Time magazine has done our nation a service by publishing Steven Brill's long article on medical care costs. There isn't much in the article that people who follow the issue closely didn't already know piecemeal, but Brill puts things together in an articulate package for the average reader.
Brill makes several points: Per-unit medical costs are substantially higher in the United States than in nearly every other nation. We charge the highest prices to the self-insured or uninsured people who have the least bargaining power. Compensation levels for some doctors and many managers are high, as are profits for hospitals and technology suppliers. Where the government does regulate price, it buys treatments cheaper than private insurers and at only a fraction of the list prices charged to the uninsured or underinsured. All of these assertions are generally correct.
Brill argues the solution is greater government regulation of health care, largely following one of the European models. But some other commentators, particularly those to the right of the political center, argue the opposite, that the way to solve the problem is less government involvement in health care provision and financing. Who is right?
That question is far too complex to answer in one column. But it is useful to examine the basic arguments.
Start with markets. For 236 years, the idea central to economic thinking has been that without government action, the spontaneous social interactions which we call "markets" can efficiently allocate resources to produce goods and services that meet people's needs. Leaving the bulk of resource allocation up to market forces certainly has improved the prosperity of many nations.
However, certain conditions need to be true for free markets to produce optimal outcomes for society.
These conditions include there being a uniform or "homogeneous" product that is offered by many sellers and sought by many buyers. No single seller or buyer may be large enough to be able to influence overall market prices. Both buyers and sellers must have very good information about all the relevant aspects of the product, good and bad, and about the quantities and prices of the product in dealing with all possible counterparties. There must be no "external costs," pollution for example, involved in producing the good, and no "spillover benefits" from the product that benefit anyone beside the buyer. There must be no coercion of any kind.
Obviously, one or more of these conditions are not met for nearly any good or service from apples to xylophones. And yet markets function well. The issue then becomes one of how many of and how deeply these preconditions can be violated before government action could yield a better outcome.
This involves two variables. How bad is the market failing and what can government do to offset this failure?
Conservatives err in underestimating how frequently and how badly unregulated markets fail to produce optimal outcomes for society.
Liberals err in overestimating the degree to which government action can correct market failures.
Obviously, markets for health care fail to meet virtually all the standard criteria for a successful unregulated market. Health care services are not homogeneous commodities like No. 2 yellow corn or A37 construction steel. Health providers and insurers have considerable market power in most locales.
They are large enough to be able to set prices of treatments. They often have monopsonistic power in hiring of workers or buying supplies. Consumers have extremely bad information about the relative costs and benefits, monetary and nonmonetary, of different treatments. They don't even know the costs of the same treatments from alternative suppliers. There are external costs to some practices and there are spillover benefits to others.
Moreover, for reasons of equity, we have long had some governmental role in health care, even if only to the extent of county hospitals that provided at least minimal care to the indigent, special federal and state facilities and services for military veterans and some health care for Native Americans.
Over time, government financing of health care has grown, as has regulation. And while the big federal health programs of Medicare and Medicaid were initiatives of Democratic presidents and Congresses, initially established over the objections of many Republicans, these now have broad support in both parties.
Even conservatives have contributed to regulation. The federal law that bans hospitals from turning away indigent patients from their emergency rooms, for example, was signed into law by President Ronald Reagan.
In some areas, we regulate prices and covered procedures. To cite one mundane example, Medicare does not pay for routine tetanus shots. And Medicare sets maximum payments to providers for many procedures. In the other direction, Congress has banned it from limiting or bargaining for prices on scooters and electric wheelchairs, for example, leading to egregious ripoffs.
Congress also has prohibited Medicare from bargaining over prices for drugs under the Part D benefit passed in 2003. But the Veterans Administration is free to so negotiate.
Nor are there any limits on the operating margins of for-profit or non-profit providers nor on insurers nor on compensation of doctors, nurses or managers at any level.
We don't have free-market health care, and we don't have government health care. To a great extent, we have the drawbacks of each without having the advantages.
So the idea that we need to move in one direction or another seems attractive to many.
Economist Edward Lotterman teaches and writes in St. Paul, Minn. Write him at email@example.com.