I believe in the free market, and that is precisely why I am for major healthcare reform and the introduction of a public option.
I’ve detailed my argument in this previous post so I will only summarize here. Free markets work because they permit supply to meet demand at a market clearing price. Free markets insure that we spend the fewest resources we can to provide the things that people most desire. This does not work for health care because there is no proper, independent demand curve for health care services. In simple terms, consumers do not know what health care services they want. When demanding health care, consumers only know the outcomes they want.
In health care, as in many other industries, outcomes and services are de-coupled. For the most expensive to treat, most pressing health care needs, doctors cannot know for sure what services will lead to the desired outcomes. The variation across patients and the variability of complicating factors is too great. This gap between services and outcomes is especially large for preventative and diagnostic medicine. The sicker a person is, the greater the immediate risks to their life or particular bodily functions, the clearer the need for intervention. But for long term care — managing risks of heart disease or diabetes, treating cancer — we just don’t know. We don’t know enough about how well any particular treatment, test, or procedure will work to tie it to an outcome with an appropriate price.
The impact of this service-outcome disconnect is most evident in the proliferation of unhealthy behaviors in early and middle life. What, for example, is the appropriate price for a service that sends you a sarcastic, disparaging text message (via your iPhone/Blackberry) every time you try to eat a cheeseburger? Given today’s information, few young people would sign up for this service. But given what they know in 20 years, when many people realize they have heart disease, many might. That is, when people find out later that their desired outcome (long life) is improved by a particular service, they’ll desire it. But there is a good chance that, regardless of how many cheeseburgers one eats, there will be no heart disease. There are too many complicating factors — we just don’t know.
Since we can’t expect the price of health services, particularly for long term outcomes, to be accurate, we can’t expect that a system that uses price to allocate resources and decide outcomes to be efficient. In other words, for the resources people would desire to spend on healthy outcomes, the current system does not maximize health.
The current system performs exactly as we would expect it to perform. It over-allocates resources to services that can be tied directly to outcomes, specifically, drugs and surgeries, particularly close to the end of life when consequences to inaction are imminent. These are the services for which there is robust demand. At the same time, suppliers spend resources trying to avoid these high demand customers — the sick and the elderly — in favor of low demand customers, i..e customers for whom no services are required to meet their desired outcome — the young and the healthy.
A crucial source of efficiency is lost in this shuffle. We don’t spend enough on making young people healthy and this makes our old people sicker. Or, in other words, we could have a lower cost, higher outcome system if we found a way to get young people to take better care of themselves.
Now here is the trick. In whose interest is it to make this happen? Insurance companies? No. As described above, this is fundamentally a demand side problem. An insurance company cannot make more money off of healthier young people unless it can capture their health expenditures over their entire lifetime. That is, if the demand curve was for a total lifetime expenditure, insurance companies could profit by making you healthy now so that you were healthier later. What about employers? No. Same problem. Only if the health plan is part of a vested pension would the company save money if people were healthy after they retired. What about the individual? This is the original point of the critique. The individual lacks the information necessary to make an appropriate decision.
As I see it, there are only two entities that could conceivably gain from addressing this inefficiency:
The Government
The Family
These institutions can gain because they are the only institutions that stay the same for people throughout their entire life-span. There are exceptions, of course, but for the most part people remain in the same country their whole lives, and people remain in close bonds with their parents and children their whole lives. Thus, these institutions stand to gain from better allocation of health care resources and are the biggest losers in the current, poorly allocating system.
I will debate the pros and cons of these approaches in a subsequent post.
