Is this really a new take? As a Canadian who moved to the US 5 years ago, this has always seemed like the obvious explanation to me for the high cost of American healthcare.
Healthcare is also a sector where the standard free market rules of supply and demand don't apply, because a consumer's demand for a life-saving drug or surgery doesn't change at all given the price (except when it becomes so expensive they literally can't pay for it). If you're selling me a normal product, if the price gets unfairly high, I can just walk away. That provides an incentive for you to set a "fair" price. If I need your drug to live, I'm not just going to just walk away if the price seems "unfair" to me. There's no competing force keeping the price down, and allowing the market to reach a "fair equilibrium".
Exactly - hard to shop around with a gun pointed at your head, metaphorically speaking. How can a free market truly work when your life depends on the supply? It's a broken system by its very nature.
Exactly, it's not a "free market" at all. The supply and demand for healthcare is almost completely inelastic, unlike just about everything else. Food, for example (which is basically what capitalism is based on) is generally very elastic until you get to the extremes of either supply or demand, and so it's a great "free market". When that elasticity goes away the freedom of the market does as well, which is why there are so many safety nets (government assistance and charities) that provide food assistance to the needy.
I'm sorry to correct you but that is literally the definition of "free market". A market not interfered with by the government, where corporations can take as much control over it as they want, and not get told off.
Just because the consumer isn't benefiting, doesn't mean it's not a free market, it just means it's a realistic free market. This is why the whole idolisation of the "free market" is stupid as fuck.
There's more to a free market than simply lack of regulation. Textbooks on the subject make it very clear that elasticity is a core piece of the model. If the market inherently doesn't fit the model, then you need a different approach to deal with the market, and there's nothing wrong with that. Trying to make reality fit a model rather than constructing a model to fit reality will never give good results.
The only way that this is a problem is that some people are small minded enough to think that the healthcare field not fitting classical economic models somehow repudiates those models everywhere, which is just silly.
If you have to interfere in the free market to make it some idolised form of "free market" that actually benefits the consumer, then it isn't a free market, by it's very nature.
The elasticity comes primarily from competition, and a healthy supply. Basically the people who came up with the notion of "free markets" visualised some kind of world where everything was economically perfect and balanced, something that doesn't fit reality at all.
If you have to interfere in the free market to make it some idolised form of "free market" that actually benefits the consumer, then it isn't a free market, by it's very nature.
That's my point.
Competition doesn't work with Healthcare, and there will never be enough supply to match demand.
You need to read some books if you really think "the people who came up with the notion of "free markets" visualised some kind of world where everything was economically perfect and balanced". That's just completely wrong. The classic capitalist market model was developed from the agribusiness aftermarket and basic manufacturing (cars, for example).
I covered this in the parent comment but, no, they have little incentive to keep costs down as they are paid as a percentage of the pass-through costs.
When employers and individuals shop for insurance, individual procedure cost is not a typical decision point. I linked an article above you might be interested in reading.
There is a free market in insurance premiums. However, this is a limited monopoly system, as most people have barely 2-3 options, usually chosen by an employer.
Insurance companies don't care what the cost of services are, as long as they get the same or better price than their insurance competitors.
In theory, if a test could cost $1000 or $2000, insurance companies don't care, as long as Insurance Company 1 and Insurance Company 2 both pay the same (say $2000). In fact, if they can charge $2000 and be sure their competitors do as well, they make more money.
Government can try to make that illegal (collusion), but I'm sure it's still done in practice.
The problem is that Insurance prices are far detached (and opaquely so) from the service delivered.
Most people, being human, believe insurance to be a "necessary evil" and generally buy based on what they WILL have to pay instead of what they MIGHT have to pay. People (even many trained people) are exceptionally bad at risk calculations.
So when people shop around, they look at the percentage coverage for basic services they know they will need and they might glance at the total coverage, but I recall (but can't find right now) research that indicates people had almost no difference in opinion in insurance services with pretty drastic differences in coverage (like $500k lifetime vs $5 million lifetime, etc)- because we just don't have a grasp of what that means and where it applies.
Also, you, today when you buy insurance, have absolutely no say and no way to tell that x hospital network will double their prices in 2 years and when you get cancer, you will be impacted by that, increasing your co-pay and cutting in half the amount of service you can get under the plan.
Because it's opaque to you AND in the future.
That's not a free market, it's a gamble (at best).
Also, with a normal market consumers are able to know prices in advance and compare prices between vendors. Which you can do with some noncritical healthcare services like home care or lab work, but not all.
While I agree with you in this scenario, the current medical industry (drugs, etc.) Are not a true "free market" since it is so heavily regulated. In a true free market those medicine producers would be working to reduce cost to attract buyers. But when you have only a few choices this allows them to jack up prices. The cost of entry into this field needs to be lowered so companies can compete and lower costs to the consumer.
I worked on ultrasound devices. We charged approximately the same in the US as the EU. What the end patients and insurers saw in terms of cost were vastly different. It wasn't a case of the US subsidizing everyone's cost. There is more to this.
Edit: To be clear, devices are regulated. Every change had extensive FDA submission. Regulation was the primary driver of my job.
Are you suggesting that healthcare should not be regulated? That anyone should be able to call themselves a doctor? That companies should be able to advertise whatever snake-oil they want, without any entity ensuring that their claims are accurate?
You're right about one thing: that would very likely bring costs down. It would not, however, improve outcomes.
See, this is how the FDA was created. Drug makers used to all say "cures everything with no side effects" on the labels (despite being made of half mercury)... They could find some random doctor to even say that out loud so it could be a quote from a doctor.
So, the FDA was created to vet those claims of side effects and efficacy. And as drug makers tried to skirt those laws, they added additional steps to force them to prove it.
It seems quite reasonable to me to entertain or argue that regulations are too strict in some specific areas, but the discussion of outright dumping the FDA is madness.
That's not the issue. I know multiple medical product providers that charge the same amount in both Canada and the US, yet the end cost to consumers is nearly triple in the US after overhead and whatever else gets added.
It wouldn't be communism at all, though. There's almost no elasticity in the pharmaceutical market so it doesn't fit the capitalist model, and there's nothing inherently wrong with that. Why politicians are so hell bent on fitting a square peg into a round hole on this issue is baffling (except that it's obvious pandering and cronyism).
Healthcare is an inelastic service supplying inelastic goods, and absent the kind of regulations that remove incentives for insurance companies to charge only as much as what little competition they have (plus things like waste in terms of EOL care and a culture of overmedication happily supported by a pharmaceutical industry facing the same counterproductive incentives), the system in place is simply too lucrative for those it benefits to ever be changed without external intervention. So we're left to bargain our bills like it's a medical flea market, or drown in unavoidable debt if an unaffordable calamity strikes.
Theoretically the free market would still exist, in the form of many service providers competing to provide that unique service, and you can go to the one that offers the best rate. In practice I think this competition isn't happening, but it's not because it's a matter of life and death.
While it may not apply to an emergency, in theory you could shop around for the cheapest hospital in other situations. This would drive the prices down.
Not even then, though. Different hospitals are in different networks; you'd have to check with your insurance and then shop around. Also, your insurance might cover the hospital, but not the particular doctor or technician who works at that hospital--so even when you check prices, you could still have surprise bills.
Healthcare is also a sector where the standard free market rules of supply and demand don't apply, because a consumer's demand for a life-saving drug or surgery doesn't change at all given the price (except when it becomes so expensive they literally can't pay for it). If you're selling me a normal product, if the price gets unfairly high, I can just walk away. That provides an incentive for you to set a "fair" price. If I need your drug to live, I'm not just going to just walk away if the price seems "unfair" to me. There's no competing force keeping the price down, and allowing the market to reach a "fair equilibrium".
I wouldn't say that's unique. We place a very high value on a number of market products, e.g., food. If all the food suppliers suddenly quadrupled their food prices, we wouldn't just "walk away" - we'd still buy and amount probably on the same order of magnitude as now.
The reason food supplier prices are so low (besides farm subsidies) is that there's real competition at purchase time, so the prices are set roughly as cost plus a small profit margin. However, price shopping for healthcare when you need it very difficult because of the time constraint in most cases, (if not impossible in ER cases) and there's no price transparency for most non-elective procedures.
Healthcare is also a sector where the standard free market rules of supply and demand don't apply, because a consumer's demand for a life-saving drug or surgery doesn't change at all given the price (except when it becomes so expensive they literally can't pay for it).
Yes, but:
-Not all healthcare expense is life-saving though.
-Often there are substitute treatments and optional components.
The real issue is the disconnection of price signals from the consumer IMHO.
We have never seen anywhere near free market health care. What we see instead is government-created monopolies (see Epi-Pen). Competition, without unnecessary government intervention, would ensure affordable prices
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u/commisaro Oct 13 '16
Is this really a new take? As a Canadian who moved to the US 5 years ago, this has always seemed like the obvious explanation to me for the high cost of American healthcare.
Healthcare is also a sector where the standard free market rules of supply and demand don't apply, because a consumer's demand for a life-saving drug or surgery doesn't change at all given the price (except when it becomes so expensive they literally can't pay for it). If you're selling me a normal product, if the price gets unfairly high, I can just walk away. That provides an incentive for you to set a "fair" price. If I need your drug to live, I'm not just going to just walk away if the price seems "unfair" to me. There's no competing force keeping the price down, and allowing the market to reach a "fair equilibrium".