Contrary to Popular Opinion, Health Care Does Follow Free-Market Mechanisms
On Sunday, one of my favorite economists, Greg Mankiw, used basic economic concepts to describe how the government reimbursement system distorts the health care market:
If a government policy increases the demand for a service, the price of that service tends to rise. If the government prevents prices from rising, shortages develop. The quantity provided is then determined by supply and not demand. In the presence of such excess demand, the result could be a two-tier market structure.
Mankiw’s point is that, by failing to reimburse providers for the full cost of providing services, the government is creating an artificial shortage. Some health care providers will stop seeing Medicare and Medicaid patients because they lose money on the services that they provide to them. The Mayo Clinic is already doing this. Unless the government starts to reimburse fully for the services performed, more providers will follow Mayo’s example.
Mankiw continues. Here, he describes the aforementioned two tiers of the market:
Consumers who can somehow pay more than the government mandated price will be able to purchase the service, while those paying the controlled price may be unable to find a willing supplier.
In other words, patients who rely on government reimbursements (i.e., Medicare and Medicaid patients) will have difficulty accessing services, but those who pay out of pocket will not.
I have seen this happen in my professional experience. Before I started working at the Show-Me Institute, I worked as an analyst in the business strategy department at a major health care system. In our expansion, we deliberately avoided populations with high proportions of Medicare and Medicaid patients. Instead, we targeted populations that were concentrated with fee-for-service patients, because they would pay for their services in full.
Parenthetically, this government reimbursement system raises health care prices. Providers charge more to fee-for-service patients then they would in a non-distorted market. In order to stay in business, they have to make up for those patients who cannot afford to pay more than the government mandated price. It’s just like how retail stores increase their prices in order to compensate for losses due to shoplifting.
I like Mankiw’s post because it illustrates how, contrary to popular opinion, health care does follow free-market mechanisms. Health care is subject to the same laws of supply and of demand as any other market. When the government intervenes, it creates a price floor or a price ceiling, and a shortage or a surplus.
I thought of two semi-related things and posted them to Chrissy’s facebook, rather than here. I’ll repost them here for the sake of clarity, and so that Chrissy gets kudos from the Benign Libertarian Powers That Be. Besides which, facebook doesn’t let comments go on too long, and I can pontificate all I want here.
1. Markets in Everything…
“I read this and it made me think of another example of where Health Care Follows Market Mechanisms: increasing specialization of doctors. Who wants to be a general practitioner (snoooooze!) when you can be a radiologist/oncologist and make the big bucks?”
2. Other examples in health care of multiple-tiered pricing systems…
“Another kinda tangential example of a multiple-tiered pricing structure: the market for health insurance. Businesses pay lower rates than people looking for an individual policy. CHRISSY, THE MARKET IS ALL AROUND US!! What an interesting world we live in when we stop to look!”
Comment by David C. Miller — November 16, 2009 @ 1:33 p.m.
Thank you for the comments, DCM! In your first point, you provide an excellent example of free market mechanism in health care, and it’s one that I didn’t think of. However, I would describe the mechanism differently.
Because subspecialties are more complicated and generate higher revenue for health care organizations than primary care, the best and brightest doctors will compete for these positions and beat out the less-talented doctors. A person doesn’t even need an MD degree to provide excellent primary care. If I were seeking the services of a subspecialist, however, I would pay extra for a more-talented one. Patients get better health care as a result. The consumer wins!
Comment by Christine Harbin — November 16, 2009 @ 1:38 p.m.
Christine,
I don’t know if the mechanism you propose explains increasing specialization: if there are a limited number of ’spots’ for radiologists, then increased competition for those spots will lead to better care (maybe). It could also lead to more radiologists.
But be careful before you say ‘the consumer wins’. We may have more and better-trained radiologists, but I am unlikely to need their services. Instead, I may be stuck with a higher bill from my too-dumb-to-be-a-radiologist GP.
President Obama had a town hall meeting a few months ago where he talked to a woman who had some ridiculous amount of debt from going to med school. Like $300,000. Which is ridiculous. Why go out-of-state and then complain about high tuition rates? I was a little peeved.
Anyway, this woman said that she wanted to be a general practitioner because they do the most good for the most number of people, but she would be forced into becoming a higher-paid but less-useful-to-society specialist in order to pay off her student loans. President Obama said something to the effect that if you agree to be a general practitioner for 5 years, the government will help you out.
Comment by David C. Miller — November 16, 2009 @ 2:28 p.m.
I agree with Chrissy. For much of primary care, the real skill is knowing to which specialist one should direct actually sick patients. Otherwise, all the vaccinations/ check-ups/ cold /flu-symptoms /strep and mono tests can USUALLY be handled by a less trained person, like a Physician’s Assistant or Nurse Practitioner. (They are able to refer people to specialists just as well as doctors, too!)
Someone mentioned in one of my Public Health classes that to stay informed in the most basic level as a general practitioner, you would need to read 30 journals a month. That’s nearly impossible, and they don’t have time to really hash that out with patients anyway. That’s why it’s better to allow MDs to specialize, because it is easier to be fully immersed in the literature, the new techniques, new diseases, etc when one is specialized. (Should everyone pay a MD’s price to go see a doctor about 90% of things? Probably not)
In regards to businesses paying less for insurance, you can thank government tax structures and federal regulatory barriers for that!
Comment by Caitlin Hartsell — November 17, 2009 @ 8:04 a.m.