Why the American Health Care System is a Mess: Perspective from an Ordinary Schlub

When I was an undergraduate, USMA required an introductory course in microeconomics. I can’t say I remember all that much; yadda yadda supply and demand curves, marginal cost vs. marginal revenue, yadda yadda. But one thing I do remember this idea of an ideal market, where it was proven that resources are allocated optimally; I also remember that no real markets are ideal, but the general consensus is that small deviations from ideal result in small inefficiencies, and large deviations result in large inefficiencies.

This whole set of ideas rushed back to mind when I saw a video from Vox about how much having a baby costs (side note: we just had a baby, too!), and more importantly, how hard it is to find out how much it costs before you get the final bill. It also reminded me of health care coverage for me and my family while I was a graduate student; we had only one choice for insurance with a premium that cost more per year than our rent, with a significant deductible, and an insurance company that could not be reached by phone even after they mistakenly drained my bank account the day before our rent was due. Yet, even with all those problems, any other path would have been even more exorbitant and out of reach for a graduate student.

The Vox video is embedded at the bottom of this post, but I want to go a little bit beyond. I don’t know what the exact right policy changes are, the below named problems of the health insurance market that can be seen by a consumer in this market need to be fixed before we start getting rid of the large market inefficiencies. To that end, I’ll suggest a few general policy ideas.

Because I only focused enough in Econ 2001 to do well in class but not enough to remember everything, I leaned on Wikipedia to remind me all the pieces of a perfect market. Briefly, I’ll the parts of the health care/insurance market that SEEM aligned with a perfect market before pointing out the non-ideal aspects.

How the health care market is ideal:

  • A large number of buyers and sellers.
  • Every participant is a price taker (no participant has market power to set prices). You might argue this one, but I would claim that even the biggest of Big Pharma or biggest insurance company doesn’t have anything near monopoly power.
  • Perfect factor mobility, i.e. Doctors and medical equipment/facilities can move to where the demand for care is.
  • Non-increasing returns to scale and no network effects. In the health care context, there’s a limit to the number of patients a single doctor or other provider can see.
  • Homogeneous products. This is iffy, I guess, but fundamentally doctors provide care that is far more similar to each other than, say, cars or furniture.
  • Well defined property rights that determine what may be sold, as well as what rights are conferred on the buyer.

And how it is not:

  • Perfect information: All consumers and producers know all prices of products and utilities each person would get from owning each product. This is first and most obvious on the list, and the one that prompted the Vox video. It’s not just having a baby; I challenge you to find out how much an appendectomy, or even a simple exam or prescription costs without actually having to buy it. You can’t! And how can a consumer shop for the right price if you can’t find it out ahead of time. What’s worse is that even if the hospital could tell you the price, they’re probably not able to tell you the price the insurance company will actually pay for it, nor your responsibility in that bill.
  • No barriers to entry or exit. The American health care system has huge barriers to entry and exit: doctors and other providers pay huge sums for education and licensure. Health care consumers, since they typically rely on employer-based insurance coverage, face the obstacle of having to have a good enough job to get decent coverage. A critical and currently insurmountable barrier is that insurers are not legally allowed to sell insurance outside the borders of the state they are registered in. While there are national health corporations (Blue Cross/Blue Shield and Kaiser Permanente being two examples), if you read the fine print, there are individual corporations for each state, and you can only buy the coverage for the state where you live.
  • Zero transaction costs. Any provider, whether they see 1 patient a year or 10,000, pays malpractice insurance; the multi-million dollar claims on this insurance make the premiums borderline exorbitant.
  • Profit maximization of sellers. Many (maybe most?) health providers are non-profits to begin with; even if you asked doctors in for-profit hospitals whether they were trying to maximize profit, I’m sure they would blanch.
  • Rational buyers: Buyers make all trades that increase their economic utility and make no trades that do not increase their utility. This element could go in either category; patients by and large can make good decisions about the health care they consume if presented with the right incentives, but I also know how irrational people can be when they are presented with certain circumstances.
  • No externalities—Costs or benefits of an activity do not affect third parties. This criteria also excludes any government intervention. Obviously based on most of the previous points I’ve mentioned, there are externalities in this market.

These deficiencies naturally point to a handful of policies that would actually help:

  • Require providers to make an itemized cost list available to patients BEFORE they select a provider or request care; and insurers must make it easy to see any deductible or cost share for this list. This would allow people to shop for care and make informed decisions. Require providers to charge those who pay cash for medical services be charged at the lowest rate negotiated by insurance companies, so that the price charged truly reflects the price of service.
  • Create “Yelp for doctors” that makes it easy for patients to register feedback and other patients to see that feedback, as well as some kind of quality rating of various doctors. Granted, measuring doctor quality is an inexact science at best, but there IS useful information to be had.
  • Allow patients to own their medical data and easily port it from provider to provider, as well as read and reference it themselves. This allows people to, if they choose, make themselves better informed to make the right decisions.
  • Everybody pays something for care, maybe means-adjusted. Even a nominal fee of a few dollars would provide incentive for people to consider whether it’s worthwhile to consume healthcare.
  • Give patients the option to cap potential malpractice claims in exchange for reduced cost.
  • Allow national, or at least regional competition of healthcare providers.
  • Tax healthcare benefits to untie health insurance. While I understand that health insurance is not required to be employer based, it almost always is so, because of the tax benefits, which makes the non-employer-based market tiny. New taxes are never popular, so this could be possibly offset by relief in marginal rates or a higher standard deduction, for example.

Finally, and I realize these kind of go against my free-market tendencies, but

  • emergency medical services should be fully government-funded, if not government-run. I say this because services to save life, limb, or eyesight are time-critical, cannot be “shopped around” and a benefit afforded to all people through a basic moral obligation. This is a life-saving service, same as the police or firefighters, and the immense cost of an ambulance and ER stay needs to be out of the equation when somebody needs to call 911; to keep a cap on people abusing the free service, people who frivolously call an ambulance could be subject to the justice system, same as those who call in fake crimes or fires. Perhaps this government service could be a uniformed service, with those who serve accorded the honors given to policemen and firefighters and soldiers.
  • basic pre-natal care, childbirth, and pediatric care to say, age 12, should be free. I don’t think that there is a right to health care for kids, but a) we should minimize the damage done to a person’s whole life by their parents’ inability to provide for them, and b) the investment in childhood wellness is a productivity boost and cost savings as those people are healthier as they age.

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