Republicans' Free Market Health Care Fantasy

Conservative politicians and others in and out of government think of health care as a homogeneous product in the market. Usually a homogeneous product, or products that are close substitutes, define an industry, synonymous with a market. For example, the automobile industry sells automobiles, though of different brands. In health care we have a market of health care providers, such as hospitals and clinics of various types, health insurance market and a market for pharmaceutical drugs.

On the consumer side we have consumer patients. However, consumers are also providers of their own health care, as when they control their diet and engage in physical activity. In addition, out of six major government (third party) programs, Medicare and Medicaid, the biggest programs, covered slightly more than one-third of the population in 2015.

The myth, especially among GOP conservatives, is that there is a high degree of free market competition where the “law of one price” prevails in markets for hospitals, clinics, insurance industry and pharmaceutical drugs. Most GOP politicians in Congress have consistently propagated the free market myth. It was one of the centerpieces of the legislative bill proposed and withdrawn by Rep. Paul Ryan in the House of Representatives.

Politicians tend to prime their constituents with this falsehood that overtakes, among many Americans, their own conscious reasoning in deciding the real economic status of the current health care system. Professor and Nobel Laureate Daniel Kahneman states in his book, Thinking, Fast and Slow, “Studies of priming effect have yielded discoveries that threaten our self image as conscious and autonomous authors of our judgments and our choice.” Based on his experimental research Professor Kahneman further argues that,

“A reliable way to make people believe in falsehoods is frequent repetition, because familiarity is not distinguished from falsehood.”

The facts are that none of the component markets in health care are free in the sense outlined above. Providers, especially investor owned, are monopolistic. They engage in non-price competition in heterogeneous output of services and in inducing demand, since insurance coverage and government programs make consumers less sensitive to prices. Prices of medical services and drugs (see Steven Brill report, “Bitter Pill”, Time, March 4, 2013) have very large variability, which tends to increase insurance premiums. In addition, most small towns have a very limited choice of hospitals or clinics, with a limited choice of services. There is locational disparity in the number of providers of medical care, hence locational monopolies in small towns. However, contrary to other markets, in the health care providers’ market even the large number does not bring down the cost, due to increased competition for and hence wages of physicians. Medical drugs are subject to import controls and patent protection, thus contributing to monopoly power and price escalation.

Consumers’ choices of hospitals and/or clinics are governed by choices of physicians. Since there is asymmetrical information problem between providers and patients, physicians are supposed to represent the consumer patient to fill the information gap. However, they are influenced by monetary and non-monetary incentives provided by hospitals and drug companies in their quest for maximizing revenues and /or profits. The study by Jeffrey and Joshua Gottlieb, American Economic Review, April 2014, finds that physicians’ supply of health care does significantly respond to financial incentives. Medicare is involved in funding projects to facilitate information flow between doctors and patents.

The insurance industry suffers from moral hazard problem, one of the causes of market failure, when patients’ incentive to take care of their health decreases when an insurance company pays most of the cost of care. However, this problem is partly remedied by increasing deductions and co-pays in such instances. The industry is also implementing incentives in providing preventive health care mandated by the Affordable Care Act (ACT), such as paying for obesity prevention strategies and for gym services.

Kaiser Family Foundation reported in 2010 that in the large group insurance market, the insurance industry is monopolistic, according to Herfindahl-Hirschman Market Share Index. Insurance companies also face adverse selection problem when they end up with mostly unhealthy people in the pool. It increases premiums, thus further discouraging healthy people to buy insurance, especially when emergency care is guaranteed. To keep premiums low, the insurance pool must have a mix of young and old, and healthy and unhealthy people.

Many companies have opted out of some areas under ACA because they did not have enough healthy people in the insurance pool to keep premiums low enough to attract such people to buy insurance. That is the reason for the mandate in the ACA to buy insurance. Congressional Republicans’ opposition to mandates is indicative of their poor grasp of the insurance business.

The fact is that ACA mandate incentives are weak. One probable way to bring down insurance premiums would be Medicare coverage for all. In such a program all would be required to pay into the fund according to their ability to pay, Medicare would be allowed to negotiate drug prices and design payment schemes, as is done now, for providers’ services in the market. Insurance market would be allowed to issue policies such as Medicare Advantage supplemental insurance.

Another possible course of action could be that, rather than reinventing the wheel of health care, they may try to fix the problems in ACA and incentivize the component markets in health care to improve on efficiencies and relax import controls on drugs. I hope that Republicans in the Congress, and policy makers, look at the reality of markets in health care and do not get swayed by the free market rhetoric.

Our nation’s health crucially depends upon the health of its people.

Mathur is chair and professor of economics and professor emeritus, Department of Economics, Cleveland State University, Ohio. He resides in Ogden, UT.

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