The Market-Based Healthcare Fallacy

One of the primary goals of the Republican effort to ‘repeal and replace’ Obamacare is to achieve so-called ‘market-based’ healthcare.  In the conservative world view, every complex social problem can be solved by the magic of the ‘free market’.

Of course everyone understands that government tends to be bureaucratic and inefficient and that market-based, competitive industries are preferable to monolithic, centrally-controlled bureaucracies.  But selling toothpaste and providing healthcare are two very different things, and there are certain things in a society where market forces are not as efficient nor as compelling.  For example, we do not generally outsource our military to the free market or our legislature (though perhaps that might be a good thing . . . ).

The free market and associated market forces work best on commodities, products or simple services in direct buy/sell relationships.  A consumer purchases a product or service based on a combination of quality and price, and the competition for the consumer’s dollars causes the supply chain – retailer, manufacturer, etc. – to become more efficient and the products and services of higher quality to earn the business.

But healthcare is not a simple buy/sell relationship.  Consumers do not directly buy healthcare services – they are too costly.  Instead, a consumer buys an insurance plan that pays for the services.  But how much healthcare service a consumer utilizes is a complex interplay between healthcare providers (doctors and hospitals), the patients (consumers) and the insurance companies.  Efficiency, quality and cost reduction are not simple concepts here.  Having a consumer visit doctors less frequently or having the doctors prescribe fewer tests or drugs might seem like good cost reductions and improvements in efficiency, but the result might be long terms problems and massive increases in the cost.  It is not likely that these very nuanced and long term aspects of the healthcare relationship will be comprehended and improved by a short-term, profit-oriented market approach.

When we talk about market-based healthcare, we are talking about competing healthcare insurance programs.  At first blush, this sounds like a good thing – as insurance companies compete for healthcare dollars they would in theory become more efficient and find cheaper ways to deliver healthcare for their customers. 

But the question is how would they reduce those costs and gain efficiencies?  The insurance companies have four primary cost factors – (1) their own administrative costs, (2) hospital costs, (3) physician costs and (4) the ‘use’ of the insurance by their customers – i.e. how sick they are and how much healthcare they utilize.

The easiest and most lucrative way for insurance companies to be more competitive and ‘efficient’ is for them to control the 4^th factor – how much their customers utilize – by enrolling a relatively healthy set of customers, excluding people with chronic healthcare problems and denying or restricting services.  This is what insurance companies have been doing for years. 

A relatively small amount of benefit can be obtained from controlling the first factor, administrative costs, though I imagine it is the one advantage that this structure has over a single payer system. 

The insurance companies can pay hospitals and doctors less and insist that they become more ‘efficient’, but that is a very indirect process and it is not at all clear that a multiplicity of insurance companies with varying schemes of healthcare policy can impact those areas as well as a single payer with a unified vision can.

Giving the insurance companies and consumers a ‘free market’ with few restrictions will work great for the healthy and those who work for generous employers who are willing to foot the bill for great healthcare benefits.  But as seen in the past, this system will be a nightmare for people with chronic issues or sudden catastrophic illnesses, or those who are under- or un-employed.

A fairly large percentage of U.S. citizens already receive healthcare from a single payer system – the U.S. military, government, Medicare and Medicaid – more than 30% of the population.  No one will claim that these systems are efficient, and their costs continue to grow dramatically.  But that is the challenge that all healthcare provisioning systems face in a time of increasing human longevity and medical complexity.

The biggest question that Americans need to answer about healthcare is whether our society is obligated to provide at least a minimum of healthcare to every member.  If the answer is yes, then a single payer system available to all, with a private insurance system in parallel would probably be the best way forward.  We need only to look at the EU healthcare systems for excellent examples.  These systems are far from perfect, but they are generally valued by their constituents as preferable to the U.S. system.

A market-based healthcare system would almost certainly not be the panacea that our conservative members of congress claim it will be.  This is one area where capitalism’s profit motive will create more problems than it will solve.  Medical costs will ultimately need to be reined in, but the free market is not the mechanism to accomplish this.  Medical providers and community health experts need to drive the future of healthcare, not accountants and MBAs!