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Examples of free market health care
There are, however, no examples of successful health care based on the principles of the free market, for one simple reason: in health care, the free market just doesn’t work.
That's Paul Krugman. I would frame this point a little differently. There are in fact plenty of people who buy their health care in a more or less free market setting, most of all in Latin America but all over the world. It's far from obvious that these markets fail in efficiency terms ("compared to what?" is the obvious follow-up). For the wealthy in Latin America these markets seem to work well. They work much less well for the poor but is that because of market failure or because these poor simply don't have much money to spend?
One possibility is that the main problem with these markets is distributional rather than efficiency. (Krugman's third paragraph recognizes this, but he doesn't use the point to reorganize the analytics of his critique. Also note some tricks. When markets fail at providing insurance, ex ante this is a possible efficiency problem but ex post it will be a problem of distribution.)
Another way to state the health care problem is this: once we try to obtain distributional objectives, supply becomes less efficient. That understanding might focus your attention on a voucher-like system, combined with deregulation. rather than government interference in provision. Another option is for government to provide nudges to have better monitoring of HMOs or insurers, to make them more trustworthy. Or maybe catastrophic-only insurance, to overcome the distributional problem where it is most severe.
You can understand the French system by citing the incentive for overtreatment and now we are back to the possibility of efficiency being the primary problem. If you limit overtreatment, by organizing doctors into poorly paid, fixed salary co-ops, you keep costs down and make some parts of the distribution problem easier to solve.
There are plenty of health care services in this country, such as laser eye surgery, or plastic surgery, which are supplied in more or less market settings. I don't consider their efficiency an open and shut case, but it's quite possible we'd be delighted if other areas of health care worked this well in terms of cost-lowering and innovation and even availability. It could be that these services are more transparent or it could be they are simply less regulated and further removed from third-party payment.
Read this post of Bryan Caplan's and ask yourself whether the Arrow problems are in fact what motivate most of the health care intervention we observe in the U.S. Maybe France is the country which took Arrow seriously.
It makes a difference whether you view the case against the market as starting with issues of efficiency or distribution and usually those concepts are jumbled together.
Sometimes I wonder how wealthy we all would have to be before we could just pay cash for our health care. I call this the Pablo Escobar solution. It's a long way away but is it imaginable at all? Does it recede as we approach it? Do we have to give up some distributional objectives to ever get there? Do we simply embrace it when the poverty line is defined as standing at $200,000 a year?
Posted by Tyler Cowen on July 26, 2009 at 07:03 AM in Medicine | Permalink
Comments
How much do doctors earn in that $200,000 poverty line future? And biochemists?
Posted by: Zamfir at Jul 26, 2009 8:24:46 AM
I do thing that Krugman is wrong - there are pockets of market based health care. Let me try and share one example of my personal experience with market pricing.
A couple of years ago I found myself "between coverage" - my prior plan had expired and the coverage from my wife's employer would no start for another month. I had an appointment with my Doctor and had two choices - go ahead with the appointment or postpone for a month until I was covered.
I went ahead with the appointment and after it ended went to the counter to pay for my visit - normally a modest co-pay. The young woman seemed a bit shocked about someone wanting to actually pay for the service they had received. She looked uo the charge on the computer and let me know I owed $74. I asked her what the "charge" to the insurance company would have been and was told it would have been $94.
I am not certain she was correct in either cost - but I have since then believed that something like 20% is what we pay for the benefit of having an intermediary involved in the system.
It is a shame that Krugman and others are not more interested in how that 20% - or whatever the number might be - can be used to improve care and make basic health care affordable.
Posted by: Lonely Libertarian at Jul 26, 2009 8:48:18 AM
I think we all need to stop conflating health care with health insurance in our thinking. There is a basically free market in health care. If a doc chooses to accept certain insurance he accepts their reimbursement rates. He can also take cash if you have it.
The health insurance "market" is what's FUBAR, and not free. Krugman's arguments apply to every kind of insurance, and yet many smart people choose to insure things anyway. He's dismissed the free market's ability to innovate, case closed, based on a 45 year old economics paper. Who's the conservative?
In the debate you hardly ever hear about people who keep terrible jobs that they hate and would quit if they didn't need the insurance. They're out there, though. The massive distortion created by having most people obtain insurance as an employment benefit puts individual seekers of health insurance at a disadvantage. What if instead of single payer, we had "single pool?"
The massive distortions created by state-mandated first-dollar coverage have made high-deducible plans economically infeasible in many populous states, like NY & NJ. What if we stopped packaging insurance with prepaid expenses?
Maybe if we stopped letting the perfect be the enemy of the good we could make some progress here.
Posted by: David at Jul 26, 2009 9:28:54 AM
@Lonely Libertarian:
"The big bucks are in triple coronary bypass surgery, not routine visits to the doctor’s office; and very, very few people can afford to pay major medical costs out of pocket"
(From the same blog post that started this conversation)
Posted by: Camilo at Jul 26, 2009 9:32:30 AM
What does Krugman mean by a successful free market health care system? Is it a system that achieves both the efficiency of free market systems and the welfare distribution and equality function of a controlled market system? Most economists probably regard that as a unachievable as free markets tend to produce outcomes that indicate economic inequality and unequal access to its primary goods and services. Such has been the experience, so it is only natural for Krugman to assert free markets as disfunctional that way. The cases from Latin America suggest exactly that.
But even if most or perhaps all examples of free market approaches in major social sectors indicate unequal outcomes, does that necessarily imply that the culprit is the system itself, or is it something else?
In my view, the problem may not be the free market itself, but the lack of philanthropist functions in a free market system. The main drive behind controlled or planned welfare systems are of philanthropist nature, i.e. to utilize the demographic power of the State through a majority of vote in order to confiscate money through taxes from the wealthy to distribute amongst the poorer so that all are given equal opportunities and services not dependent on their income. But if societies are so determined to distribute wealth that way for the most appreciated goods that are health and education, why don´t the same functions appear in a free market system? Wouldn't a free market health care system in a society determined to aid the poorer in their quest for health and education indicate a vast system of non-governmental welfare institutions based on free donations of those better off, be it individuals or even companies? But why don´t they appear?
Western societies have for the last century or so been determined to incorporate general welfare into the State, mostly successfully, and by such removed the impetus for people to allocate money freely to such functions. They have outsourced it to the State, so to speak. So isn´t the problem of bringing the older free market approach back just a basic problem of market penetration? Why, and how, can non-governmental welfare institutions compete with the image of the State as the major player on the market?
Posted by: Samuel T. Petursson at Jul 26, 2009 9:35:48 AM
The fact that health care is dominated by large corporations (hospitals that own the dr. practices, health insurance companies, lab companies) means the current system is driven by the profit motive above all else. And that is the root of the problem. I have no issue with businesses making profits, but healthcare needs a baseline social objective that has to be placed above profit making. That's impossible given the current structure of the industry. I don't have the solution, and clearly no one does and until we have a solution for the high costs and millions of uninsured, this system will continue on a path toward bifurcation based on economic strata and job type (Federal gov, large corporation) and GDP unsustainability--both of which will end in disaster. That may be what it takes to get real change that brings healthcare back to a rational system of providing care for the health of US citizens.
Posted by: Nik Kondratieff at Jul 26, 2009 9:43:17 AM
What does Krugman mean by a successful free market health care system?
There is no disputing taste. Writing in evaluative terms evades the possibility of dispute, which is convenient for a columnist such as Krugman. Krugman does not write to persuade the unpersuaded; he writes to reassure his own audience, and so avoiding the possibility of dispute (and therefore the possibility of troubling his audience) has a higher priority, to him, than persuading the unpersuaded. The Nobel comittee, which for many years delayed his deserved Nobel, now that he has abandoned economics in favor of writing professions of faith to reassure his coreligionists, has given him his Nobel, all the better to protect the cause of progressivism.
Posted by: Constant at Jul 26, 2009 9:53:04 AM
the profit motive ... is the root of the problem.
People still believe that! It's like the 20th century never happened.
Posted by: Constant at Jul 26, 2009 9:55:43 AM
Socialist generally dislike free markets because they dislike the way resources are distributed. It does not fit their views of an equitable society. Obama and Krugman are clearly in this camp with regard to healthcare.
We as a society have decided to ignore free markets in health care and attempt to provide for many who can not, or even will not provide, for themselves. This has created a huge financial problem for the government. Plus it has created incentives for some to depend on the government system and leave the private market.
People spend an increasing amount on health care. That should be expected. Wealthy societies that are aging will buy more health care. Politicians have a lot of spending that they want to do for various interest groups and object to budget constraints imposed by increasing medical costs. Society is calling for more health care, while government wants to promise more but lacks the resources to directly provide more care.
Doctors are like other businesses. When they have stable relatively high incomes they are ethical. However firms or Doctors faced with rapidly shrinking incomes, think inner city doctors dependent on medicaid, ethical boundaries get blurred. That is human nature. How Krugman thinks he can squeeze health care providers without having some game the system is unclear to me.
The first problem is that the poor lack income to buy insurance. The second problem is that the government has decided to take on responsibility without funding the obligation.
The government has rejected free markets, vouchers etc., and decided that they need to enroll more healthy people and ration care to the elderly. But to ration care based on political considerations rather then market considerations
Posted by: DanC at Jul 26, 2009 10:01:19 AM
In addition to laser eye surgery and plastic surgery, IVF and other fertility treatments are provided by a nearly free market. As popular media has shown us, these treatments are affordable for many people.
Posted by: Ian P at Jul 26, 2009 10:07:00 AM
For those advocating a free market in healthcare:
1) why does just about every other industrial nation have much lower costs than the US and at least as good quality?
2) Are we as a society prepared to let people die or suffer major health problems if they can't afford to pay?
Posted by: fusion at Jul 26, 2009 10:13:56 AM
>>laser eye surgery and plastic surgery, IVF>>
I'd expect a free market to work for things which are optional. There is little difference between buying cosmetic surgery and buying a TV for these purposes. On the other hand, there is a major difference between critical care and a TV. You can live without a TV, but not without treatment for life threatening conditions.
Posted by: fusion at Jul 26, 2009 10:16:31 AM
laser eye surgery and plastic surgery, IVF
I'd expect a free market to work for optional things (cosmetic surgery, TVs, etc.) but not for essential things (treatment for heart attack).
Posted by: fusion at Jul 26, 2009 10:19:00 AM
Krugman is a liar
Market models include: dental care, veterinary care, plastic surgery, lasik surgery, and optometry.
That the government has distorted markets since WWII to the point of near disaster is not a market failure, IT IS A GOVERNMENT FAILURE...or success, depending on your viewpoint.
Posted by: Ragspierre at Jul 26, 2009 10:34:51 AM
..For those advocating a free market in healthcare:
1) why does just about every other industrial nation have much lower costs than the US and at least as good quality?..
This is simply false. Our care is extremely good, and better than virtually anywhere. Why are you here? Go away, and leave us one place in the world where free markets can flourish. You know...diversity...!!!
Posted by: Ragspierre at Jul 26, 2009 10:42:21 AM
>>>I'd expect a free market to work for things which are optional.<<<
You mean like food, clothing, shelter...?!?!?!
Posted by: Ragspierre at Jul 26, 2009 10:44:30 AM
What about Singapore, a developed country where all health care is paid for from health savings accounts and catastrophic-only insurance policies.
Posted by: hvl9h at Jul 26, 2009 10:45:30 AM
@Fusion is asking the right questions.
To be more specific, we pay about 40% more for health care than people do in France, Germany, Canada, Japan, etc. and yet we do worse on the most basic metrics like overall satisfaction with health care, life expectancy, access, preventative care, etc. On some metrics, we do better but no one seems to be able to show that we do measurably better overall (and that's not for lack of trying). David Cutler and others have carefully documented this enormous discrepancy. At some point, we have to face this fact.
In some industries, like retailing, a freer market seems to be correlated with better outcomes. That does not seem to be in the case in health care. Arrow and others provide an explanation for why this is the case. The market is wonderful mechanism that works passably well more often than most people realize, but it's not a magic elixir that always and everywhere solves our problems.
Shouldn't economists be willing to learn from what the data are showing us on healthcare? Or should ideology rule, regardless of the evidence?
Posted by: a student of economics at Jul 26, 2009 10:46:00 AM
"...but healthcare needs a baseline social objective that has to be placed above profit making"
Why ? Cars are a necessity in most of the US, do brake jobs need a "baseline social objective", whatever that banality means ?
"...why does just about every other industrial nation have much lower costs than the US and at least as good quality?"
The costs are "lower" because the government is subsidizing through absurd taxes. The "quality" isn't as good. The problem with "quality" is that it is ill defined, and things like infant mortality and life span trotted out as indicators of "quality". Infant mortality is a canard because of the difference in counting that what is an "infant mortality". In the same vein, life span is a bogus indicator because of the disparity between rates of accidental death (higher in the US) and the like.
If one defines "quality" in terms of access, choice, quality & availibility of ancillary care, quality of life, quality of hospitals, and access to the latest devices and treatments (most of which come from the US), the rest of the world is sucking dust.
Posted by: Winslow at Jul 26, 2009 10:47:50 AM
Camillo - I don't get your point - I am not suggesting that major surgery does not warrant insurance coverage - but a high deductible "catastrophic coverage" policy is very different - and costs a lot less than a comprehensive insurance policy that pays for office visits - and tests that may or not be actually needed [but are authorized]. I have roughly half as money blood tests a year as my insurer would readily pay for because I got tired of getting stuck by a technician every six weeks.
Mandated coverage of things like marital counseling and extension of employer provided insurance coverage into dental and eye care have also added to costs - without meeting a real clear need.
I think Tylers basic question is getting lost - at what level would it make sense for us to "self insure" against most health care expenses.
Posted by: Lonely Libertarian at Jul 26, 2009 10:49:26 AM
> "IT IS A GOVERNMENT FAILURE"
How does one unravel and separate government intervention (HMO Act of 1973) from free market (dentistry, optometry) from medicare/medicaid/insurance companies acting like monopolies (e.g., pre-approval for treatments)? Seems this would be a requisite for any talk of reform to make any sense. I've read plenty of "this is what's wrong" but never a dissection of who is doing what that necessitates reform.
Posted by: Colin at Jul 26, 2009 10:51:16 AM
>>>Shouldn't economists be willing to learn from what the data are showing us on healthcare? Or should ideology rule, regardless of the evidence?<<<
You made a bunch of unsupported conclusory statements. The metrics I have show the opposite of your claims (i.e., that Americans are very happy with their health care quality, if not cost, etc.).
Why not address the factual government market distortions imposed on our system since WWII, with FDR's wage and price freeze?
Why was health care provision in the US prior to these distortions perfectly fine?
HMMMMMMM....??
Posted by: Ragspierre at Jul 26, 2009 10:53:34 AM
Please, our health care system is so distorted and manipulated by existing regulations and subsidies that it's impossible to call it free market with anything like a clear conscious. Our system has been getting more and more out of whack for at least the last 40 years.
One quick fix, allow the existence of something in between Doctor and Nurse. Must it really be so rigid? Is what we currently have really the optimal makeup of certifications?
Posted by: Daniel at Jul 26, 2009 11:11:14 AM
@Ragspierre says "You made a bunch of unsupported conclusory statements. The metrics I have show the opposite of your claims"
Google "satisfaction with health care by country" or something similar and you will quickly find that the overwhelming evidence is that the US lags. E.g. http://www.gallup.com/poll/117205/americans-not-feeling-health-benefits-high-spending.aspx
Objective metrics like life expectancy are also mediocre, at best, for the U.S. compared to other nations. Please show me evidence that any of my statements is not accurate.
In a way, the success of other systems is very good news for us. We have plenty of existence proofs that health care can be delivered much more cheaply and effectively. Why not embrace this and learn from these examples? Think how much better off GM would have been if they had embraced Toyota's example instead of stubbornly closing their eyes to better methods in use in other nations. It's not unpatriotic to learn from others.
Posted by: a student of economics at Jul 26, 2009 11:12:09 AM
Daniel: you mean like physician assistant or ANRP?
Posted by: Colin at Jul 26, 2009 11:13:06 AM
