Friday, July 10, 2009

Why does the free market not work for healthcare?

That's what the numbers say -- the more "free market" a healthcare funding system is, the more expensive it becomes. The more state involvement in healthcare, the less expensive a healthcare system becomes. That is the reality. To a certain extent we can simply accept that reality and move on (unless you are a right-wing ideologue, in which case your ideology takes precedence over reality). But if we understand why that is so, perhaps we have some guide that will help us create a better healthcare funding system.

The core problem is one of the expense of modern disease treatment. Leukemia treatment, for example, costs on average $1 million. Luckily not everybody gets leukemia. Thus we can insure ourselves against the cost of leukemia treatment via risk pooling -- if leukemia strikes one out of every 1,000 people, we can gather 1,000 people together and have each toss $1000 into the kitty for leukemia treatment, and then if one of them gets leukemia, we have that $1M to pay for the treatment.

In other words, the cost of modern medical treatment makes risk pooling mandatory, or else you end up with a lot of dead bodies in the streets because only millionaires could afford health care. The problem is that once you have risk pools, you divorce payment from cost. It is no longer the individual who is paying, it is the pool.

The net result is that a free market health care system is no longer possible if you wish to have a modern medical system. Once you divorce payment from cost, the normal mechanisms of the free market cannot operate -- people no longer seek the least expensive health care that achieves acceptable results, so providers have no incentive to control their costs. If there is no external mechanism to force them to control their costs, they will not do so. Thus every "free market" health care funding system has shown a death spiral of upward costs as providers "game" the pools for extra funds rather than controlling their costs. The only thing that has been shown to stop this upward spiral is severe government intervention into the health care market -- either by serious intervention at the funding level (e.g. single-payer, or severe regulation of health insurance funds and provider reimbursement rates), or via the draconian solution of making all providers state employees (the British solution -- which, BTW, I do not recommend for a variety of reasons).

In short, people pushing for a "free market" solution for health care funding are proposing unicorns -- imaginary solutions that cannot work in the real world because reality is that modern medicine simply is too expensive to work that way. They assume that leukemia treatment would suddenly become affordable to non-millionaires if not for "evil government", when the reality is that modern medical technology is simply too expensive for that to happen, the development costs for new procedures, drugs, and tools are too high for the cost of these things to be driven down severely via free market competition. Risk pooling, which inherently divorces payment from cost and thus subverts the mechanism that makes the free market work, is thus absolutely necessary to ensure that expensive treatments are available to those who need them, but the "free market" zealots utterly ignore that reality. They are like Communists who assume that human beings will not be selfish and lazy if placed into a pure Communist system -- they ignore key facets of reality. And thus, like Communism, their proposals for "free market healthcare" would result in huge numbers of dead bodies if actually put into reality. Luckily, in a democracy, even the American public isn't stupid enough to do that -- while President George W. Bush proves Americans will vote against their own best interests, themselves and their own dying for lack of health care most certainly would incentivate them to do otherwise. Nothing like the threat of death to motivate someone to say "no way!".

-- Badtux the Reality-Based Penguin

15 comments:

  1. Whatever happened to just paying your doctor for his services and paying the hospital bill W/O prepaid health insurance? Am I deluding myself?
    my word verification is: "sorman" and yes I AM!

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  2. So do you have $1M in your pocket to pay for leukemia treatment? I don't. Without risk pooling, there is no way to do it unless you're a millionaire. If you *are* a millionaire, feel free to go insurance-less. For the rest of us, it's a death penalty.

    - Badtux the Numbers Penguin

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  3. Free market my ass. That is exactly the opposite of what any growing corporation covets. Watch this:

    Moyers interviews ex Cigna CEO turned human being.

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  4. i would think you could take your premise and stretch across the entire insurance industry\

    like auto insurance - other than you might get killed - there is no incentive to not worry about a car crash since the insurance company will be pay for fixing...... no cost control

    all insurance works on a pooling -

    i DO agree with what you are saying but am i wrong to think that it means all insurance in inherently anti-free market

    dcap, the confused hedger

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  5. Don't be ridiculous, DCap. Insurance doesn't make you sick, and insurance doesn't make you crash your car. What insurance does is make the aftermath of getting sick -- or of crashing your car -- less expensive for you personally, but more expensive when you go to get the damage fixed.

    Yes, this effect of decoupling payment from cost works in the auto industry too. The difference is that it has an upper limit for auto insurance, and does not have one for healthcare. Auto makers deliberately price OEM body parts higher than they otherwise would because insurance companies are paying for it, not individuals. Same reason why a bumper that cost them $200 to make is suddenly $1500 when someone crashes into your car, and why it might cost another $1,000 for the body shop to actually install and paint this bumper. The insurance company is paying, so the individual has no motivation to bargain for a better price.

    However, there is an upward boundary to this effect in automobiles. The average automobile is worth maybe $10,000. If auto body shops and body parts manufacturers price their services *too* high, they get $0 -- the insurance company instead turns around and says to you, "here's $10,000, go buy another car." But there's no such possibility in healthcare. If you get leukemia, the insurance company can't turn to you and say, "here, here's $10K, go buy another life." There's no upper bounds inherent here. You only get one life on this planet and no amount of money will suffice to buy you another one.

    So yes, you are correct that this effect also drives up the costs of auto repair, but you ignored the fact that insurers have the option of just giving you the money to buy another car if body shops raise their prices too far, which puts an upper limit on body shops' prices. There is no such possibility with health care -- no amount of money will buy you another life.

    - Badtux the Insurance Penguin

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  6. This is a really good analysis. I'm going to link to it.

    And yes, Ima Wizer, you are deluding yourself. Do you have any clue what hospitalization actually costs?

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  7. This unfortunately is only one aspect of the problem. At present the U.S. spends 2+ trillion dollars per year for healthcare. That number is expected to go up by as much as 35% next year. Blue Cross has already raised their prices by 17%. With the economy sinking more people are without insurance making those that still have it stuck with paying more. Then there's the issue of the aging population. When you have less money comming into the system and more going out in Medicare payments. Well I think you get the picture. Just risk pooling isn't going to cover it although it's a good start. The problem as I see it will be to get the large profits out of the system but at present the medical community is spending over a million dollars a day to lobby congress to have their way.
    Lastly there's the issue of end of life costs. That is the old folk who end up in ICU for weeks or even months before they die. The costs are close to your leukemia patient.

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  8. Right, the costs side of thing is completely out of control, something I touch on in a later article to be published tomorrow. The problem is, our current fragmented health care funding system is utterly incapable of reining in these costs. No one entity has a full picture of who is paying what for what, and thus no one entity has the power to step in and say to a doctor, "you can over-prescribe expensive treatments all you want, but we're going to pay you a fixed amount regardless to make sure you don't personally profit from it, and put you in jail for defrauding us if you accept money from any of the vendors whose expensive snake oil you're selling."

    Thus far the only entity that has proven anywhere in the world capable of doing that is some government body. Even where there are multiple funds, some central government body has to come in and collect the data and use it to scorecard doctors and pass the data along to sickness funds to deal with doctors who game the system for excess profit. That's just what international reality has shown. As I show above, a "free market" approach ends up with an infinite upward spiral, because there isn't an upper boundary when we're talking health. You only get one life, your insurer can't buy you a new one if fixing your current one is too expensive. But now we're on tomorrow's article again :-).

    - Badtux the Healthcare Economist Penguin

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  9. Good post.

    The only thing wrong is your misunderstanding of aftermarket auto part costs. The car manufacturers don't set those prices. The cost drivers come from individual part handling, storage, shipping - all the details of logistics. That $200 is very likely not even made by a car co. It comes from one of the also bankrupt suppliers. Further, though the individual has no reason to bargain for price, the Ins Cos. do. Yeah, replaceent parts are costly, but that doesn't mean there isn't a lot of competition in that business - a least on the part manufacturing side.

    Cheers!

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  10. Uhm, Jazz, my dad was in the business. I know a leeeetle bit about wrenchin' :-). (See my MotoTux blog).

    I do agree that once aftermarket sheetmetal providers enter a particular market, prices go down. But over the course of my lifetime I've seen collision repair prices rise far more than the cost of cars rose, far faster than inflation. Some of this was because of the inherent difficulty of collision damage repair on uni-body cars, where you can no longer just bang out the dents and bondo things because the sheetmetal is the frame too and you must make sure the frame is straight. But the extension of comprehensive coverage for more years also contributed -- when I was young a 3 year auto loan was a long one, now they're up to 7 years (!!!!) and the car must be insured with full collision coverage for all of those 7 years.

    That said, as I previously pointed out, collision repair has a natural upper boundary (the value of the car) that prevents it from going completely out of control, not to mention that there is still a lively market for "ghetto" repair (i.e., uninsured repair for cash). So it's still possible to get reasonably-priced body repair if you shop around, though the results might be a little rough (i.e., maybe you'll see a few little bumps where they didn't properly grind off the rivets from their stud gun when they popped out the dent). But if you have a 10 year old car, who cares about a perfect paint job, eh?!

    Problem is, a human life isn't a car, so when we talk about "ghetto repair" to uninsured human bodies, we're talking about things that will make that human's remaining life contain much more misery and suffering than it should. A car runs just fine if its body has bumps from bad repairs. A human, on the other hand, has aches and pains if that's the case. Health repair and auto repair are simply too different to make direct comparisons that way, in the end, because human lives aren't replaceable and human suffering results if health repair is done badly on the cheap.

    - Badtux the Car Penguin

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  11. Hi...........I did as I said I would and posted your original blog as a response to another blog I read and this is his response

    perfectlyhuman
    reply
    perfectlyhuman wrote today at 11:29 AM, edited today at 11:36 AM
    Thanks for coming by hon.

    I have deleted the non essential sections such as ("unless you are a right-wing ideologue, in which case your ideology takes precedence over reality").

    This sort of thing is simply an attempt at character assassination...the attempt to replace ideas with insults. I don't think that has a place in a proper discussion. I have also answered the key ideas on which this argument is based and deleted the pointlessly reworded repetitions.

    So....with that explained...lets move on.

    "That's what the numbers say -- the more "free market" a health care funding system is, the more expensive it becomes."

    This is an unfounded assertion. Where are the numbers? Where are your facts? History and a simple look at how the market has lowered prices and made so many goods available to the masses contradicts this.

    "The core problem is one of the expense of modern disease treatment. Leukemia treatment, for example, costs on average $1 million. Luckily not everybody gets leukemia. Thus we can insure ourselves against the cost of leukemia treatment via risk pooling -- if leukemia strikes one out of every 1,000 people, we can gather 1,000 people together and have each toss $1000 into the kitty for leukemia treatment, and then if one of them gets leukemia, we have that $1M to pay for the treatment."

    True. That's the principle insurance is based on. The superiority of the private insurance approach is that competition keeps that down to manageable levels as well...or would if the government would back off and let the market work. Another aspect of private insurance is that it is voluntary...no one is being coerced into buying health care for others. No thieves...no parasites.

    "Once you divorce payment from cost, the normal mechanisms of the free market cannot operate."

    Very true.

    "-- people no longer seek the least expensive health care that achieves acceptable results, so providers have no incentive to control their costs."

    That's only true when the taxpayers are footing the bill. In the free market cost is kept down because of competition with the doctor down the street and what the average man on the street can afford.

    "If there is no external mechanism to force them to control their costs, they will not do so. Thus every "free market" health care funding system has shown a death spiral of upward costs as providers "game" the pools for extra funds rather than controlling their costs. The only thing that has been shown to stop this upward spiral is severe government intervention into the health care market -- either by serious intervention at the funding level (e.g. single-payer, or severe regulation of health insurance funds and provider reimbursement rates), or via the draconian solution of making all providers state employees (the British solution -- which, BTW, I do not recommend for a variety of reasons)."

    I have already shown this to be a false statement and an impractical alternative. I will also add that it is an immoral alternative. Theft is theft. Under a free market...no one will force you to sacrifice you and your families welfare to support those who cannot...or will not...care for themselves...nor will it stop you from reaching into your own pocket and spending all you wish on the welfare of anyone you choose. As I have said...charity is fine...but theft..whether by some thug with a gun or a gang of them who call themselves "the Government" is still unacceptable.

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  12. I posted the URL to the numbers but like all right wing ideologues, you ignored the numbers and went straight to fact-free talking points that utterly ignored reality in favor of a delusional universe of your own making where unicorns are real, cotton candy grows on tree, and free market health care actually works.

    The numbers are the numbers. The more "free market" a health care system is, the more expensive it is. The least expensive health care systems, like the British or Finnish ones, are those where the entire health care system -- hospitals, doctors, the whole works -- are owned by the government or are government employees. Going above that, you get the single-payer systems such as Canada and Taiwan, which are more expensive than the nationalized health systems like the British or Finnish ones (go read my URL, idiot!). Above that, you get the single+multi-payer systems like the French and Swiss, which have a significant free market component. And finally, you have the United States, alone at the top, which spends twice as much as the OECD average yet surpasses only Mexico and Turkey on outcomes within the OECD. We're #19! U S A! U S A! WOOT!

    Fact: There is not a single working example of a totally free market health care system *ANYWHERE* on the planet. You cannot point to one. Not one. Nowhere. You are talking unicorns, fictional beings that don't exist anywhere except in your bizarre imaginary universe where cotton candy grows on trees. All you have are talking points WITHOUT A SINGLE PIECE OF DATA TO SUPPORT THEM. None. Zero. Nada. You're spouting FICTION, and pretending it's fact, and you don't even know the difference anymore you're so divorced from reality. You're only one step removed from that guy in the bathrobe and fuzzy slippers shuffling down the street near the homeless shelter while pushing his shopping cart and muttering to his imaginary friend. I mean, come on. I know that the Republican motto is "Math is Hard", but this is ridiculous. You can't even seem *recognize* numbers, much less do math with them.

    - Badtux the Math Penguin

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  13. (Note: the above response is not to Lorretta, but to her poster).

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  14. Thanks for posting a response. I was going to post it as a response to his latest comments re your post but; I decided not to because....well....it is obviously going to make no difference to the way this man thinks.
    I used your blog as an answer to his because I though he would respond to your argument better than he would to mine. Your arguments are logical and based on social/ political analysis, mine on the other hand would have been more of a moral/ ethical argument. My arguments would go something like.......''in a civilized society we have a duty of care to our fellow citizens and as such are morally bound to jointly finance a system of health care that will be accessable to all regardless of the specific need of the individual and/or the ability of the individual to pay''. Obviously this guy would not give a response like that any consideration, which is why I decided to use yours instead. Now I realise I wasted my time, he just doesn't want to know how ever you put it. He has said in his blog that for the gov to take tax from him to pay another persons health bill is ligitimazed theft and if a chronically sick or disabled person can not afford essential heal care that person has no right to expect any one else to pay it for them. His attitude is health care is like any other commodity on the market, you only get what you can pay for. And basically if you die as a result of no health care, well its sad but not his fault and not his responsibility...........
    shit I didn't know people like that really existed.
    Thanks for letting me use your arguments.

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  15. if you want to see the whole of his argument and all the comments, most of which agree with him, it is here

    http://perfectlyhuman.multiply.com/journal/item/188/Why_Are_We_Moving_Toward_Socialized_Medicine_Posted_with_permission

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Ground rules: Comments that consist solely of insults, fact-free talking points, are off-topic, or simply spam the same argument over and over will be deleted. The penguin is the only one allowed to be an ass here. All viewpoints, however, are welcomed, even if I disagree vehemently with you.

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