Wednesday, October 19, 2011

Free Market Mechanics and Healthcare

Now, I hear something all the time in my work in the health policy realm, and that is that the “free market” could lower prices.

I even recently had someone approach me after I mentioned that the PPACA had resulted in an extra million people aged 18-25 having health coverage this year. His statement? “That’s exactly the wrong direction, we need to have less people, far less people with health insurance.” I asked him his reasoning…of course, already knowing what his response would be. He reasoned that it would force people to compare prices, shop around, and would dramatically lower prices through the mythical, magical “free market”….

Of course, this ignores some rather real problems with this line of thinking. For starters, healthcare does not behave like normal commodities for a variety of reasons.

To start with, healthcare does not lend itself to price comparisons, and comparison shopping. The high costs are often related to trauma and emergency care/hospitalizations. It is simply not practical to ask which hospital in the area offers the best rates on cardiac catheterizations while you are being rushed to the hospital in the midst of an MI.

This impracticality also lends itself to probably the biggest problem. That is irrational behavior. Any of us who have taken even undergraduate economics remember the discussions of rational actors, and how prices were sensitive to rational behavior. Much of health care involves emotionally charged, heated, and oftentimes difficult decisions. Most patients and families can hardly be expected to act in a rational fashion about receiving the news of a terrible diagnosis such as cancer. Real world experience reveals this to be true. I wish I could count how many times I have presented various treatment options to patients, only to hear “Do whatever it takes”.

Hayek once wrote that spontaneous order was a result of market economies, and that it was “a more efficient allocation of societal resources than any design could achieve.” This of course, assumes rational behavior, and assumes that a market can be symmetric.

Because of this behavior, and because people view healthcare not as optional, but as a necessity, price elasticity scores generally trend around 0 or -1. This indicates an inelastic market.

Of course, the next time I have a 21 year old kid who comes in after a farm accident without insurance, and is badly injured, I’ll make sure to tell him that perhaps he should have shopped around.


Wanker said...

Nice article, but what about doctor shortage? I would suspect that if their were no doctor shortage, doctors would have to compete.

Also, home come more hospitals are not like the Mayo clinic?

No competition.

Anyone would go to the Mayo Clinic, but their is no competition.

I will check back. Thanks.

Wanker said...

What about doctor shortages?

If their were more doctors, their would be more competition.

How come more hospitals are not like the Mayo clinic?

No competition among hospitals, that is why.

Niam Hew said...

I agree. The corporation of healthcare is a major stumbling block to a successful system. When the administrators are following the same playbook as the banks, oil companies and automakers, the only ones to suffer will be the patients. Patients are not equivocal to customers, they are PATIENTS, and to treat them otherwise is a disservice to them, even of they don't understand.