Friday, July 25, 2008

If The Cure for Health Costs is Competition, the Prescription is Transparency

All too often in conversation about universal health care coverage, universal access, or the rising cost of health care, many American people I talk to fall back on the trusty free market response: a free market with healthy competition produces value.

I don't dispute this, having been born and raised in a much more left-leaning UK economy that doles out social welfare money like there's no tomorrow, I'm happy and excited to be part of the US economy, I've done well for myself here and probably far better than I would have if I'd stayed at home.

My first argument is always that it's the job of any government to provide health care for it's citizens. Aneurin Bevan put it best, I won't try to rewrite it, but it seems embarrassing to me that the US government can't provide health care for all. They already pay for about 40% of all health care in the country, which puts a big dent in the knee-jerk "we don't want government choosing our health care" you hear all too often in the US, fact is, they already do for half of all health care provided in the US. However, unlike Britain's National Health Service, which employs the doctors, in the US the government is merely a payer, they pay the bills, but you have to shop around for a private provider. Military care aside, the government doesn't employ health care providers.

That leaves us with a quasi free market economy where people are free to shop and choose their provider, shop and choose their insurance company, and generally exploit free market capitalism to restrain health care costs. Value is derived from competitive choice.

So wherein lies the rub?

First and foremost, a lot of people do not have any choice. They see the doctor nearest them that is a member of their health plan. They go to the hospital where their doctor has privileges, or they go to the only hospital in their vicinity. They may only have one option for their health care insurance, if they have receive insurance from their employer. And of course, yes, they might not even have health insurance.

I was once an uninsured middle class American. When I first came to the US myself and my wife were uninsured for a good five years. My (American) wife wanted me to buy health insurance, which I could never fully understand. As a Brit I knew that Americans were often subject to huge medical bills, but as I was told it the insurance I would get would not cover major medical expenses, just the routine stuff, and as I calculated it we were spending about $500 a year on health care.

When I finally caved in and acquired health care for us through a Small Business Association (I was self-employed at the time, late 1990s) I paid about $1600 a quarter - $6400 a year - to cover $500 worth of consuming. I still don't get it.

The argument you'll get from health care economists is that us young, healthy people need to pay into the pool to balance out the cost of caring for older, sicker people.

I'm not at all averse to that, in fact I advocate for it. It's called socialised medicine and I'm 100% behind it, I'd just prefer to pay my government in the form of taxes than private HMO companies in the form of padding their CEO profits. At least that way maybe we could cover everyone for 18% of GDP instead of 60-70% for 18% of GDP.

I'd prefer it if everyone was covered for 10% of GDP, but that's not likely here. Most developed countries provide health care for all for much less than 10% of GDP, yet in the US, which is currently spending about 18% of GDP on health care, even spending double doesn't cover everyone.

Makes sense?


Moving on, for those people who *are* covered through their job, they are basically getting $9,312 in health care coupons on top of their salary. The average cost of providing health insurance in 2008 is over $9,000. If the median income is $36,835, and it is, then that means the average person with average health care coverage makes on average a quarter of their compensation via invisible health care money.

25% of your compensation is health care Monopoly money. What you do?

I'd spend it.

So we have an expectation from American workers that they will receive health care coverage from their employer, we have an expectation from HMOs to turn a profit, and we have a bunch of people with what are, for all practical purposes, coupons for free health care with little to no accountability for what the health care consumed actually costs.

If we expect competition to drive down costs, we need to know what things cost. Competition in the footwear industry would not be possible if we did not know how much shoes cost. We know what cars cost, we know what cheese costs, we know what haircuts cost, and we make decisions based, in varying degrees, on cost.


Why do we even have to use the word transparent? We don't call supermarkets transparent. Of course they put their prices on their products, how else could we stimulate competition? Houses have prices. Vacations have prices. Colleges have prices.

Enough already. Either we have universal coverage through taxation (please do not mandate me to buy health care from a private, shareholder corporation) or we have a free market. The US system is no less paternalistic than anything in Europe, the only real difference is there are people profiting from the money as it flows uphill.

We cannot have a free market without price conscious shoppers.

Can we?

You tell me what you think.


atul said...

Small nitpick. Does the median income include the health care benefits? If yes your math is fine. Otherwise 20% (not 25%) of your compensation is health care Monopoly money

Kenneth said...

That we don't have a not-for-profit single payer system is a national embarrassment. It also makes no financial sense.

Thanks for the insightful post on how much we're really spending. The free market zealots get excited about issues like this. But, like so many markets: it's not close to being free. The artificial friction in the market place nullifies most of the free market solutions that I see proposed.

Jaz said...

@atul: nit well picked :-) The best answer I came up with when deciding to arbitrarily compute the fraction was that household income as reported to the IRS would not include health care benefits, so I'm 95% confident I'm right. Even if I'm not, it's still one fifth of compensation and it's still a bloody big number :o)

HI_Research said...

Thanks for the great post. As an American, having lived in Canada, gone to post-grad school in the UK and now living in Brazil. Oh yeah, and being retired US Military. I can easily say that the economics and the availability of healthcare in the US is a national embarrassment.

Brazil is considered a "developing" country and they still provide adequate healthcare with no risk of it driving you into bankruptcy for every individual.

Healthcare should be included in the US Constitution along with the pursuit of life,liberty and happiness. Not in the bills authorizing tax dollars to pad huge pocketbooks of CEOs.


Jaz said...

Interesting question, whether or not health care services is a fundamental right alongside life, liberty and property/happiness, the US version of which is - I believe - in the Declaration of Independence and is a preamble to justifying revolution, not necessarily protecting rights such as those found in the Bill of Rights/US Constitution.

There's an interesting argument here: about whether or not access to health care is a human right, although of course the UN's General Assembly adopted a human bill of rights which includes good health, see

Without being too lawyerly about it, I would personally argue for the basic human right to not have good health, meaning I have the basic human right to freedom to consume alcohol or tobacco or big macs, or other foods and substances deemed harmful to my health. Tricky argument, but nonetheless I would argue for a law - as opposed to a declaration of a right - that commits the government (and therefore, all of us as taxpayers) to paying for all the medically necessary health care. Deciding what is and isn't medically necessary is a touchy subject of course, and it happens everywhere including the USA, payers have to decide what they will and won't cover and those payers include the federal government.

We all seem to agree that we need clean drinking water, adequate sewage, garbage collection, food inspectors at restaurants and street cleaning for a healthy, clean society to exist, and we already pay for it willingly in tax dollars. Why not health care? Do we not really agree that health societies are productive, happy societies? And if so, why allow private insurance to profit from it?

I quote: "What is really bought and sold is the group, for the elaborate actuarial tables worked out by the insurance company are nothing more than a description of the patterns of behaviour of that collectivity which is the subject of assessment for the time being. To this the company adds nothing but its own profits. This profit is therefore wholly gratuitous because it does not derive from the creation of anything. Group insurance is the most expensive, the least scientific, and the clumsiest way of mobilizing collective security for the individual good... The second objection is even more serious. These schemes all have for their aim the consumption of the apparatus of health (emphasis added). But they leave the creation of that apparatus without plan and central direction. In place of a rational relationship between all its parts, there arises a patch-quilt of local paternalisms. My experience has taught me that there is no worse enemy to the intelligent planning of a national health service, especially on the hospital side." (Nye Bevan, In Place of Fear, 1952)

What I'm saying is while access to health care is not an inalienable right, (if it were, would we have to go invade countries that don't offer it?), it is a moral obligation on the part of a fully developed government to ensure the well-being of it's citizens , and by government and mean you and me, we, the people. I believe everyone around me should be as healthy as possible, and should receive necessary preventive and curative medical care as society deems fit.

In addition, a tax-funded health payer would close down the argument for so-called illegal immigrants getting health care. Visitors to the USA consume goods and services like any citizen, thereby contributing directly to the funding source, and would be immediately eligible for health care.

Another quote from Bevan:

"But it does mean that the Service is there to be used at the time you need it without payment anxieties. To put it another way, you provide, when you are well, a service that will be available if and when you fall ill. It is therefore an act of collective goodwill and public enterprise and not a commodity privately bought and sold."

We ALREADY pay for health care, everyone does, somehow. It will never be free. It could, however, be freely available to all, for pretty much what we're paying now.

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