The market for health care

Health care marketThis graph demonstrates that while the health care market may as a whole find an equilibrium price, we suffer from few customers for health care.  The main customers for health care are major health insurance companies and the government.

If we were to segment the prices paid by those respective customers into private and government, we would necessarily find that the government pays below the market rate, while the private insurers pay above the market rate, and no one really pays the total market equilibrium.  It is a theoretical price that is somewhere between the two.

I would also anticipate that any small amount of cash customers in the market will be charged even more than the common private insurance rate, which is already above market, due to lack of bargaining power.  I suppose this based on my own billings that start with an artificially high price, and move down to a negotiated rate with the insurance provider.  Without the insurance negotiation, I would be charged the top line price.

Private insurers do not have the same incentives and motivations as their customers and are primarily driven in the health care market by what is needed to succeed in the health insurance market, covered in a forthcoming post.

If the health insurance market were to suffer a huge shift towards government plans, and future government plans also paid significantly below market rates in the health care market, care becomes necessarily rationed because of the gap in supply and demand caused by the price ceiling below the market rate.  If private insurers survive a large shift to government insurance, the disparity between the two prices paid will become greater, further affecting the competitive landscape of the health insurance market.

Conviscating professional services

I’ve been watching a lot of the health care debate and town-hall meetings lately, as I believe this is a seminal issue that will define our view of rights vs. privileges in this country for a long time to come.  Now the analogy that I am going to draw is a stretch, but it really is the general direction that we are currently headed.

What if some legislators decided that everyone in America had a right to ‘affordable’ professional tax preparation?  How would this potentially affect the market for tax preparation services?  Furthermore, these same legislators want to tell you how to provide this service and help you define the extent of service each client may need.  At the same time, they will tell you how much this service is worth under the auspice of ‘negotiating the best deal for the customer.’

Would you be excited to be providing services in this type of marketplace?  Would the customers be excited to receive the services that are grudgingly provided by professionals who used to work in a free enterprise?  Would there still be the same incentives to become more effective and efficient and utilize technology or would these improvements be mandated with more legislation and grudgingly implemented?

How do you think that doctors and patients will fare any better than other professionals under the same circumstance?  Are they so much more altruistic that it will work?

Health care reform that will work

I agree that health care reform is desperately needed.  I also agree that prices have spiraled out of control and we need to stop it.  I don’t think that the government running the health care system or being a larger player than they already are will help anything.  According to the Kaiser Foundation in 2004 there were 42 million people covered by Medicare and 52 million people covered by Medicaid. There are about 87 million total covered between the two programs as 7 million are dual eligible.  So with our population of 300 million people, almost a third already have access to an existing public option.

Another public option is not the solution, but systematic reforms could change the way consumers consume health care, reducing costs for us all.

  1. Front the money. If individuals had to front the money for their own health insurance, it’s more likely that they would consider the price of a procedure, and actually demand this information before moving forward.  Not that it will change their mind on the necessity of the procedure, but the awareness of price may lead to competition on price, delivering lower costs for us all.
  2. Extend tax benefits to individuals. Keeping the benefits of providing health insurance on the employer side has kept the policy in the employer’s hands.  Extend tax benefits to individuals the same way you would to the self-employed so that opting out of your employer’s group option can make cents.  This is especially true for young employees in aging organizations where the young may pay higher premiums than they would in the private insurance market to subsidize the older participants in their group.
  3. Encourage competition in insurance. This issue is so complicated that it’s hard to know where to start, but some common sets of regulations that allow competition to flow more freely from state to state would be a great place to start.  This should not come as a federal mandate, but as a cooperative of the states utilizing what is already working best in various parts of the country to make some uniform guidance and grounds for competition.

These reforms would help to put market pressure downward on prices for both care and insurance as well as upward pressure on quality of care.  There are efficiencies under development in the health care market that are not being exploited because of the regulatory state of affairs and third-party payer system.  Telemedicine holds great promise to deliver care more efficiently, but may be held back if insurance companies do not give doctors a code to be paid for this service.

However, innovations such as this would take hold more quickly if the perception of health insurance were to change drastically in the marketplace.  Currently, health insurance is viewed as a way to avoid paying anything for medical care, so that the consumer can consume health care freely and let someone else pay for it, so long as they can ante up with the monthly premiums.

If health insurance were perceived more like homeowners insurance, where you take care of maintenance yourself and use the policy for major damages, doctors and patients would have more control over care than the insurance companies.  This would also drive down the cost of health insurance as much more of the health care spending would be cash from the patient to the doctor instead of from the insurance company to the doctor.

Government Health Care

This presidential race has garnered much attention for those who wish to socialize medicine by having the government guarantee health care for all.  Some of the problems in our current system are due to the government being a major customer of most if not all health systems.  However, the government either federal or state do not generally contribute to the profit of these health systems.

Medicare and Medicaid both work under a “cost reimbursement” system that only allows the government to be billed the actual cost of the procedure, rather than the market rate for that procedure.  The effect here is that to maintain profit margins across the whole system the “market rate” for those with private insurance and those who pay for themselves must be increased.  So we pay for the government health care plans with our tax dollars and further pay a subsidy to the hospitals through increased health care costs and higher insurance premiums.

A move to a single payor system (the government pays for and regulates all health care) could eliminate the profit from healthcare and greatly diminish quality.  It’s hard on the people with private insurance to make up the difference for Medicare and Medicaid twice (taxation and subsidy), but if a governmentally run healthcare system eliminates the profits from the industry there will be less pay for doctors, less structural improvements, less equipment upgrades, and more regulation of services provided. 

The effect of this change would not be apparent over night as it would be several years before the lack of structural improvements took a toll on the whole system, but it seems the system would necessarily deteriorate over time as profits were replaced with cost reimbursements across the board.