04/05/2012 02:31 pm ET | Updated Jun 05, 2012

Five Reasons Free Markets Don't Work in Health Care

Last week's debate on the floor of the Supreme Court about the constitutionality of the Affordable Care Act reignited a substantially more lively, if not bipolar, public conversation about health care in our country.

Conservatives pontificated about freedom and the sanctity of the constitution, and progressives waxed philosophical about health as a human right and the wellbeing of the poor.

Although an issue like health care certainly reflects many of the broader ideological schisms in our political debate, amiss in ideological debates like these is the technical reality -- epidemiologic and economic -- of the unique challenge posed by health care. How do we provide equitable access to high quality healthcare in a cost effective way?

That's the $2.5 trillion dollar question right now. And no one's sure exactly what the right answer is.

But here's one thing its definitely not: the free market. Here are five reasons why.

First, there's this peculiar thing about people -- if given the choice, they prefer a certain future to an uncertain one. And they're willing to pay for that certainty. Given the fact that health is, by its very nature, really uncertain, people are willing to invest money to make more certain its effects on their pocketbooks. That's why in a free market health system, people buy insurance.

Insurance is tricky. Insurance companies exist because some people get sick, but they make money because some people don't. So they want the healthiest people to buy their plans, even though the sickest people need them most.

But as you'd expect, in a completely unregulated market, healthy people don't buy plans as often as sick ones do -- after all, they're less likely to get sick and so they're less worried about the uncertainty disease can cause. That drives the cost of health insurance up as insurers try to pay for the costs of the sick they cover, further pricing out the healthy whom the insurers desperately need to keep costs down. A vicious cycle takes hold, and eventually, the whole market "unravels" because there are too few healthy, less expensive people to cover the costs of the sick, more expensive ones.

Ultimately, only a few people can afford this insurance, and the rest of us are left to deal with the uncertainty of disease as it comes -- which isn't very pleasant.

Second, there's this problem of imbalanced information. When you get sick and you go to a doctor, how do you know that the doctor really has your best interest at heart? After all, she spent 12 years training for her job and has likely forgotten more about medicine than you'll ever know. Can you be sure she's not running you for a loop? That becomes even more problematic when your health and her pocketbook are at odds. In his article in the New Yorker on the misaligned incentives of surgeons, Jerome Groopman shows how for doctors, patients' interests can often take a back seat to making a buck in a free market health care system -- and that the result can often be poor quality health care at a high cost.

Third, people are really bad at understanding and valuing the consequences of their actions -- especially when it comes to their health. This tendency, called "discounting" means that people usually want what maximizes their happiness today over what maximizes it tomorrow. That's why making decisions that promote long-term health -- like eating healthy foods or exercising -- is so difficult: It feels way better in the short-term to sit on your butt and have a second helping of ice cream than it does to forgo ice cream altogether and go for a run. What's worse, in a free market health system, providers get paid more for providing more care. That means that they have no incentive to help their patients prevent disease. Because prevention is hard, and because market health care systems don't incentivize it, it just doesn't get done in free market health systems. In the end, this raises costs and contributes to more disease, which is bad for everyone.

Fourth, there's the problem that access to care in a free market health care system is completely contingent on one's ability to pay for it. That's a problem when health care costs can hit several thousand dollars per year, even among healthy people. If we believe, as a society, that it is immoral to allow a sick person to suffer, then a free market system, which prices out society's poorest, is complicit in that immorality. What's worse, there are pages upon pages of medical studies that show that the poorest are also the sickest, independent of access to care. That means that in free market health systems, health care is denied to the people who need it most.

Fifth, and finally: Unlike most circumstances, where markets produce meaningful innovation, in health care, the government produces the most important innovations. Consider this: The U.S. is the world's leader in medical innovation. And pundits and politicians alike like to attribute this to our free market health system, as Rick Santorum suggested in a recent op-ed in USA Today. But nothing could be further from the truth. The U.S. is the world's leader in medical innovation because our government pumps tens of billions of dollars into health research each year through the National Institutes of Health. In fact, many of the drugs, medical devices, and clinical tests that ultimately get marketed and sold by private sector medical companies originated in NIH-funded labs across the country.

So, what's the best way to provide equitable access to high quality health care in a cost effective way? At least we know what it's not. And that should be a start.

A version of this essay was first published as part of a policy debate on PolicyMic