Health care is different (from other industries)

It’s clear to me from Ezra Klein’s reference to my “Health care is different” post that I need to say more.

Many suggest that the solution to our health care system’s problems is to be found in a more market-based approach. Consumer-directed health plans are at the center of this concept. If you make people spend more of their own money, they’ll be more prudent users of care and seek better value at lower prices. That’s how other industries work, and we don’t complain much about them. Why should health care be any different? Get the government out of the way. Give vouchers to Medicare and Medicaid beneficiaries. Let people shop for the best deal on the unfettered market. And, moreover, reduce first-dollar, third-party payment by encouraging high-deductible plans.

About now you’re thinking I disagree with the notions I just expressed. Actually I don’t. They have merit, which I recognize, accept, and support. Where I take issue is that they are not solutions to all the problems in our system. They can address, at least in part, some of the problems, though even there more is required. It’s just not that simple. (Again I strongly encourage those who thinks otherwise to read Katherine Baicker and Amitabh Chandra, “Myths and misconceptions about U.S. health insurance.”)

That brings me to the post to which Klein referred. I illustrated how health care is like other industries,

  • Health care markets and the airline industry both have barriers to entry. The former requires special licenses, the latter requires considerable capital and regulatory compliance.
  • Trust in one’s doctor is important, as is trust in one’s lawyer.
  • Information assymetries exist in health care as in auto repair. Your mechanic (doctor) knows more about your car (your internal organs) than you do.
  • Health services and health insurance products are differentiated and complex, as are other products like cell phones or personal computers.
  • Health professionals want a good income, as do those in other fields.

That would suggest that if we just make health care even more like any of those industries, by reducing third-party payment, government regulation, and so forth, we could harness all the characteristics of the free market–characteristics that we don’t complain about (and even like) with respect to other products and services. True!

Except that health care is different, in one crucial way. I said it, and so did Klein:

First, if you don’t get good health care, you might die. That makes it hard for individuals to say no to things, it makes it hard for insurers to resist the backlash that comes when they say no to things, and it makes it hard for government to say no to things. [Bold mine.]

This may not seem important to the wealthy, young, and healthy. But to poorer, older, and sicker individuals (e.g. those on Medicaid and Medicare) it dominates. It is very hard to be a prudent purchaser of care when you’re in the ICU or responsible for the health of a vulnerable population. That alone suggests that an emphasis of moving the cost risk to individuals isn’t sufficient. There is plenty of cost risk to spread around. Some of it should be borne by physicians and hospitals, some by insurers (public and private), and some by individuals.

The optimal allocation of risk across these entities is not likely to be the same for the young and healthy as for the old and sick. That might be OK for buying a cell phone–overpaying for or under-utilizing cell phones won’t do you much harm–but it isn’t for buying health care. Why? Because health care is different. A mistake costs far more (your life) and you really do know far less about it than the salesman or practitioner, particularly when you’re very sick.

Some reduction in costs at minimal to no reduction in health may be possible with increased personal responsibility. The RAND health insurance experiment has demonstrated that, on average. However, that fact does not hold for all sub-populations. The health of individuals with certain chronic illnesses included in the RAND HIE was harmed by increased cost sharing. The RAND HIE did not include the elderly. More recent work has shown that increased cost sharing for Medicare beneficiaries can lead to adverse outcomes and doesn’t necessarily save taxpayers money.

I’m all for using square pegs in square holes. But when the hole is round, it just doesn’t fit. Forcing it is bound to break something, or someone. And it isn’t necessary. A health policy more nuanced than “free market for all” isn’t really that much harder. It just takes a little more thinking than can be conveyed on a bumper sticker.

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