Healthcare is No Free Market
March 15, 2010 
7 Comments
“Our health care system is in need of major reform, but we need to go more in the direction of free enterprise and free market principles,” said Congressman Jimmy Duncan (R-TN). Tea party supporters, vocal opponents of what they call “ObamaCare”, echo the same sentiment: health care should be a free market. Democrats have taken the route of explaining why government solutions might be beneficial, but this skirts the underlying issue: healthcare is not a free market to begin with. The current system of medical care and more specifically insurance creates a system which violates a number of contingencies for the application of free-market principles.
If everyone could pay for their healthcare out of pocket, free-market principles would indeed apply. But the problem is really the double-edged nature of insurance—while it helps shield policyholders from unexpected cost, it also eliminates any incentive to use discretion in seeking medical care. Such perverse incentives along with imperfect information are problems which free-market theory assumes do not exist and is therefore unable to alleviate.
A key assumption of free-market theory is that perfect information exists; that is that all market participants have all the information they require to accurately value goods and services. When this is not available, the problem is described as one of imperfect information. More specifically in the case of healthcare, asymmetric information, meaning that insurance applicants often know far more about their health than the companies selling the policy, drives prices higher for everyone. There is an obvious incentive to hide potential pre-existing conditions—for most people the lower premium is well worth the remote legal risk. How does this affect honest applicants? Health insurers cannot know whether you are honest or not and to compensate for those who understate their health problems they must charge everyone the same rate. Whether you like it or not, you are paying for any gains made by those who withhold information on their applications.
When this sort of problem manifested itself in the used car market, George Akerlof introduced the concept of a “Lemon market” in 1970. The idea was that because used car buyers do not know whether a used car is good or a “lemon” (somehow defective), they will deem the quality of the car to be somewhere in between and expect to pay an average price. Good car sellers will not be able to find a buyer at a high enough price and will withdraw their car, leaving lemons to flood the market.
The same issue of lemon cars in the used market presents itself in healthcare
When it comes to healthcare, the “lemons” are those who have hidden information from insurers. The victims are the healthy individuals who, given the inflated cost of insuring themselves, will choose not to. While many still choose to buy insurance even when information asymmetry fixes prices higher than they should be, others will not be able to afford insurance at the incorrect price the market has established. Lemons in the car market were driven out by federal and state legislation which protects purchasers of used vehicles. Hidden information problems in healthcare could be solved one of two ways, the second not unlike the Lemon Law legislation. We could supplant the market; government provided healthcare sidesteps the issue of high-risk applicants concealing medical history because they have no incentive to do so. But asymmetric information issues can also be combated by creating centralized, government-administered heath records and by providing better assistance to those who would have high premiums and would be likely to fudge the truth when applying for insurance. Government can either play a big role by superseding insurers or a small one by aiding them. It cannot however, do nothing. Imperfect information represents a failure of markets to provide the best outcome not only for everyone, but for anyone at all, and government must intervene to correct failures of the free market.
Millions of insurance applicants in the U.S. are turned away for pre-existing conditions
Maybe the reason why so many people feel compelled to withhold information from insurers is the strict stance against pre-existing conditions insurance companies have taken. Under the current insurance system, it is logical that people with pre-existing health risks should have to pay higher premiums on their insurance. Those who represent a greater risk to the liability pool must, by the nature of insurance, contribute more to that pool. Whether this is morally right or even desirable is beside the point; left in private hands, insurers and policyholders will seek the best short-term outcome for themselves, and that will never involve accepting financial responsibility for others. But where the insurance industry fails to adhere to market logic is in its rejection of risky applicants. Regardless of how severe the risk they present might be, surely there is some price at which private insurers would be willing to cover these applicants? Insurance could remain mostly privately operated if insurers could ascribe some sort of price to risk, an additional 10% onto your premium for low risk pre-existing conditions like asthma, perhaps. Maybe private coverage could do better than the woefully deficient, overpriced high-risk pools offered by 35 U.S. states in insuring those who are likely to need it. But at least for now we’ll never know, as risky patients hang in limbo because the free market cannot determine a price on its own.
Frequency of CT and MRI scans has increased dramatically in the past decade
It’s not those who are costly to insure though that present the greatest challenge to the healthcare system. Insurance can often create perverse incentives, negatively affecting an insured individual’s behavior by reducing his responsibility for his actions. Take the use of magnetic resonance imaging (MRIs), for example. The number of MRIs per patient tripled from 1997 to 2006, according to a 2008 study published in Health Affairs. The study confirmed speculation that overuse of MRIs was unnecessarily driving up healthcare costs. The phenomenon holds true for a host of other examples. You are far more likely to see your doctor for a cold, a dermatologist for an innocuous rash, or a chiropractor for temporary muscle tightness when the cost of such actions is dramatically reduced by medical coverage. Although co-payments and deductibles help to check medical superfluities, they certainly do not eliminate them. Regardless of the real cost of a copayment, the feeling that the majority of the cost of a procedure will be covered by an insurer may make it seem like a great deal, even when it’s wholly unnecessary. Such perverse incentives may help individuals be minutely healthier, but they also create inefficiencies and inflate medical costs. Free market thought assumes that incentives, the driving force behind human decision making, will generate the most efficient outcome. But the moral hazard of health insurance incentives creates just the opposite. It allows us more medical coverage than we need at the expense of those who truly need that coverage, but cannot afford it.
Healthcare should not become a government enterprise, at least not immediately. Private ownership often is more efficient and productive than government management and sometimes its thriftiness can pay off. Advocates for the immediate government takeover of the entire healthcare system are as deluded as those who still claim it is a free market and should remain so. There is no sense to adopting dogmatic reform which forces the nation to admit that either fully private or fully public healthcare is the only feasible system. But healthcare has clearly expanded to a point where it no longer acts like a market in many respects and in those areas legislation or partial government management are required to correct market failures. The “free enterprise and free market principles” which Congressman Duncan supports in many cases simply do not exist. While free markets often produce efficient outcomes, markets can sometimes fail to accomplish what we want them to. In those cases, government is the solution to problems the market cannot solve.
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The real problem with ‘pre-existing’ conditions and the way the insurance companies administer this perverted concept is that it often has absolutely nothing to do with the ‘risk’ involved with an individual and what they should or should not be paying for their health care; it relates to one thing: the possibility of the denial of care somewhere down the road. Someone can be denied service (until the kick in of the HCR bill’s ending of the pre-existing condition component for adults in 2012) based on information that has not been disclosed unintentionally – not for any malicious means, just because they thought it wasn’t an important issue to disclose. For example: women have been denied care for not having disclosed that they had ‘acne’ as teenagers – then, when diagnosed with breast cancer they are told it could be ‘pre-existing’ because of the failure to disclose the acne. ACNE!
What about cold sores? Did you know that the pathogen that causes a cold sore is related to the Herpes Simplex virus? Does everyone who ever had a cold sore declare it on their health insurance as a ‘past illness’? They better – otherwise, they have LIED and could be dumped for failure to disclose. Period.
You see, the health insurance companies are NOT in the business of caring for people, they are in the business of making money from the suffering of others – something that is diametrically opposed to the good of those they are ostensibly serving. The idea that people will not use a service because of the idea that they are ‘saving’ money is patently ridiculous. A person uses a service when it is needed – and should have access to those services when they are needed, not according to when the funds are available. That is called rationing, something the opponents of the HCR accused the Canadian system of going through, which is another fiction perpetuated by the right wing that wants the insurance industry to continue to rake in their obscene profits while paying out the least amount possible in ‘benefits’.
The fact that part of the HCR bill had to deal with the amount of money that insurance companies pay out in actual health care costs is, in a word, obscene. The system is not only sick, it is diseased, infected, necrotic and gangrenous – it is time to resect the dead tissues (the insurance industry) and replace it with something that limits the amount spent on administration (Medicare spends less than 5% on administrative costs) and offers all Americans an opportunity to access the health care they need.
The idea of a ‘public option’ only goes half-way: taking the money that is being wasted by the insurance industry (the whole idea of ‘health industry’ is pathetic – profiting from the suffering of others – oh, how noble we have become as a ‘civilized society’) and put into a public health service that truly serves the public. I don’t know what is so difficult about this idea – it has been working in most European countries, the UK, Canada, New Zealand and Australia for decades – all of which have higher life expectancies than the United States … and spend less on health care, per capita, than the United States.
If the age thing doesn’t impress you, the money should. You can spend less and get better results – the only caveat being this: some fat cats are not going to be getting rich off of the sufferings of the people. Is that such a bad thing? Yes, I suppose that is absolutely unforgivable …. Ultimately, America will get the system it deserves.
I am commenting here on the US Healthcare market of which I know very little, however I can definitly say that it is provides quality health care at most places compared to a lot of other 3rd world countries. The government is already doing its bit by providing mediclaims, medical insurance and other benefits for the citizens to be able to afford health care benefits. I do believe that good health starts from within each of us, of course excluding health issues where I have no control upon. For other issues having a free health care system is a pure over use of public funds..over weight, smoking, drugs definitly to be excluded. Rest this is a very debatable subject.
Oh no, there’s NO connection between health care and amnesty…please see this short Washington Times article:
http://www.washingtontimes.com/news/2009/sep/18/obama-ties-immigration-to-health-care-battle/
Perhaps it’s that you don’t pay taxes or live in Texas. Perhaps there aren’t illegals everywhere sucking off the government and degrading society. Perhaps…
There’s certainly some overlap between the issues of healthcare and amnesty for illegal immigrants. That’s not what I said. There is no connection between the healthcare reform bill President Obama just signed and amnesty however. It does not grant coverage for those living here illegally.
The Washington Times article you linked to brings up a separate point, one on which you and President Obama clearly disagree. As I see it, there are two distinct camps on illegal alien amnesty. The first group, of which President Obama is a member, feels that whether we like it or not, there are a lot of illegal immigrants in our country. President Obama feels the best solution to that problem is to try to convert these immigrants into productive taxpayers, albeit at an initial cost to taxpayers. His hope is that if we give illegal immigrants who are already here enough incentive to declare themselves (amnesty plus full citizenship), the amount of taxable income that will no longer transacted under the table will largely offset if not eliminate the cost of offering citizenship benefits to the illegal immigrant population.
The second camp, of which I think you’d agree that you are a member, says that we cannot acknowledge any legitimacy or entitlement on the part of illegal immigrants. That would supposedly create a tantalizing incentive for more impoverished immigrants to enter the country illegally and leech money from government programs without contributing to the tax pool.
I will not place myself on either side of the argument, since that is beside the point. The fact is, the immigration debate is a separate one. You are correct in saying that, if illegal immigrants were granted amnesty, the recently passed healthcare bill would cover them. However, the bill does not intend to cover illegal immigrants, only citizens of the United States. Based on your viewpoints, you should vociferously oppose an illegal immigrant amnesty bill if one is proposed. But given that the only government services still provided to illegal immigrants are emergency medical care and K-12 education, I have trouble seeing how this bill will support illegal immigrants on its own.
Also, it’s probably best not to cite the Washington Times as a source. It’s funded by a church and known for its severe conservative bent. There’s not any glaring problems with the article you linked to, but you definitely would not want to cite a Washington Times opinion piece.
Comparing health insurance companies’ management of health care to the sale of cars is distinctly like comparing apples and oranges. Health care is a necessity for people, a car is not. In no way can a system that is built on for profit private enterprise being the keeper of the gateway to health ever be considered economical. The current 30-40% rise in premiums in many states this past year alone proves this. The right wing meme that government based single payer is going to be more expensive and less efficient than private enterprise is a fallacy that flies in the face of government managed health care the world over. If Japan, Canada, Germany and France can do it and at less cost per person than our system affords us, there is no reason we cannot do it and cover all the people not just the financially well off.
I think we’re in agreement here that there needs to be some sort of government run healthcare program. The reason I advocate gradualism is because a bigger bill won’t go through. I’m sorry to see that the public option won’t be passing.
With regard to healthcare to cars, the comparison is absolutely apples to oranges. They are mostly dissimilar. But the lemon law originated with cars so I had to explain its origins. It’s been widely applied to other products and can surely offer insight into healthcare.