run systems around the world.

Single-pay IS a financing mechanism that controls prices/costs – just what we need.

Steve2
Guest
Steve2

1) I have doubts about the Oklahoma Surgery Center despite the fawning reviews by libertarians, most of whom arent in the medical field, few who understand medicine,and none of whom have seen their books. I have looked at their prices and they are not that much different than those at our hospital. Not that much different than some other surgicenters I know. Yes, they save billing costs by not taking insurance. Great. Most people have insurance so this really isn’t a generalizable model. Plus, the people I know in the industry dispute the “no added” costs claim. In short, if… Read more »

zamishka
Guest
zamishka

1&3) Healthcare has a general transparency problem. I suspect that at least part of this is because the debate has been so suffocatingly focused on the issue of private vs public financing that it sidelines all other important issues. The status quo of how insurers design their contracts reinforces the secrecy about prices and safety, so I doubt there can be any meaningful progress on the cost/quality problem until the financing debate is concluded. 5) You are correct that there are models and I personally favor a mixed market solution. The French system is highly underappreciated in the model debate… Read more »

Steve2
Guest
Steve2

Just curious without trying to be mean. Have you ever looked at the books of a surgicenter? Any idea what costs are for such a place? What they need to generate a return? I have, for several of them. It is my sense that not many people who write about health care policy and economics have very little first hand experience with retail medicine. What sounds good to an academic, sometimes, doesn’t make sense to those of us in the trade who see the real numbers. More broadly, while I like the idea of transparency, I don’t see much evidence… Read more »