Market Forces & Reform
Market Forces and Health Care Reform
Dr. Joe Jarvis, Utah Policy Daily
First published June 15, 2011
Health care is not a commodity that can be efficiently distributed by a market. In the United States, we continually pretend that market dynamics just need to be invoked (by making quality and cost information more transparent, etc) and the invisible hand of Adam Smith will take care of the problem. Unfortunately, market forces will never fix health systems, though accountability can. Allow me to explain:
A market exists when a completely informed buyer can freely choose to enter into a transaction with a self-interested seller without any positive externality. Market efficiency is demonstrated when demand rises as price declines. None of these conditions is an accurate description of health care.
a) Buyers of health care are not completely informed and even with web-based "transparency" of price and quality, they can not become completely informed. Physicians spend a decade gaining knowledge and experience so that their clinical judgment can be relied upon by patients and families. no amount of web-based research will ever replace that clinical judgment/skill. This lack of information on the part of patients makes impossible the usual dictum of 'caveat emptor' and it is the reason for the ethical obligations of physicians and nurses, embodied by the Hippocratic Oath.
b) Buyers of health care, especially acute care (trauma, intensive illness, emergent surgery, etc which accounts for 80% of costs), are not free to decide whether to purchase health services. They are constrained by their condition and are generally making few if any decisions about what happens to them. No one is forced to buy a car--one can choose a bus ticket, bicycle, or tennis shoes instead. This is manifestly not true of health care.
c) Sellers of health services are not supposed to act in their own self interest. Ethical and legal restrictions have evolved restraining doctors, hospitals, skilled nursing facilities, and all other health institutions and professionals. They are all supposed to place the patient's interests before their own. This has created very awkward situations in the for-profit settings, where the executive officers of the corporation have a fiduciary duty first and foremost to make as much money as possible for the shareholder, which is an interest in direct opposition often to the care of the patients. Greed is supposed to be an important motivator for sellers in a free market, but we do not tolerate physicians and nurses whose greed pre-empts the best interests of their patients.
d) Positive externality is an economic term referring to a situation when someone other than the buyer or seller has a legitimate interest in the outcome of a transaction. Generally, positive externalities do not exist in markets. I don't care what kind of shoes you buy, or car, or food, etc. Those decisions matter for you but not for me. However, I do care whether you are treated for TB, your children are immunized, and your extended family members receive proper care if injured. Perhaps the infectious disease examples are obvious to you concerning why I should care about others access to health care. Access to trauma surgery also matters to me because if I am ever injured, my best hope for survival is if the trauma system is in constant use making it always optimally functional (that's why it is called the practice of medicine). We have massive infusion of tax dollars into health systems because of positive externalities. What market of $2.5 trillion is based on $1.5 trillion in tax revenues?
e) The inverse relationship between price and demand does not hold for health services. No one ever bought an appendectomy because it was on sale. Demand for health services is determined by epidemiology (the frequency of disease and injury), not by price.
Thus, the underlying presumption that market forces will solve our health care woes is not correct. Lack of accountability in our health system is not a market failure, since health care is not a commodity efficiently distributed by market forces. Rather, lack of accountability in health systems is a social failure. Preventable hospital injuries can be discovered and eliminated not by individual buyers (patients) but by public health agencies. Reducing inefficiency waste in health financing should be the job of the insurance commissioner and a (as yet to be established) health benefit commission. A health benefit commission is the vehicle to reduce massive variations in the practice of medicine and surgery and the all too frequent use of inappropriate care. With socialized health financing (which we already have) and socialized accountability (which we must create), private physicians and hospitals will be free to do what they cannot do now: focus on the patient and provide highest quality care.