Wednesday, February 1, 2012

Public vs. Market

I am taking a class at Harvard School of Public Health this term called "Health Care Issues: Public vs. Market."  It is a cumbersome title, but defines the topic and scope of the course well.  Essentially it applies the debate between free markets and government intervention to the Affordable Care Act (ACA). Our first policy memo (which kind of blends into an essay in my case) was about our personal thoughts on the public vs. market debate.  Are there times when government intervention in health care is necessary and if so, when and how?  I offer up a few suggestions.


To: Speaker of the House
From: Jason Kroening-Roche
Re: Public vs. Market in Health Care Reform
Date: January 30, 2012

            We are at a significant turning point in the history of healthcare in this country.  With the passage of the Affordable Care Act (ACA)in 2010 and the upcoming elections in November 2012 the debate about marketsand government in health care is intense.  In this memo I will explain thebenefits of competitive markets and then explain why the health care market differs. I will finish with a discussion of the ACA and how it addresses theseissues.
            Competitive markets have been the foundation of an Americaneconomy that is the largest in the world.  Competition for profit spursinnovation, contains prices, and gives the consumer choice.  Innovationresults when companies consistently push the envelope with new technologies,products, and production processes in an effort to expand their market share andmaximize profits.  Competition alsoworks to keep prices for consumers low.  Companies search for new, moreeconomical methods of production and reduce inefficiencies in their businessmodels.  Southwest Airlines, for example, has repeatedly reduced operatingcosts by eliminating “frills” and shortening turnaround time between flights inorder to keep their prices competitive.  Lastly, markets give the consumerchoice.  In truly competitive markets, many businesses provide the same orslightly variable products from which the consumer can choose.
            Health care differs from perfect markets in several ways, however. First, many view health care as a human right and believe access tohealth care should not be based on employment status or ability to pay. Second, health care is an unpredictable need and often catastrophicallyexpensive.  An insurance market is a viable solution.  The twoclassic problems in the health insurance market, however, are moral hazard andadverse selection.  Moral hazard is the principle that after obtaininginsurance, patients will seek care they do not need, because it is free at the“point of sale.”  Adverse selectionis the principle that patients know more about their state of health thaninsurance companies and therefore will buy insurance only when they need it. This leads to the third pitfall of a competitive health care market.  Competitive markets assume perfectinformation.  The informationasymmetry in health care is undeniable and unavoidable, both between insurancecompanies and patients (adverse selection) and between patients and theirproviders.  Patients often do not know their medical needs and rely on theprovider (i.e. physician, hospital, etc) for advice, often in times ofemergency and stress.  These issuescannot be addressed in a competitive market for health care and thus requiregovernment intervention.
            The ACA contains solutions to many of these challenges that makesense.  First, the ACA provides access for an estimated 32 of the 50million people in the US for whom the current system was failing, increasing equityin a way the market cannot.  Previously, affordable health insurance was availableonly through Medicare, Medicaid, and employer-sponsored insurance, incentivizedthrough tax subsidies to companies who provide insurance for their employees.  Second, companies were not mandated toprovide insurance to employees, nor individuals to carry it.  This created equity and adverseselection issues, especially for the individual market.  The ACA now implements a mandate with subsidiesfor persons unable to afford to buy insurance on their own.  Third, the ACA places an emphasis onquality and transparency.  Regulatingquality measures gives consumers more information and power to make rationaldecisions about where they will seek care.  The insurance exchanges promote transparency whenindividuals are choosing a coverage plan. These are important interventions to improve information symmetry.
            Inconclusion, markets have been extremely successful in this country.  However, the health care market needsgovernment intervention to correct market failures and there are many models toachieve this.  Working within thecurrent system, however, the ACA does a good job ensuring greater access andequity, mitigating adverse selection, and protecting consumers from informationasymmetry.  I recommend it for yoursupport.

1 comment:

  1. Jason, this is a really interesting post. I find myself struggling with what the best solution is. The private market has done amazing things in health care including improved efficiency and innovation. Arguably, the U.S., which is one of the most private market health systems in the world, has produced many of the most innovative and lifesaving advancements in the world. However, the free market fails in the equity department. The million dollar question is how do you take the good from private markets in health care and combine that with the good of public markets? It sounds like you will spend the semester exploring that very question. Keep us posted on what you learn and how your thoughts on the matter develop.

    In Professor Hsaio's Health Economics class, we covered this issue as well, briefly. You might find his list of pros and cons interesting. Most of them overlap with what you presented:

    Advantages of the Free Market:
    1. Human tastes are heterogeneous; the market caters to different tastes
    2. When consumers pay full price, this price reflects marginal utility
    3. When firms are price takers and have to compete on prices, they have to improve efficiency
    4. The market yields information on patient preferences.

    Preconditions for a Free Market:
    1. Informed Choice
    2. Rational Choice
    3. Advance information on price
    4. Free entry and exit into the market (I believe he means on the supply side)

    Causes for Market Failure in Health Care:
    1. Uncertainty of illness and health care
    2. Externalities in health care (i.e. immunizations)
    3. Emergency and life-threatening conditions
    4. Asymmetry of information
    5. Imperfect agency relationship: physician is the agent for the patient, but the physician is poorly incentivized.
    6. Lack of free entry and exit

    Clearly, Professor Hsaio's lists show that the health market's complexity lends to several areas where it can breakdown.

    One unrelated comment: Regulating quality is a part of the ACA to address information asymmetry. However, as we have discussed before, measuring quality is a beast in and of itself. Providers' perceptions of quality are different than patients'. There are also so many barriers to effectively measuring and quantifying quality, that I am not sure that this will do much to increase patients' information on the services they are buying.

    Thanks for the great post!