Marketing Health Care

SyringeEconomist Paul Krugman claims that the market cannot provide health care, because of the inevitable conflict of interest between health insurers and consumers. He draws far too many conclusions from the phenomena that he observes.

The health care debate tends to conflate the two elements associated with a market: supply and demand. The imperfections in the free market affect both sides differently, and require different approaches. Luckily though, they can be separated and dealt with accordingly.

Let’s consider the supply of health care first. Krugman notes that health care has to be provided by insurance. Consumers pool risk and make small contributions. Hopefully, they won’t be the unlucky person who ends up needing to pay for treatment out of the insurance fund.

But he claims that the nature of insurance companies is that they are trying to rip you off, and not provide cover. Somehow, they are achieving this in the US by promoting opaque and unclear health insurance policies – then reneging on payments and treatment. This trickery costs money, and is socially destructive.

Krugman is correct that medical care is complex, and that there are real difficulties in comparing different policies. How is it though that an industry with such low consumer satisfaction as health insurance can still reap high profits? These conditions can only persist if there is a lack of competition and transparency.

There are severe barriers to entry in the medical insurance industry. Some of these are derived from the nature of the service provided, and others may be created by government regulation. But firms insulated from competition have a major interest in confusing consumers, making coverage as opaque as possible so that they can later renege on care. This health insurance ‘cartel’ isn’t going to disappear any time soon.

This problem might be eliminated by restricting consumer choice. Let us imagine that an independent commission designed a standard range of health insurance policies. Each could be described by a few variables: the extent of coverage (care in emergency and catastrophe situations only, or are electives covered?), treatment options and payment plan (treatment mandated depending on the diagnosis according to standard medical practice, or does the consumer have choice over how to spend his money given the diagnosis?), amount of hospital choice, etc.

Insurers could be allowed to only sell policies that can be described using this system, which restricts them significantly. But the terms of each is legally enforceable, and laid out by the independent commission. Consumers can be absolutely certain what they’re getting, because the system is perfectly transparent.

The range of policies might include really basic coverage for those on low-incomes, bells and whistles such as private rooms for those with higher incomes, etc. There may only be a couple of options in each bracket. But once you’ve determined what plan is best for you, it’s very simple to shop around to different insurers and compare prices.

As it currently stands, consumers have considerable difficulty weighing up different coverage plans – distinctions between which may be extremely nuanced and hard to understand. But an informed consumer has more bargaining power and is more powerful.

Under such a system, bad insurers will need to drop their prices or lose business. If hospitals were independently owned and operated as well, insurers would direct their consumers to those which provided an adequate level of care (as described in the government-enforced insurance policy) at the lowest cost.

This ensures efficiency in the production of health services. With political factors out of the picture, health resources will be allocated according to demand – not the desires of special interest lobby groups. Hospitals might consolidate if it’s the cheapest way to provide the statutory level of care and invest in better ambulance services, or they might not. Let the market decide.

They will always be guided by efficiency, but they can’t compromise standard of care or rip consumers off – a frequent criticism leveled against the free market for health. In turn, this should lead to staggering improvements in the cost effectiveness of medical care, and significant savings for tax-payers.

This is simply suggested as a compromise and alternative to the ‘single-payer’ system, in which the government directly foots the bill. Critically, it maintains the incentives for efficiency which disappear when the government has direct control over hospitals or the cost of medical insurance. In practice, it might be difficult to come up with an acceptable range of policies.

How would it be financed though? That will be left to the next post – in which the consumer side of health care will be analysed: how to combat moral hazard and adverse selection, and how best to provide care for those who can’t afford it themselves while preserving the benefits of free market economics.

© The Free Marketeer 2009



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