This article is inspired by a series of recent articles on health care, including Lamborghini Healthcare and this article about wealthy Europeans coming to America for better care and even a few cheers for the French health care system.
It is almost universally acknowledged that the provision of medical care in the US is flawed. A wide range of solutions have been proposed, but it seems to me that most of these proposals only attack the symptoms of the problem rather than the underlying causes.
To get at the underlying causes, let me start by quoting one of Brad Farris' posts on a related article:
I'm not sure what [you mean when referring to health care] service . . . The "service" provided by insurance companies, or the "service" provided by health care providers? They are certainly not the same, which is what I mean when I say that I believe that the American health care system functions differently than a more typical "market," and that it can't be measured the same way. Most Americans buy insurance plans, not health care. If you go to the doctor with the intention of paying a fair price in exchange for a service, you'll find it's quite impossible. Your physician is contractually bound by one or more of the insurance companies with which he or she does business to charge you more than the insurance company is charged. You can't negotiate with a physician for reasonably-priced care. The insurance companies got there before you.
Brad is quite correct that consumers purchase insurance and insurers pay for providers. This is not a normal market, it is two markets interacting with each other. It's more complex than the typical supply-and-demand-for-coconuts example you get from a microeconomics textbook, but the underlying rules are the same.
Let's start with the consumer/insurer relationship. It seems to me that the largest disrupting factors are 1) subsidizing the purchase of coverage through the tax code and 2) outlawing various insurance practices that allow people of varying risks to be assigned different premiums. Since we have given employers a tax break for purchasing insurance, they are encouraged to give health benefits as a form of compensation. This inflates demand for insurance, encouraging greater supply. Insurance regulations that mandate comprehensive coverage and prevent risk pooling have split the insurance market into two sub-markets. One, the sub-market for catastrophic coverage, has (in effect) an extremely onerous price control. The result is shortage. The other sub-market, for comprehensive coverage, has an effective price support. The result is surplus.
The combined result of these factors is quite familiar. Those who want cheap coverage, can't get it and become wholly uninsured. Those who want comprehensive coverage have escalating premium payments, and the vast majority of these insurance policies are actually paid by employers. (So, a significant part of this market is actually three interactions: employee/employer, employer/insurer, insurer/provider.)
Next let's look at the insurer/provider interaction. The distortions in the insurance market mean that demand for medical services is enhanced. This should cause enhanced supply (presumably in the form of more providers). But it doesn't. Increases in the number of doctors are carefully controlled by licensing requirements pushed in large part by the AMA (a sort-of doctor's union that has completely captured the regulatory apparatus). Without additional providers, the only way to increase supply is to add additional "care" -- tests that people don't really need, drugs that people don't really need and longer hospital stays.
These aspects of US health care are no doubt quite familiar as well. For those who have good insurance, they could fairly be said to be receiving too much health care.
But what about the uninsured or under-insured? While some of them qualify for Medicaid, many do not. There are millions of Americans who occupy a medical Limbo -- too poor to get insurance, not poor enough to get public assistance.
Who benefits from this complex system? As is often the case, concentrated interests end up profiting handsomely from the results of decades of effective lobbying. Probably the three biggest winners are drug companies, insurance companies and, yes, doctors. All of these groups benefit tremendously from inflated demand and restricted supply. To some extent, this situation has been deliberately engineered. However, we don't need to explain the situation as the product of conspiracy. In fact, most of the flawed policies noted above were justified to protect the public.
The AMA's cartelization of the medical profession was done to increase doctor quality. The tax break for health insurance was created to encourage large employers to provide it back when such insurance was uncommon. Restrictions on risk pooling were created to prevent insurance companies from discriminating among customers, or providing only partial coverage. There is almost always a "good" reason given for a policy, even if it later results in tremendous problems.
There is, however, a further problem with US health care. The main argument for reform stems from the fact that non-wealthy Americans can find themselves wiped out financially by a sudden illness. Even if all of the flawed policies above were eliminated or mitigated, this fundamental issue would remain (although, IMO, it would certainly be less of a problem).
The problem with medical bills is that they tend to come all at once. Thus, medical bills must be paid for out of prior savings. Alas, years of easy credit have made our society almost allergic to saving. Furthermore, savings are almost always accumulated by individuals or nuclear families. Yet, many individuals or families will never experience the terrible accident or genetic anomaly that would financially cripple them. One family's savings are not enough. Instead, multiple families' resources should be combined.
Insurance is presumed to play this role in our society, and it is possible that removing the restrictions on insurance noted above will allow catastrophic coverage to fulfill this needed role. However, I doubt this. Catastrophic coverage is sufficient for short-term high cost medical bills, but the worst case scenario is when someone gets ill and will be ill for years afterward. An insurer doesn't want this customer. If you're insuring a home or a car, and the insured item is "totaled," you scrap it an get a new one. When a person gets totaled, you can't get a new body.*
The long-term high-cost medical condition is the only case in which some degree of government intervention seems reasonable. In addition to eliminating the distorting policies noted above, we should phase out Medicare and Medicaid in favor of a system that directly pays for these special cases. Let insurance handle the cases where insurance will address the problem, and have government target resources on those who truly have no recourse.
Now, to be honest, I don't like advocating any form of government intervention, but I'm afraid that the reforms necessary for private resources to handle long-term high-cost care are probably beyond what is politically possible. For the sake of being thorough, I will spell out the reasons why the market has a hard time with this special case.
The problem is the structure of savings in the US (and the developed world in general). Various forms of savings (401k, HSAs, IRAs, Trusts, etc.) are privileged due to tax incentives. We have a system that is very good at protecting individual wealth, but discourages the pooling of savings by large groups. It seems to me that the market solution to catastrophic health care costs would be some kind of community savings organization -- sort of like a charity, except that it only helps members (this would disqualify it for tax-exempt status, which probably explains the lack of such organizations). As you can see, the deck is stacked towards individuals saving separately, which is great if you're rich but otherwise leaves you completely vulnerable to a catastrophic illness.
Remedying this imbalance would either require some highly unpopular tax restructuring for investments or creating a specific exemption for non-profits of this type. Both of those processes could lead to some very messy compromises in Congress. This leads me to believe that the path of least resistance is to provide a public benefit now and slowly untangle our savings structure over a process of years or even decades.
Overall, the problem with our health care system is not a market failure -- rather, the market has responded to collective priorities set long ago. This response is understandable but clearly unsatisfactory.
* At least, not yet. Alas, braintaping and vat-grown bodies are still very much the realm of science-fiction.