Health Care and the Free Market: Never the Twain shall Meet

This was originally published in the Mercury News on 8/21/09

By Bruce Wydick

Special to the Mercury News

Posted: 08/21/2009 05:43:11 PM PDT

Updated: 08/22/2009 06:18:04 PM PDT

One of the central arguments of those opposed to health care reform is that the free market should remain the principal mechanism through which health care is provided to Americans. This argument seems to be based on the belief that the market ought to bring the same level of efficiency and functionality to health care as it does with other goods and services. But health care has never operated under a free market, it never should and it never will.

Markets are wonderful things, and they do a marvelous job of allocating resources in the vast majority of the economy. The free market shines for goods like computers, food, clothing, books and cell phones. In markets for such goods, there is a high degree of information and accountability, consumer decisions have little impact on outsiders and there is little risk. Health care, however, is different. What the work of several recent winners of Nobel Prizes in economics has shown is that where there is an asymmetry of information between buyers and sellers, the free market breaks down. Economists have demonstrated that this problem not only affects health care, but also financial markets — another economic sore spot for our economy.

With health care, the problem stems from people (rightly) paying for their health care through health insurance, where patients have better information about their health than insurers. This leads to a problem called adverse selection, where based on their willingness


to pay higher premiums, people with greater health risks drive healthier people out of the insurance pool. To counteract this, insurers do all they can to screen riskier patients from their portfolios. Notice that in a normal market, firms try to attract customers with high demand for their services. The perverse incentives of the health insurance market cause firms to try to screen out those who need their product the most.

Economists also understand that beneficial properties of well-functioning markets (in terms of efficiency and social welfare) break down when there are spillover effects in consumer decisions. Here my consumer choice affects not only me, but others.

If I lack health care and therefore am more likely to get sick, the contagious nature of disease makes it more likely that others will get sick, too. I show up at the county trauma unit, bleeding but without health insurance.

Unless society is willing to let me die, others pay for my lack of health insurance through higher taxes.

Despite America’s regard for libertarian ideals, in true medical emergencies, we are our brother’s keeper. Like it or not, everyone has an interest in everyone else having health insurance.

Currently the U.S. health care industry is so far removed from the classical free-market paradigm that it becomes absurd to identify it as such.

A handful of mega insurance firms dominate the industry, using industry profits to lobby state and federal government to create regulatory rules perpetuating their own profitability.

It is not the individual who typically makes major health insurance decisions but an employer’s human resources department.

Moreover, it is costly for new firms to enter the market and difficult for individual consumers to purchase insurance without being part of a “pool.”

Believe it or not, the empirical evidence on this issue comes down on the side of greater consumer satisfaction with government provision of health care: For example, a recent seven-nation study by the Commonwealth Fund found that people in advanced economies with single-payer coverage are substantially more satisfied with their health insurance than are Americans today. A study published in the journal Health Affairs shows that elderly beneficiaries in Medicare (a U.S. government program) are 2.7 times more likely than those with private insurance plans to rate their health insurance coverage as “excellent.”

Sophisticated societies develop sound mechanisms for spreading unavoidable risk over their population. Even the job of private health insurance firms is to “socialize” risk over a large pool of premium holders.

We need to rebuff the simplistic argument that the free market can do the job for us in health care. It’s not doing the job, and it won’t.
Bruce Wydick is a professor of economics at the University of San Francisco and the author of “Games in Economic Development— (2008). He wrote this article for the Mercury News. http://www.usfca.edu/fac-staff/wydick/#F

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