These questions were inspired by a comment over at OTB. What would a free market in healthcare look like? What would a free market in healthcare insurance look like?
I think I have a pretty good idea and, based on my understanding, I don’t approve of a free market in healthcare and I’m skeptical of one in healthcare insurance. However, I want to hear the views of others.
Just for the record I think that we should be considering Pigouvian taxes to deal with the negative externalities of our current non-free market in healthcare.
I’d personally go back to Henry VIII, who first recognized physicians to be a learned profession, chartered the first physician’s school and initiated the twin rules of law that held physicians responsible to provide their services regardless of ability to pay and liable in malpractice for care that fell below the standards set by the physician’s accadamy.
We’ve moved away from these concepts (in all professions) towards the notion that there is a cost for professional services and the public will pay for those who can’t afford it.
But at the core, we still have the notion that healthcare is a licensed profession, with public obligations that are greater than merely those contracted for, which is a product of state action.
In that context it bears mentioning that in the United States the formal code of ethics of the medical profession requires its members to provide their services regardless of ability to pay. Somehow over the years that has come to be interpreted first as accepting Medicaid, then as being affiliated with an institution that accepted Medicaid, quite a distance from a personal professional obligation.
I don’t see the issue with health care insurance markets unless you want to go the insulation route (the route we have now where every little thing is covered). The classic approach to insurance is for large cost events that are rare. Seems to fit. Of course, such health insurance policies would cover the big things leaving the “little things” to be paid out of pocket. And I imagine many would object because such little things could still be on the pricey side.
One problem are pre-existing conditions, and if we had a rational policy towards that end I don’t think we’d be spending what we are now. That is, we could probably subsidize the health care for such people.
I guess I’d be curious as to what your objections are?
Nice incentive problem right there. If I don’t have much in the way of assets or income, why buy insurance even if I could afford some sort of catastrophic insurance policy?
Having now read the comments section at OTB, I think many people want to look to state interference as a first cause of any problems, for at least the possibility that removing the state interference might be the cheapest, most efficient solution.
As I suggested above removing all state interference in healthcare seems put us back at the pre-licensing stage, which would impose these costs: (a) lack of incentive to pursue advanced training to become a physician; and (b) no protection against quasi-monopolistic pricing practices (Mr. Gates, you need by-pass surgery? Let’s see your checkbook)
Why would Mr. Gates be stuck with that doctor? Why couldn’t he go get a second opinion?
Cause Mr. Gates is afraid he might die waiting for a second opinion. Besides, if the doc is willing to charge that much, he must be good.
Or, said another way, healthcare is a Veblen good.
@Steve V
“One problem are pre-existing conditions, and if we had a rational policy towards that end I don’t think we’d be spending what we are now. That is, we could probably subsidize the health care for such people.”
Don’t we have that now in Medicare? I mean, being aged, and all that entails, is a pre-existing condition, no? In my own, case my chronic health problems, still so far minor (knock on wood), didn’t show up until I was in my 60s. I’m pretty sure that if I tried to get insured in the individual market, I’d be turned down.
Really, with that much money he can’t get a speedy second opinion?
You’re kidding right? I’m rich so I want a triple by-pass? And the guy who is even richer he wants a quadruple by-pass? I’m thinking…mmmm…no.
And the price might be acting as a signal of quality of the health care practitioner. So again….no, or at least there is a competing hypothesis so data please.
For example, one example at the above link is a bottle of Louis Roederer Cristal. It is not uncommon for those who don’t know much about wine to look at price as an indicator of quality, when in reality quality and price are not necessarily correlated.
No. Medicare subsidizes people over the age of 65 no matter what their health status and subsidizes all consumption of health care or at least a majority of such consumption. Further, it has bad incentives built in. Why bother saving for paying health care costs in the future? Why worry about making wise health decisions? I’d even argue it entails overuse of health care resources. For example, if a particular treatment can be treated via drugs or surgery why not look to the least costly?
No, I don’t think old age itself qualifies as a pre-existing condition.
Quite prossibly if you have certain conditions. Once you have them insurance is no longer possible. At that point it is question of subsidies….welfare/transfer payments, when you get right down to it.
“No, I don’t think old age itself qualifies as a pre-existing condition.”
I was being somewhat rhetorical there, but I’d guess that, as a class, those in the 60+ cohort have a great number of health problems than those in the younger cohorts.
It also might be that even if healthcare isn’t a Veblen good that it operates as a Veblen good. While it might be true that you won’t get a second triple bypass just because it’s expensive, it is also indubitably true that, as countries become wealthier, they spend more on healthcare.
I think it might be because people are buying something different than what it is they are trying to buy. People buy healthcare but only the pathological few really want it.
What people want is health (as long as it’s not too inconvenient) and they purchase healthcare as a means to that end.
That is a normal good.
“Really, with that much money he can’t get a speedy second opinion?”
C’mon Steve, healthcare has at least three or four features that defy the rational market thesis:
(1) the patient may be incapacitated or otherwise incapable of knowing consent;
(2) the patient may not understand the service options, which themselves require the specialized knowledge of medical education;
(3) the services may be required on an exigency basis, rejecting the notion of alternative comparisons and time for journeying to a second physician; and
(4) the services can be literally the difference between life and death, or healthy years of life.
This is why the state needs to interfere with special rules to keep, . . .well in my view, to keep doctors from being slain, but less cynically to provide some non-private market mechanism to maximize the outcome from a difficult contractual relation.
Not buying it. I don’t think this is going to lead to an irrational market. At least not anymore than our current system.
For example, my great grandfather became ill and was put on a machine to breath for him. He never really was aware enough to give consent. Now, in his case my grandmother had his will to go by and she decided that prolonging treatment was not what he wanted. But there are plenty of cases where the family says, “Do whatever you can for him,” and the hospital does even though the end result is going to be the same: death. In the latter case, tens of thousands if not hundreds of thousands of dollars are spent. And to be quite blunt, why should they worry about that? It isn’t like they’ll have to pay that money.
Would a market reproduce the second kind of outcome? I’m doubtful that it would become more common.
And this is why you’ll always have a runaway cost problem. France has it, England has it, Germany has it, Canada has it, we have it. The countries that don’t are the exception, not the norm. No politician is ever going to pass a bill that is going to let Grandma die. Never. Of course, eventually the trend wont be sustained…and then things will get really ugly.
1) I notice no one describes a free market approach.
2) As someone who has to sit down with people and talk with them about major health care decisions, they are often far from rational. It is mostly people in their 50s or older. When they are younger, they are incredibly emotional as a rule. I seldom see the well informed, rational types that write on blogs.
Steve
I think Boomers should agree to die voluntarily once we become too expensive. We take a pledge to allow ourselves to be euthanized once our one-year Medicare expenses reach a given amount at a given age. So let’s say a 65 year old can spend up to a half million max, a 75 year old only gets to spend 250k, and if you’re 85 you max out at 100 bucks.
It’s really the least we can do for the Millennials.
PD –
“C’mon Steve, healthcare has at least three or four features that defy the rational market thesis:” ect etc
I think you’ve fallen into the classic red herring trap, confusing treatment issues with insurance issues.
Its absurd to say the insurance business fails because a patient, lying on a bed wondering whether to do a stent or go to bypass, is too emotional or ill informed.
Would you argue that the homeowners insurance business is busted because when some guy’s house is on fire he doesn’t know whether just the garage will burn, or the whole house? “How much water you gonna pour on, Mr Fireman?? Will the insurance company pay??” Its ludicrous.
Insurance decisions can and should be made in quiet, thoughtful and pre-emptive moments, with the assistance of experts (medical and insurance), and taking into consideration all the factors anyone would make with any important decision.
I would argue that any sane person insure against a wide array of catastrophic events: cancer, heart disease, chronic diseases like diabetes, stroke or other disabling events, sudden death (life insurance) etc. Rationale people can do that. Then they can decide how much “routine” care they want to insure. That can also be done rationally.
What can’t be done – and the central fault of our current system, is to insure ALL costs. That might work for an individual (the lottery winner – sort of, since they are the sick one), but it won’t work for the entire population – by definition.
But please, let’s not invoke the horror of ER room or “you’ve got cancer” decisons in the name of potential insurance market failures. If you are not already insured by the time that moment comes………..you are the lame wildabeast on the plains that the lions call “supper.” That one will get me in trouble.) But the argument is simply ridiculous on its face.
“I think Boomers should agree to die voluntarily once we become too expensive.”
I’m with you Michael, and I appreciate and am proud that you have offered up yourself as a beta site. I look forward to your public announcement, with President Obama and Nancy Pelosi, absolutely beaming, at your side. Now THAT’S leadership.
And as a spry 52 year old, I’m feeling comfortable we can get rid of some of the dead wood until economic conditions improve…….you are a hero.
:->
Drew:
I’m a still reasonably healthy 55. But I have young children. Loud and demanding young children. So I may offer myself up at any moment.
Drew, I’m not sure what I’ve written that invokes insurance matters; I’ve tried to imagine what the healthcare market would have been like centuries ago and identify the government involvement. To sum it up:
1. Government licensing, enforced by shutting down non-licensed businesses and disgorging profits;
2. Government designation of doctors as a “common calling,” which meant that like innkeepers, millwrights and ferrymen, the doctor was legally required to accept all comers and charge a fair price;
3. Government imposition of extra-contractual obligations. For example, the doctor is not free to contract to provide lesser quality services in exchange for lower fees. Doctors also have fiduciary duties to their patients.
To me these are all government interferences in the market, all of which increase costs in exchange for quality.
PD,
Drew’s point is that while the issue of what kind of treatment might be emotional and might be subject to the issues you bring up, health care insurance is not generally so since it is usually bought while you are healthy and in a rational state of mind.
As such you insurance provider would likely be the one to say, “Uhhhmmm sorry, no you can’t just take our clients check book and go have fun.” Similarly when you are unconcious and in need of care, in that case does the patient have insurance? If yes, treat him. If call up the insurance company and say, “This guy is filthy rich we are witholding treatment till he transfers half of his wealth to us”, then the insurance company would be calling the police and having the person arrested on all sorts of criminal counts.
Government licensing is one way of earning economic profits. Unless you argue that the licensing produces an increase in quality that surpasses the deadweight loss and justifies the transfer of wealth from the customers to the license holders. However, I would argue that licensing should be temporary and subject to periodic review/re-licensing.
Are we going to do economics via Thomas Aquinas or are we going to take advantage of the hundreds of years of learning and information that has been acquired on said subject? Just curious.
Only if you get care. Take for example your last one,
If that increases costs of care, which in turn increases the cost of insurance then some people might very rationally say, “No, thanks.” And go without health insurance. As a result they might delay seeking treatment and in the end find themselves worse off than if they had purchased insurance where #3 did not apply.
It is similar to the problem with the FDA. You have an experimental drug that might help Patient X who is suffering from condition Y. Condition Y will kill X, but he has looked everything over and wants to risk taking the experimental drug. He even points out that even if it doesn’t work, his taking it might provide useful data for improving the drug to save others (in public finance this kind of action is known as “dragon slaying”). But the FDA says no. Now that might extend X’s life since the drug might have killed him sooner, but it might have also resulted in X not being saved by the drug.
What is to describe, we already know how markets work. If you can’t pay you don’t get the commodity. However, it should be noted that this is, in part, what insurance is for. It helps people cope with large, often catastrophically expensive, events. Now a purely market based solution has its downsides such as pre-existing conditions and that some people are simply not going to be able to afford health care.
However, by the same token why doesn’t someone describe what the health care market is going to look like when the trend is no longer sustained? I’m thinking it will be unpleasant to put it mildly.