HEALTH Why markets can’t cure healthcare

[FarmerJohn]

by Paul Krugman
July 25, 2009

A significant number of Americans believe that the answer to our health care problems — indeed, the only answer — is to rely on the free market. Quite a few seem to believe that this view reflects the lessons of economic theory.

Not so. One of the most influential economic papers of the postwar era was Kenneth Arrow’s Uncertainty and the welfare economics of health care, which demonstrated — decisively, I and many others believe — that health care can’t be marketed like bread or TVs. Let me offer my own version of Arrow’s argument.

There are two strongly distinctive aspects of health care. One is that you don’t know when or whether you’ll need care — but if you do, the care can be extremely expensive. 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.

This tells you right away that health care can’t be sold like bread. It must be largely paid for by some kind of insurance. And this in turn means that someone other than the patient ends up making decisions about what to buy. Consumer choice is nonsense when it comes to health care. And you can’t just trust insurance companies either — they’re not in business for their health, or yours.

This problem is made worse by the fact that actually paying for your health care is a loss from an insurers’ point of view — they actually refer to it as “medical costs.” This means both that insurers try to deny as many claims as possible, and that they try to avoid covering people who are actually likely to need care. Both of these strategies use a lot of resources, which is why private insurance has much higher administrative costs than single-payer systems. And since there’s a widespread sense that our fellow citizens should get the care we need — not everyone agrees, but most do — this means that private insurance basically spends a lot of money on socially destructive activities.

The second thing about health care is that it’s complicated, and you can’t rely on experience or comparison shopping. (”I hear they’ve got a real deal on stents over at St. Mary’s!”) That’s why doctors are supposed to follow an ethical code, why we expect more from them than from bakers or grocery store owners.

You could rely on a health maintenance organization to make the hard choices and do the cost management, and to some extent we do. But HMOs have been highly limited in their ability to achieve cost-effectiveness because people don’t trust them — they’re profit-making institutions, and your treatment is their cost.

Between those two factors, health care just doesn’t work as a standard market story.

All of this doesn’t necessarily mean that socialized medicine, or even single-payer, is the only way to go. There are a number of successful health-care systems, at least as measured by pretty good care much cheaper than here, and they are quite different from each other. 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. And people who say that the market is the answer are flying in the face of both theory and overwhelming evidence.

http://krugman.blogs.nytimes.com/

 

[gdpetti]

I could post the article, but this chart pretty much says it all. fair use http://www.escapefromamerica.com/2009/06/why-healthcare-is-killing-america/

 

[nanna]

Krugman's argument above is presented in an either/or scenario.

I believe there is a combination of structural change and free market which would be better than what we have now, as well as better than what I understand is being proposed.

For example, the current proposed legislation would basically destroy HSA (high deductable, low premium oriented) regimes ... which would take out of the system those who prefer to self-insure except in the case of catastrophic situations. But, those who self-insure can negotiate better rates because they can pay cash on the barrelhead rather than the doctor having to wait however long to get paid from insurance.

Young folks without children, particularly, are disadvantaged by the expense versus the benefits of the proposed legislation - the removal of the HSA just throws salt in the wound as well.

For the bigger pictures, a better alternative would be to create healthcare cooperatives, in a similar fashion to rural farm credit banks or utility cooperatives, where groups could negotiate "volume discounts" and perhaps be backstopped by the Gov agencies, but the intent would be for them to be self-sustaining. These cooperatives could cross-sell to the small businesses they already serve to a great extent.

Just as distributed architecture made its way through technology, and now is making its way through electricity, the de-centralization of social systems is due to begin, IMO.



nanna

 

[FarmerJohn]

Nana, you seem to be an advocate of something like the French system.

FJ

The French health system combines universal coverage with a public–private mix of hospital and ambulatory care and a higher volume of service provision than in the United States. Although the system is far from perfect, its indicators of health status and consumer satisfaction are high; its expenditures, as a share of gross domestic product, are far lower than in the United States; and patients have an extraordinary degree of choice among providers.

Lessons for the United States include the importance of government’s role in providing a statutory framework for universal health insurance; recognition that piecemeal reform can broaden a partial program (like Medicare) to cover, eventually, the entire population; and understanding that universal coverage can be achieved without excluding private insurers from the supplementary insurance market.

http://www.pubmedcentral.nih.gov/articlerender.fcgi?artid=1447687

 

[FarmerJohn]

A public option would also drastically level the playing field when it comes to over-50 workers.

FJ


http://blog.buzzflash.com/contributors/2026 (by Steve Corrick)

...So here's the dilemma: There are increasing numbers of 50 and older workers who cannot find good paying jobs commensurate with their successes and credentials because of the cost of providing them with health care. So what do they do instead?

With No Insurance, Unemployed Workers Can:

1. Retire early. If there's some small pension out there, such as one from the government or the military, it's easier to retire than to keep fighting for a job when your health insurance costs make employers unable to hire you.

2. Go bankrupt. If you have serious medical conditions, the only way to get Medicaid is to go bankrupt. Then the government will take care of you. This means you have to blow through your pension that you've worked all your life to save, and that means that you'll be living on the government dole for the rest of your life.

3. Get a job at a convenience store. As long as they don't have to pay benefits, they can pay you $7.50 per hour and know that you'll probably show up for work every day, probably won't miss work because you took Ecstasy and danced all night, and won't mess up the reconciliation of the store receipts at the end of the day.

4. Be a consultant, independent contractor, or self-employed realtor. You can hire out and your employer won't have to pay benefits. This can sometimes offer you good money and, if they hire you as a consultant, your employer gets all your expertise and none of your health insurance costs. You, on the other hand, are still stuck with soaring (or unavailable) health insurance, with the hope that you won't keel over and blow it for your family and retirement and with hope is that you can scrape through until 65 when Medicare kicks in.

5. Live on the street. According to a 2006 The New York Times article an ever increasing percentage of the homeless in New York are between 55 and 65.

6. Get married to get access to someone else's insurance coverage.

Problems Without a Public Option:

1. You'll probably have to use up your pension. You know, the one you've worked all these years to save that was supposed to help you retire in comfort. Your problem, of course, was just that you didn't know you were starting a savings plan so that it could be harvested at 55 by some pharmaceutical company or some hospital. Silly you! You believed that crap about saving for a comfortable retirement.

2. You'll quit contributing to Social Security at any significant rate and will put additional strain on a system you should have been contributing to at your highest pre-retirement levels.

3. American companies won't be able to hire you -- even though they desperately need experienced, dedicated employees -- because the company's accountants and shareholders won't let them.

4. Without proper and affordable medical care, your health may decline, but then again, there's always bankruptcy and Medicaid.

5. You'll probably have to seek early government assistance or accept whatever minimal level of Social Security they'll offer. After all, both still pay better than the greeter's job at Wal-Mart.

On the other hand, if, pray God, we get a public option whose premium doesn't discriminate based on age or pre-existing conditions, the entire job situation for older workers will change beyond belief virtually overnight.

With a Public Option:

1. Employers will be able to hire you (or not) based on your experience and qualifications. What a concept! Maybe someone with a degree and a 30-year track record of job success might actually make a good new hire? Get outta' here....

2. Fewer older employees will lose their high-paying positions, because the cost of their health care will no longer overshadow their continuing ability to do their job well.

3. More workers will work extra years before retiring. Why quit early if you're making good money and you're contributing to the success of your company?

4. With more workers working extra years, some of the increasing pressure on Social Security will be relieved.

5. Unions will be able to negotiate for better pay and better safety. They won't have to fight for expensive health care benefits that certainly offer less benefit for younger workers -- except, of course, when they really, really, really need them.

6. American corporations can be come more competitive as the crushing health care burden that sunk General Motors are no longer eating as heavily into their profits.

7. Businesses will make fewer mistakes driven by youthful exuberance and inexperience. It's great that younger workers have the drive and energy to push goals forward, but it makes sense to have top management decisions made not just by youthful visionaries, but also by those who've seen the consequences of rash decisions made by too much testosterone and Red Bull. (The Internet boom comes to mind.)

8. Uninsured health costs paid by the government would go down.

9. Hospitals could stay in business because they would reduce unpaid care provided to those without health insurance.

10. The general health of the 55-65 demographic ought to improve a bit as needed medical care can be accessed as needed, rather than only when situation become desperate.

11. State funded workman's compensation costs would go down, thereby making American employers more competitive.

12. More money will be available for banks to loan, because American savings rates will go up, when IRAs are no longer bled dry by medical bills.

13. Bankruptcies and foreclosures will go down. 50% of all bankruptcies are medically related and 25% of those facing foreclosure say their inability to pay is related to medical problems.

14. When we die, we'd get to quit having to answer all those embarrassing questions from St. Peter about why the richest country on Earth wasn't willing to provide basic health care to many of its citizens. ("And the King shall answer and say to them, Truly I say to you, Inasmuch as you have done it to one of the least of these my brothers, you have done it to me." Matthew 25:40.)

So our choices are stark:

1. We can continue as we are, with our top priority clearly demonstrated as the need to offer an earnings bonus to insurance and health companies at terrible personal, physical, and financial cost to a generation of older, injured, and sick workers. Or,

2. We can create a public option that covers all uninsured workers, thereby reducing health care costs by $150 billion over 10 years (according the Congressional Budget Office). We'll also increase American competitiveness, increase America's healthiness, dramatically reduce its medical costs, bolster Social Security, and we'll end the embarrassment of being the only first-world country that lets millions and millions of its citizens suffer without health care.

 

[Lynn]

...So here's the dilemma: There are increasing numbers of 50 and older workers who cannot find good paying jobs commensurate with their successes and credentials because of the cost of providing them with health care. So what do they do instead?


A simple solution would be for them to pay their own insurance. Problem solved.

I'm uncomfortable with the twist that national heath care is going to be a life saver for older workers.

 

[Lynn]

Krugman's argument above is presented in an either/or scenario.

I believe there is a combination of structural change and free market which would be better than what we have now, as well as better than what I understand is being proposed.

For example, the current proposed legislation would basically destroy HSA (high deductable, low premium oriented) regimes ... which would take out of the system those who prefer to self-insure except in the case of catastrophic situations. But, those who self-insure can negotiate better rates because they can pay cash on the barrelhead rather than the doctor having to wait however long to get paid from insurance.

Young folks without children, particularly, are disadvantaged by the expense versus the benefits of the proposed legislation - the removal of the HSA just throws salt in the wound as well.

For the bigger pictures, a better alternative would be to create healthcare cooperatives, in a similar fashion to rural farm credit banks or utility cooperatives, where groups could negotiate "volume discounts" and perhaps be backstopped by the Gov agencies, but the intent would be for them to be self-sustaining. These cooperatives could cross-sell to the small businesses they already serve to a great extent.

Just as distributed architecture made its way through technology, and now is making its way through electricity, the de-centralization of social systems is due to begin, IMO.



nanna

I agree with your solution. The health problem isn't a one size fits all.

 

[Garryowen]

Both of these strategies use a lot of resources, which is why private insurance has much higher administrative costs than single-payer systems.

I'd like some proof that .gov admin costs are less than private insurance companies. I'm old enough to have seen enough .gov waste to believe ..gov never operates efficiently, neither does it have any incentive to do so.

For a number of years we participated in a Christian cost-sharing organization. Our monthly contribution amounted to about 60% of what our insurance premium would be. We had no complaints, but the state moved in with a cease and desist order to prevent the ministry from operating in our state. Personally, I think it could have continued if some money was donated to someone important, but that's only my opinion.

I have friends who are Amish, and they carry no insurance at all, choosing to help one another in a crisis. I asked him one day how he thought their costs would compare with participating in a plan such as we had. He replied that he had the same question and had done some calculations. His community had been hit unusually hard that year, having a premature baby in neo-natal IC for an extended time, and a particularly expensive heart surgery, in addition to the normal needs that crop up. He said that, surprisingly, paying their own way turned more cost effective than participating in a group plan such as we had.

That says something about administrative costs in insurance, and about how communities can address medical costs. In our case, government interference ran up our costs another 35% for a satisfactory arrangement to provide for our care.

"The market" may not be an accurate term for providing medical care, but there is no substitute for freedom in finding solutions. And freedom is often the first casualty when government takes over any enterprise.

And, also, when I am paying for my medical care, I want to know whether the same care might be available at a more affordable price. When you know the insurance company is paying everything above your co-pay, usually you don't bother to ask.

regards,

Garryowen

 

[The Freeholder]

How do we know the free market couldn't "fix" health care? We haven't tried it in our lifetimes.

 

[FarmerJohn]

...So here's the dilemma: There are increasing numbers of 50 and older workers who cannot find good paying jobs commensurate with their successes and credentials because of the cost of providing them with health care. So what do they do instead?

A simple solution would be for them to pay their own insurance. Problem solved.

I'm uncomfortable with the twist that national heath care is going to be a life saver for older workers.

I'm mystified about how some of us might go about doing that.

Example: me. Age 56 Good health except for a diagnosis of Chronic Lymphocytic Leukemia in 2001. I received treatment (conservatively valued at $50,000 in 2006. I'm considered to be in "partial remission". It is very likely that I will need treatment in the next ten years. My personal health insurance costs have now risen to over $750/month. If I want to change jobs any new employer will take one look at my situation and go "hell no!"

Should my current employer vanish there would be no way whatsoever that any sane employer would take on an employee that would be expected to cost the company insurer $75,000 - $100,000 in the net few years (or more if a stem cell transplant is indicated).

Health insurance is one of those things that makes sense to do nationally to cover everyone. Young people could pay in and (except is a very few unfortunate cases) not cost anything. Young and healthy people don't stay that way forever. Everything that I've seen on public insurance costs (overhead) says that public costs (Medicare) run in the low single digits while private insurance (i.e. Cigna - who's own employees sometimes can't afford the high deductible) run to 25% - 27%.

How else could they be affording the lobbyist fees to derail a single-payer or even a public option for a new health insurance plan?

FJ

 

[Lynn]

Sorry about your health. A relative had it and he lived a good long life.


You should do a lot of reading about how this health care will apply to you at your age. It may not be what you are hoping for.

 

[magnetic1]

...So here's the dilemma: There are increasing numbers of 50 and older workers who cannot find good paying jobs commensurate with their successes and credentials because of the cost of providing them with health care. So what do they do instead?


A simple solution would be for them to pay their own insurance. Problem solved.

I'm uncomfortable with the twist that national heath care is going to be a life saver for older workers.

yeah right, I am high risk because of asthma and diabetes and there is no way I could ever afford the premium and I have not had any emergency care for either my whole life and I am in that 55 and older group! So, work hard, get screwed and help the illegals get it all...what a deal!

 

[Y2kO]

There are two strongly distinctive aspects of health care. One is that you don’t know when or whether you’ll need care — but if you do, the care can be extremely expensive. 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.

Klugman is such an idiot. He doesn't even know what a free market is and doesn't want to know. He likes the current socialist system better. Get the government out of health care and you would see costs drop dramatically. Let people shop for the best price and service and watch the free market return. Routine office visits at $175 for 30 minutes is pretty good money if you ask me. And triple coronary bypasses wouldn't even be necessary if we had a free market where health care specialists could provide alternate natural medicine. Who would go for the triple bypass when it could be resolved much less drastically and cheaper?

 

[Ender]

I'd like some proof that .gov admin costs are less than private insurance companies. I'm old enough to have seen enough .gov waste to believe ..gov never operates efficiently, neither does it have any incentive to do so.

For a number of years we participated in a Christian cost-sharing organization. Our monthly contribution amounted to about 60% of what our insurance premium would be. We had no complaints, but the state moved in with a cease and desist order to prevent the ministry from operating in our state. Personally, I think it could have continued if some money was donated to someone important, but that's only my opinion.

I have friends who are Amish, and they carry no insurance at all, choosing to help one another in a crisis. I asked him one day how he thought their costs would compare with participating in a plan such as we had. He replied that he had the same question and had done some calculations. His community had been hit unusually hard that year, having a premature baby in neo-natal IC for an extended time, and a particularly expensive heart surgery, in addition to the normal needs that crop up. He said that, surprisingly, paying their own way turned more cost effective than participating in a group plan such as we had.

That says something about administrative costs in insurance, and about how communities can address medical costs. In our case, government interference ran up our costs another 35% for a satisfactory arrangement to provide for our care.

"The market" may not be an accurate term for providing medical care, but there is no substitute for freedom in finding solutions. And freedom is often the first casualty when government takes over any enterprise.

And, also, when I am paying for my medical care, I want to know whether the same care might be available at a more affordable price. When you know the insurance company is paying everything above your co-pay, usually you don't bother to ask.

regards,

Garryowen

Absolutely.

Also my POV is that a free market in health care will bring down prices to an affordable rate.