Wednesday, July 29, 2009

The Current Health Care System is not a Market

By Justin Williams, 07/29/2009, Reposted from Barstool Economist at

While the two parties falsely stage a contrived debate on the “desirable” degree of socialized medicine in the market place and what should and shouldn’t be taxed, one myth that is not being discussed in the news must be busted:

The current health care system is not a market.

A competitive market consists of various buyers and sellers voluntarily exchanging goods and services within a price system, either with currency or other goods. While health care has many buyers, it has few sellers, and no price system.

The lack of prices in any industry throws market coordination off, which creates many of the problems America is facing today. In a pure competitive market-based system, buyers and sellers, working tandem, would not be faced with rising costs and lower coverage.

Simply put, if the prices were too high for buyers to afford, sellers would do everything in their power to lower their prices so that they would not go bankrupt.

Instead, under today’s non-competition price-fixing system, health care expenses keep going up causing insurance companies to up their rates. This is when the last remnants of a market kicks in and more costs taken out of employees checks translates into less people willing to pay.

But isn’t this a price? No, it is one fixed amount taken out of the employee’s check every month regardless of whether he or she goes to the doctor every day of the month, or not at all.

And for most private health insurance plans, when the person visits the doctor they only pay a fixed co-pay (usually $10 or $20) regardless of how many tests they did or did not have.

This would be like joining grocery store with a flat membership fee in which the person had to pay the same price whether they were buying a Thanksgiving feast or running in to grab a gallon of milk. For obvious reasons, no grocery store has ever set up their business model this way.

This is because customers would only buy the most expensive items. If the choice were between filet mignon and scrapple as your meat for dinner and cost was not an option, the choice would be fairly obvious.

In fact, since the cost is not associated with the item at all, there is only an incentive for the producers to raise the price on the grocer. This slowly trickles into higher membership rates, meaning less people will be members as expenditures will rise higher than consumer price index (see below). In the case of health care, this means fewer people being able to afford insurance, while those who do have it live with a false sense of security, blithely unaware that the roof will inevitably fall.

So we know why over the past 60 years, the third-party-payer system has perverted the health care market place. But the question remains, how did we get to this point?

After World War II, President Franklin Roosevelt worried that the transition of millions of soldiers back to the workforce would drive down current wages. So Roosevelt froze wages.

This put business owners in a position where they could not attract better skilled labor with more money. So, of course, they offered benefits, and third-party pay was born. After this, it would be near impossible for businesses to stop offering employees those benefits and go back to a true market price system.

Without prices, there is no market information. And with flat rates for everything, there is only one preference, which equals higher costs.

The Republicans have not offered any solutions and will lose the debate if they stick with the status quo argument. The status quo and the Democratic plan to socialize health care both lack the necessary price mechanism to make health care affordable and viable for everyone.

It’s simple, the constant increase in costs is due to the lack of a market price structure. And if the situation, whether the statue quo or the proposed plan, continues to lack market price competition then health care costs will continue to rise. And if businesses cannot reduce costs, they will be forced to reduce quality.

In short, the Obama health care scheme offers, the worst of both worlds: higher costs and lower quality. Not to mention euthanasia for those sentenced to the rationing rooms.

Justin Williams is the Senior Commentary Editor of ALG News Bureau and as always accepts any comments or questions for the Barstool Economist at

Comment: Great article! It is so obvious that we do not have a price system for health care. If someone else pays the bill, then no one cares what something cost. Those who are defending the status quo are on the losing end of this health care debate. We will move toward socialism or move toward markets. The status quo is not sustainable. Those who are defending the status quo and ignoring the problems with the American system of healthcare and pretending everything is OK are doing us a disservice.

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  1. I must admit, coming from the other side of the aisle, I also think this is a very good article. The current health care system is a big problem. The question becomes, how do we best fix it.

    This is where I question what seems to be an underlying assumption. It seems like Mr. Williams believes that market forces are always the best way to address a problem. I am not sure I believe that.

    While competition is generally a good thing, and profits is generally a good way of determining the success of the competition, I believe that there are other considerations.

    Our schools, libraries, and roads are generally public services provided by the government. The ability to send your child to a good school should not be limited to those who can most afford it. The ability to access good books should not be limited only to those who can most afford it. The ability to drive to the office, or to town hall should not be limited only to those who can most afford it. We, as a country, as well as individuals are better off if everyone has a fair chance to get a better education, drive on public roads to better jobs and get to town hall to work on forming a better government.

    Likewise, I believe we, as a country, as well as individuals, are all better off when a certain amount of public health is available. If we can help the less fortunate avoid catching and spreading dangerous diseases, we all are safer.

    So, how do we balance the need to promote the public good for everyone with advantages of competitive systems? I don't have a good answer, but some of it, I am sure, has to do with the need for checks and balances; the sort of checks and balances that have helped our country survive and thrive for so many years.

    Unfortunately, we do not have such checks and balances on our medical system today. The medical industry is spending millions of dollars a day lobbying to make sure that we do not get a more competitive system, a system with more checks and balances; and there is no check or balance on their spending money from our premiums this way.

    So, what can we, as Democrats and Republicans working together come up with for a better health care system? I would love to hear your thoughts and the thoughts of some of your other readers.

  2. Thanks Aldon for that thoughtful comment. I certainly accept that there is a government roll in public health and I accept that we must provide a certain level of care for those who can't provide for themselves. I am not an absolutist libertarian on these issues. However, I believe the market can do most things better than government, but I do concede the market is not working in health care. There are things we could do to strengthen the market: tax employee health care benefits, give the tax deduction for health insurance to the individual, remove the prohibitions against interstate commerce in health insurance, tort reform. And there are other market models for providing health care than the exclusive fee for service model. I oppose the public option because it would, I fear, lead to the only option. Non-profit health co-ops however might be a good idea. I oppose the employee mandate because I believe we should be moving in the opposite direction of separating health care from employment. My employer should no more pay my health insurance than he should my car insurance. While I don’t like it, I think some sort of requirement that individuals be required to purchase insurance or penalized for not doing so may be necessary. I have addressed some of these issues on other post about health care and will address others in future post.

  3. Rod,

    As is often the case, we may disagree on certain aspects of how to tackle various issues, but I appreciate your willingness to think through and talk about the pros and cons of tackling assorted issues.

    I like a lot of the ideas you've suggested in your comment. However, I disagree on some of them. In particular, I do not believe that a public option would become the only option. Public schools certainly haven't become the only schools, and public libraries certainly haven't become the only place to get books.

    I have posted a copy of my original comment on my blog with a pointer to the discussion we are having here. I hope it draws more people into thinking more seriously about how to address the health care issues in our country.


  4. Hey, Aldon!

    Basically another way to look at it is whether or not health care is a public good or a private good.

    A public good, like a school, means society benefits more by having as many people as possible educated. Therefore cost is taken out of the equation so that people can't decide they would rather buy a car than send their kid to school... because the spillover effect of a bunch of new cars and uneducated, unemployable young adults would be a mess.

    Health care can also be looked upon as a public good. The issue with cost isn't all the tests as much as it is the people who don't get basic checkups or have that serious conversation to quit smoking, lose weight, cut out the sugar, etc. They think they can't "afford" to go to the doctor, or their cholesterol meds, or fresh vegetables... and then they end up in the emergency room with a heart attack, stoke, diabetic coma... Blind, feet amputated, disabled, unable to work to support themselves.

    So, does society benefit more by making sure people are healthy and productive? I think so.

    Therefore making sure all our citizens get their blood pressure, etc checked regularly and have that serious discussion with an authoritative figure in a white coat will save us a lot in the long run.

    Unfortunately, in our political system, the long run can take a very long time.