The Republican failure to replace and/or improve the Affordable Care Act once again included some calls for free market solutions instead of government involvement. Once again, as an economist, I must try to explain why the market by itself cannot solve our health care challenges.
The private market economy allocates scarce resources to satisfy our most urgent needs better than any alternative system when key conditions are present.
• First, the market model assumes that the buyer and seller have reasonably equivalent bargaining power in order for a private transaction to satisfy both sides. This is clearly not the case when a person has a life-threatening challenge and needs immediate assistance. Imagine the price a profit-maximizing supplier could extract in this situation. Society usually asks government to intervene in a way to protect a vulnerable consumer.
• Second, the market theory assumes that buyers and sellers have enough information to insure a rational decision. In our modern society, patients rarely have access to information necessary to challenge or question a health supplier’s proposed action. A study in Texas found patients in a county had almost double the national health care costs because doctors were recommending questionable tests and other procedures from clinics they owned.
• Finally, this system only works when customers can afford to pay enough for a product or service so that the private suppliers can earn an adequate return on their investment of capital. We know that this is not the case for many low-income Americans when they need health care services.
When this happens in the market for automobiles, for instance, our society does not feel the need to ensure that everyone can purchase a vehicle. We do, however, provide alternatives such as public transportation subsidized by our tax dollars.
People who cannot afford medical services from profit-oriented firms would impose costs on us in several ways. They would go to emergency rooms for their treatment, the most expensive supplier, and we taxpayers would pay their bills. They would endure more health problems than necessary, increasing their use of emergency rooms and passing their diseases to the rest of us. Poor health would also reduce their productivity at work and the ability of children to learn.
Adam Smith, the father of market economic theory, explained that when society deems that all citizens deserve satisfaction of a specific need, we should first allow private firms to satisfy it. Government must then fill the void to supply those who cannot afford to pay the prices on the private market. Public education is a perfect example of government is helping to satisfying a need. The question for economists is not whether government should act but how can government do this most effectively.
Our health care is the most expensive in the world. Several factors seem to be causes: our pharmaceuticals are more costly than in other countries; our medical specialists are the highest paid; private insurance companies require costly paperwork for every payment; the system of paying for procedures instead of outcomes does nothing to encourage cost saving; people without insurance use expensive emergency rooms for care; and we spend almost 25 percent of total costs on patients’ last year of life.
Discussing the Affordable Care Act rationally seems an impossible dream. One important feature of the law, however, deserves support. States are encouraged to develop Accountable Care Organizations to serve Medicaid patients. This operation attempts to fund health outcomes instead of paying for procedures. If allowed to develop further, this could be a step toward coordination of service, which could reduce unnecessary procedures, one major cost factor.
Another central feature of the ACA is the requirement that health insurance cover services in 10 mandated areas. These are: ambulatory services, prescription drugs, emergency care, mental health services, hospitalization, rehabilitation and habilitative services, preventive and wellness, laboratory tests, pediatric care, and maternity and newborn care. The failed Republican plan would have allowed customers to choose which of these services they want covered.
Why should healthy young males be forced to pay for pediatric and maternity care they do not need, asked the proposal’s proponents.
Two problems. First, women cannot make babies without the participation of a male. More importantly, the buffet choice approach to health care violates the central principle of insurance. If we allow only those who most need a specific coverage to pay for it, the pool this risk is spread over is minimized and the cost to participants would be maximized. Insurance only works when we spread the risk of occurrence over the largest pool.
Broadening the insurance pool was the central goal of the proposal developed by the conservative Heritage Foundation that became the core of the Affordable Care Act. The pools would be widened by forcing everyone to purchase insurance. This mandate was to be achieved by penalizing employers and individuals for not buying coverage. Most objective observers now believe that the penalties for not complying were set too low, resulting in fewer people entering the insurance exchanges than expected.
What else may be done? A growing number of doctors and economists support the single-payer system. Here a government agency pays for all health procedures and uses its bargaining power to lower prices. This is not government control; private doctors and firms would supply the services and patients could work with their providers of choice.
This is how Canadians purchase pharmaceuticals for 30 percent to 40 percent less than we do.
This could be part of a new reform proposal in two ways. First, President Trump has long said that we pay too much for our drugs. Democrats in Congress, along with moderate Republicans, could give him this authority.
Also, Republicans have long called for giving states more opportunity to develop their own methods for solving their health challenges. The single-payer concept could be offered to states as one alternative.
Finally, some expenditures could be reduced if all seniors had end-of-life directives. As a Medicare enrollee, I know that the system now encourages us to complete these. Why not make this a requirement for us to receive services?
Kenneth Zapp, Ph.D., professor emeritus at Metropolitan State University, and Mentor for SCORE Savannah