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    Some Thoughts on Health Care Economics
    By Gerhard Adam | August 26th 2010 05:08 PM | 7 comments | Print | E-mail | Track Comments
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    Recently I've seen the questions come up regarding why the market doesn't respond to health care or why supply and demand don't seem to work in health care as in other economic models.

    The answer is simple.  There is no free market nor is there a supply/demand model for health care.

    While some might dispute that claim, consider the way the process works.  Supply and demand is based upon the notion that prices will be set based on what the market will bear and consequently supply and demand will rise or fall in response to those prices.  Even though one could argue that such a premise is seriously flawed when it comes to health care anyway, there's another reason why it doesn't work; insurance.

    The role of the insurance company is that it effectively guarantees the price that the medical profession can charge.  In other words, there is no concept of "what the market will bear" because it is the insurer that determines what prices are acceptable.  Without the medical profession having to be paid by their actual "customers", there is no market force being directed at them or their prices.

    As a result, the market forces are between the patient and the insurance companies as well as between the medical profession and the insurance companies.  The common ingredient here is the insurance companies are the parties that are actually engaged in the economic model.  It's little wonder that health care is not the result of this relationship.

    In other words, the insurance companies must engage in figuring out "what the market will bear" based on the premiums that they can charge.  As long as they're profitable then they've satisified their business model and if they have a sufficient customer base, then they can be successful.  Similarly, the medical community represents the liability that the insurance company must pay; their cost.  If they can control their expenditures then they are successful.  This balance is what makes the insurance companies work.

    However, no where in that example is there any consideration for the actual needs of the patient.  This isn't a simplistic commodity choice like deciding to have steak versus hamburger.  

    The problem is that the medical profession operates on the assumption that they are entitled to a certain level of compensation, so there is no need to respond to the realities of the marketplace, since they only have to satisfy the insurance companies.  Similarly the insurance companies only need to control their balance sheets, so once again, there is no requirement to actually provide reasonable healthcare since that isn't their mission.

    This is why medical costs keep going up and insurance premiums keep going up while actual care is declining.  There is no room in this economic model for the actual delivery of services.

    The purpose of the free market is to allow the participants to respond to the various pressures each brings to bear so that adjustments can be made without guarantees.  People are allowed to succeed or fail based solely on their ability to participate in the market.  However when artificial guarantees are put in place, then there is no market, nor can there be a market response.

    In short, the solution is actually to remove the insurance companies from the mix and let the medical profession have to directly deal with their "customers".  In this way the true force of the market will be felt and the appropriate decisions and responses can occur.  While a doctor may feel he's entitled to large sums of money, if he can't actually get it from his patients, then his attitude will change quickly enough.  Similarly when it comes to the extravagances that have become standard for hospitals.  Perhaps the choice of equipment and technology needs to be brought into line with what people can actually afford, rather than relying solely on the money that can be collected from the insurance companies.

    This would cause a real assessment about the state of our health insurance and health care system, in general.  After all, what's the point in having world class technology and treatment facilities if no one can actually afford to use them?

    Comments

    kerrjac
    Good points, the insurers - as middlemen - certainly demand scrutiny.

    Another important factor however is supply of medical services: It is extremely limited. Accredited med schools use many resources, reject many applicants, and keep the supply of doctors low. Med school further creates a need for specialization: The public demand is for internists, but if every doctor became an internist, then they wouldn't be able to recoop their educational expenses.

    Supply of other health services&goods is also limited. Over-cautious restrictions keep the barrier-to-entry high for new drugs, and make existing ones more expensive.

    Both the AMA and FDA, somehow, have gone under the radar in the health reform debate.

    With health services in such short-supply, I would argue, you should re-evaluate your take on insurers. This shortage increases the risk of negative health events. Getting sick entails the risk of poor health; but it also entails the arguably greater liability of having to pay for health services. This is in contrast to simpler insurance schemes which protect against negative events with fixed costs. Getting your car repaired isn't expensive because there's a shortage of labor&parts, not to mention car insurers' ability to cross state lines.
    Gerhard Adam
    With health services in such short-supply, I would argue, you should re-evaluate your take on insurers.
    I have to disagree.  Right now with the protection of the insurers, every ache and pain presumes that a doctor is necessary.  We have no sensible method of escalating care or treatment.  In many cases, a nurse might be adequate or a physicians assistant.  However, we don't have any mechanism for providing a tiered approach to care because it's an all or nothing proposition from the perspective of the insurance companies.

    Why pay high premiums and then NOT see a doctor?  However if the money were coming out of your own pocket, there would be significantly stronger incentives to see cheaper alternatives first.

    Similarly medical schools simply need to be sued under the anti-trust legislation.  If they are manipulating the marketplace regarding supply, then their actions are illegal.  However, I suspect that if doctors weren't protected by the insurance company prices, then loans would be impossible to repay, you'd see a restructuring back to the true market forces instead of the gluttony as it currently exists.  Once again, it's an artificially defined system and consequently seeks to evade the consequences of the market.

    Right now, it's a complete self-serving inbred system that feels no requirement to respond or even acknowledge market forces.  As a result, the status quo will invariably always opt for its own best interests. 

    Basically I don't believe there's a shortage of medical services.  I believe there's too many doctors seeing patients that don't require doctors.  Just like repairing my car doesn't automatically require a mechanical engineer, neither do the routine medical tasks currently performed by hospitals and doctor's offices.
    Mundus vult decipi
    kerrjac
    Basically I don't believe there's a shortage of medical services.
    Simply by the numbers, there really is a shortage. See this WSJ article for instance. The system is clogged at a number of different levels, including number of medical school graduates, available residency positions, and number of medical universities. New medical schools face a tough and long accreditation process, while they graduate small classes. Even if the system was smoother, it is still stymied by the time it takes to graduate. 

    That's not to say that insurance laws don't play a role - in addition to being limited by geography, they're also tied to employers in an unhealthy way. Most of those who receive insurance through their employer, for instance, don't have a choice for who to go through. High career turnover - which has become the norm since the '90s - further complicates this.
    Just like repairing my car doesn't automatically require a mechanical engineer, neither do the routine medical tasks currently performed by hospitals and doctor's offices.
    Good point, but you're still able to order car parts, whereas you're limited in your purchases of medical supplies, particularly Rx drugs, which - by no fault of insurance carriers - require a physician.

    In the end, sometimes a sticky situation is just a sticky situation. If you wreck your car, that just sucks; insurance can help minimize your loss, but you'll still have a high price to pay. That's not to say that there aren't weak points in the system, but when it comes to healthcare - in a sense - every party is just responding to their situation, and the bottom line underneath all of it is that there is a lot of demand and very little supply. Insurance is simply distributing that little supply in a manner that - ideally - helps cut your personal liability. But with or without it, there is still little healthcare to go around. 
    Similarly medical schools simply need to be sued under the anti-trust legislation.  If they are manipulating the marketplace regarding supply, then their actions are illegal.
    I'm not saying that there's a conspiracy that's keeping things the way they are. In fact, the problem is almost the opposite - everyone is trying to act with the best of intentions, but it's all producing negative consequences. 

    People - especially those in public service - genuinely want the public to be well off, to go about their lives without being manipulated, to take safe drugs, and to see competent physicians. But over-caution can have deadly results - in healthcare, it prevents doctors from being trained and drugs from being developed. All this makes healthcare expensive, and it even prevents people from taking it into their own hands, when you have companies like General Mills threatened for saying that Cheerios helps lower cholesterol. 

    Further compounding things is that health care is rapidly developing in spite of these restrictions. Scientific advances are made frequently, and it has been rapidly growing even as the economy fell. It's wildly expanding field and it's understandable that public officials react with concern and a desire to protect the public. But the industry needs to breathe. Imagine if the computer industry had been chained by such draconian regulation during the 90's. 
    Gerhard Adam
    New medical schools face a tough and long accreditation process, while they graduate small classes.
    I have to disagree.  It's no coincidence that many doctors come from foreign schools and that U.S. students attend foreign medical schools.  I don't accept the idea that the U.S. can't get their act together to have enough schools.  The point is that there is no incentive to change.
    ...whereas you're limited in your purchases of medical supplies,...
    We're only limited because true competition isn't permitted.  When there was a possibility of people ordering their medications from Canada, the government intervened.  It wasn't protection of the public that was involved, it was protection of the pharmaceuticals.

    Once again, this is only because of the insurance companies.  If people had to pay these costs directly (not just a few victims), then the pharmaceuticals would figure out how to recover their costs according to the market and not their own subsidies (i.e. insurance). 
    Insurance is simply distributing that little supply in a manner that - ideally - helps cut your personal liability.
    Not at all.  Insurance pays phenomenal amounts of money even when a procedure fails.  The medical profession feels no obligation to justify its revenues by actual successes.  This moves the whole argument into malpractice suits, because an individual is still expected to pay their medical expenses regardless of how poorly they were serviced.
    People - especially those in public service - genuinely want the public to be well off, to go about their lives without being manipulated, to take safe drugs, and to see competent physicians.
    However, they do nothing to actually achieve this.  All that's ever done is assume that throwing money at it will magically help it get better.  Our lives are manipulated regardless of anyone's intentions (why else advertise prescription only drugs on television).   We see attempts to curtail the ability to file malpractice suits, as if this is going to improve quality care.  It will only try to keep doctor's liability insurance costs down.  So there's even less incentive to do well.

    The point is that the medical profession is protected and doesn't want to participate in a "free market".  That's why things perpetually get worse, because everyone wants to maximize profits, but the only thing stopping them is all them damn sick people.


    Mundus vult decipi
    Aitch
    Gerhard

    I think there is another combination factor - that of Government and the lobbyists and location

    Healthcare is a global industry, and corporations will target certain product to a national consumer market that it may not target to another because of Government and national legislation - Here in UK, Healthcare is very influenced by our national health service and government health advisories

    Many 'scares' are generated to sell product...we just survived one in UK

    and the bottom line is....sadly....the LAST thing the drug companies want is a health CURE

    Healthy people no longer need the product.....

    and that's why there's no natural market force - it's just too manipulated

    Where is the pure research on what health actually is?

    Until that is known, how can it be known what needs 'fixing'

    We are at a turning point of what natural health is, as genetic modification is changing our whole planet, and we may simply evolve into a new type of being, such is the level of change being engineered into our core DNA, our crops, and foodstuffs and medical experiment

    The foodstuff experiment already specialises in seedless crops, that need annual renewal/re-purchase/re-stocking - to sell product

    Where does it end up?

    If we just become a drug dependant people, in my mind we lose our heritage of what was once natural.....healing is inherent - no drug causes it - if I cut myself I heal

    Would you have it any other way?

    Take the lobbying, the economic manipulation, and the national/government and locational influence out of the equation, then you may be in with a chance, in my opinion

    ....but that may require an end to global war, also.....

    That's a big ask, isn't it??

    Aitch
    kerrjac
    and the bottom line is....sadly....the LAST thing the drug companies want is a health CURE
    An appealing conspiracy theory, but this does little to explain the development of advanced antibiotics, anti-virals, and other vaccines which actually do work. Furthermore, in the developed world, conditions at the forefront of public health - like cardiovascular disease, cancer - are not the sort that can be cured overnight, in contrast to infectious diseases, which often in theory - if not in practice - can be cured quickly. 
     if I cut myself I heal
    You don't get anywhere by minimizing the problem. In a modern developed world with vaccines, sanitary conditions, antibiotics, regular meals, and central heating, you have a much greater chance of healing than people who live in undeveloped areas, or - for that matter - than most humans throughout history. 

    Today you get sick, you stay home from work, maybe see a doctor. In the 'natural' state of things, if you get sick, you either recover or you die. For much of the past few centuries, death was a part of everyday life - you have a cold one day, you could easily be found dead the next. 
    Would you have it any other way?
    Yes.
    Gerhard Adam
    An appealing conspiracy theory...
    It's not completely a conspiracy theory.  After all, how do you account for the onslaught of advertising for prescription drugs on television?  It's suspicious, since the overwhelming majority of viewers obviously can't write the prescriptions, so the point is to get the public interested enough to pressure their doctors into prescribing the medications.

    It speaks to one of the fundamental manipulations that are occurring in health care.  It's irresponsible of doctors to prescribe drugs on "demand" from their patients and it's irresponsible for drug companies to promote drugs for the sole purpose of trying to gain that inside track.
    ...does little to explain the development of advanced antibiotics, anti-virals, and other vaccines which actually do work.
    Now there are five suppliers to the domestic market. And the vaccine industry, once a backwater of the pharmaceutical industry, is attracting new investments, lured by government subsidies and higher prices for vaccines.
    http://www.nytimes.com/2009/04/29/business/economy/29vaccine.html
    Even here there's a basic problem because most of the pharmaceuticals don't do much regarding this kind of research.  This is precisely why there's a concern about new antibiotic resistant strains of bacteria, since new antibiotics are few and far between.

    ...the number of different antibiotics available to treat such infections when they do occur
    is dwindling because pharmaceutical companies have neglected to invest in the development of new types of drugs.


    Mundus vult decipi