THE BLOG
07/07/2016 12:03 pm ET Updated Jul 08, 2017

Does The Private Health Care Marketplace Provide Efficiency And Value?

Conservatives have long held that U. S. health care should be based on the "free market," that the role of government should be minimal, and that a deregulated marketplace can resolve issues of access, costs, affordability and quality of care. (1) We have been told this so often that these unproven claims have become a meme: a self-replicating myth or slogan that by constant repetition becomes part of everyday language, without regard to its merit.

Recent decades have shown this claim to be completely false as the magic of the "free market" continues to create worsening access, higher costs, less affordability, and variable quality of care. But this time-worn meme is still pervasive and distorts this election year's contentious debate over the future of our health care system.

A Rebuttal to the Free Market Meme
The fact that markets in health care don't work the same way as those for other products was recognized as early as 1963 by Kenneth Arrow, a leading economist at Columbia University. He saw uncertainty as the root cause of market failure in health care--uncertainty among patients not knowing what they will need, uncertainty among physicians about diagnosis, treatment and prognosis, and uncertainty among insurers about risk of enrollees. (2)

These are some of the ways that under-regulated markets fail
patients and the public interest:

  • A nine year tracking study of 12 major health care markets found four barriers to efficiency of markets: (1) providers' market power; (2) absence of potentially efficient provider systems; (3) employers' inability to push the system toward efficiency and quality; and (4) insufficient competition among health plans. (3)
  • Joseph Stiglitz, Nobel Laureate in Economics and former chief economist at the World Bank, reminds us that:

Markets do not lead to efficient outcomes, let alone outcome that comport with social justice. As a result, there is often good reason for government intervention to improve the efficiency of the market. Just as the Great Depression should have made it evident that the market often does not work as well as its advocates claim, our recent Roaring Nineties should have made it self-evident that the pursuit of self-interest does not necessarily lead to overall economic efficiency. (4)

  • Recent years have seen increasing corporatization and consolidation throughout the medical-industrial complex, including among insurers, the drug industry, hospital systems, nursing homes, and dialysis centers. As their market shares grow, they have more latitude to set prices to what the traffic will bear.
  • Corporate stakeholders pursue the business "ethic" seeking maximal revenue well beyond the service tradition.
  • The private sector is much less efficient than public programs. Compared to traditional Medicare, privatized Medicare is more expensive, less efficient, less reliable, more restrictive in choice of physician and hospital, and has much higher administrative costs (e.g. 15 percent overhead compared to about 2 percent for Medicare). (5)
  • Privatized Medicaid follows the same pattern, as illustrated by Tennessee Medicaid plans, operated by Blue Cross BlueShield of Tennessee, UnitedHealthcare, and Anthem, with their inadequate physician networks, long waits for care, and denials of many treatments, even as these insurers take away new profits. (6)
  • With our present multi-payer financing system, there is little opportunity to achieve sizable discounts through bulk purchasing. Bulk purchasing of drugs was specifically prohibited by the Medicare Prescription Drug, Improvement and Modernization Act of 2003, while the 2010 Affordable Care Act continued to ban the government from negotiating drug prices.

Implications for Today's Debate over Health Policy
In their 2014 book, Social Insurance: America's Neglected Heritage and Contested Future, Theodore Marmor, Jerry Mashaw and John Pakutka drew this important conclusion about the effects of "free market" policies in our health care and the need for more government involvement:

In health care, the "invisible hand" [of the free market] fails to drive down costs, improve quality, or ensure distributional outcomes that are regarded as fair. We can tinker with the rules, regulations and payment schemes that govern medical care, but the forces that increase the demands for and supply of more care are relentless. Only powerful countervailing institutions can keep them under control. Only governments have the necessary authority, assuming they have the political will to use it. (7)

This is not a new concept. The appropriate role of government, as is so needed today to reform our health care system, was recognized more than 200 years ago by John Adams, second president of the United States and one of our founding fathers:

Government is instituted for the common good; for the protection, safety, prosperity and happiness of the people; and not for the profit, honor, or private interest of any one man, family or class of men.(8)

John Geyman, M.D. is the author of The Human Face of ObamaCare: Promises vs. Reality and What Comes Next and How Obamacare is Unsustainable: Why We Need a Single-Payer Solution For All Americans

References:

  1. Goodman, JC, Musgrave, GL. Twenty myths about single-payer health insurance: International evidence on the effects of national health insurance in countries around the world. National Center for Policy Analysis, Dallas, 2002.
  2. Arrow, KJ. Uncertainty and the welfare economics of medical care. American Economic Review 53:941-973, 1963.
  3. Nichols, LM et al. Are market forces strong enough to deliver efficient health care systems? Confidence is waning. Health Aff (Millwood) 23 (2): 8-21, 2004.
  4. Stiglitz, JE. Evaluating economic change. Daedalus 133/3, Summer, 2004.
  5. Healthcare-NOW! Single-Payer Activist Guide to the Affordable Care Act. Philadelphia, PA, 2013, p. 22.
  6. Himmelstein, DU, Woolhandler, S. The post-launch problem: the Affordable Care Act's persistently high administrative costs. Health Affairs Blog, May 27, 2015.
  7. Marmor, TR, Mashaw, JL, Pakutka, J. Social Insurance: America's Neglected Heritage and Contested Future. Los Angeles, CA. Sage Copress, 2014, p. 128.
  8. Adams, as quoted by Hartmann, TA. A red privatization story. The Progressive Populist, November 15, 2014, p. 11.