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Sunday, October 26, 2008

Medicine and the market

There are a number of conditions necessary for a market to operate effectively. Among them are these:
  • there is a provider who is paid and a buyer who pays;
  • the buyer has as much access to relevant information as the seller;
  • the costs and benefits associated with the goods or services in question are reasonably clear and available to the buyer.

On November 4, Arizona voters will be asked to approve a Constitutional Amendment (Proposition 101) which is designed to prevent, in Arizona, the implementation of a possible future National Health Service, as in the United Kingdom, or a single payer system as in Canada.

Proposition 101's premise is that the market is the most efficient way to allocate resources. The current financial crisis, however, casts considerable doubt on such a belief.

The exact text is this:

ARTICLE II, SECTION 36. Because all people should have the right to make decisions about their health care, no law shall be passed that restricts a persons freedom of choice of private health care systems or private plans of any type. No law shall interfere with a person or entity's right to pay directly for lawful medical services, nor shall any law impose a penalty or fine, of any type, for choosing to obtain or decline health care coverage or for participation in any particular health care system or plan.

Leaving aside the dangers of writing policy, rather than process and organization, into a constitution, there is little in the way of a working market for medical products and services:

  • patients, who are purportedly the buyers, do not pay for the majority of the goods and services delivered by the sellers: insurance companies and government (Medicare, Medicaid, Veterans Administration and TriCare) are the primary payers;
  • the uninsured pay little for the care provided through emergency rooms. Costs are shifted to those who can pay.
  • few patients have the information, or the ability, to evaluate the merits of any proposed course of treatment.
  • the more that sellers "do" to the buyer, the more that they get paid.
  • doctors' actions are driven partly by remembered knowledge which may no longer be accurate or complete, partly by patient demands - fueled by direct to consumer advertising, partly by self interested desires for higher incomes, partly by "conventional medical wisdom", partly by fear of tort lawyers, and all too rarely by scientific evidence.

Proposition 101 is intended to perpetuate the present dysfunctional system. Arizona voters should vote 'No'.

The current payment system is largely socialistic - not free market - because it relies on pre-paid medical care plans rather than insurance (a catastrophic, high deductible, plan is real insurance), on government payments, and on cost shifting.

Market failures come about when one person (the doctor or seller) decides what is to be done to a second person (the patient or buyer) who has inadequate information and knowledge to evaluate the proposed course of action. Asymmetry of information is a primary cause of inefficient markets and leads, with few exceptions, to overpayment by customers. Any used car salesman from the pre-Internet era will attest to that!

(In the interests of full disclosure, I did sell used cars - and learned many interesting lessons - for a while in 1971.)

The biggest reason for market failure, however, is that a third person (government or insurance company) pays but has little to say about the cost effectiveness and value of the proposed therapy. Since patients do not pay, they have no financial incentive to seek out the most cost effective treatment. When insurance companies deny reimbursement for treatments that they consider unnecessary or ineffective, they are universally condemned for their heartless behavior.

Politicians who maintain that a free market system can address the woes of the present medical care system are either uninformed, lying, or merely stupid. Our present system is broken and, in the long run, unaffordable. There are surely good reasons why every other civilized country has a universal health care system. Almost all of them - Canada is a notable exception - permit private payment.

The need for leadership is critical. Perhaps, Senator Obama or Senator McCain (whichever is elected next week) will dare to challenge the conventional wisdom, the sterile ideology, and the special interests. Medical care costs will, sooner rather than later, swallow our economy. This must be a priority for our next President.

I may be naively optimistic that either of these two politicians will challenge the special interests over the structure of a sector that accounts for approximately one sixth of our economy. The American model, unfortunately, delivers worse results than the much less expensive and more effective, but "socialist", European models. Given, however, that Senators Obama and McCain appear to be men of intelligence and integrity, we can hope.

At my age, I have little at stake in the decision. I will likely be in another place before the crisis reaches its full flower. I do, however, feel a moral obligation to the next generation, so I will continue to encourage. Others may describe it as nagging, but I beg to differ.

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