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Markets can provide both efficiency and quality, but to do so they must be 'free' markets.
by Matt Weber
Consider this: The definition of a free market price is a situation where no party to the transaction is compelled to act.
When you want to fly to Los Angeles, and know that you want to go in 2 months, you can shop around for a ticket. That is essentially a 'free' market. You are not compelled to act now to purchase a ticket. You have time to shop around, and the airline evaluates the demand on a daily basis, and will adjust the price to alter the demand. Odds are at some point during the next month, you will find a ticket to Los Angeles for a 'reasonable' price.
For example if I wanted to fly to Los Angeles on February 4th, it will cost $158 each way on US Airways.
However if you discover this morning that you need to be in Los Angeles tonight, you are compelled to act, and the airline knows it, and ups the cost of the ticket dramatically, that same journey that costs $158 on 4 February, costs $382 tomorrow on US Airways.
The airline has you because you are compelled to act (and as a result, it is no longer a free market). The same analogy holds true in health care. That isn't a free market in operation, and much of the time, health care delivery is just like needing to get to Los Angeles today.
Consider this: The definition of a free market price is a situation where no party in the transaction compelled to act. The bind is that invariably in health care, one side, the patient, IS compelled to act: If you have Cancer, you are compelled to act. If you have a heart attack, or a stroke, there is indeed an urgent need to act. So almost definition, it is impossible to have a free market for health care.
Both the Dutch experience and the US experience demonstrates market forces don't work in health care, because by definition, health care doesn't operate in a free market, and no amount of wishful thinking by politicians, health care executives, or insurance executives can alter that basic fact. The very nature of health care, makes it incapable of being a free market, so any 'market' based solutions are not going to produce the desired result. No matter how you slice it, one side is in fact compelled to act, and the other side knows it.
Once you no longer have a free market, market forces cease to operate, and as a result, there is no balance of power, or the market moving to bring, price, supply and demand into balance.
So a true free market in Health care is in fact an impossibility. It is a given that health care CANNOT be a free market. Consequently any 'market' based solution has a zero probability of success, because health care does NOT have an underlying free market. Markets that are not free, do not have the normal market forces to bring costs, supply and demand into balance because one side is in fact compelled to act. So any proposal to use free market methods to make health care work, fails because by the market is by definition not free, and as a result the normal market forces don't operate.
There is a more interesting, secondary problem in the US health care system. We have a highly fragmented health insurance industry. Unfortunately on the provider side (Hospitals and Drugs), we have a only a handful of major players. (What portion of the Hospital beds in Pittsburgh does UPMC control?). One consequence of this imbalance is drug companies and Hospitals know that they can simply refuse to negotiate with an insurer. The loss of a single insurer simply doesn't alter the market position of the provider. However it is hard to provide health insurance in the Pittsburgh area if you don't do business with UPMC hospitals. There is NO balance of power.
In addition insurance companies have little incentive to negotiate aggressively. They are in effect paid a commission on the total cost, so the higher that cost, the larger the sales commission. Who do you suppose has a larger lobbying budget: The Pharmaceutical Industry or the Insurance industry?
The reality is that if the insurance industry really wanted to lower drug prices for example, they would support the re-importation of drugs. They clearly have more money than the Pharmaceutical industry.Does the insurance industry lobby for the repeal of the ban on re-importation of US made prescription drugs? Of course not, that would in fact reduce their sales commission (Profits).
As an aside, did you know there is only one class of made in USA products that cannot be re-imported into the USA: Prescription drugs. Anything else that comes back to the USA does so with no duty, taxes, merchandise processing fees, or any other charges. Only Prescription drugs made in the USA cannot be re-imported.
The leverage that insurers should have, and should use on providers, instead gets used on individual practitioners, and policy holders, who often have no choice, and no recourse. Most people who have health insurance, have very little choice about what company provides it. The result is higher costs and reduced and/or rationed services for the insured, reduced compensation for practitioners, and increasing wealth for hospitals and insurance companies.
Realistically the only fix for this problem is to alter the balance of power. The way we have done this in the past is through regulated monopolies, often with Government participation in those monopolies (Think Tennessee Valley Authority). Outside the USA in health care this happens routinely.
Brand name prescription drug prices outside the USA are roughly one third of what they are in the USA. That's because the balance of power on pricing outside the USA generally rests with the relevant national or regional health authority. You either come to terms with that organization over the price of your product, or you are shut out of the market. It isn't a freemarket, but the balance of power puts the health authorities in the driver's seat on drug pricing. It presents a drug maker with an interesting choice: Reduce the margins, or exit the market. Don't cry too hard for the drug companies.
Abilify sells for about $14 for a 10mg tablet in the USA. Same drug in Australia costs the health authority about $3 (and it IS the brand name drug). One must assume that if it can be sold profitably at that price otherwise there is no rational reason to sell it all. (The generic form, where available, is about $.50).
Medicare does have the necessary market power to negotiate with hospitals and drug companies, but is prohibited by law from doing so. So one of the things that has to happen before single payor can provide any meaningful reduction in total health care costs is medicare must be enabled to negotiate and exercise power.
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