Economic principles don’t apply to health care

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Richard Feldman

2:22 p.m. ET March 21, 2017

The Republican approach to fixing our health-care system has relied on free-market principles (consumerism, competition and absence of governmental regulation). Unfortunately, free-market forces don’t work in a health-care system that doesn’t follow the usual rules of economics.  Consumer-driven health care and competition will not ultimately expand insurance coverage or significantly lower costs given the dynamics of our health-care system.

Health Savings Accounts are the cornerstone of consumer-driven health care. The rationale for their use involves patients paying first-dollar medical care through the HSA up to a high deductible. The idea is that patients become more financially engaged, astute health-care consumers, prudently restraining spending. This consumerism infuses competition into the health-care system, reduces costs and increases quality.

There is little evidence indicating that the use of HSAs will produce such results.  Few patients actually shop or research cost and quality data and are powerless to determine the value of what they will receive.  Except, for example, seeking the best price on pharmaceuticals or a single expensive test, shopping for care is simply not a reasonable option.  Prices are not readily available and inexact when identified. Patients lack the knowledge and the medical sophistication to evaluate what many times is a very complex decision-making process with many variables. HSAs are also an ineffective way to expand insurance coverage, especially for the poor who often live paycheck to paycheck and are unable to divert money for a truly self-funded HSA.

Unlike shopping for other consumer products, patients do not have the luxury to shop when facing an acute or serious illness. Besides, the total charges for a major hospitalization or illness are apt to be much more than the HSA high deductible, so there would be little incentive to seek the best price.  Additionally, shopping is usually limited by insurance networks that lock patients into a health system and restrict choice. Generally, savings are created by forgoing care. Consumerism in health care is largely a fallacy.

Moreover, little competition based on cost and quality among providers exists in the traditional sense. When was the last time a hospital advertised a sale on a knee replacement or gall bladder surgery?  Most price control results from insurance companies negotiating prices with providers or from what government programs are willing to pay. Those without insurance are left to pay extraordinarily high prices.

Most of the discussion on competition centers on insurance-company competition.  That’s important, but insurance companies can only compete on premiums to a limited extent because of the high costs of medical services.

The free-market forces that do exist have served to produce a system, largely dominated by corporate interests, that supports high and ever-escalating costs by investments in the most lucrative aspects of medicine;  a system which promotes high-cost medical procedures, overbuilding, duplication of services, over-utilization, over-specialization, and perverse incentives.  Our health-care system has become a market-driven economic engine, running on the ability of society to pay the bill.

With congressional inaction, Obamacare began to falter because it failed to alter this inflationary volume-based fee-for-service system of reimbursement, and because insufficient numbers of younger healthy individuals chose to obtain insurance to spread the risk and the financing of the system. The new Republican plan must solve these problems or it will fail.

Unfortunately, it will take more than free-market principles.  Is that why the GOP proposals are flush with governmental regulation and relatively little free-market principles? You bet.

Feldman is an Indianapolis family physician and former Indiana health commissioner. Email him at richarddfeldman@gmail.com.

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Economic principles don’t apply to health care

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