Tuesday, February 23, 2010

Economics 101 and Health Care

In the US we long ago adopted free markets as the basis of our health care system. Today we spend twice as much per person on health care as any other country in the world, but our lifespans are shorter than many other countries, and we are generally considered by the World Health Organization to have a pretty mediocre health care system.

Are we just inherently unhealthy people? Or is there some basic flaw in the way we do Health Care.

Perhaps we should go back to Economics 101 - Consider what it takes for a free market to work effectively -

1. Low barriers of entry - when demand exceeds supply it must be easy for other people to move into the business.

In the US you cannot be a doctor with going to a school approved by the Doctor's Union (the AMA) and then passing tests, and then working incredibly long hours for peanuts for years to get experience. The AMA has, effectively, a supply monopoly. We clearly fail the low barriers to entry test.

2. Buyers and sellers not acting under compulsion

If you go in to buy a car, and all the cars seem overpriced, you go to another dealer, buy a used car, or just don't buy anything and make due with your old car. So free markets work wonderfully for cars. Or toasters, or ...

On the other hand, if you have a heart attack, you are in no condition to shop around for a doctor, bicker about the price or just walk away if the price is to high. If your child breaks a leg falling off a bike, you aren't going to spend your time shopping around for the best deal, or just walk away for awhile if everything is to expensive. Health care fails the no compulsion test as to buyers.

To some extent our system substitutes insurance companies for us - we buy Insurance and it is up to the company to do the shopping around and negotiating. Two problems with this approach.

First, Insurance Companies are driven by the need to make profits, so they are constantly pulled toward the cheapest path. It may be cheaper to find ways to limit coverage than to negotiate. They aren't feeling the patients pain, they are feeling the stress of their balance sheet.

Second, there is still a limited supply of doctors. As long as the Doctors jointly hold out for certain levels of payment, the Insurance companies have less room to negotiate. Insurance companies are contractually obligated to provide coverage, they can't just walk away if Doctors are unreasonable (and we wouldn't like it if we had to routinely go to a Doctor or Hospital 150 miles away because it is more cost effective).

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