Monday, July 10, 2017

Free market health care?

Farzon Nahvi, writing in the New York Times, reiterates the tired argument that health care can't be left to the free market, because people in comas can't negotiate.
As an emergency medicine physician in a busy urban hospital, I have patients brought to me unconscious several times a day...
Well, if the Times can recirculate tired stories, I can recirculate responses. Responding to an eerily similar essay way back in 2012, I argued in "After the ACA"  (starting p. 189)
Yes, a guy in the ambulance on his way to the hospital with a heart attack is not in a good position to negotiate. But what fraction of health-care and its expense is caused by people with sudden, unexpected, debilitating conditions requiring immediate treatment? How many patients are literally passed out? Answer: next to none.

What does this story mean about treatment for, say, an obese person with diabetes and multiple complications, needing decades of treatment? For a cancer patient, facing years of choices over multiple experimental treatments? For a family, choosing long-term care options for a grandmother with dementia?

Most of the expense and problem in our healthcare system involves treatment of chronic conditions or (what turns out to be) end-of-life care, and involve many difficult decisions involving course of treatment, extent of treatment, method of delivery, and so on. These people can shop. Our healthcare system actually does a pretty decent job with heart attacks.

And even then . . . have they no families? If I’m on the way to the hospital, I call my wife. She is a heck of a negotiator.

Moreover, healthcare is not a spot market, which people think about once, at fifty-five, when they get a heart attack. It is a long-term relationship. When your car breaks down at the side of the road, you’re in a poor position to negotiate with the tow-truck driver. That is why you join AAA. If you, by virtue of being human, might someday need treatment for a heart attack, might you not purchase health insurance, or at least shop ahead of time for a long-term relationship to your doctor, who will help to arrange hospital care?

And what choices really need to be made here? Why are we even talking about “negotiation?” Look at any functional, competitive business. As a matter of fact, roadside car repair and gas stations on interstates are remarkably honest, even though most of their customers meet them once. In a competitive, transparent market, a hospital that routinely overcharged cash customers with heart attacks would be creamed by reviews, to say nothing of lawsuits from angry patients. Life is not a one-shot game. Competition leads to clear posted prices, and businesses anxious to give a reputation for honest and ef cient service.

So this is not even a realistic situation.

To be sure, some conditions really are unexpected and incapacitating. Not everyone has a family. There will be people who are so obtuse they would not get around to thinking about these things even if we were a society that let people die in the gutter, which we are not, and maybe some hospital somewhere would pad someone’s bill a bit. (As if they do not now!)

But now we are back to the straw man fallacy. Once again, the idea that ACA is a thoughtful, minimally designed intervention to solve the remaining problem of poor negotiating ability by people with sudden unexpected and debilitating health crises is ludicrous. As is the argument that we should accept the entire ACA because of this issue.
More generally, (p. 185)
There is a more general point here... Critics adduce a hypothetical situation in which one person might be ill served by a straw-man completely unregulated market, with no charity or other care (which we have had for over eight hundred years, long before any government involvement at all), which nobody is advocating. They conclude that the hypothetical justifies the thousands of pages of the ACA, tens of thousands of pages of subsidiary regulation, and the mass of additional federal, state, and local regulation applying to every single person in the country.

How is it that we accept this deeply illogical argument, or that anyone making it expects it to be taken seriously? Will not one person fall through the cracks or be ill-served by the highly regulated system? If I find one Canadian grandma denied a hip replacement or one elderly person who cannot get a doctor to take her as a Medicare patient, why do I not get to conclude that all regulation is hopeless and that only an absolutely free market can function? Both straw men are ludicrous, but somehow smart people make the first one, in print, and everyone nods wisely.
(Sorry for recycling, but good prose is hard!)

This is also great example of selected sampling and the dangers of making policy by anecdote. I'm sure Dr. Nahvi is a wonderful and caring emergency room physician. But despite the vividness of his experience, that does not make him a great expert on policy. In a completely heartless free market, most of the people he describes showing up on his doorstep would have bought catastrophic coverage. They are employed, normal people who buy cellphones, life insurance, car insurance and home insurance. (That's his point -- poor people are treated for free in emergency rooms. His point is entirely the cost of treatment, for that extremely narrow group, people with assets who somehow don't have insurance.)  As a doctor, he does not see that economic counterfactual, or how cheap unregulated catastrophic coverage would be.  And emergency room physicians dealing with comatose patients are not exactly an unbiased sample of the health care system. Even if such patients need to have government support, just why does a routine dermatologist visit need to be subject to the tender mercies of the Federal Government?

And leave it to the times to deliberately confuse health care with health insurance, and to get in a gratuitous swipe at Paul Ryan,
When it comes to health care coverage, House Speaker Paul Ryan says, “We’re going to have a free market, and you buy what you want to buy,” and if people don’t want it, “then they won’t buy it.” In this model of health care, the patient is consumer, and he must decide whether the goods and services he wants to protect his life are worth the cost.
The health care debate has, apparently, become like the old joke about jokes in prison. One inmate says "31" and everyone laughs. Another says "22", and they laugh again. The new guy says "11!" and is greeted with silence. "What's wrong? he asks." "You didn't tell it right" they answer.

Well, "22" says the Times. "35" say I. We're going to make a lot of progress this way. At least people like me acknowledge and respond to their view. The bubble, apparently, is a one-way street.


  1. Even some doctors agree. Excerpt from Weekend Edition Saturday (

    GUNTHER: I think there's great examples that current health care prices are upwards of a thousand times more than anywhere close to true cost. My patients can get a CAT scan - cash price for $300. If they go into the local ER, it'll bill out at $2,400. So I think we need to start asking why. Because we keep talking about who should pay or how we should pay for health care.

    But if we allow free market forces and competition to create price transparency, then we start to have the opportunity for price control, cost control. And then I think we can completely change the dialogue from who should pay and how should we pay too to what parts of health care do people need help paying for.

    1. This is a great point. Most of Dr. Nahvi's examples of huge prices are just this kind -- and reflect a completely uncompetitive market. If a towtruck tried to charge $10,000 for a tire change, he'd be out of business quickly.

    2. Those prices are in all likelihood the hospital's posted prices for procedures, "list price" if you will. 15 years ago I joined a group that was considering buying a small hospital in Las Vegas. We had no experience in Las Vegas, or in hospital administration, so we did some digging around and asked a bunch of questions. One of the bits of information we received pertained to the question of hospital posted prices for procedures. As it turns out, those posted prices are almost never the prices actually charged. The prices are set in relation to the health insurance companies' desire to be awarded discounted prices for the traffic the insurers send to the hospitals. The depth of the discount is a measure of the ability of the insurance company's representative's ability to negotiate on behalf of his employer. This may be one factor in explaining the discrepancy in prices mentioned in the press and those that a private practitioner will see in the course of his career. The "almost never" conditional reflects the chance occurrence when a hospital or a practice group admits a patient who lacks insurance but has the financial wherewithal to pay for the services delivered. In the case of an uncle of mine who experienced a stroke en route by plane from L.A. to Vancouver, BC, and was hospitalized in Vancouver, the posted rate per day was $2,500 for a bed (includes all services, medical and house-keeping) in a common ward. The year was 2004. And that was the charge rate that appeared on the hospital's invoice that I settled in cash on his behalf after a 10-day stay in the hospital. If he had had insurance it would have been considerably less ($0/day if he were covered locally). He had Medicare, but it wasn't of use outside the USA. It may well be different in France; in British Columbia, it differs little from the USA for those without insurance.

    3. Bear in mind too - those published hospital prices are greatly inflated by cost shifting from Medicare and Medicaid patients. As the baby boomers age into Medicare and as Medicaid coverage expands, "list prices" MUST keep rising to recoup rising cost shifts.

      This is the conveniently ignored reality - those on government insurance schemes are not paying the full costs of their treatments...

  2. This is the most inane rebuttal of a marginal issue in the massive health care disaster we suffer under here in the US I've read this month. No developed nation fights tooth and nail to pay twice as much for bad health care than 'Muricans. Having lived in several foreign countries and experienced their national health services, and struggled under our absurd system, I think i can say with authority that our system 'bites the big one'. Arguing for capitalist health care makes as much sense as demanding that you pay $50,000 for that $25,000 Hyundai, knowing it only runs properly half the time. My fellow Americans amaze me.

    1. This is one of my favorite health-policy-by-anectdote memes. "why I was in France once, busted my leg, and they fixed me up right good, and cheap too. They've got a great system." No need to peek at French tax rates, employment, growth, debt and deficits, no need to go meet the Canadians at Mayo clinic, no need to meet people on long waiting lists or denied expensive new treatments.

      Policy by anecdote is how we got in to this mess.

    2. Also, let's be clear that there are few, if any, instances of true single-payer systems (except perhaps Cuba and North Korea). Most purportedly single-payer systems actually involve a hybrid system in which the strain on national payment/delivery systems are alleviated by (i) private carriers offering supplemental coverage and (ii) customers engaging in medical tourism to obtain faster and better service than is available to the average person through the relevant national system.

    3. Emergency care overseas is no different than emergency care in the US and as Mr. Cochrane points out, is NOT the main cost driver in health care. Long term, chronic care is the cost driver and THAT is what gets rationed in those wonderful "free, universal" systems like Canada's where a new hip replacement is available months from now, instead of days or weeks from now as in the US...

    4. "instead of days or weeks from now as in the US..."

      If you can afford it. You either ration by price or by queuing. Fundamentally, those are the only two options. The rest of the world seems to have come to the conclusion that queuing is the more tenable choice. I haven't seen a decent argument that price is better, but I could be convinced (because I am already "wealthy").

  3. Though I am only beginning to delve into Economics, I do think it's obvious that you take apart Dr Nahvi's arguments. The literal, physical ability to negotiate does not seem to be the problem.
    However, this particular article seems to pick on what is possible one of the weakest arguments for the ACA that I have ever read. Generally, most supporters of the ACA I have read or heard the views of quite openly admit that it is not efficient in the sense of being Pareto efficient, in the manner Dr Nahvi does by portraying severe, incapacitating illness as something like a market failure.
    Most supporters (that I am aware of) do admit the inefficiency of the ACA in the above sense, but make the normative claim that ensuring that everyone has insurance is more important than lower premiums for those who would get it in a free-market situation, and the myriad other benefits that would accrue to those who get insurance in a post-repeal situation.
    Taking this into account, this article seems like a waste of time in that it a) targets an argument that isn't worth targeting and b)Continues a tendency I have seen in those against the ACA to focus on the more obviously sentimental (read: economically illiterate) arguments for the ACA and ignore the core one I mentioned above.

    1. Then why did they call it the AFFORDABLE Care Act? THer eis an element of dishonesty in this. In the end, public provision of Health Care does not solve the problem of rationing its provision, which will be different from prices but no less unjust.

    2. He's replying to a NYT article that addresses a common defense of the ACA. You in fact are changing the goal posts and criticizing his "failure" to meet YOUR goal.

      AKA a strawman argument.

      Economics has nothing to say about normative values, only about the means used to achieve those values. As such the main economic objections to the ACA are that the means inherent in the act have done nothing to achieve the goals it set out to achieve: insurance coverage is not universal; premiums have risen, not fallen; expanded deductibles have made fewer people able to afford the costs of care; emergency room visits have risen, not fallen; Medicaid has expanded, but studies show Medicaid users have no better health outcomes than the uninsured.

      These failures are what economics rightfully comments on. The normative goals must be decided by individuals...

  4. American tax rate 10 to 39%. French tax rate 14 to 45% From google.

    1. Don't forget payroll, state, local and sales taxes in US. Don't forget much larger payroll (health insurance, social security etc), VAT, taxes in France. Both numbers are much higher. What matters economically is the overall marginal tax rate -- every bite between the value you create for your employer, and what you take home from the store.

    2. The explicit tax rate also ignores all the cross subsidies and shadow prices that go on behind the scenes. I'm not familiar with how its done in Europe or other countries, but I'd be curious to see how they compare to our convoluted, chaotic mess.

    3. Tax revenue as a share of GDP: US 26.37%, France 45.50%.

      Tax wedge for the average single worker: US 31.71%, France 48.07%.

  5. I've worked at the Mayo Clinic as a physician (and spend time working in health policy) and I've never met a Canadian there, so that "anecdote" is not useful here. I have met a lot of American patients with the "sudden, unexpected, debilitating conditions" that you say are so rare. Yes, a few anecdotes are not effective in crafting policy, but gather enough anecdotes and pretty soon you have yourself a solid data set.

    1. Thanks for catching my own passing on of anecdotes from my Canadian friends who sought better or locally unavailable treatment in the US. I didn't say they are rare, just not such a large a component of the total health insurance question that we should take sudden, unexpected, debilitating as the paradigm condition for patients to shop for medicine. Actually, I thought the Mayo Clinic specializes in the opposite -- people with longstanding, difficult to diagnose, hard diseases, who are there because they do a lot of shopping and are not happy with the choices offered by their medicare, medicaid, hmo, or other insurance.

    2. His general point still stands - our current healthcare system involves a lot more than sudden catastrophic ailments that need immediate attention.

    3. This is no anecdote: live in NEOH where our health care providers as well as all those along the Canadian border in other states do a robust cash based Canadian health tourism business for access to the care they cannot get under Canada's "free, universal" system.

      There are those who can pay for access, and those who wait months/years for treatment of non-acute yet debilitating physical ailments.

      In the US, while our costs are high, access is far, far faster...

  6. John Cochrane:

    The largest healthcare program in the United States operates in federally owned hospitals, on federal land, staffed by federal doctors, nurses and administrators, for the benefit of former federal employees. No co-payments, no private provision of services, all financed by income-tax payers.

    I just described the VA. It is distilled communism.

    My understanding of the ACA is that services are mostly provided by the private sector through competitive bid, and there is some co-payments.

    Do you dare state the obvious?

    Any discussion of the US healthcare system should start with, "We must eliminate the VA medical system. Communism is proven failure in health care and in economies. VA beneficiaries have families and cellphones and can take care of themselves by buying health insurance."

  7. I was wondering, Prof Cochrane, since you've engaged with this topic extensively now, do you have an opinion on the mooted reforms as currently proposed in the form of the AHCA? I believe you haven't commented on them directly so far.

    My own impression is that it does not move towards the sorts of reforms that you propose, but I might be mistaken, which is why I'm curious to hear your thoughts on them.

  8. A Forbes Magazine column (2013) provided a ranking of countries by the Heritage Foundation's economic freedom index. The U.S. ranked 13 and 11 of the 12 ahead of us have universal healthcare. Maybe we could become more free by adopting Swiss or Singapore healthcare and dropping our highly segregating approach of Medicare, Medicaid, employer-based, and individual coverage.

  9. Here’s some data I found interesting from the National Center of Health Statistics related to Emergency Department Visits.

    • Number of visits: 130.4 million
    • Number of injury-related visits: 37.2 million
    • Number of visits per 100 persons: 41.9
    • Number of emergency department visits resulting in hospital admission: 12.2 million
    • Number of emergency department visits resulting in admission to critical care unit: 1.5 million or about 1.15%.
    • Percent of visits with patient seen in fewer than 15 minutes: 29.8%
    • Percent of visits resulting in hospital admission: 9.3%
    • Percent of visits resulting in transfer to a different (psychiatric or other) hospital: 2.2%

    Also, from

    ‘The Medicaid Mess. In 2004, the rate of ED visits for those without insurance was 44.6 per 100 persons, compared to 47.1 per 100 persons for those covered by Medicare and 20.3 per 100 persons for those with private insurance. In contrast, the ED visit rates for Medicaid and SCHIP patients was 80.3 per 100 persons-four times the rate for the privately insured and nearly twice the rate for the uninsured and Medicare recipients.’

    It is frightening to me that our current congress is unable to fix or at least start to fix something so obviously and tragically broken.

  10. The main argument I got from Dr. Nahvi was

    "And what Republicans, and many Democrats, forget to stress,is that in a totally free-market health care system, you must be willing to let some patients die...If they [Republicans] want medicine to be truly free-market, then they have to be willing to let the next man or woman they find lying in the street remain there and die."

    Assuming this could or would even happen, I'm perplexed as to why he believes that admitting we'd have to let others die is an effective argument against free-market medicine, but not other free-market goods/services. Does he own a house? In order for us to allow that, we must be willing to let some construction workers die (e.g. accidents). Does he wear clothes? In order for us to allow that, we must be willing to let some assembly line workers die (e.g. factory fires). The list goes on...

    So sure, if this were the case, it would be unfortunate. However, in a world of scarce resources, the net benefit we get is more transparent and affordable medical services, just as the net benefit of risking a small probable death for ANY occupation is a house, or clothing, or a swimming pool, etc.

  11. Part of the problem is that for all practical purposes there is no free market in health care. If we did have a free market in health care, there would be no prescription laws and people would be free to buy whatever medical drug they needed at their local drugstore. If they needed help in making a decision, the pharmacist would advise them or make up a compounded medication that would help the patient for no extra charge over and above the cost of the medication.

    The last time we enjoyed that level of individual freedom was in 1938 before the passage of prescription laws. A free market means the consumer makes the decisions. The relationship between the doctor and the patient is more like the relationship between master and serf. The doctor controls access to medical drugs. Charges a fee for the service with the patient paying both the doctor and paying the druggist for the medication prescribed. In a free market I might have need for a doctor's services perhaps once in a decade. The rest of the time I'd simply study, determine the best medication for what I need to treat. Today you can determine these things to a good degree of accuracy if you are willing to take the time to do the necessary study. It isn't that difficult to control things like high blood pressure, high cholesterol, two conditions that are the cause of most heart attacks and strokes. Toss in a bottle of coated standard strength aspirin to help your heart.

    We should note that professional organizations are labor unions under a different name. The professions attempt to gain higher income through restrictions on the freedom of non-professionals to take care of their needs. Thus earning incomes they could not otherwise earn without the support of the government. Labor unions organize to extract higher wages and benefits from employers. The basic principle is the same in both cases.

    1. The idea that individuals are generally competent enough to make sound medical decisions is completely farcical. Certainly professionals groups are rent seekers, but that doesn't negate their knowledge or experience.

    2. Beyond doubt, the current system is FUBAR. Health care costs in the U.S. are out of control. The solution, however, is clearly not a so-called "free market in health care," whatever that is supposed to mean. The current system is dominated by giant privateers who pillage and plunder those unfortunate enough to be stuck with the bill under our current system. As a small employer, I am only too familiar with the obscene costs our current system imposes upon us. The health care industry is the most profitable sector of the economy, led by pharmaceuticals. Note: only 8 percent of every healthcare dollar spent actually goes to a doctor. Billions of dollars in profits to insurance companies does nothing to promote the delivery of good and cost effective health care. Just about every player in health care is doing everything possible to increase the prices that it can charge.

      The idea, more a slogan, really, that the "free market" leads to an increase in competition that lowers prices and improves quality is right wing propaganda designed to attract the low information voter/consumer. Hey, it works for cell phones, it must work for health care, right? Just imagine all the competition to build hospitals in rural communities.

      Funny, I don't hear anybody demanding a "free market" for delivering police or firefighter services, or the myriad of other services that only a effective government can deliver. There are certain things that only society as a whole can provide. Obviously, the super wealthy oppose that idea. They are super wealthy, precisely because they have managed to acquire more than their fair share for themselves, and they have no intention of changing that.

      Comparing U.S. tax rates with those of other countries is futile. It is simply apples to oranges. France, for example, delivers health care, great unemployment support and pensions to its taxpayers. If the overall tax burden is higher, it is because the taxpayer gets more in return. The only meaningful comparison is the percentage of GDP devoted to health care. Measured thusly, the American citizen is getting royally screwed. Paying too much and getting too little in return.

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