The US spends significantly more on healthcare than other wealthy nations, and we get (arguably) worse results.
I think every American, regardless of political persuasion, agrees that healthcare is too expensive.
The heated disagreement comes when you discuss how to fix it.
I’d like to share some thoughts on how I think about this problem:
I used to believe government intervention in the market caused high prices and poor outcomes.
But I have come to believe that this position is reductive at best and totally wrong at worst.
Yes, there are non-evidence-based policies in our system that create inefficiency and increase administrative costs. that get passed to the consumer. These bad policies should be addressed.
But the insane prices are mostly a natural result of business incentives combined with the unique context of the healthcare market.
Let me explain.
Free markets drive down costs and improve quality when 4 key assumptions hold:
- Competition: New players can easily enter and exit an industry
- Price Elasticity: As prices to go up, demand for a product goes down
- Price/Quality Salience: That prices and quality are transparent and discernable.
- Access to Options: When different player exist, I can reasonably access those options
But markets are not designed to drive down prices, they are designed to optimize returns on capital.
So, when these assumptions don’t hold, the opposite happens in a free market: companies increase prices to maximize their profits.
Let me explain how each of the above assumptions does not hold in the healthcare market:
- Competition: There are many barriers to entry, such as patents, medical boards, FDA approvals, and large capital investment requirements. Because of these barriers, providers have the power to raise prices. For example, from 2007-2016, the makers of EpiPen increased its rate by 500%. Because it has no competitors, they could do this and make a lot more profit. Yes, we can reform some of these institutions to improve competitive outcomes, but the barriers will always remain in some form—unless we’re prepared to say we want to get rid of FDA and medical standards. Not me. I’d like to ensure my medicine is clinically proven before I ingest pills and that a doctor has sufficient education before she/he cuts me open.
- Price Elasticity: If Dr. Pepper increased their prices 500%, you would switch to Coke. If Coke, Pepsi, etc. were unavailable, you would probably just forgo the drink. But when you’re about to die of an allergic reaction, you will pay ANYTHING for an EpiPen. Thus, healthcare products do not have regular price elasticity.
- Price/Quality Salience: Have you ever gone to the doctor’s office and seen prices listed on a menu? There are many reasons for this (e.g., the complexity of the services, the service value chain, payment/reimbursement arrangements). But needless to say, there is very little price transparency, and providers have no incentive to provide this. I applaud what the Trump administration is doing to solve this issue, but as this post shows, it is only a small part of the overall problem.
- Access to Options: For many reasons, access to options is very limited in healthcare: the geographic nature of the services, provider networks, provider and device/pharmaceutical agreements, etc.
And all of the above is only the tip of the iceberg when it comes to healthcare market failures: endless conflicting incentives between services and outcomes; adverse selection in the insurance market; non-payments because of ethical considerations around payment collection (e.g., you have to pay for your Coke before you get the Coke, but are you going to make sure someone pays in the middle of a heart attack before they get life-saving treatment?).
In short, most comparisons drawn between a typical market and the healthcare market are probably bad analogies.
For these reasons, I don’t think it’s productive to frame the healthcare debate in terms of socialism/capitalism or more government/less government.
Instead, we should ask: what are the failures caused by the unique dynamics of this market, and how can we make smart policies to address them? And how do we address these market failures while allowing capitalism to keep doing what it does well, namely, innovating, finding inefficiencies, and pushing for quality?
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Hopefully, you found these thoughts helpful! If you think I’m wrong about anything above, or if I’m not thinking about something the right way, please share.
This is a super complicated issue, and I want to understand it the best I can do my small part to help my children grow up in a country with better and more affordable healthcare!