• My kindness to free-market advocates

    Readers may not have noticed the debate that has occurred in the comments of a prior post on rates of increase in public versus private health care spending. It’s worth a look. Eric Adler, one of the participants in that debate, has paid me what I consider to be a complement:

    You are very kind to give the free market advocate[s] a lot of time. They have been making the same argument for years, without any real evidence to show which backs their beliefs. We must have experienced their best evidence by now.

    Why am I being so kind? Eric and others may wonder. In fact, it isn’t kindness. It’s genuine curiosity. I really do want to hear the best arguments for private plans. In part, I want to hear them because I have my own ideas about the roles of private and public plans in a health insurance market, and I welcome my ideas being tested, provided they’re first understood and taken seriously. (In fact, they’re not my ideas, but those of others I have borrowed, specifically Robert Coulam, Roger Feldman, and Bryan Dowd.)

    For my part, I actually take some of the best features of a market seriously. Choice does have value, independent of cost. The market can innovate more rapidly than government. And, if properly structured, a market can drive prices and overall costs lower than what they’d otherwise be.

    But, just because a market can do all those things, doesn’t mean one specific type of market for health care or health insurance will do all those things everywhere. What many free-market advocates, as well as single-payer advocates, are missing is that, for health care, markets are local and not all the same. Looking at Medicare, in some markets, there is good reason to believe, and the evidence shows, that traditional Medicare achieves the lowest costs. In other markets there is good reason to believe, and the evidence shows, that the most efficient private plans can achieve the lowest costs. However, it is critical to recognize that even though there may be a plan or a few plans that can achieve the lowest costs in some market, that doesn’t mean that private plans on average can do so.

    This insight is what explains the results of analysis of competitive bidding among health plans in Medicare. I’m not convinced everyone understands it, not even all those who advocate a purely market-based system. If one is truly interested in the lowest possible cost, one should want all possible entities competing toward that goal, public and private alike. One should then want to reward the organization that offers the lowest cost, subject to a constraint on quality and generosity of benefits.

    Put another way, there’s a broad misunderstanding or a narrowness to what counts as “a market.” A market does not necessarily include only private businesses. A market is a system with rules designed to achieve a certain outcome. Depending on its structure, it can drive prices to a minimum. In a sense, a market is just a computing machine, an analogy I once made. The type of machine you build determines what it can do.

    An apt analogy might be to a human and a computer. The former possesses the creativity and perspective to understand what ought to be done. The latter possesses the raw power to calculate rapidly. We would not put the computer in charge of what problems to solve, of what questions to ask. We ought not put the human in charge of rapid arithmetic. Similarly, the market can be exploited as a computing machine. It can tell us what the optimal price […] is, but only if we set up the problem so it produces that answer. Garbage in, garbage out.

    What I’m saying is that it is trivial to imagine a health insurance market, composed entirely of private plans that is nothing but garbage with respect to the problems we’d like that market to solve. One can do the same with public plans. Or, one can recognize that it is not the plan type that matters, but how the plans interact, how they compete, on what dimensions, and with what constraints.

    So, yes, I want to know what is the best evidence for private plans. Where do they perform well? Where do they perform poorly? I do not believe any claims that private plans always and everywhere beat traditional Medicare (tomorrow I will show that, on average, they certainly do not). Nor do I believe that traditional Medicare always and everywhere beats every private plan. More importantly, I don’t have to believe anything. I could, instead, be agnostic and just let those plans compete in a structured market. May the best plan (type) win.

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