Thursday, October 25, 2012

Why the Free Market Doesn't Work For Health Care

From the New Yorker:

This is an appealing vision. In most areas of the economy, free-market principles insure that products and services keep improving, and that consumers get better and better deals. But the free market, though it may be the best way of allocating new TVs and cars, falters when it comes to paying for bypass surgery or chemotherapy. The reasons for this were established nearly fifty years ago, by the economist Kenneth Arrow, in a classic article entitled “Uncertainty and the Welfare Economics of Medical Care.” Arrow showed that health care is distinctive in ways that limit the power of the market. Because people don’t have the expertise to evaluate doctors, hospitals, or treatments, it’s hard for them to comparison-shop. Because they can’t pay for major care out of pocket, they must rely on insurance, thereby often losing the final say in what to buy or how much to spend. More fundamentally, markets work only when consumers have the power to say no if the price isn’t right. Yet it’s very hard for people to say no in the case of things like end-of-life care or brain surgery.

Let's look at the emboldened points in a bit more detail.  I'll use my recent hip surgery as an example.

1.) Lack of expertise to evaluate.  I saw three doctors about my hips,  with the second two being members of the same practice.  The first doctor was a member of my network -- which is why I called him -- and he had all the bedside manner of an SS Trooper.  So, I asked my wife's doctor to make a recommendation to another practice.  The first doctor was very nice, but he recommended a second doctor because my problem was really more in the second doctor's area of expertise.  In all of these examples, I was really going with personality; I have absolutely no ability to evaluate any of their skill sets.  And I still don't. 
2.) At no point did I ever ask for a price from any of the surgeons.  And the reason is it was covered (mostly) by insurance.  I assumed it would cost a ton (it does).  And I also know I'm responsible for a deductible.  But, overall, my out of pocket expense is a small part of the overall cost. 
3.) I did not have the ability to say no.  OK -- I could have and faced the possibility of a continually deteriorating condition that would eventually leave me crippled.  But, that really wasn't an option.  In short, I had to have the service -- like everybody else in my position.
The ability to say no is crucial to keeping prices down as it exerts a downward pressure on prices by forcing those who provide goods or services to not charge too much for their services as doing so would drive people out of the market.  As such, point number three is crucial and noticeably absent from the health care market.  The lack of an ability to say no places service providers in a far more advantageous negotiating position -- one more akin to an oligopoly rather than a pure market environment.

This is just a short example the highlights the basic problems of using the free market to contain health care costs.  And, for my money, it's really number 3 -- the fact that health care has to be purchased, placing all the bargaining power in the providers hands -- that really highlights the fundamental problem with this approach.