Market Failure v1.0

Take a moment; sit down. Can you hear that? That's the sound of the free-market workings its talismanic properties to create an efficient, cost-effective and high quality health care system. Wait, you don't hear it? Its ok, neither do I. And we are not alone. But you wouldn't know it based on the current soiree of congressmen, senators and AMA members who don't dare consider a health system not based on the free market structure (ie. single-payer).

Ever since our current style of health care started to take shape in the middle of the 20th century, it has always been based on the free-market concepts. The exceptions are of course Medicare, Medicaid, SCHIP, the VA and the Native American Health Groups. But for the majority of the population we only have the option of picking a private insurer to cover our health care.

Anyway, as the free-market story goes, the price of obtaining insurance, seeing a physician and being checked into a hospital should go down based on the concept of competition. Additionally, in order to attain and sustain lower competitive costs, those institutions will be forced to become more efficient and deliver more effective services. Thus, this should keep costs under control and help improve over all quality.

However, since the 1960's, when major private and for-profit institutions started to enter the health care system, we have seen nothing of the sort. Why is this? In his book "A Second Opinion", Dr Arnold S Relman describes the evolution of the commercialization of health care and why it hasn't worked to keep costs down. Specifically, he mentions Kenneth Arrow's article "Uncertainty and the Welfare Economics of Medical Care" from the American Economic Review of 1963 which gives a pellucid view as to why health insurance is unlike any other "commodity" of the free-market.

For one, the relationship of supply and demand break down since the demand for health services is not regular or predictable. Two, the supply of services does not simply respond to the desires of the buyer. What that means is physicians are the ultimate informed consumers of health care. Although a patient can voice their opinion or insist on a specific treatment, the physician is the person who will be ordering the types and number of tests, procedures and prescriptions.

Three, there are limitation on who can enter the provider side of the market due to high start up costs and education, licensing and so forth. And finally, there is significant insensitivity of prices in the health care system. No hospitals or doctors are actively advertising lower prices or clearance procedures! Simultaneously, a majority of patients don't actively seek out those price reductions. There aren't many individuals who are willing to risk monetary savings for assumed quality of service.

Thus, we shouldn't expect to see many changes by trying to alter the current system a little here or there, or going as far as implementing cumpolsory health insurance. Let me include this caveat: by no means am I saying that single-payer health insurance is the answer to all of our problems. There are many other reasons why health care costs are continuing to rise and are hard to control (ie. how health care is administered). However, as Dr Michael Ybarra states, "administrative costs make up 7% [of health care costs]. [Accounting] for $168 billion dollars annually". The significance of this number is shown when compared to Medicare's 2% administrative costs.

So, lets say, even if health care costs weren't escalating higher and higher ever year and the financial stability of our country didn't depend on recasting the entire health care industry, wouldn't it still make sense to change a system of payment if the saving would give our country back 168 billion dollars? The question is even easier to answer when you consider that amount could cover the 47 Million Americans who are currently without health insurance.

- m.tsang