January 28, 2011

What Healthcare “Market”?

By What Healthcare “Market”?

Author:  Anne Hayes

Progressives are often fond of claiming that the free-market, despite all evidence to the contrary, does not “work”– a term placed in quotes because it is not always clear what progressives consider success.   For the most part, however, free-market systems indeed “work” with respect to any number of goods and services so long as there are no artificial barriers to honest market competition.

In particular, many progressives have relished the failure of the American healthcare system to do what advocates assert are two typical hallmarks of a free-market capitalist system: to drive prices down as a result of market competition, and to encourage innovation and improvement by the introduction of new entrants to the market.  This failure, to them, proves that free-markets, in general, are unworkable, and that therefore a centralized-planning approach, such as that approached by Obamacare, provides the only valid remedy to our nation’s healthcare woes.

It cannot be gainsaid that healthcare costs have been steadily rising, and there does not seem to be a general improvement in how care is delivered.  However, progressives are simply on the wrong page when it comes to assessing the healthcare problem as one of insufficiently regulated “markets,” and they are especially wrong if they believe Obamacare’s prescriptions are destined to curb costs and improve care.

At the outset, it must be recognized that Obamacare’s crafters did little to identify or address the factors which actually affect the cost and availability of medical care.  Instead, they have institutionalized some of the problems with our current system that has lead to the healthcare morass we are now treading upon.  And that morass was borne out of government meddling in the market.

As noted elsewhere, when employer-paid medical insurance was invented during World War II, it was used as a means for employers to attract employees when government-mandated wage and price controls foreclosed the option of attracting employees by offering higher wages. Because benefits were not treated as compensation to employees and could be written off as business expenses, employers began to use health coverage and other tax-deductible benefits as a way to attract and hold employees.  Medical coverage, in other words, was used by employers as a form of compensation in lieu of wages.

As a result, our current healthcare system is built around employer-paid insurance coverage. Obamacare advances this centralizing trend:  employers must offer a plan or face a penalty for each employee not covered by an employer-provided plan.  This system, it should be noted, is unique in the world:  in no other country is the bulk of the burden for funding medical care for its citizens placed primarily upon employers.  This system is so ingrained into our culture that most, if not all, American employees regard health insurance as something that is tied directly to employment, and most would balk at the notion of having to pay for their own insurance, even if the difference would be made up for by direct compensation.

This situation, standing alone, has led to additional problems.  Specifically:  those who face unemployment face the additional burden of leaving not only themselves, but their families, of being uninsured.  While federal law requires employers to allow employees to continue coverage, the tremendous cost of continuing coverage coupled with a lack on income makes this option rather unappealing to those who lose their jobs.

As a result of this employer-based system, today’s medical market, outside of portions of Medicaid and Medicare, involves private insurance, and the private insurance market is dominated by employer-mandated plans and their clones. But saying that insurance is private is not the same thing as saying that the healthcare market operates under free market principles. Like many markets, it is distorted and handcuffed by liability exposure, by government regulation, and by bureaucratic excess.  But more than that, the healthcare “market” is distorted by the tremendous gap between consumers and suppliers.

What might otherwise be a simple economic transaction–the trading of money for goods and services–has now become an extremely muddy economic proposition.  Doctors and hospitals do not compete for patients, patients rarely have the complete freedom to choose their doctors or even, in many cases, their treatment. Almost nobody—except the particularly well-heeled and those who eschew insurance plans—pays cash for medical care in a traditional market’s “fee-for-services” model. 

The fact is, employer-insured employees who consume medical care almost never freely choose to have or even utilize medical care, in the sense that they have personally weighed the cost-benefit of purchasing insurance or any given medical service versus another. They often have no idea how much the service they have utilized actually costs, because their insurer is not only footing the bill, but insurers are occasionally the only ones who ever see a bill.  Moreover, even when they see a bill, employees only really care about the portion they have to pay, not the portion covered by their insurance plan, no matter how exorbitant that fee may be.

Even employers do not know the actual medical costs incurred by their employees; instead, they see the costs of insurance premiums. And while employers do care about insurance premiums, they have little or no control over how often or how wisely their employees use the medical resources available to them.  Even more, doctors and hospitals are not reimbursed by their patients or even by their patients‘ employers, but by insurers, and these insurers often operate by setting fixed prices for given procedures, regardless of the facility providing it.

In this so-called “market,” both consumers and suppliers are almost completely insulated from actual market forces by employers and insurers.  As a result, doctors and patients, to a large degree, already operate under a semi-socialist model.  Employers and insurers are the only ones who really end up having money in the game, and the insured pay collectively and indirectly through premiums.  And insurance companies and assorted private and public bureaucrats each get their cut of all the funds moving through the system–-funds, by the way, that do not directly benefit either caregivers or their patients.
 
When you add to these factors the fact that almost the entire healthcare market is based not on actual care provided, but on insurance coverage, a real market between suppliers and consumers dwindles further.  Both doctors and patients (through their employers and insurance companies) have been herded into HMOs or other block insurance packages that generally treat consumers to one-size-fits all plans, in which men and post-menopausal women employees have full maternity coverage and men and women employees alike are entitled to both prostate screening and mammograms. And yet, these one-size-fits-all plans come in every size conceivable–that is, all of them have an encyclopedia-length list of what is covered, what is not covered, limitations on coverage, procedural requirements for obtaining coverage, and so on.
 
Any individual or benefits administrator or insurance broker sifting through a pile not only of insurance providers, but service providers and insurance plans offered by a given insurance provider, can be forgiven for being completely befuddled as to what, exactly a particular insurance plan provides and whether that plan will be adequate for the plan’s potential participants, particularly when trying to compare one plan from another offered at different rates.  Given the number of conceivable types of care that might be required, when it comes to medical insurance packages, more insurance dollars does not translate into more care or more convenience to every individual who may actually need to utilize it.

Obamacare’s response to this tremendous disconnect in the healthcare “market” is first, to force the uninsured to purchase insurance; second, to require employers to foot specific portions of the insurance cost burden (or pay a fine for not offering coverage); and third, to mandate to everyone specifically what their insurance plan must and must not cover.

As a result, rate-payers, through their employers or via government-run “exchanges”, will not only have to foot the bill for their own coverage, but the increased costs for those who need expensive care and can’t pay for it, the additional operational costs of insurance companies and exchanges, and, through taxes, the costs of the bureaucratic armies that are going to be policing this whole convoluted scheme.

How does this conceivably reduce the costs that rate-payers pay or expand the availability of healthcare services to those who need them?

Obamacare encourages irresponsibility, both with respect to one’s own behavior (from which most health problems derive), and one’s own utilization of health services, by cementing in place a system in which nobody has a financial stake in their own health.  It does not take much imagination, and even less study, to realize that this spells disaster, just as it has for most government programs modeled on insulating people from the consequences of their own behavior.  An ever-diminishing population of responsible individuals will end up bearing the costs for an ever-increasing population of irresponsible individuals, likely with a little corruption, mismanagement, and fraud thrown in.

It is an admirable thing to want to provide medical care to the poor, and especially to provide costly medical services and procedures for individuals who truly need it but cannot afford it. But Obamacare does not actually do this.  Even more, no matter what Congress or the Obama administration imagines, there simply is no justification for placing faith in a system which denies to every individual any choice or any responsibility for their choices, or for believing that such a system can lead to greater efficiencies. Obamacare’s inflexible scheme insulates healthcare from any incentives–-market or otherwise–-that might reduce prices, improve or increase the provision and delivery of service, encourage innovation, and instill personal responsibility.

Current government healthcare policies rest on a faulty foundation.  It makes little sense to add on to this dubious structure.

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