• 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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    • Public Plans, private plans. It really does not matter until the fee for service structure is changed. As long as the incentives of health care providers are to increase the costs of health care (the patient or insurer’s costs is the provider’s income) no amount of competition amongst insurers will change things.

      People seem to forget that the insurance company is not providing the health care services. It is providing a service in which it changes variable costs to the patient into fixed costs, but it do not change the variable cost nature of the providers into fixed costs. Obviously a large single payer monopoly insurer like Medicare will have the lowest costs, but those costs will rise as we have seen in the past.

      I fail to understand why this is so difficult for people to understand. It is Econ 101. The heatlth care system is almost entirely a fixed cost structure. Maximizing profits in such a system means maximizing revenues. Maximizing revnues means maximizing cost to the patient.

    • “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.”

      Your definition of markets helped me understand why you and many free market advocates may simply be talking past one another—that plus your belief that the government can be simply another “market competitor.”

      The way I conceive of markets is that they properly consist of voluntary exchange. Force and fraud violate the requirement “voluntary” and thus are not legitimate market actions.

      Government,, other other hand, is by its nature force. Properly, government force is restricted to actions emanating from an individual’s right to self-defense (which is a corollary of an individual’s right to his own life and only to his own.). Thus, governments can properly only defend individual rights or assist with retribution against those who initiate force (or fraud) against others. But, there is no right to initiate force.

      So when you talk about mixing an instrument of force into the market–you destroy the very meaning of “market” as a mechanism for voluntary exchange. I am not expecting to to agree with this–just to point out that you are using one definition of market. Other definitions exist.

      There are some advantages to separating the disciplines of politics and economics, but some crucial aspects of the issue got lost when we quit thinking of it in terms of “political economy.” The two fields really are inseparable as you can not have meaningful discussions without first agreeing on the meaning of terms like market, or property , or even for that matter, rights.

      • There is a market for transportation in my area. Some options are private (cars, bikes, feet). Some are public (buses, trains). I have a nice set of choices. I do not feel the heavy hand of government forcing me to do anything.

        • If you only look at the choices which exist and not the mechanism by which they came into existence, then you will not “feel the heavy hand of government..” I would argue you need to widen your scope of attention. That is the point of Hazlitt’s One Lesson and Bastiat’s Seen and Unseen.

          Again, I am assuming you will continue to disagree. At this juncture, I am just working on clarifying where those points of disagreement arise, and why.

          • Yes, and we need to look at how the heavy hand you perceive supports both sides, public and private. Do you think the private auto industry would be what it is without government subsidies along the entire combustion engine infrastructure?

            I just don’t think “free market” is what people generally imply it is. Nor do I think a “public option” is what some want us to fear it is.

            Right back at you: Again, I am assuming you will continue to disagree. At this juncture, I am just working on clarifying where those points of disagreement arise, and why. I think, in fact, the points of disagreement are clearer when we take a specific example. My favorite is Medicare, including the private plans of MA and Part D. Which model is working best and why?

            • “I just don’t think “free market” is what people generally imply it is. Nor do I think a “public option” is what some want us to fear it is”

              I will keep this in mind as I continue to follow your posts. This helps me understand the point of view you are working from.

              I would agree that it is equally important to see where government is supporting private industry–but I consider that a manifestation of the mixed economy, and not an action which would occur in a free market.

              Thanks again for the work that you do, here on this blog and elsewhere.
              .

    • @Beth Haynes
      Michael Walzer wrote an Interesting book called Spheres of Justice (about 20-25 years ago) that addresses many issues related to how goods are distributed, and discusses issues related to private and govt purchasers in the same market. Given your comment, you might be interested in the book.

      • Thank you Don. I will check it out.

      • @Don
        I am very interested in gaining a better understanding of the justifications for social justice and have read several works by John Rawls and am gradually working my way through multiple other authors.

        Just wanted to share a really cool thing—I have a new toy (iPad) and was able to find a Kindle version of Spheres of Justice for about the same price as I would pay for a used hard copy in decent condition. And, I accessed it instantly! Now I just need to carve out the time to read it.
        Thanks again–and btw I have very much enjoyed your recent posts on Medicaid, LTC and palliative medicine.

    • David R makes a good point. I would argue that health insurance is a poor example of the potential of a free market health care system. Health insurance is a construct that behaves more like a socialized service rather than a competitive market. Enrollees have all manner of perverse incentives, as do providers and insurers.

      In markets were third-party payment is absent, the prices are stable and innovation occurs. Awhile back I created a price index for cosmetic surgery. Over the past 15 years prices increased similar to inflation.

      • However, third-party payment addresses a real problem. Without it one could legitimately say there is a market failure (incomplete market). No matter the price, some health services for which the benefit exceeds the marginal cost are inaccessible to some people due to price relative to their income. The income transfer effect of health insurance is dramatically welfare improving.

        I think one can argue about the structure of insurance (welfare optimizing copayments and the like), but one should not go so far as to argue against health insurance in any form. Insurance of some type emerges quite naturally in a market when the chance of an expensive life/health/wealth-preserving event is uncertain.

        Cosmetic surgery (except in some instances of massively disfiguring injuries) is not the best example of a life/health/wealth-preserving event.

        • I absolutely agree that insurance is welfare improving — including the wealth transferring effect in the event of an illness. I also think it’s safe to say a significant portion of the medical technology available today is due to the fact insurance created a demand for just about any health-improving technology regardless of its cost.

          The downside is public and private coverage both insulates patients from the cost; and providers from competition. As a result health care consumes an ever increasing portion of our economy.