Vijay
K. Mathur
Conservative politicians and
others in and out of government think of health care as a homogeneous product
in the market. Usually a homogeneous product, or products that are close
substitutes, define an industry, synonymous with a market. For example, the
automobile industry sells automobiles, though of different brands. In health care
we have a market of health care providers, such as hospitals and clinics of
various types, health insurance market and a market for pharmaceutical drugs.
On the consumer side we have
consumer patients. However, consumers are also providers of their own health
care, as when they control their diet and engage in physical activity. In
addition, out of six major government (third party) programs, Medicare and
Medicaid, the biggest programs, covered slightly more than one-third of the
population in 2015.
The myth, especially among GOP
conservatives, is that there is a high degree of free market competition where
the “law of one price” prevails in markets for hospitals, clinics, insurance
industry and pharmaceutical drugs. Most GOP politicians in Congress have
consistently propagated the free market myth. It was one of the centerpieces of
the legislative bill proposed and withdrawn by Rep. Paul Ryan in the House of
Representatives.
Politicians tend to prime
their constituents with this falsehood that overtakes, among many Americans,
their own conscious reasoning in deciding the real economic status of the
current health care system. Professor and Nobel Laureate Daniel Kahneman states
in his book, Thinking, Fast and Slow,
“Studies of priming effect have yielded discoveries that threaten our self
image as conscious and autonomous authors of our judgments and our choice.”
Based on his experimental research Professor Kahneman further argues that,
“A reliable way to make people believe in falsehoods is frequent
repetition, because familiarity is not distinguished from falsehood.”
The facts are that none of the
component markets in health care are free in the sense outlined above.
Providers, especially investor owned, are monopolistic. They engage in non-price
competition in heterogeneous output of services and in inducing demand, since
insurance coverage and government programs make consumers less sensitive to
prices. Prices of medical services and drugs (see Steven Brill report, “Bitter Pill”, Time,
March 4, 2013) have very large variability, which tends to increase insurance
premiums. In addition, most small towns have a very limited choice of hospitals
or clinics, with a limited choice of services. There is locational disparity in
the number of providers of medical care, hence locational monopolies in small
towns. However, contrary to other markets, in the health care providers’ market
even the large number does not bring down the cost, due to increased
competition for and hence wages of physicians. Medical drugs are subject to
import controls and patent protection, thus contributing to monopoly power and
price escalation.
Consumers’ choices of
hospitals and/or clinics are governed by choices of physicians. Since there is
asymmetrical information problem between providers and patients, physicians are
supposed to represent the consumer patient to fill the information gap.
However, they are influenced by monetary and non-monetary incentives provided
by hospitals and drug companies in their quest for maximizing revenues and /or
profits. The study by Jeffrey and Joshua Gottlieb, American Economic Review,
April 2014, finds that physicians’ supply of health care does significantly
respond to financial incentives. Medicare is involved in funding projects to
facilitate information flow between doctors and patents.
The insurance industry suffers
from moral hazard problem, one
of the causes of market failure, when
patients’ incentive to take care of their health decreases when an insurance
company pays most of the cost of care. However, this problem is partly remedied
by increasing deductions and co-pays in such instances. The industry is also
implementing incentives in providing preventive health care mandated by the Affordable Care Act (ACT), such as paying for obesity
prevention strategies and for gym services.
Kaiser Family Foundation reported in 2010 that in the large group insurance market, the
insurance industry is monopolistic, according to Herfindahl-Hirschman Market Share Index.
Insurance companies also face adverse selection problem when they end up with mostly
unhealthy people in the pool. It increases premiums, thus further discouraging
healthy people to buy insurance, especially when emergency care is guaranteed.
To keep premiums low, the insurance pool must have a mix of young and old, and
healthy and unhealthy people.
Many companies have opted out
of some areas under ACA because they did not have enough healthy people in the
insurance pool to keep premiums low enough to attract such people to buy
insurance. That is the reason for the mandate in the ACA to buy insurance.
Congressional Republicans’ opposition to mandates is indicative of their poor
grasp of the insurance business.
The fact is that ACA mandate
incentives are weak. One probable way to bring down insurance premiums would be
Medicare coverage for all. In such a program all would be required to pay into
the fund according to their ability to pay, Medicare would be allowed to
negotiate drug prices and design payment schemes, as is done now, for providers’
services in the market. Insurance market would be allowed to issue policies
such as Medicare Advantage supplemental insurance.
Another possible course of
action could be that, rather than reinventing the wheel of health care, they
may try to fix the problems in ACA and incentivize the component markets in
health care to improve on efficiencies and relax import controls on drugs. I
hope that Republicans in the Congress, and policy makers, look at the reality
of markets in health care and do not get swayed by the free market rhetoric.
Our nation’s health crucially depends upon the health of its
people.
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