The why and how of market-driven medical care
The American public regularly hears of plans to further extend government control over medical care but rarely of reforms that would go in a different (and sometimes opposite) direction. Part of the problem is that Republicans are more comfortable and adept at criticizing the flaws of Medicare for All and similar initiatives than at articulating a vision of their own. That needs to change if the decades-long drift toward ever greater governmental control of the health sector is to be arrested and reversed.
The goal of a market-driven system is not maximum and undifferentiated deregulation. Some regulation is necessary, to correct for tendencies that are inherent in the provision of medical services. However, while some regulation is essential, that does not mean that the only, or best, answer is a fully governmental system. Indeed, under the right circumstances, private incentives could deliver more innovation, higher quality, and lower costs than full public control.
It is sometimes argued that Kenneth Arrow’s seminal assessment of the welfare economics of medical care provided the definitive argument for a fully regulated scheme. That is an over-interpretation of his analysis. What he posited was a description of why medical care is different from other purchased services, and thus incompatible with a completely unsupervised market. Arrow’s main points were that the degree of uncertainty about the timing and effectiveness of care, and the imbalance in expertise and information between physicians and patients, are what set medical services apart from other sectors of the economy and require a public policy response.
Consumers, quite understandably, want to offload the risk of needing costly medical attention; most could not afford to pay out-of-pocket for lengthy hospitalizations or treatments. Thus, there is a market for insurance, but that market would work inadequately without some regulation. Among other things, consumers with elevated health risks (due to genetic factors, for instance) would pay high and perhaps unaffordable premiums because of their known conditions. Low income households may not be able to afford insurance and therefore, in the absence of subsidies, would face significant financial barriers to accessing services necessary to maintain their health.
The extreme asymmetrical relationship between patients and their physicians also distorts the market by altering the normal consumer-supplier dynamic that applies in other sectors. Patients usually have much less expertise and training than their doctors, and thus must trust that the services they are advised to receive are in their best interests. Society expects physicians to behave outside the normal rules of a market; they are to act as agents for their patients irrespective of financial considerations.
Voters sense that the medical care market is unique and therefore support some public intervention in it. Among other things, there is strong support for the state role in the credentialing and licensing of physicians, even though these requirements restrict the supply of physician services and raise the prices patients and insurers must pay for medical care. Most Americans also support the various federal and state programs and subsidy provisions that improve access to care for lower-income households and those with high expected costs. As Arrow notes, consumers value these programs in part because they want all residents, not just themselves, to access needed care, and they believe the market will not deliver that level of access without public regulations and programs.
While Arrow believed that a single-payer plan would be the best choice among imperfect alternatives, he did not rule out that a combination of private incentives alongside appropriate regulation might deliver better results (although he might have been dubious regarding the political prospects of such a complex undertaking).
While some regulation of medical care and insurance is necessary (and inevitable), there are strong and compelling reasons to favor using market incentives rather than government regulation whenever possible, and in particular when allocating resources to, and within, the health sector. Government control, when it extends to payment levels for services, has a tendency to stifle innovation because investment capital must take into account the unpredictability of the regulatory process. Regulatory capture also allows incumbents to protect their revenue by placing hurdles in front of potential competitors. And there is no reason to believe the government has a unique capacity for determining the appropriate prices to be paid for medical services. Quite the contrary, the history of Medicare indicates that fee-setting by the government carries a high risk of misallocating resources by underpaying for some services and overpaying for others.
Advocates of market incentives in health care should focus their energy on two reforms that would make a real difference by making it easier for consumers to identify and obtain high-value, low-cost care. These reforms do not require deregulation of the insurance market or elimination of subsidies intended to ensure a level of access to care for lower income households.
First, the federal government should proceed with an aggressive price transparency initiative. The Trump administration has issued rules that point in the right direction but are too tepid and piecemeal to push the market where it needs to go. The initiative should begin with development of a robust and mandatory pricing list comprised of common medical procedures. All providers of medical care engaged in providing services on the list should be required to cooperate with other clinicians and facilities in the posting of all-in pricing information. For instance, a procedure to repair a torn labrum will involve, at a minimum, a surgeon and an anesthesiologist, as well as an outpatient facility. There will also be a follow-up visit with the surgeon. All of this should be covered in an all-in price that consumers can compare with pricing from competing suppliers on an apples-to-apples basis.
The government also should require insurers to provide, at the request of their enrollees, a fixed payment for services on the required pricing list equal to what they would pay for in-network care. The combination of a required pricing list along with fixed insurance payments for these services would lay the predicate for robust price competition.
The second major reform should be adoption of defined contribution payments when subsidizing enrollment into health insurance. This reform — sometimes called “premium support” — would create strong incentives for enrollment in insurance plans that can effectively manage the costs of patient care because the government’s contributions would not increase with the expenses of the plans chosen by consumers. Individuals would be free to select high-cost plans but would be required to pay for the added premiums (above an average) themselves. Premium support can be applied to the Medicare program, and to employer-provided insurance through reform of the federal tax subsidy.
There are many other reforms that would be beneficial to the health sector, but these two stand out because they would facilitate a powerful role for the consumer — a role that is almost entirely nonexistent today.
Arrow long ago identified, in academic terms, what most patients know by experience and instinct, which is that the provision of medical care has characteristics that invite and necessitate some public regulation. This is not a justification for the avalanche of rules that are burying today’s health sector with added costs at no additional value to consumers. Effective market reforms are the antidote to this kind of government overreach because they will give consumers the power to shift resources on their own to high-value options, which in turn will encourage providers to deliver better care at lower costs without the government getting involved in the cost-cutting. It is an ironic by-product of the unique aspects of medical care that steering the health system in this more productive and market-based direction will require adoption of better public policies.