A Plague on Both Our Houses

OK, I’ll admit that I’m stumped on this one.  It’s starting to look like we’re actually going to get some sort of healthcare reform which, at least in general terms, I believe is a good idea.  If you think what we’re doing now is working, read the first paragraph of this article.   We spend more to get less than just about anybody else.

In my mind, it’s not acceptable for a nation as affluent (at least for now) as we are to have a fifth of its people uninsured.  I understand that “uninsured” is not the same as undoctored.  But it doesn’t make sense to me that the right way for millions of people to get healthcare is to wait until their needs are dire and then seek care in the most expensive possible venue – the emergency room.

That said, there’s a serious problem in the debate.  We have the Republicans decrying government intervention and insisting that the market can deliver.  With equal vehemence, the Democrats are defending a highly intrusive government role while claiming that there will be no rationing of healthcare.

As best I can tell, everybody’s wrong here.

The core underlying problem with healthcare is that it’s not actually a market.  A market is a place where multiple buyers and sellers come together, each with enough information to make at least somewhat informed decisions and with multiple options, including the option not to buy.  This is the infamous invisible hand – the natural mechanism for controlling the amount of demand for a product or service.

Healthcare doesn’t work that way.  First off, instead of a buyer and a seller, most transactions involve three parties, a seller (doctor), a user (patient) and a payer (insurance company).  The interests of the payer are diametrically opposed to those of the user.  Meanwhile, the user has the most to gain/lose, the least information, the least power and the fewest options.  These dynamics mean that normal buyer-seller equilibrium does not occur.

Moreover, one of the keys to market behavior is the ability of buyers to place a monetary value on the benefits delivered by the product or service.  This is essentially impossible with medical care.  There simply is no way to decide how much is too much for a treatment that will save or significantly improve your life.  Consequently, there is no natural upper bound on the demand for healthcare, which is why US healthcare spending is growing at nearly 7% per year in an economy with little or no inflation.

The implication is pretty obvious.  With no market to regulate demand, there has to be some externally imposed limit or we will spend ourselves into oblivion, which we’re already trying to do.  Call it what you will, it amounts to rationing.

We currently ration healthcare mostly based on the ability to pay, and to a lesser extent on the ability of doctors to talk insurance companies into paying for things they don’t want to pay for.  We also engage in a lot of cost-shifting (i.e., part of your health insurance premium pays for uninsured people to be treated in ERs), which limits transparency and manageability.

Other approaches have been tried.  The state of Oregon (formerly known affectionately as the Soviet of Oregon) explicitly rations healthcare by simply refusing to cover some treatments.  Maryland tries to strengthen the market by, perversely, mandating reimbursement rates for all healthcare providers and insurers in the state.  The idea is to eliminate the ability of large insurers to negotiate lower prices from providers, which should keep more insurance companies alive and create a better market for consumers.  How well either approach works is something I can’t say.

I don’t pretend to know what the right answer is.  I do know that pretending healthcare is a market like any other won’t get us there.

Oh, and one other thing. . .the plan that eventually passes is going to cost a trillion dollars or so that we don’t have.

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6 Responses to “A Plague on Both Our Houses”


  1. 1 steve November 27, 2009 at 6:57 am

    As usual you offer a cogent analysis of the problem. However, in this case I think you missed the major factor leading to the situation: we actually have a disease profit industry rather than a health care industry.

    By disease profit industry I mean that all the parties delivering and paying for health care are motivated by profit and not by health. Hence we spend huge amounts on lobbyists buying off our legislators to ensure that each disease profit player maximizes their profit rather than maximizes the health care provided.

    Compare this to many European countries which provide better healthcare at lower cost due to the fact that they come at healthcare from the perspective that it is a given that they should ensure they provide healthcare to all of their citizens…and come at it from a heathcare rather than a profit maximization perspective. Better heathcare at a lower cost, but also lower profit for the disease profit industry.

    Perhaps we should end government heathcare for legislators and force them to buy their own with psuedonyms so they can see what it’s like for the rest of us.

    • 2 dwallace12 November 30, 2009 at 5:27 pm

      Boy, I’d hate to think I missed a major factor, let alone THE major factor. I must be slipping. . .

      I agree and like your characterization of the “disease profit” industry. I would describe this as another very compelling reason why healthcare really isn’t a market. In the fee for service model, healthcare providers clearly are better off economically when people are chronically unwell. It’s a little like gyms – the worst thing you can do to a gym after signing up for a membership is actually show up.

      Again, think of the three-way relationship. It’s in your doctor’s interest for you to need (or at least get) lots of services. It’s in your insurance company’s interest (assuming you’re lucky enough to have one) to pay for as few of those services as possible. You’re stuck in the middle – least information, least power, and most to gain/lose.

      The Kaiser model is interesting – it combines the provider and payer into one entity. It’s a non-profit that gets a flat fee per patient. Like the insurance companies, they are best off when they pay for as little as possible. The question is whether they reduce payouts by keeping people healthy or by cutting back on the level of care they provide.

      While we’re on the subject of three-way-relationships, I was in a very nice restaurant recently, and when I asked the waitress to recommend a glass of red wine she suggested that I try the Menage-a-Trois. Here again I’m invoking my “I never make this stuff up” rule. Once I regained the ability to speak, I gave it a try. It was quite good, although I really don’t want to know how they crushed the grapes.

  2. 3 de-I November 27, 2009 at 8:50 am

    I enjoyed your post immensely along with Steve’s reply. How sad it is that not only is the real debate in Congress solely the province of those who already have their hands in the candy jar. And equally sad that the public debate resides in the realm of histrionics.

    That being said I think there is another element that needs to enter the discussion if we are ever going to have a rational system that works. That is the element of acceptance of risk. Or rather the unwillingness of the majority of the American populace to accept any risk. If we as a people say we need to spend whatever money is necessary to keep any one person alive (listen to the debates on any limit to diagnostics or treatment), then we will fail…we will bankrupt ourselves.

    And since this is the attitude of most of the voting public, I am very pessimistic on our prospects.

    • 4 dwallace12 November 30, 2009 at 5:26 pm

      Thanks for your comment, Michael. Steve (other commenter) and I have had some long conversations about how totally wacky Americans are in their (well, our) insistence that life should be risk free (all evidence from Wall Street to the contrary, although the model there is “I’ll take on lots of risk; I just want someone else to pay for it”).

      Healthcare is especially tricky, though, isn’t it? I have a friend whose first child was born about 10 weeks early. He’s now healthy, happy, and developing right on schedule. If his parents are any guide, he’ll go on to do wonderful things in life. Between the mother’s months of pre-delivery hospitalization, the child’s months in the neo-natal ICU and all the special services the child received, this kid probably has a million dollar price tag. Would you want to be the one to tell his parents that he wasn’t worth it? I sure wouldn’t.

      In my mind, that’s exactly what makes healthcare so tough and why eventually I think some kind of pretty explicit rationing is inevitable. I believe unequivocally that risk is part of life, but if it were my kid, there’s no limit to what I’d be willing to spend. (Or, more precisely, have someone else spend on my behalf. I guess I’m a Wall Streeter at heart.)

  3. 5 Len Bland November 29, 2009 at 11:29 pm

    There are other factors further removing the delivery of health care from being a market. One important one is the fact that our government provides an incentive (tax deduction) for companies to provide health care for employees. Companies want to provide health care to hire quality workers, but they also want to do it to support their profits.

    This additional party introduces even more complexity that prevents the user of health care from understanding the cost.

  4. 6 Scott Mc February 10, 2010 at 2:46 pm

    Hey Dan: I’d like you to comment on this statement: “It’s starting to look like we’re actually going to get some sort of healthcare reform.”


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