Health Care is Not a Normal Market

September 24th, 2011 at 6:18 pm

As faithful readers know, I’m always on the lookout for market failures, and health care consistently offers rich pickings.  Most recently, courtesy of the President’s budget plan, I’m reminded of the failure of market competition to deliver lower drug costs under Medicare Part D.

Under Medicaid, drug manufacturers pay rebates to the government for the benefits they get (high volume orders) of participating in the program.  When the Part D prescription drug bill was introduced, market freaks (backed by big Pharma) argued that competition between providers would provide lower costs than the Medicaid rebate approach.  Under the new approach, each plan that sponsors Part D drug benefits negotiates specific rebates with drug manufacturers.

That’s where the magic of market competition is supposed to beat the clunky government.  Except it doesn’t (and don’t be misled on this point).   As the budget doc reports:

“…the Inspector General has found substantial differences in rebate amounts and net prices paid for brand name drugs under the two programs, with Medicare receiving significantly lower rebates and paying higher prices than Medicaid.”

By switching Medicare Part D over to the Medicaid rebate regime, we could save $135 billion over 10 years.

We keep doing this in health care, implementing policies that are supposed to tap competitive forces and constantly being surprised when they cost more than the regulated approach.  Yet every other advanced economy has figured this one out and saves the equivalent of around 5-8% of GDP compared to us (while covering their whole populations with comparable or superior health outcomes–hat tip, PVdeW).

We would do well to learn this lesson the next time Rep Ryan or whomever starts going on about injecting market competition.  That works much better for future options on pork bellies than it does for pain medication.


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16 comments in reply to "Health Care is Not a Normal Market"

  1. tom says:

    Profit is a cost.

  2. Geoffrey Freedman says:

    The problem here is we’ve got a philosophical political debate of talking points going on instead of debate on the real issues.

    The medical industry has a huge lobby, and it’s bought off a majority of our elected officials, hence the cozy way drug prices are negotiated under Medicare part D.

    Long live the top 1% and cronyism.

  3. bestliberalwriting says:

    Jared writes:

    “As faithful readers know, I’m always on the lookout for market failures…”

    Thank you. Someone needs to do this. In fact what is needed is a central depository for market failures curated by a smart, fair person. It would be a terrific check on the zealotry of market fundamentalists….

    • Bearpaw says:

      “When all you have is a hammer …”

      For some folks, The Market is the only economic tool available and the only one that *should* be available. And if it doesn’t work, the only acceptable solution is for the government to back off and let the Invisible Hand whack more little people with that hammer.

  4. jude folly says:

    this is a good start to question why ‘free market’ schemes rarely lead to lower prices. the conversation everyone misses out on is why we tolerate the medicine economy being structured for profit. there will be no controlling of costs when the goal of insurance, big pharma and hospital industries is maximizing shareholder value.

    when the conversation is the high cost of medicine i like to recall a pivotal moment from a conversation in the nixon white house between the president and one of his policy advisers, john ehrlichman. mentioning a visit he had received  from edgar kaiser, CEO of the kaiser permanente HMO, ehrlichman offered a key element to the president’s “national health strategy,” announced on february 18, 1971, the  following day.  describing kaiser’s business model, the president’s adviser stated that the CEO was “running his permanente deal for profit….  all the incentives are toward less medical care because the less care they give them, the more money they make.”

  5. Michael says:

    Health care is an utterly ordinary market. There are a LOT of markets where information is hard to come by, and decisions are hard to make well.

    • Stuart in Austin says:

      The issue that causes the medical market to inherently fail is the fact that no one values their life at its economic value.

      If you were offered the total economic value of your life for the benefit of your heirs on the condition that we drag you out in the alley and put a bullet in your head I am sure you would decline.

      Given the option, anyone with a fatal illness will desire that any cost be paid if it means they keep on breathing. It is a circumstance where it is perfectly rational not to be a rational economic actor.

  6. davesnyd says:

    The “market works” is predicated on an assumption that each individual making decisions in his or her own best interest in sum total is beneficial to society. Often true.

    But, by definition of the fallacy of composition, also can be false. When that happens, laws and regulations need to be enacted to channel behavior towards a net societal benefit.

    The Libertarian claim that the markets can fix everything ignores those situations completely. Unfortunately, as a society, we seem to celebrate the Libertarian approach while denigrating the regulations that are needed to protect the rest of society from the externalities of individuals’ decisions.

    Markets do break down. They do so whenever the decisions of individuals do not, in fact, benefit society as a whole.

  7. Rima Regas says:

    You’re so right! The two markets that aren’t markets are education and health. We need to stop treating them as if they are. They’re not, and they never will be.

  8. Steve says:

    The government just keeps trying to interfere and they simply make it worse – and there are many, many examples of this. Medicare is on its way to insolvency, and cost shifting has lead to higher costs of care for the commercially insurered to make up the difference in what the government doesnt pay doctors. If the government wanted to do something that would actually help, they could force price/cost transparency in the market. Consumers should be the ultimate arbitrators of value. The government gets in the way.

    • Chigliakus says:

      Many examples but you can’t be bothered to actually name any? I don’t buy the claim of cost shifting to the commercial insureres due to Medicare, why is it that every nation with socialized medicine pays less for better outcomes? You are asserting free market fundamentalism “Consumers should be the ultimate arbitrators of value. The government gets in the way.” with a twist, lack of “price/cost transparency in the market.” I think this is where you’re almost getting it, most markets lack price/cost transparency but fortunately in most markets a bad decision by a consumer leads to buyer’s remorse instead of buyer’s death.

  9. Tom Cammarata says:

    In health care provided by market forces, all the incentives are to maximize gain — premiums — while minimizing loss — benefits. That’s what markets do. And that’s why a market solution to health care is all wrong.

    The goal of a national health plan should be to maximize its benefits will minimizing its premiums. That is what the rest of the civilized world provides its peoples.

  10. Rich2506 says:

    My favorite example is that of a woman getting a breast enlargement. The breast enlargement is a standard basic market type of transaction because the woman has plenty of time to research the issue, she can bargain over the price and she can research how other customers have felt about the company/hospital.
    Now let’s say the new breasts start leaking into the rest of her body. All of the sudden, her market-type of transaction turns into a medical problem and she turns from a customer into a patient, even though we’re talking about her using the same doctor in the same operating room.
    Why is that? Well, there’s no time to research other hospitals because even if there’s actually plenty of time before irreversible damage is caused, she’s aware that every moment of dangerous fluids leaking into her creates still more damage to her organs. She’s going to be too panicked to calmly and diligently research any other hospitals.
    The same is true for a stroke, a heart attack, a burn from a fire, etc., etc. No one is going to research a medical procedure before it’s needed and by then it’s too late.
    No, a medical procedure is not like a market transaction. Never was, never will be.

  11. Gregory Wilson says:

    It’s saddening enough to know that Health Care is considered a “Market” but to know that there are people out there having money for Plastic Surgery when others don’t have any to pay for their Medical Expenses.

    When could we expect change on this? Hope it’s soon..

  12. Helikopterflug says:

    I couldn’t agree more with Gregory, as Health Care is more of right that a privilege hence it shouldn’t be considered as a market. In fact, everyone deserves a right to be treated when they need to, not to be asked first if they’re insured before they do so.

    Sad to say this is the current situation.

  13. Jake says:

    There is a lot of talk in the comments about “free market schemes”. There is no free market. The “free market” is regulated by the government in various ways. For example, you need a license to practice medicine and drug makers get patent protection. Perhaps even more important, new drugs need to be approved by the FDA. The field of medicine is a highly regulated market. The competitive advantage is a often found in using these regulatory mechanisms to create monopolistic like domination. For example, drug makers start scrambling for new uses of blockbuster drugs just before the patent runs out so that they can re-patent them and extend their legal monopoly. Another example is health insurance. A small alternative medical practice might like to offer its own home grown insurance policy to its patients where they pay a monthly fee for unlimited visits. This though is illegal. So food for thought – when we talk about free market schemes, we should also talk about these sanctioned mini-monopolies that impede the free market.