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Fundamentals: Free Markets and Health Care

As interest groups start to pick over President Bush's plans to reform Medicaid and Medicare through an increasing reliance on market forces, it's helpful to back up a bit and review a few fundamentals about free markets and health care.

First, let's look at theory:

• In the economic model of free markets, the consumer is the purchaser. In health care, the consumer usually isn't the purchaser. The Administration's desire to place more control and responsibility in the hands of the consumer, while laudable, does little to stem the tide of middlemen who stand between consumers and providers, and may well exacerbate it.
  
  
• In free markets, consumers are aware of attributes of products. In health care, consumers are often unaware of attributes of products. The goal of more control in the hands of the consumer is a good thing if it leads to active comparison shopping based on quality and cost. Unfortunately, there is little reliable information readily available today on which to base those comparisons.
  
  
• In free markets, producers are expected to maximize profits. In health care, producers aren't supposed to maximize profits. It's considered unethical. The fact that an increasing number of people today consider health care profits not only ethical but even laudable shows how far we have come in reducing health care to a commodity.

How about free markets and health care in actual practice?

• Unregulated markets can lead to massive consolidation and less competition. That's why we have anti-trust laws. Over the past decade, consolidation on both the payer and provider side has driven up costs and even reduced competition in some markets. The larger providers that are connected to capital markets to finance a medical "arms race" are making money; public and other nonprofit hospitals that provide services primarily to the indigent and low income patients are not.
  
  
• Consolidation among physicians (large specialty groups) and the growth of specialty facilities (heart, orthopedics, etc.) pick off profitable services from hospitals, increase the impact of pricing distortions and erode opportunities for cross subsidies that have traditionally financed charity care. As more physicians become disillusioned and leave networks to buy into specialty facilities and other aspects of "boutique" medicine, the web of social reciprocity is frayed even further.
  
  
• On the purchasing side, behavior follows economic cycles. With smaller human resource departments and little success in collective "push back" on plans and providers in the past, those employers who still offer health insurance benefits (many small employers do not) have little choice but to pass on higher costs to their employees, who continue to demand the choice, broad networks and low co-pays of earlier flush times. The market responds with more individualized plans and financing mechanisms; however, there are limits to cost sharing, particularly among low income workers, and competition based on quality and cost is impeded by an absence of useful clinical information.

By placing more reliance on market forces in public programs like Medicaid and Medicare, the Bush Administration runs the risk of increasing the divide between the haves and have nots in health care access. Free markets work well if you have the money to play, but literally millions of people don't have the price of admission. Low Medicare and Medicaid reimbursement rates may well be incentives to control costs, but it won't mean much for low income patients if they find that there aren't enough providers willing to see them because "market forces" have pushed them upstream and left a broken safety net of care in their wake.

Clearly we need to place more emphasis on personal financial responsibility for health care. A dynamic market of services, plans and providers - and most importantly, a dynamic market for accurate and useful health information on quality and cost - will rise up to respond to more active and involved consumers.

But just as clearly, we need to provide access to health care to all of those in America who, for one reason or another, are unable to get it on their own. That's what you do in any civilized and caring society.

Market forces alone won't accomplish this. We need strong public programs and reimbursement rates sufficient to sustain a safety net system, with costs spread fairly throughout the entire population. We need to encourage and support those who enter health care because they want to do the right thing and help others, not because they want to see how much money they can make by treating people like commodities.

For all of the talk about free markets and return on investment, there are more of these people out there than you might think.