Missing ingredients in healthcare

As a practicing physician, I’ve enjoyed listening to the tussle over what to do about health care/insurance costs over the past few years.  We hear reports of millions of uninsured, ever escalating costs, and the clamor for politicians to “do something” about it.  We hear supposed health care experts proposing solutions ranging from tweaking this or that policy, or even advocating a complete government takeover of the health care industry (how’s the VA working out again?).  I’m entertained listening to their solutions, as these technocrats often have no idea what health care consumption actually is.  There is a fundamental issue at the root of the entire problem which hardly ever gets mentioned.  There is no functioning free market in health care, and there hasn’t been in living memory!

We are told that health care is somehow different from any other category of goods or services we provide to each other, and therefore the laws of economics must be ignored or suspended through magical acts of legislation.  This premise could not be any more misguided, health care is a service just like any other.  Hospitals, doctors, and nurses do not fall out of the sky.  There is not an unlimited supply of medical resources, and we must try to economize them rationally as every dollar spent on health care is a dollar that can’t be spent on something we may value more.  The economic rules that apply to the makers of cars, computers, or airplanes are in effect for health care just the same.  The primary difference with health care is its size, we consume 1/6th of the entire value of US economy on health care spending annually.  Does it seem like we are getting good value here? Our wishes that the laws of economics don’t apply are of no concern to the real world.

Here’s a skyscraper level view of how things work in a free economy, based on private property, and mutual voluntary exchange with a division of labor.  Consumers want something, producers try to anticipate the consumer’s wishes, and produce accordingly.  They provide goods or services, at the highest possible price the consumer will bear, in order to maximize profit.  Those who fail to provide what the consumer wants in the form of cheapest or best goods/services soon lose their position as producers (assuming no government bailout!).  In the free economy, the consumer is king.  The consumer decides what is produced and by whom.  This is where the phrase “the customer is always right!” originates.  A key ingredient here is a functioning price system.

Prices are a spontaneously occurring phenomena in a complex, free economy.  They function to share information among complete strangers.  You as a consumer may not care one whit how your car is produced, but the price tells you how much labor you must expend to get it.  For the producer, the price tells them what the consumers most urgently want.  Without functioning prices, both consumers and producers are lost.  They have no rational way of learning what the other wants or values.  When was the last time you saw a menu in a doctor’s office informing you what their services will cost? Contrast this with booking a hotel room, you are able to choose from an endless array of options, decide what’s right for you as an individual, and know exactly what it will cost up front.

So what’s the deal Health Care Industry, too good for prices? Well, one major issue here is comprehensive health insurance (which is not synonymous with health care by the way).  In the US, somewhere around 90% of health care costs are paid indirectly.  Meaning that when we go to the doctor, even for routine services, most of the bill is paid for by a 3rd party (insurers or the government).  Now how is this ever supposed to work rationally?  Imagine if you were to go to a restaurant, prices were not listed, and your bill would be paid by someone not present at the table.  Do you think you may order differently in that fantasy world?  When we consume health care, we have the illusion that the services are being subsidized by someone else, but they are not!  Nothing is free, please write that down.  When your insurer picks up the tab, that consumption is reflected in the premiums you (or your employer) pays.  Guess where the money originates that pays for that employer provided policy?  Hint: it’s not the employer.

Here’s the crux:  we make choices differently when we consume health care, because we feel as though we aren’t paying for it.  We tend to accept whatever the doctor tells us we need, we don’t question the necessity, and we don’t shop around.  When we aren’t taking cold hard cash out of our wallets, we tend to consume more, and not drive a hard bargain (why do you think casinos use chips rather than actual cash?).  It may not be pleasant to picture a trip to the doctor being similar to a trip to the used car dealer, but it needs to be.  With no consumer-applied downward price pressure and 3rd party payer, you can bet the farm on higher prices and more consumption.

Side note: the dirty secret in medicine is that us doctors really don’t even know if a lot of the stuff we do works.  When I graduated medical school, the commencement speaker told us “congratulations, 50% of what you just learned is wrong, we just don’t know which half”.

Now, anti-market folks will make the case that health care is different because of the vast information disadvantage consumers are at with respect to their doctors.  The people supplying the services just know far too much for the average person to be able to discern their own needs.  How condescending.  I would simply inquire; do you know how your TV was made?  Do you know all the technical differences between models?  Must you have studied to be an electrical engineer to be able to buy a TV?  Of course not, but there are people who have the information we seek, and they share it with us in many ways.  When you shop for a TV, you ask around and research!  You figure out what product meets your needs, and when you hit the buy button on Amazon, you are satisfied that you have gotten the best value for your money.  Contrast that experience with a trip to the doctor, who is often running behind schedule, lets you talk for 15 seconds, then tells you what services you need to consume.  What protects the consumer from abuse in the free market is the presence of open competition among producers, and the free flow of information in the form of prices.

The contrarian will then say that people don’t have time to shop around for health care, it’s too important!  True, when trauma or stroke strikes, there isn’t time to cross shop.  However, I would argue the vast majority of health care consumption is not emergent, it’s routine (and of questionable efficacy).  If routine care is under a functioning price system, we will then be able to learn the true value of services (I predict dramatically lower), and that will be extrapolated onto emergency services.  Somehow you and your plumber come to an agreement over how to settle the bill for a middle of the night broken pipe, right?

So here we are, trapped in the status quo, which no one could argue provides high quality, consumer satisfaction, all at the lowest possible cost.  Health care cost growth has outstripped the general inflation rate for decades.  We pay more and more, and many of us are unsatisfied with the choices offered.  This is not the result of individual bad actors; the culprit is the absence of a functioning free market.   Many call for full socialization of health care, as if that would encourage people to freely choose to consume less (no, faceless strangers in government bureaus would do that for us).  My simple suggestion would be to move in the other direction, towards a free market.  It may hurt to crack open that wallet, but you are already doing it anyways, whether you realize it or not!