There is No “Market” for Health Care

UPDATE: for more detail on how pricing would work under Medicare for All, scroll down: the internal links don’t seem to be working today.

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Sometimes human culture rests on fundamental misconceptions of reality. You can’t call them “lies” because they’re not the product of identifiable individuals telling falsehoods in their own self-interest—at least not entirely. They are fundamental misconceptions honestly and wholeheartedly believed by most, if not all, of society.

These misconceptions have much in common with myths or religion. People take them on faith and seldom examine them rigorously. They worm their way into a whole society’s thinking. There they confirm an insight attributed to Euripides: “Those whom the gods wish to destroy, they first make mad.”

So it is with the notion that there are “markets” in health care. In fact, there are none. There are none for three simple and powerful reasons.

First, the very notion of a “market” presupposes not just the bare legal right, but the ability, to bargain. Bargaining depends on the power to “take it or leave it.” But you can’t leave your life behind and still exist, and you can’t leave your health behind if you want to be free of pain and suffering. Who doesn’t?

So there’s no “market” in health care because life and health are not things you can take or leave. You will pay whatever it takes (up to whatever you can afford) to preserve them.

The second reason why there’s no market in health care invokes classical economics. If health care were a common service like trash pickup, it would have what economists call “price elasticity.” That is, health care’s “market” price would depend on things like the price and availability of substitutes. But there are no “substitutes” for life or health; there is only death or suffering.

The third and final reason why there’s no “market” in health care is even more basic. The “consumers” of health care don’t pay for it. Insurance companies do. Sure, our oligarchs, Saudi oil sheikhs, and a few other similarly rich people don’t need insurance. But the overwhelming majority of people here in the US and around the world need insurance (or government run health-services, as in Britain) in order to afford the expensive scientific “miracles” of modern medicine.

This is not just abstract theory. Careful studies have shown that patients really don’t “shop” for health care, even if given information online with which to make price and quality comparisons. They don’t shop in part because most don’t have the expertise or patience to compare quality, let alone to relate price to quality.

But there’s a more fundamental reason why patients don’t shop. They don’t care about price when their lives and wellbeing are at stake and someone else is picking up the tab. Summaries of careful studies proving these points in fact, not in theory, appeared in the New York Times mere days ago [search for “Fallacy No. 4”].

So why do pols, business executives, and sometimes even economists talk about “markets” in health care? The reason is clear: “free markets” are something of a national religion. We learned that after the Crash of 2008, when supposedly mathematical economist (and then Fed chief) Alan Greenspan publicly recanted his religious belief that free markets always self-correct their imperfections and pathologies. It took the Crash to get him to recant, but as an honest man and presumed scientist, he did.

In a world where nearly all patients require insurance or government assistance to afford modern health care, there is yet another reason why there is no relevant “market.” As I have explained at length in another post, insurance doesn’t work by normal market principles. It’s not competition among many firms that lowers premiums, but having the largest possible risk pool by which to spread the many possible losses around.

This fundamental feature of insurance as a business, including health insurance, makes it violate the normal principles that competition is better than monopoly. In the insurance business, monopoly beats competition by putting all people subject to a given risk in a single pool, thereby lowering premiums and giving the entire population equal benefits.

In one of my last academic papers as a professor of law, I proved a related point for a subset of the health-care industry—the sale of patented or otherwise monopolized pharmaceuticals. I proved that there are no practical or economic limits on the amount of profit, or “return on equity” that a pharmaceutical firm can “earn” when it has the only product on sale that actually works to save life or reduce suffering caused by a specific disease or condition.

I proved this point mathematically, with equations, charts and simple cause-and-effect reasoning. The only limits on the monopolist’s returns, I showed, were the ability and willingness of society to pay. In today’s America, “society” means mostly the insurance companies or government.

My conclusion was that the pricing of monopolized pharmaceuticals (including most, but not all, patented ones) is, was and has to be a matter of politics. That is, society collectively must set or limit the prices through a political process. Otherwise, there are no “market” limits on the price that greedy business people can charge when they have no competition.

I’m proud of this insight but ashamed of its consequences. I have no idea whether my paper was the cause. But mere years after my paper came out, business people, if not pols, had assimilated its insight. The result was an epidemic of price-gouging in the pharmaceutical industry.

So-called “entrepreneurs” bought up sleepy old-line pharmaceutical companies producing long-established products. Then they raised the prices unconscionably, without warning or any apparent reason but greed. The most infamous of these so-called “entrepreneurs” was a man named Martin Shkreli, who raised the price of a life-saving HIV med 5000%, i.e., 50 times.

Shkreli is now in jail, not for that crime against economics and humanity, but for the more technical offense of securities fraud. His story is not unlike that of Al Capone, the vicious Chicago mobster presumed responsible for the St. Valentine’s day massacre in Chicago. They put him in jail, famously in Alcatraz, but only for tax evasion.

The great economist John Maynard Keynes once called economics a “dismal science.” It’s made a lot of progress since his day, mostly due to computers and massive data analysis. But in the field of health care, it has yet to undergo its “Copernican revolution.”

Before Galileo, humanity believed that our Earth was the center of the solar system and the Universe. The sources of this belief were religion and human arrogance. Tycho Brahe and Nicolaus Copernicus shook that theory with careful, methodical observations of the stars and the planets. But it wasn’t until Galileo Galilei perfected the telescope and observed the moons of Jupiter that accumulated evidence for our Earth revolving around the Sun reached the tipping point. (The Church threatened to excommunicate and execute Galileo for his insight.)

We are at or near that tipping point in the economic science of health insurance today. The evidence is overwhelming that there is no market in health care, and that the only restraints on pricing are a political process or internal struggles between the consciences and greed of doctors, nurses and the business people who run health-related firms.

So who will be our modern Galileo? Who will push us over the edge into believing that, in our era of rampant greed, there is no effective restraint on prices in health care but politics?

Before becoming president, even Barack Obama declined the role. In a 2007 speech, he declared a “public option” for health insurance politically impossible. At that time, I lauded his “realism” in this blog. I recalled my favorite uncle, a skilled Navy surgeon now deceased, thundering against “socialized medicine.”

But times have changed, due in part to President Obama’s Herculean effort. Public understanding of the absence of markets in health care has grown. We are now in the era of Brahe and Copernicus, but we have not yet found our Galileo. Could Elizabeth Warren or Bernie Sanders be the one?

From the perspective of strict logic, their “Medicare for All” plans seem unnecessary. “Medicare for All who Want It,” i.e., a “public option,” eventually will morph into “Medicare for All” as citizens voluntarily choose that option. Lower premiums, more reliable coverage, efficiency, and honesty (with no monetary incentive to deny claims) will draw patients inevitably to that choice.

So why not just enact a public option and wait? “Medicare for All” would not take more than ten years, maybe even five, to arrive organically, through tens of millions of individual choices.

The trouble is, as President Obama recognized, there’s about as much opposition to a public option as there is to “Medicare for All.” Doctors, hospital executives and insurance people are smart enough to know that the one will inevitably morph into the other over time. For various structural reasons, private insurers simply couldn’t compete with a properly arranged public option, any more than they now compete with Medicare. (They don’t. For patients eligible for Medicare, they only supplement it.)

Under these circumstances, pushing for Medicare for All has two advantages. First, it focuses on the end game. When all the dust settles, a public option eventually will have become “Medicare for All,” after having given patients time to understand reality and switch to Medicare. (Patients will also switch after losing or quitting their jobs, and so losing their private health insurance.)

By focusing on the end result, Warren and Sanders can simplify their political arguments and their debates. They can show voters what a rational health-insurance system will look like in the absence of health-care markets.

Second, Medicare for All is a political bargaining tool. To all the health-care and pharmacuetical providers who want their incomes (in the absence of competitive markets) to depend only on their personal balance between conscience and greed, it says:

“The writing is on the wall. Your days of self-determined income are numbered. Some day soon, a government bureaucrat will decide how much you can charge for various services, if you want to serve patients backed by health insurance. But if you drop your opposition to a public option, you will have a few years to transition from the current regime of pricing by whim. You will have time to accept reality and adapt.”

As support for “Medicare for All” rises rapidly, especially among youth, that political bargaining tool may soon win the day.

The absurdities of our current system should by now be clear to the average patient. Just look at your local medical laboratory, as I did. I saw three out of eight employees working full time not doing tests, or anything related to medicine, but taking and verifying insurance information. Then look at your bills. See the astronomical charges asked for simple procedures and services and the much lower prices actually paid by insurers, and ultimately accepted by providers (mostly under duress).

In the absence of any real market, someone is actually fixing the prices paid for medical care. Right now, it’s the insurance companies, whether Medicare or private firms.

As a result, prices for the same service vary crazily, from one hospital to the next, and from one doctor to another. They vary widely even in the same city, let alone from city to city and from state to state. And the initial asking prices, which you see on your insurance company’s invoice, have as much relationship to the final paid prices as those for women’s shoes, or the prices you might ultimately pay after bargaining in an Arabian souk.

In the absence of any real market, wouldn’t it be better to have a single, nationwide authority, not driven by profit or greed, setting those prices? Such an authority need not decree nationwide uniformity. It could accommodate differences in the cost of living in different cities. It could also improve access to medical care by providing price premiums in underserved rural and remote areas.

Before you answer the question, recall that insurance, whether by government or a private firm, is a service entirely outside of health care. Nothing in US law, now or in the future, will prevent doctors or hospitals from serving uninsured rich people and charging whatever prices those patients can bear. This is not just theory: there is, in the San Francisco Bay Area, at least one medical group that refuses to handle any insurance, including Medicare, but insists that its patients pay cash.

The Cleveland Clinic’s main campus provides another example. The private hotel on its grounds contains two floors set up for Arabian sheiks and their entourages, complete with closed-circuit Arabic-language TV. The unique prices the sheiks pay help subsidize medical care, facilities and medical research for the rest of us.

So there is method in the “madness” of Warren’s and Sanders’ insistence on “Medicare for All.” It simplifies the discussion by going right to the end game: the system into which any public option eventually will evolve. It provides a powerful argument to forces opposing any public option: if you accept the inevitable now, you will have a few years to adjust to it. And it gives us a vision of what a rational, nationwide health-insurance system would look like, if only we accepted the facts that the Earth revolves around the Sun and that there is no “market” in health care.

Footnote: As is well known to patent practitioners, not every patent confers an economic monopoly. If there are practical substitutes for a patented product, for example, noninfringing drugs that work about as well as the patented one, then the patent confers no practical monopoly. My paper and its summary in this blog address patented or otherwise monopolized pharmaceuticals which have no practical substitute for curing or alleviating a particular disease or health condition. Producers may have such practical monopolies without patents if, for example, the number of patients is too small to support more than one producer, a dominant trademark provides a monopoly, or for historical reasons no other firms have produced competing products.

Pricing without a Market

In the post above, I used a curse word. To conservatives, the word “bureaucrat” connotes an irresponsible functionary driven by clueless ideology, patronage or worse. To progressives, the word is an insult to all the highly educated, hard-working experts in our government who protect our economic health (the Fed) and medical health (CDC and NIH), monitor and control pollution (EPA), study the weather and warn of violent storms (NOAA), regulate workplace safety (OSHA), do basic scientific research (NSF, NASA), and seek justice (DOJ).

So I apologize for using a curse word on this blog. To atone for my sin, I want to write a bit about how pricing would work in a “Medicare for All” system. In the absence of any “market” for health care, how would we determine what prices universal health insurance would pay providers?

It’s not as if there are no precedents. The Fed is an independent committee of experts that fixes the price for the most basic commodity of all: money. Almost all states, and many cities, have public utilities commissions that set prices for electricity, natural gas, water, and/or disposal of sewage or trash.

No one thinks twice about these “price-fixing” bodies. They are established parts of our economy, our government and our civic life. It’s only when people get up from prostrating themselves before the “market God” where no market exists that they get confused.

The key to understanding how pricing would work under “Medicare for All” is that it would have nothing to do with any political ideology, far less “socialism.” It would be based on data.

An independent committee of experts in medicine and health economics would constantly monitor the data and adjust prices accordingly. It would review the number of patients and the prevention, diagnosis, treatment, outcomes, and re-treatment for every known disease and condition. (We can do this with modern “Big Data.”)

The committee would keep track of things like how long patients have to wait for treatment and how often each CAT scanner and MRI machine is used. If wait times got too long in a particular community, it would raise prices to encourage doctors and hospitals to locate there. If a CAT scanner or MRI were little used, it would provide financial incentives to relocate it where more needed. If medical-school enrollments started to drop nationwide, with no decrease in national need, the committee would raise reimbursements paid doctors generally to encourage more students to enter the profession. If service lagged in a rural or remote area, it could raise prices to encourage providers to relocate there.

In every case, the experts would closely monitor the effect of any price changes on services and outcomes, community by community. They would do their best, using the best of Big Data, to mimic the outcomes that a market would produce if there were a market in health care.

Just as the Fed has two mandates—full employment and low inflation—the Medicare for All committee would strive to maximize both the accessibility of health care and its quality, community by community, nationwide. Prices would probably vary geographically, just as they do today, but they would vary for a purpose: to insure accessibility of high-quality health care for everyone everywhere.

There would be controversies, of course. The genius of American health care is its ability to innovate. With every innovation in medicine—such as a new diagnostic tool or a cure personalized to one’s DNA—the committee would have to decide whether, when and how to cover it. If the committee was slow, the private insurance market could cover the innovation in an insurance supplement.

In this way, as I have outlined earlier, there would always be a need and a place for private insurance. But the Medicare for All system would make sure that everyone nationwide had access to at least the last generation of “modern miracle medicine.” And in the absence of any market, it would do so through the very same mechanism that markets use generally: price signaling, in this case through levels of insurance reimbursement.

At the same time, rich people could purchase health care, without insurance, for whatever price they were willing to pay. But doesn’t it make sense, if the people fund insurance through their own taxes, for them to decide, through experts aided by Big Data, what to pay for the levels of quality and accessibility they demand?

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