While most people believe that our healthcare industry is one comprised of free markets, it is anything but. FULL ARTICLE by Kel Kelly
Source link: http://archive.mises.org/15949/the-myth-of-free-market-health-care/
The Myth of Free-Market Healthcare
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Great article; packed with information and to the point.
While I agree with much of the article (particularly licensure and tax-preferred status of health care benefits), it is based on a premise that there is a health care “crisis” and that if we improved the system through free market principles (which I support) we would spend less on health care. This is potentially flawed in that we spend what we want to on health care because we CAN. Spending (as a % of GDP) on food and clothing has decreased in almost exact proportion to the increase in health care spending. There is little evidence to suggest we would spend less on health care if the distortions & inefficiencies were removed. But there could certainly be an improvement in the quality/availability of care for the same price.
Suppose the free market reforms were allowed and the cost of the current quality of care reduced. Would we save that money? Would we spend more on food? Entertainment? Or better health care (at an increased cost)? Personally, I would probably spend it on better health care since I’m pleased with the quality and quantity of food and entertainment I consume (thanks to the free market). Another item to note in this debate: while suffering the “unsustainable” costs of health care, we’ve doubled (as a % of GDP) our spending on recreation & entertainment. Where is the outrage?!
Hi Luther, here is my reply:
You stated:
“This is potentially flawed in that we spend what we want to on health care because we CAN”
We CAN spend that much because we don’t (seemingly) have to spend much at all–most of it is free. If food were mostly free, we would be able to demand much more of it because we would be “demanding” with someone else’s buck. If we had to pay the full cost of the healthcare we demanded, we would consume less. Costs such as healthcare, oil, and education that rise at three times the rate of inflation due to regulation/manipulation, would not, without regulation/govt. spending/money printing. Without costs rising so rapidly, the total amount spent would be less. Thus, the total proportion of GDP would be less. These industries like healthcare and financial services that have gone from like 5% to 15% of GDP are have seen artificial growth and thus have artificial sizes.
If the costs of healthcare were less, and if we demanded less, we would spend less of our incomes on those industries. We would spend more on other goods because we have a desire for more of most of those other goods. If you didn’t have to pay $5K+ out of your paycheck (which you do) for healthcare, wouldn’t you spend that money on something else?
You stated:
“as efficiency gains more rapidly in one product/service, spending in other sectors (or savings) will grow.”
Yes, this is possibly true. Industry by industry it depends on the elasticity of demand. As supply in an industry grows, price falls. Total spending in an industry might or might not decrease, depending on how insatiable the demand is for that product. For some, like coffee tables, people want only so many). For others, like clothes, many people will buy more each day. The spending could increase as an industry grows, or slow. Similarly, spending could increase or slow in other industries when a particular industry expands. But this is all theoretical. Here’s what is pretty obvious: when a government-manipulated industry grows from a small proportion to a large proportion, and we all spend more on that industry than we want, you can bet that we would likely spend less on it if it were not a manipulated industry with high prices. I think it is obvious that if we did not spend on that, we would spend on something else.
Not sure this has been a very good answer, but it would take a long time to really lay out the case mathematically.
Luther-
I think that the point is that there wouldnt be a crisis as there is perceived to be now. However, I would say that a state monopoly on medical licensing certainly represents a crisis. That crisis could easily be remedied, and that is the point.
Government intervention surely, as Mises would contend, creates more inefficiencies than it eliminates. So the quality/availability of health care is hampered by those policies. But the point I’m trying to make is this: even with a purely free market economy, as efficiency gains more rapidly in one product/service, spending in other sectors (or savings) will grow. In that scenario, we might spend 50% on health care if we are satisfied spending just 50% on all other products/services. The politicians (though largely unnecessary in a free market economy) would scream, “Health care costs are unsustainable!”
Unless politicians can point out a “dragon to slay” (with your money), they have no job.
I agree with what you’re saying, but in a free market, prices would drop significantly enough so that even a higher percentage in relation to other expenditures wouldn’t make a big difference.
Certainly, that’s possible, but everything has a limit and other uses of those resources will still compete against a potential “recreational” health care use, as is noted among the elderly who use Medicare. However, it’s unlikely that we’ll engage in such practices as a society as it’s not pleasant taking time to visit a medical professional. There are plenty of other uses of resources, such as other recreational activities, that would most likely take precedence.
Actual healthcare cost is not the problem, it is the insurance structure. What the doctor bills is not what the doctor is paid by the insurance company. For example, if you go into a doctor and the bill comes to $150 and you have a $100 deductible, you will pay the $100 and the insurance company will pay $30. If you go into the doctor and pay cash for the service, you will pay about $60. I pay cash for all my care and on the average I get a 60% discount. Furthermore, over the last 3 years I paid more for vet bills for my cat than I did on myself.
The other problem is the demand on healthcare from people that have insurance paying their bills. These people tend to use healthcare services for every little problem, since they are getting it for “free”.
What we need is for everyone to directly pay for their healthcare cost. They can have insurance, but they must submit their paid bills to the insurance company. People will see the actual cost of healthcare and will think twice before going into the doctor.
On the profits of the insurance companies, they are understated due to the fact that they are regulated by the states. Take a careful look at their balance sheet and you can clearly see they are doing very well.
greg, you nailed it this time. But you forgot to mention the role the state played, beginning during WWII, in creating a demand for employer provided medical insurance. It was the predominant factor that inserted a third party between the doctor and his patient.
As I mentioned in another blog here at Mises, back in the 1980s I was on the mailing list of a very courageous doctor (he was battling the thugs at the IRS) who was a member of a small group of doctors called something like American Private Practice (or Pay) Physicians. If you went to one of these doctors, you paid them directly yourself or went elsewhere. Not only did that keep administration costs to a minimum, but it was deemed a contributing factor to the best possible doctor-patient relationship.
He covered the state’s role in employer health insurance right here:
Greg and Ned make excellent points about paying cash for health care.
Luther seems to be in pretty good shape financially, so congratulations to him.
However, with group premiums around $13,000 per year per family, and median household income at $50,000, I can’t envision health costs increasing as they have, unless insurance is the primary payer.
I envision, even if Obamacare passes, and people have low deductibles, I envision people intentionally deciding not to put in claims for approved insurance coverage.
The reward would be lower premiums for everyone, for lower claims.
This reward would accrue to those families who consciously decide to pay bills less than a certain figure, out of pocket.
In fact, we could set up a plan, sort of like an HSA, where part of the premium earns interest, as in a savings account, and the balance buys “paid-up insurance”, which provides say, 4 times the amount of insurance that is in the savings account.
In 4 years, this combined savings-insurance combination could provide up to $50,000 of coverage.
If that occurred, the deductible could be raised to $50,000, thus saving about 80% off the traditional premium.
Of course, for this to work with subsidies under Obamacare, those subsidies would need to be split between insurance and savings in the underlying coverage (up to $50,000).
Don Levit
I’m not sure why anyone would even set up an HSA instead of just putting money away in a mutual fund or other investment vehicle. HSAs are still inefficient as there’s still a larger employee pool used to process and pay claims as HSAs aren’t 100% self-financed. They still have deductibles, but you can opt to pay them out of a special account instead of out of pocket. If anything, a large scale move toward HSAs would likely increase unnecessary spending as the immediate bank account never gets touched at all.
Touché!
One of the consequences of the “free market” that wasn’t considered is catastrophic injury.
The “free market” solution would be helpful in reducing the cost of annual doctor visits, sick kids, sprained ankles and the like, but what about someone who as a heart attack and needs bypass surgery?
That’s what the insurance is invented for. You don’t buy auto insurance to get your oil changed, you get it to cover if some guy T-bones your car and your engine is now a pile of twisted metal on the ground. Major events like bypass surgery would be something people buy insurance for.
That is where health insurance would be useful. If you wanted to protect yourself or your family against the possibility of catastrophic injury, you would buy health insurance for that purpose. In my mind, this is what insurance is…a protection from the unexpected.
I didn’t read where Kel Kelly mentioned this in his article, but a free-market would not preclude companies from offering real health insurance to protect consumers against such catastrophic injuries.
Yes, what is these days called health insurance is really managed health care. Insurance is for things that are likely to never happen to you, but if they do, be more than you could ever afford. Thus your premiums over a lifetime are far less than it would cost if you had to pay for the rare event yourself. This breaks down if the certainty of the event approaches 100%; in that case, you’ve just added an intermediary, which as described in the article, increases prices since the critical cost-benefit feedback loop is broken.
Mississippi Guesser,
No I didn’t mention it (I think I do elsewhere in the book–which is where this article is from–but not in the article). But you’re absolutely right: that’s what real insurance is–coverage for statistically unexpected events.
J. Murray:
I am not talking about a typical HSA.
I am talking about a different product which is primarily (80%) self-financed in a savings vehicle, like mutual funds.
The other 20% pays for the “insurance,” which would be a multiple (for example, 4) of the savings account.
Thus, if after 4 years, his savings account has $10,000 and his multiple of insurance is still 4, he has $50,000 of total coverage.
That wouldn’t cover the bypass surgery Matt referred to, but that would be covered by a separate catastrophic policy, whose deductible starts where the primary policy ends, at $50,000.
The cost of the $50,000 deductible policy is about 20% of typical health insurance.
Don Levit
I really like this article except for the section on quality of care. Kelly cites our poor infant mortality ranking among developed countries, but this statistic is misleading. Our outstanding neonatal care allows many prematurely born babies to survive that would not even be born in other countries. My own nephew was born very prematurely. I don’t remember how many weeks exactly, but we were able to slide a wedding ring up his arm to his shoulder and the doctors were very unsure of his chances of survival. If a baby who was born this prematurely or with birth defects dies and is factored in to our infant mortality rate when that baby wouldn’t have even been born in other countries, that leads to a misleading comparison.
Infant mortality rate is not a good measure of health care, and all of the other numbers thrown out in that section are useless without comparisons, making for a very weakly supported claim that we have inferior health care. Kelly does not even explain the reasons behind this claim. The truth is that we still have very high quality health care compared to other developed nations because it’s not completely socialized yet.
Note that I’m not claiming that more free market health care would not improve health care quality; I’m just claiming that our quality of health care is not as bad as Kelly claims.
Good point. European nations, for example, would have tallied your nephew as a miscarriage and not bothered, thus saving the statistic. When normalized by removing births that aren’t premature, US infant mortality is the lowest in the world.
Here is a thought I was mulling over last night – a health care system has remarkably little impact over child mortality rates.
First, I have to pull back the lowest statement. I discovered that the data I relied on used some questionable statistical techniques, so I can’t relay that claim. However, what it does do is reinforce that the infant mortality rate statistic is basically useless information. There isn’t a baseline reliable standard being used across nations to get a good number. Reporting requirements are different, the reliability of the numbers are in question, and there are too many statistical anomalies between differnent nations to think of the statistic as anything but useless garbage. The error rate is large enough to wipe out any difference between the top 50 nations in the statistic.
I’ve looked up what appears to be the concept of what a medical system does for a pregnant woman, which seems to be just talking to a doctor about diet and exercise. What this tells me is that there isn’t anything the health care system actually does that impacts the major stages of development or the major causes of birth weight and term length. The major impacts on infant mortality seem to be the following:
Diet
Hygene
Exercise
Stress levels during pregnancy
If the mother is overwight (overweight and obese women have a significantly higher chance of losing a child to complications)
Number of children conceieved (twins, triplets, etc)
The first five are beyond the control of a health system and the sixth is an artifact of fertility treatments. Multiple births increase the chance of infant mortality and they would not have been born in the first place without the treatment, meaning adding them to the overall statistic skews the information the statistic is attempting to get at. None of these major factors would be improved in any way, shape, or form under a universal care system or increase in medical system use. They’re ingrained aspects of a culture that cannot be undone by paying a doctor to tell you to lose weight. Many Americans already do this and there is little success in having a trained doctor tell you you’re too fat in the battle of the bulge. For the most part, there is no lack of care during nearly all of the pre-birth pregnancy stages that the medical system can control, nor is medical system use even required as I found all the care advice necessary for a healthy pregnancy term over the Internet in a grand total of 30 seconds in Google. No doctor costs required. If a mother doesn’t care enough to check Google on how to generate a healthy birth, then this same mother is unlikely going to visit the good doctor for the same information.
For infant mortality to be a meaningful statistc, all deaths that can be attributed to the behavior of the mother or other external factors beyond the control of the medical system (the level of pollution in the environment for example) must be excluded from the sample. This leaves deaths attributable to the point of birth and the stay in the hospital system itself, such as infections due to inadequate sanitation, mismanagement of full term baby care in the initial day of birth, and other such errors. There isn’t much I can find that can attribute an instance of infant mortality to the inability to pay for something in a hospital, and those that are, such as attempting to maintain life of severely premature children, are too much a factor of poor pregnancy conditions or even the bad luck of genetics to be slapped on the hospital as a failure (premies are already a high risk area).
Without a serious study to filter out all the extraneous data, infant mortality rates are mostly a waste of time as there is no way to reliably compare the two nor does it provide the information they attempt to give.
Mike,
Thanks for your comments. You might be completely correct on this. I cited it because it seems to be a commonly cited statistic for healthcare around the world. It might be a flawed and unrelated statistic. If so, I am wrong for including it.
This article is out of sight. Very well done.
One thing I’ve long wondered is why we never see any medical professionals advertising prices openly, sending coupons, etc., but I’ve never been able to find the answer. I understand the distortions making such practices less likely, but it has to go beyond that; there have to be laws or regulations prohibiting it. Can anyone point me to some info?
Very understandable critique of current system’s problems. Very interesting history of limits on supply. On the other hand the discussion of what might be done seems pretty superficial and almost whimsical at times ( competing rating agencies !)
I’ve read a lot of wistful articles on how the free market will save medical coverage, but I’ve yet to see any discussion of a real-world example. When I pursued this on the web, I found that almost every first and second world country has some form of government mandated healthcare. You can certainly find private markets in Haiti, Somalia, and other sub-Sahara countries, but I wouldn’t tout them as a good example of private enterprise. So how about an article on a first-world country that has a successful, low-cost private health care system? If it doesn’t exist, why not?
Ed
“If it doesn’t exist, why not?”
Ed…it’s called democracy.
Ed,
Check out Singapore’s system. It’s not free market, but close. Citizens there have to maintain a $5K fund to pay for their own healthcare. Quality is high and costs do not rise out of control. Not a perfect system, of course, but gives insights into the economics of it all.
Or check out the history of Lasik in this country and watch how the price has steadily dropped even as quality has gone up.
Though I must say, having just read this article, I’m extraordinarily disappointed with Kel Kelly’s liberal remarks anent infant mortality:
“The United States is far from achieving the lowest world infant mortality and death rates.”
I and others — like the dynamic Dr. Linda Halderman — have written extensively about that canard:
http://pajamasmedia.com/blog/the-doctor-is-in-infant-mortality-comparisons-a-statistical-miscarriage/
http://rayharvey.org/index.php/2010/02/how-the-american-healthcare-crisis-began/
Quoting, at some length, Doctor Robert J. Cihak (M.D.), a Senior Fellow and Board Member of the Discovery Institute and past president of the Association of American Physicians and Surgeons:
Comparing statistics among countries can be tricky, but in the case of infant mortality figures, the comparisons are downright treacherous. For starters, different countries count differently.
According to the World Health Organization (WHO) definition, all babies showing any signs of life, such as muscle activity, a gasp for breath or a heartbeat, should be included as a live birth. The U.S. strictly follows this definition. But many other countries do not.
Switzerland, for instance, doesn’t count the deaths of babies shorter than 30 cm, because they are not counted as live births, according to Nicholas Eberstadt, Ph.D., Henry Wendt Scholar in Political Economy at the American Enterprise Institute and formerly a Visiting Fellow at the Harvard University Center for Population and Developmental Studies. So, comparing the 1998 infant mortality rates for Switzerland and the U.S., 4.8 and 7.2 per 1,000 births, respectively, is comparing apples and oranges.
Other countries, such as Italy, use different definitions in various parts of their own countries. Eberstadt observes that “underreporting also seems apparent in the proportion of infant deaths different countries report for the first twenty-four hours after birth. In Australia, Canada, and the United States, over one-third of all infant deaths are reported to take place in the first day. …” In contrast, “Less than one-sixth of France’s infant deaths are reported to occur in the first day of life. In Hong Kong, such deaths account for only one-twenty-fifth of all infant deaths.
A UNICEF press release notes furthermore:
“Under the Soviet era definition…infants who are born at less than 28 weeks, weighing less than 1,000 grams or measuring less than 35 centimeters, are not counted as live births if they die within seven days. This Soviet definition still predominates in many CIS countries.”
UNICEF also points out that the socialist system “stressed the need to keep infant mortality low, and hospitals and medical staff faced penalties if they reported increases in infant deaths. As a result, they sometimes reported the deaths of babies in their care as miscarriages or stillbirths.”
Facts, as everyone here knows, very often get in the way of propaganda, and that’s why it’s so disappointing to see Kelly, who seems otherwise fairly well-informed, drinking such kool-aid.
Since the United States generally uses the WHO definition of live birth, economist John Goodman (et al) in the 2004 book Lives at Risk, concludes the following:
“Taking into account such data-reporting differences, the rates of low-birth-weight babies born in America are about the same as other developed countries in the OECD [Organization for Economic Cooperation and Development].”
Likewise, infant mortality rates, adjusted for the distribution of newborns by weight, are about the same.
It must also be remembered here that advancements in technology and medical treatment mean that doctors in America are now able to save babies who, even twenty short years ago, would have perished from, for example, very low birth-weight (less than 3 pounds). Vulnerable infants such as this may indeed now live with the help of advanced medical care, while low-weight babies (less than 5.5 pounds) up until very recently had a mortality rate nearly 20 times higher than heavier babies (this according to the World Health Organization).
These infant deaths now all count as infant deaths in the United States, though not in many other countries, whereas before, 20 or 30 years ago, they were in America called stillbirths – the determining factor being a certain length of life, however ephemeral.
Paradoxically, American doctors’ ability to save the lives of more babies causes higher infant mortality numbers here than would be the case with less advanced medical treatment.
Ray,
Please see my comments above on this topic. I could certainly have erred in using this commonly cited statistic.
Kel
Those are some pretty good links there, thanks.
I worked as a medical administrator responsible for billing and practice financial management in a major metropolitan medical clinic for a number of years, and this article covers many of the problems with the system. Not mentioned in the article; however, but as equally important in the equation is the price fixing associated with insurance reimbursements to doctors when claims are submitted. Doctors are only allowed to bill insurance companies within a statistical norm price band that is based off of US Government published Medicare reimbursement rates, which are listed for each CPT code billed. If a provider exceeds the statistical norm, they open themselves to audit, and most likely will be dropped by the insurance provider, resulting in the inability to see patients with certain insurance plans, which only shifts the load to other practices and limits availability even more. Often, for high-volume, low profit-margin services like basic child vaccinations, our practice would lose money each time we saw a patient and provided a service. The only way to not lose money was to bill the patient in addition to the copay they already paid, which often cost more than if they just paid cash in the first place. It got to be such a problem that we eventually decided to give a 50% discount to our cash-paying customers.
Interesting that the id10ts in Congress were tripping over themselves to “provide health care” to every American by mandating insurance coverage, all the while complaining about the “rising costs of healthcare.” It seems the way to ensure the max number of Americans have health care is to make care affordable for every American to the point that insurance isn’t even required, except catastrophic coverage, which is what insurance was designed for in the first place. A very select few Congressmen on the Hill were asking the right question (i.e. how do we bring down costs?) The rest were too in the bag with the AMA lobbyists to give a rip. Either that, or they continue to suffer from advanced cases of cranio-rectal inversion.
Kurt:
You and others have brought up a good point – the feasibility of catastrophic coverage.
If coverage started at a high enough deductible, say $25,000, the traditional premium is lowered by 60%. At $50,000 the discount is 80%.
This is why , I believe, each individual needs 2 health insurance plans – the first to cover up to $25,000 or $50,000; the second to cover over $25,000-$50,000.
There are many cost effective ways to do this.
My particular idea builds up $1,250-$2,500 in savings each year.
Attached to the savings is a health insurance rider, costing 20% of the savings contribution, which is simply a multiple of the savings, such as 4.
The person is encouraged not to make claims, because for every dollar of savings he uses to pay for claims, he loses $4 of insurance coverage. In addition, his deductible lowers by $4 for every dollar of savings used, which increases his premium.
Don Levit
I am from India,Doctor( Ob/Gyn),having small 10 bed hospital. We pay for our Healthcare. There is Medical Insurance but its in Infancy and making huge losses.
We do not have restriction on who can practice Medicine. All these Indian Doctors you have in US are from Allopathic( Western) medicine stream, we have Homeopathic,Ayurvedic,Unani Doctors practicing in Metro Cities like Mumbai,Delhi and other Towns.As there is intense competition among doctors, same treatment/surgery is available at much cheaper rate. In Mumbai Coronary Bypass Surgery can cost $ 12000 in Hospital in South Bombay to $ 4000 in Hospital in Subarb of Bombay owned by cardiac Surgeon who operated on P.M. of India Mr.Singh.!! If you go to smaller towns than cost can drop to $1500.
I know from my expirience that 70% cost of treatment is Doctor’s charges.As competition among Doctors increases, their charges -Consultation and Surgical- drop. We have Nursing Homes where profiit is v v low but they make up as they have huge volumes. Performing 10-12 cataract surgeries a day lowers per surgery charges.
My son had ACL tear in Knee Joint due to Ski accident in Tahoe, CA. He could get Ortho.Surgeons Appointment after 4 days,got appointment for MRI after 5 days, Report after another 4 days, while waiting for which he had Medical Complication for which he had to get admitted in hospital.He could get surgery done after long wait.Total cost paid by his insurer Cigna was about $100,000.
His friend got ACL tear in Bombay on Friday evening. Consulted Ortho.Surgeon on Saturday Morning( yes we consult on weekends), MRI on Saturday afternoon,Blood Tests were done on Sunday morning,Reviewed on Monday and Surgery was done on Tuesday. Total Cost $ 1900.!!
I agree with everyone here about providing “real insurance,” paying for events that could really set families back.
That was why I was suggesting the higher deductible, such as from $25,000-$50,000.
However, most people don’t have $25,000-$50,000 in liquid assets, or at least assets they would be willing to liquidate.
This is why I suggest the $10,000/$50,000 combination plan, which can accrue over 4 years.
During that time, he can raise his deductible, automatically, per month, as he makes his payments, and save significant dollars.
Don Levit
I agree with this post. very interesting read.nursing home negligence
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