GOPideas... ideas done right

When thinking about your beliefs concerning health care policy, consider the following questions:

• How much would you be willing to pay to prevent someone you love from dying or suffering?
• If you think that something may be wrong with you that could threaten your life, what are you willing to pay to determine if you are sick?
• If you feel your health is in danger, would you be willing to take the advice of someone who is trained generally in the area of your discomfort --- or would want an expert?
• How much are you willing to pay to successfully resolve a chronic health care problem of you or a loved one?

If you are like most people, your answer is likely something akin to "whatever the cost," "as much as it takes," "all the money I have." And that's the root of the problem.

Without getting into grotesque economic detail, health care is an inelastic good, which means that even if prices change dramatically, people will continue to demand the good or service. This means that producers or suppliers of goods and service are likely to have significant pricing power, allowing them to increase prices and capture the incremental increases in prices as economic profit. In such a scenario, we can expect prices to rise at a rate higher than inflation --- which is exactly what has occurred in health care.

Furthermore, there are a number of government policies and industry norms that reinforce this market structure. For example, the prescription process ensures that if someone wishes to acquire access to a substance that could improve their life, they must see (and be billed for) a doctor visit. Second, patent law provides for legal monopolies on the production of prescription drugs --- meaning that the pharmaceutical company can charge whatever they wish, without regard to competition. (Note: if the firm is profit maximizing, it will likely price the drug at a point right below where the market will opt for another treatment --- so drugs with few alternatives are likely priced extremely high.) The structure of medicine reinforces this process, as most acute conditions require multiple doctor visits: first to a primary care physician and then to a specialist.

The fact that this occurs within a market system exacerbates the issue because those with a relative unlimited willingness to pay set the price for all the people involved. For example, let's assume that Dr. X is the best cardiovascular surgeon in Chicago and he can treat 20 patients a month. However, there are 100 people in Chicago that need heart surgery every month --- who will Dr. X take as patients. The answer (in a market economy): those that can pay the most. Thus, the issue becomes: what is patient 20 willing to pay to ensure that s/he bumps everyone from 21-100 out of Dr. X's office? If you needed bypass surgery, how much would you pay?

This not only affects the market for Dr. X, but also for Dr.Y, (Chicago's second best cardiovascular surgeon) because s/he can set the rate for surgery at whatever patient 21 was willing to pay (which is $1 less than patient 20). The conclusion is that the top people in the field get to demand almost any price --- and then the rest of the field can demand almost as much, which dictates that the prices will be set at the high end, not the low end (unless people would voluntarily go to Dr. Z's discount heart bypass supersurgery center --- unlikely). This is the same type of economic model at work in higher education.

This is the opposite perspective from most market-based economic models where price is driven down by competition, because in the cases of higher education and health care, people are willing to pay as much as they can bear to receive the best possible. So, the fundamental question is how are prices kept low in a market-based economy in which elite players set the market? Before answering that question (in a later post). Think about the following anecdote (and this is the root of one solution):

As a graduate student I visited MD Anderson Cancer Center in Houston, one of the leading cancer centers in the world. When we met with an administrator, the issue of patient selection arose (when your facility is the best in the world, you get to choose who you treat). She calmly and rationally went through their types of patients: Medicare (try to get them to go elsewhere or ensure they have good supplemental insurance --- 70 cents on the dollar was too low), people with adequate coverage but money in the bank (better, because they could pay the difference, but haggling with the insurance company is a time drain), good private insurance (they pay better than Medicare) --- and the best patients of all: foreigners (they pay whatever is asked, up front, all cash).

Thus, the inconvenient truth is that in a market-based economy, there are winners and losers in every market --- and health care is no different. Some people will get better care (as occurs today) --- if government becomes involved, then those who control the policy apparatus will decide: who gets what care?

The fear of all Americans should hold is that these decisions will be made either arbitrarily or in a wrongheaded fashion. Today we have the certainty that these decisions are based on the quality of one's insurance and the ability to pay. Imperfect, yes --- but also transparent. The issue in any reform will be whether this equation changes --- and to which groups' benefit.

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