Monday, April 23, 2018

Why Does the Free Market Fail to Control Costs in Health Care?

     In our national debate over health care and its rising cost, many health care economists say that one of the reasons why health care costs keep rising is that the free market does not work to control costs in health care. Why should that be true? Why should the free market work to control costs well in many areas of our economy, but not in health care?  The reasons are complex, but we must understand them if we are to create a health care system that does not bankrupt us. So, this post attempts to explain why the free market not work to control costs in health care when it works well in so many other areas of our economy. The main reasons are:

  1. Health care suppliers have monopoly power to set prices.
  2. Market prices do not exist in health care.
  3. Buyers of health care services cannot evaluate the quality or necessity of what they buy.
  4. The decision to buy a health care service is separated from the responsibility to pay for it.

In Health Care Markets, Suppliers Have Monopoly Power to Set Prices

A free market controls costs through competition. Sellers of a product in a free market are not free to raise its price above the market price because if they do, they will lose sales to other sellers who provide the same product at the market price. In this situation, sellers can maintain their profits only by keeping their costs under control, and sellers work to reduce their costs in order to increase their profits.

     This process works only if there are many sellers and they cannot collude to raise the price of a product or limit its supply. If there is only one supplier of a product, he/she can easily control the price at which it is sold and use that power to increase profits. If there are very few suppliers, they can work together to keep the price of a product above what a free market would establish.

     Health care markets do not have many sellers of health care services. Health care markets are local, and in each local market, there are very few health care providers.  In most communities, there is one medical center or perhaps two. Even in big cities, there are rarely more than half a dozen medical centers. Because there are so few of them, health care providers do have the power to set the prices of their products.[i] This power to set prices is known in economics as “monopoly power.”

Market Prices Do Not Exist in Health Care

     Competition in a free market controls cost by setting a market price for each product, but in health care, there is no such thing as a market price for any health care service. If you go to a medical center and ask the price of – say – a gall bladder removal, you will be told (if you can get an answer at all) that the price depends on the insurance that you have. There is a different price for every insurance company and still another price for those who are unlucky enough to be without insurance.  If you are covered by Medicare, there will be a yet another price.
     In fact, even among patients with the same health insurance, the “price” for a gall bladder removal will be different for every patient because the fee-for-service payment model allows a health care provider to charge for each, separate element of the service. How many bandages are used? How much blood is used? Was there a “facility charge?” And on and on.

     In short, the cost control function of the market price does not exist in health care because, in health care, there are no market prices.

     The lack of clear, market prices has yet another bad effect, which is that neither a patient nor a doctor can consider cost when deciding among alternative treatments. For example, a blockage in an artery may be treated by using stents or by using bypass surgery, and it is often difficult to know which of the treatments would be best in a specific situation. In some cases, it might be best to choose the least expensive procedure, but doctors are not trained to think that way, and patients cannot obtain the information to initiate the discussion. So, cost-effectiveness is rarely considered. 

Health Care Providers Are Experts While Patients Lack Technical Knowledge

     Most patients lack the technical knowledge to understand what they are buying. They have to trust their doctors, who are also the sellers of the services they are recommending. Even among health care providers, there are no accepted standards for health care services. When should arterial bypass surgery be recommended? When should a gall bladder be removed? These are matters of medical judgment, and doctors can and do differ.  In short, patients cannot judge the necessity or the quality of what is being offered to them.  If one procedure is more expensive that another, is the more expensive procedure really better? How can a patient have that discussion with a doctor?

The Decision to Buy is Separated from the Responsibility to Pay

     A market can control costs only if the buyers of a product are motivated to obtain it at the lowest cost. Their bargaining with the sellers sets the market price, and if they do not bargain, the whole process breaks down.  In the health care market, most buyers are not motivated to obtain care at the lowest cost because most people have health insurance. They do not have to think about cost. Thus, the fact that people have health insurance interferes with the cost-containment function of the market. We cannot do away with health insurance because modern health care is inherently so expensive that, without health insurance, most people would be unable to afford it. So, we must live with the fact that the buyers of a health care service are not motivated to seek it at the lowest cost.

     In theory, patients would become cost-conscious if they had to pay a part of the cost themselves.  However, in order for such “co-payments” to have the desired effect, they would have to be large, and large co-payments would create a hardship for most people. Indeed, if co-payments were large, most people would be unable to afford health care at all, and our inequitable health care system would become even more inequitable.

     For all of these reasons, we cannot expect the market to perform its function of controlling the cost of health care. The market cannot control costs because

  1. In each local market there are very few sellers of health care services, and they have monopoly power to set prices.
  2. The market price cannot serve a cost control function because in the health care system, market prices do not exist.
  3. Patients lack the technical knowledge to evaluate the cost-effectiveness of alternative treatments.
  4. Because most health care bills are paid by health insurance companies, the decision to buy a health care service is made by a patient who does not care about its cost.

Therefore, we will need non-market methods of controlling cost if we want to avoid being bankrupted by our health care system.

[i] This power might be offset by the countervailing power of the health insurance companies, but they are prevented by the anti-trust laws from joining together to bargain collectively. So, they are weak compared to the health care providers, who are able to set their prices almost at will.[i]

Saturday, April 14, 2018

Private Rights and Public Responsibilities: the Case of Private School Vouchers

We Must All Support Our Public Institutions and Programs


It is a basic principle of our democratic political system that we are all responsible to provide financial support through our taxes for our public institutions and their programs.  This responsibility does not depend on the policies of those institutions. If my government pursues policies that I disagree with (and it often does), I still have to pay my taxes.  This is important because, our government cannot survive if we do not support it financially, and if it does not survive, we will all lose the benefits of living in a healthy, prosperous country.
Why must I support government programs from which I do not benefit directly? Why cannot I instead use my money for my own benefit? The answer is that we all benefit from having strong, healthy public institutions and programs. A healthy, free-enterprise economy can function only within a context provided by effective public institutions and programs. For example:

  • Our courts make possible the rule of law without which commercial contracts would be unenforceable.
  • Our state and local governments provide safe streets and roads that are well-designed and well maintained.  Without them, workers could not go to work, and products could not go to market.
  • Our schools provide an educated work force that sustains a strong, modern economy.

Thus, we all benefit from the system itself. The benefits of being American come not from the word “American” but from our strong, effective, public institutions.

We Must Support Programs from Which We do not Benefit Directly


My responsibility to support the institutions and programs of my national, state and local governments includes supporting programs from which I do not benefit directly. For example:

  • I am not a dairy farmer, and in fact, I would benefit from lower prices for milk, but I cannot refuse to pay my share of my government’s support for milk prices.

  • My children did not attend the University of Wisconsin, but I must still pay my share of the cost of our state university.

Sometimes, the benefits I receive from a particular public program are indirect as may be seen in the case of the price supports for milk. Those supports are costly for me because they force me to pay more for milk than I would without price supports. However, the health of the dairy industry helps to sustain a healthy economy in the state of Wisconsin, where I live, and I benefit from the health of my state’s economy in many ways. 

We Must Support Our Public Schools Even if We Send Our Children to Private Schools


The issue of support for our public institutions has recently become important in the controversy over private school vouchers. Our state gives money to private schools to pay for the tuition of students who attend those schools. The argument for doing this phrased as an issue of individual freedom: parents should be free to send their children to private schools if that is what they wish to do.
In itself, this argument seems strong. No one argues that parents should not have this freedom, but that is not and never has been the issue. The issue is whether a parent’s choice to send his/her children to a private school should allow him/her to avoid his/her responsibility to support our public schools.

Historically, our answer to that question has always been, “No.” We have always agreed that parents are free to send their children to private schools, but we have never subsidized that choice by diverting a part of their taxes to pay their students’ tuition. We have insisted that every citizen must support our public schools because supporting them is a basic responsibility of citizenship.

We cannot abandon that principle because if we do, we will be accepting the idea that citizens are free to refuse to support institutions that do not benefit them directly, and if we do that, we will weaken and ultimately destroy our political system and our society.  If we say that American taxpayers are required to support only those institutions and programs that they approve of or that they benefit from, we will nullify the power of our representatives to set the priorities of our governments. We will weaken our public institutions to the point where they will become unable to provide the programs and services that undergird the prosperity on which we all depend, and we will all suffer the consequences. We must uphold the principle that all of us must support our public institutions and programs whether or not we benefit directly from them.

This is especially true of our public schools. They are among our most important institutions, and the health of our economy and society depends on the health of our public schools. Private schools will never educate more than a small fraction of our country’s children, and we do not want the majority of our children to be educated in schools with teachers or facilities that are inferior because we have failed to fund the schools adequately. 

How do vouchers damage our public schools? First, many of the facilities of a school are used by all or most of the students, and such facilities can be provided only if the number of students is large enough to support them.  Such facilities include laboratories and libraries as well as arts and athletics programs and facilities. Moreover, schools compete for a limited number of excellent, experienced teachers. If we want to have first rate math or music teachers, we have to pay them adequately. 

In short, if we want to have first rate public schools, we have to be prepared to pay for them, and we cannot divert the funds intended for their support to private school vouchers. Parents who wish to send their children to private schools will always be free to do so, but we must not destroy our public schools to subsidize their choice.

Wednesday, February 28, 2018

Bring People Together By Providing Real Security and Real Opportunity for All

Bring People Together by Making the American Dream Real Again

We need to bring people together. The Democratic Party cannot be successful if promotes only causes that drive people apart. We have to build our platform around issues that matter to most people, and here are three of them:

  1. Health care
  2. Retirement security
  3. Real Opportunity for Young People

Each of these issues is rooted in a strong, moral argument. It is wrong for a rich society like ours to fail to provide our people with a decent and secure living. We can easily afford these things, but we have chosen to concentrate our wealth ever more narrowly in the top 1% of our people, and we must change that. We must recognize that as a people, we are “all in it together.” We prosper or fall together, and we can prosper most if we work together.

Our party must stand for the moral principle that our economy should provide a good life for all of our citizens, not just the wealthy few. Let us renew the American Dream.

Health Care 

The high cost of health insurance in the United States is ruining the American Dream for most of us. 

Health care in the United States is far too expensive, and we can no longer afford it. We pay far more than most other countries, and our system delivers mediocre outcomes. Health care emergencies are the number one cause of personal bankruptcy. Millions of people are without health insurance, and even those who still have insurance through their jobs are finding that it costs them more and more while it covers less and less.  Companies that offer health insurance are finding it more and more costly.

We must have a national system of health insurance that covers everyone. “Medicare for all” is one possibility, but it is not the only one. Several European countries have health care systems that rely on insurance provided by health insurance companies in a heavily regulated market. However, whatever solution we adopt must include non-market methods of controlling the cost of health care products and services. Without that, no program will be financially feasible in the long run.

Providing adequate health care for all of our people is a moral responsibility. If we fail to do that, we will drive more and more people into bankruptcy and misery.

Our party must stand for a financially sustainable national system of health insurance for everyone in order to make the American Dream real again.

Retirement Security

For too many of us, the American Dream is ruined by the reality of poverty in retirement. Everyone hopes to have a secure and comfortable retirement. Most of us work hard toward that end, but we find ourselves in a world that makes it more and more difficult to achieve. Our Social Security system is the bedrock of a comfortable retirement for our people. It must be preserved, and its financial problems must be resolved.  We cannot allow the financial interests of a few extremely wealthy people to rob the rest of us of the secure and comfortable retirement that we have worked for.

Providing a secure and comfortable retirement for every American is a matter of basic fairness. It is wrong for us to abandon people in their old age, and every young person should be able to work secure in the knowledge that his/her retirement income is guaranteed

Our party must stand for a comfortable and secure retirement for everyone in order to make the American Dream real for all of us.

Real Opportunity for Young People

We must make the American Dream real again for our young people. It would be wrong for us to do otherwise. 

Our economy depends on our having a steady supply of well trained workers, and our democracy depends on having an educated citizenry. We should not place the burden of paying for the education that is required entirely on the shoulders of the young. Today, we act as if the education of our young people only benefited them, but in fact, we all benefit from it.

We used to understand that. We used to pay for post-high school education for all of our people mainly through taxes. Tuition at our community colleges and state universities used to be almost free, but a few decades ago, we started to shift the burden to the young. We cut state support for higher education, and we required students to borrow money to pay for it. The burden on them has become heavier and heavier through the years, and now, young people graduating from school face crushing debts, which will take them many years to repay. The burden of debts makes them unable to invest in good homes and good education for their children.

This is wrong. We should be doing all we can to make sure that the American Dream is as real for today’s young people as it was in the past, and that means increasing funding for higher education, especially at the state level.

Our party must stand for real opportunity for young people. We must make the American Dream real for them again.