A Case Against Free Markets in Medicine

In the final act of Shakespeare’s Richard III the eponymous villain king arrives on the battlefield to fight against Richmond, who will soon become Henry VII. During the battle Richard is dismounted as his horse is killed and in a mad frenzy wades through the battlefield screaming “A horse, a horse! My kingdom for a horse!” Richard shows us how  market value can change drastically depending on the circumstances, or your mental state, and even the most absurd exchange rate can become reasonable in a moment of crisis.

This presumably arbitrary nature of prices should be the first thing about the US healthcare market that catches the attention of any student of economics. Prices for the same procedure vary greatly between hospitals on opposite sides of the street, and even then appear to have no basis in reality. Further investigation reveals many other features of the healthcare market that economics teaches us will increase transaction costs and the misallocation of resources. The prices we discussed are generally not paid by the patient, but by a third party insurer. Often the patient isn’t even able to select the insurer, but is assigned one by his or her employer. What the patient thinks of the insurer’s ability as a steward of his or her premiums is irrelevant. Further, contracts between providers or pharmacies and the insurer completely hide the true price from the patient’s review. In addition, anti-competitive certificate of need laws limit competition between providers and expensive regulations compel providers to merge in order to compete in a nuclear arms race with the insurers, although the real victim is the patient’s wallet over which the providers and insurers fight their proxy wars. The best way to explain the US healthcare system is if you took every economic best practice and then to did the opposite. How does one get out of this mess?

Academics and physicians from places like Boston and San Francisco often argue that this situation is proof that free market healthcare has failed America and that the only solution is to implement a nationalized single-payer model. Writing in Medical Economics, Dr. Anish Koka makes the above point that “labeling this “the free market” is about as pure as labeling the offspring of a Great Dane and a Chihuahua a purebred” and retorts that the way out of this quagmire isn’t towards a centralized single payer, but to normalize a price driven medical market. When presented with this argument these Boston types profess their support of free markets in general, followed by a regretful proclamation that markets can’t work in healthcare because medicine is not a generic commodity or that people don’t shop.

But Dr. Koka is ready for this and preempts the argument by presenting the case of the Surgery Center of Oklahoma. Founded by Drs. Keith Smith and Steven Lantier in Oklahoma City in 1997, the Surgery Center does not accept insurance and operates on a cash basis directly with patients, or on a contract basis with businesses self-funding their employees’ healthcare. The prices for their procedures are available online and are binding, you won’t be surprised by unexpected items being added to you bill.  Their transparency and quality has earned the Surgery Center high praise from patients domestic and international, and their success is evidenced by their ability to survive for 20 years despite their unique model (unique for healthcare, that is, any fast food restaurant would be quite familiar with it, perhaps that’s why we’re more efficient at creating COPD than treating it?) Dr. Koka proposes that making the Surgery Center’s price model the standard will reveal and remove all the bureaucracy, middlemen and inefficient practices that are making the American healthcare system so expensive.

However, despite the success of the Surgery Center of Oklahoma, there really are features inherent to healthcare that make extension of the price mechanism to the rest of the market impossible or impractical. Every Russian schoolboy knows that one of the first criticisms of the market mechanics in medicine was the recently passed Nobel winner Ken Arrow’s “Uncertainty and the Welfare Economics of Medical Care“. From a libertarian perspective Arrow’s critique is a mixture of truth and opinion, but nonetheless it is a good starting point. He himself wrote that the short paper is an “exploratory and tentative study”.

Arrow’s analysis is built around the ubiquity of uncertainty in the medical field and proposes that “virtually all the special features” of medicine come from this origin. The first unique characteristic is that demand for medical care is irregular and unpredictable. Although there are other industries where demand is irregular, there is truth that relying on insurance financing schema would make a market less competitive as it adds a middleman between the patient and physician. This comment also shows the age of the analysis; written in 1963, when insurance was not as prevalent as it is today (although already a captured market with the employer sponsored insurance tax benefit in place) and medical care was still oriented around irregular acute cases rather than the reliable chronic diseases that are the greatest burden in medicine today.

Arrow next remarks that the physician has a responsibility for the patient’s welfare far above that of a typical salesman, such as a barber (I’ll write more about the Barberians at the Gates of healthcare later). While this is true of the profession in theory, in practice there is a robust medical malpractice industry that is a testament to the fact that in the end physicians are still human and there are good ones, bad ones, and sometimes even evil ones. I have no reason to believe that physicians are more saintly than barbers.

Arrow then makes his best point, which is that medical care is inherently different from commodities because the success of medical care is uncertain. In particular, this point is most relevant to the Surgery Center of Oklahoma’s model, which provides medical services that are most commodity like in their reliability and outcomes. Happy hip replacements are all like, every unhappy chemo response is unhappy in its own way.

Finally, Arrow concludes by pointing out that medicine is endemic with licensing restrictions on entry, uncompetitive pricing, and price discrimination based on income levels. This is a tautology that medicine can’t be a competitive free market because it hasn’t been a competitive free market. We’ve seen industries standardize as they mature (finance) and deregulate (airlines), so there’s no reason to believe medicine’s professional culture can’t change.

From Kenneth Arrow’s analysis we can see that there are some concerns about the uniqueness of medicine that aren’t true, some that are irrelevant, and some that are legitimate. It is these valid impediments to free market operation that need to be considered seriously before we propose that the price competition model should be extended to the rest of the market. Arrow’s most relevant point was that the success of medical services is uncertain, but in fact there are many more.

The first set of problems is cases where patients shopping is either impossible or socially undesirable. This includes shopping for medical services and health insurance, since the unpredictable incidence of disease makes the two inseparable, as Kenneth Arrow pointed out. The most obvious example is emergency medicine, which has already been culturally recognized in America as a universal service with the passage of EMTALA. An unconscious person brought into the ER by definition can’t price shop for services. Similarly, we don’t want insurers to be able to price shop by keeping ERs out of network. When I have an emergency, I need the ambulance to bring me to the closest ER able to take care of me, not the closest one that my insurer decided is a good value. Similarly, physicians are correct to be outraged with insurers trying to not cover care performed in the ER that they deem inappropriate for the ER setting. It’s absurd and dangerous to expect patients to self-diagnose when deciding whether to go to the ER. Finally, even the most brave libertarian would be hard pressed to say that the woman who recently pleaded not to have the ambulance called should not receive emergency care if she can’t afford it. I certainly can’t say it, and there are some on Twitter who have been impressed with my lack of empathy. If we as a society agree that emergency care is a public good and that shopping for it is impossible, shouldn’t coverage of ER services be nationalized?

Emergency Medicine is only 2-5% of healthcare spending, but it does demonstrate that there really are parts of medicine where free market competition is impossible. It’s a cornerstone from which the rest of my critique proceeds. Healthcare decisions that have negative externalities on the public are another example where shopping is undesirable. Mass vaccination of the public was one of the most successful medical developments of the 20th century, and the public health benefits provide a good reason for not only vaccination but all infectious disease treatment to be nationalized and available to the public at no cost. Coughing patients not going to the hospital because they’re afraid of the cost is how zombie movies and ebola epidemics start.

We also don’t want shopping to occur when the beneficiary of the medical care can’t shop for themselves. Here I am specifically referring to perinatal and child healthcare. Should infants have their entry into the world endangered because of women not being able to afford their prenatal care? Should children be required to not receive healthcare because their parents are not able to afford, or even worse choose not to purchase, child insurance? There are arguments to be made against John Rawls’ theory of justice, but they usually are based on adults using their agency to take advantage of such a system, which children by definition of their minor status can’t do. The national insurance coverage rate for children is 95.2%, it should be 100%. It is in the public’s interest that all children can receive appropriate care until they reach adulthood and are allowed to start screwing up their health however they wish.

The next set of problems are related to the nature of disease. Unlike televisions and cars, we don’t choose to buy the bodies that we are born into. As the existentialists argued, we are thrust into existence without our consent. This absurdist nature of our lives comes with many equity and justice problems, the most Rawlsian of which are pre-existing conditions, whether genetic disorders such as cystic fibrosis or more nuanced diseases like Type 1 diabetes. Disease like these, especially so when they are progressive, are a permanent tax on individuals’ ability to operate on a daily basis and impede their physiological, psychological, and financial wellbeing. The part about financial wellbeing is most important in this discussion, because these conditions directly decrease the patient’s ability to finance the healthcare that they need. Despite all the injustices and inefficiencies of cross-subsidization in healthcare, if we as a nation really are a unified community, then don’t the healthy among us owe it at least to those who are sick since their youth to support their healthcare financially as a thanks for taking the bullet during the genetic Russian roulette at birth? We did nothing to deserve to be healthy and  they did nothing to deserve to be ill; we can’t deny that we know this to be true.

The next problem is the mental health elephant in the room, which patients don’t talk about because of stigma and policy wonks avoid because there aren’t any clear solutions. In the past we used to have thick family structures to keep us insulated from life’s shocks and priestly confession to keep us from going crazy of guilt. The world developed and we became solitary atheists, but the problems of our minds remain.  Jordan Peterson often talks about how just about everybody either has or knows somebody with a mental disorder, but we still have to get up in the morning and go to work. The result is a society that is increasingly addicted, depressed, and suicidal. Similarly to genetic disorders, mental health disorders progressively decrease our ability to finance the healthcare that we would need, but to make matters worse they also inhibit our ability to even recognize that we need healthcare or to negotiate the prices for that healthcare, in a way that cystic fibrosis does not. There’s a perverse libertarian economic argument that an alcoholic with hepatitis who uses his money to buy more alcohol is making a welfare efficient decision because he is buying exactly what he wants. If we want society to remain even moderately functional, we have to reject this argument. Mental health is yet another area where price mechanisms are untenable.

Finally, we need to discuss chronic disease management and the problem it poses to the medical field. When Kenneth Arrow was writing in 1963, the majority of healthcare was infectious disease treatment and low-probability surgeries, or conditions amenable to insurance financing mechanisms. Back then obesity affected 10% of the population and childhood overweight was virtually non-existent. Today 75% of the population is overweight and 40% is obese. 50% of the population has at least one chronic disease. The obesity, addiction, and e-cig trends all indicate that the problem is only going to get bigger. It is increasingly becoming not a question of whether somebody will get a chronic disease, but when they will get it. Conservatives correctly raise the concern that insurance covering a known adverse event is no longer insurance. The problem is further complicated by the fact that although there are behaviors that can significantly improve their outcomes, there are many smokers who won’t develop COPD and there are many exercise junkies who will get diabetes. These diseases have too many causal variables to attribute blame to any specific reason. But we can’t throw up our hands and give up just because insurance isn’t going to be a viable financing mechanism. Is price driven medicine a viable solution? It doesn’t seem so. The problem is that chronic diseases are developed over decades from the accumulation of strain caused by daily living and normal aging, with the majority of costs rapidly (and somewhat reliably) materializing in the last 1-2 decades of a person’s life. People don’t consciously factor in the cost of diabetes 40 years from now when they decide to eat a slice of pie because they simply can’t forecast effectively over such a long horizon. The correct financing mechanism to solve this asymmetry is not an insurance (the outcome is known) or uninsured shopping (the cumulative cost is too high) but a long maturity bond, with the person paying into the bond over the course  of their life with the bond paying out a large lump of cash at maturity. Sound familiar? That’s exactly how pensions work, which is something that has always been nationalized (the problems with our pension schemes is a separate discussion).

To conclude, this is not a critique of the Surgery Center of Oklahoma’s model, which I praise and admire, but a beginning analysis of its limitations. The broader problem that I see is that much of the health insurance market is already nationalized through Medicaid, Medicare and the VA. The reality is that it is politically impossible to reverse from this position. If we then add to this list emergency medicine, perinatal healthcare, child healthcare, genetic diseases, mental health and chronic disease management, all of which I earnestly believe have a legitimate case to be nationalized, then what are we left with for free market shopping? Surgeries and generic drugs? At that point you might as well nationalize the rest just to simplify things and remove any regulatory asymmetries. I hate to say it, but it’s not clear to me that single payer (or at least universal coverage + optional private supplemental coverage) isn’t the right solution.

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