Markets and heathcare

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While Obamacare basically rests on the idea of having private companies (insurance companies, healthcare providers) compete and the notion that it is 'socialized healthcare' is essentially nonsense, it is also important to realize that a market for healthcare isn't really feasible because it suffers from a couple of market failures, something market fundamentalists are not terribly familiar with (to put it mildly).

2. Basic insurance economics shows that premiums decline with the number of users (as risks are spread)
   
3. Adverse selection
   

On the latter, here is a useful description:

Free market not efficient in healthcare
Many of the opponents seem to clamor for a free-market solution, but fail to appreciate that none really exist in healthcare. We've already demonstrated that the economics of risk pooling benefits from a larger pool. But adequate pricing of risk is hampered by non-transparent information (people don't really know their own health risks, and neither does an insurance company).

The biggest market failure is known as adverse selection. The healthiest people have the least incentives to insure themselves whilst they are the most desired customers for insurance companies. Under a free market, insurance companies would end up with the worst (highest risk) customers (adverse selection), which tends to self-reinforce as premiums would rise, giving low risk people even less incentives to join.

In order to deal with this situation, insurance companies use ploys to limit their exposure, but this leads to a situation in which some of the very persons who need it most (the sick and poor) either face sky-high premiums, limits to the amounts they can claim, or can't insure themselves at all. Apart from personal tragedies, this adds costs in myriad ways to society:

• Emergency room as healthcare of last resort
  
• Medical bills are the single biggest reason for individual bankruptcies
  
• The inability to get health insurance at anywhere near reasonable premiums is a significant barrier to setting up one's own company
  

Obamacare tries to deal with that by making it illegal to refuse people with pre-existing conditions (which seems to be very popular, 66% in favor), but the necessary corollary is the individual mandate (which is the one feature that is unpopular). While this might be a particularly coercive form of socialism to some and generating most of the hostility, under closer inspection it seems the corollary to a garden variety market failure to us.

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The ACA has a three-part structure. First, it bans insurers from denying coverage based on preexisting conditions. Standing alone, that provision would cause many consumers to postpone seeking insurance until they get sick, a tendency that would cause carriers to hike prices, deterring more people from buying policies. To prevent this fatal dysfunction and assure that healthy people jump into the insurance pool, the individual mandate upheld in 2012 requires that everyone obtain coverage. The third component—the one now under fire—is the provision of tax subsidies to allow less-well-off consumers to participate.

Will the Conservative Obamacare Creation Story Backfire? - Bloomberg Politics

And all three of these are necessary, you can't end discrimination on the basis of pre-existing conditions in a free market.

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A useful reminder what Kenneth Arrow, one of the most distinguished economists of the past century, argued about healthcare, from The Fiscal Times:

Why the Republican Health Care Plan Is Destined to Fail


By Mark Thoma 

March 13, 2017

“It is the general social consensus, clearly, that the laissez-faire solution for medicine is intolerable.” – Kenneth Arrow, 1963.

As Republicans struggle to find an acceptable replacement for Obamacare, a task that does not yet appear to be complete given the growing opposition to their recent proposal, they would do well to remember the words of the person who invented healthcare economics, Kenneth Arrow.
Professor Arrow, a Nobel Prize-winning economist who recently passed away at the age of 95, argued that the market for healthcare is not like other markets for several reasons.

Healthcare often involves large, unexpected expenses. To be able to pay these large expenses if and when they occur, people must have adequate savings or the ability to borrow when needed to cover the costs. But even that may not be enough, an individual may not have saved enough or be able to borrow enough to cover necessary healthcare costs. In the face of such uncertainty – not even knowing who will need healthcare and when – pooling money into an insurance fund and then sharing the risk of a major expenditure across individuals is a natural way to handle this uncertainty.

Related: Is the Republican Health Care Bill Headed for a Do-Over?

But health insurance markets have the well-known problems that are difficult to overcome. First, there is what economists call moral hazard –- people tend to take more risks when they are insured or seek healthcare for trivial ailments. The insurance company is paying, so why not? Deductibles, which make it costly to take risks or get help for minor problems, are one way to overcome the moral hazard problem.

The bigger problem is called “adverse selection.” When people are pooled together in an insurance fund some will have very high expected medical costs (due, for example, to pre-existing conditions), others will have low expected costs, and the premium they are charged will reflect average healthcare use. For the healthy, that’s a bad deal – the premiums are more than their expected health spending. So many of them won’t purchase insurance (and the emergency room is available for serious problems, and if the bill is big enough someone else will end up paying). That leaves more people with high expected health costs in the insurance pool, leading to higher premiums and more dropouts, a process that continues until only the highest cost patients are left and the premiums are unaffordable.

One way to stop this spiral to market collapse is a mandate that keeps healthy people in the insurance pool. The mandate in Obamacare wasn’t strong enough, and too many relatively healthy (and often young) people went without insurance. The mandate in the Republican proposal is even weaker and actually creates an incentive to go without insurance. The penalty for going without insurance does not occur until you sign up for insurance after a lapse, so the rational thing to do is to wait as long as possible before getting insurance. It’s hard to see how this will work.

Related: The GOP Health Plan: A Giant Step in the Wrong Direction or Merely Step One?

The presence of insurance companies in the health services market creates another problem. It means people are going to have their choices – what will be paid for, the type of care, etc. – determined by insurance companies and the policies they offer. Unlike most other goods, you can’t choose whatever health care treatment you want. The insurance company must approve it, and insurance companies will deny payment whenever possible. They have whole staffs devoted to finding reasons to deny payment, so some type of regulatory oversight is needed to ensure consumers get the care they were promised.

But the most problematic aspect of delivering healthcare in the private marketplace is that consumers do not have the information they need to make informed healthcare choices. What type of implantable heart monitor is best? If they are on sale down the road, can I trust the quality? Do I even need this procedure – are there other treatments that are equally or more effective? Doctors often disagree, if they don’t know the answers, how can I make informed choices?

We often don’t care about information problems; for example, the market for wine certainly involves a great deal of uncertainty on behalf of consumers. In many cases, people likely pay far too much for wine due to their lack of knowledge. But unlike health care, the consequences of making a bad wine choice won’t end up harming your health permanently, or maybe even causing death. When market failures have potentially severe consequences, such as in healthcare or the financial sector, regulation is needed to insulate against very costly outcomes for individuals or the economy as a whole.

Related: The Staggering Cost of Medical Waste in America

How can the information problem be solved? One way is through professional standards, certification, and self-policing within the medical profession. We expect more from doctors than we expect from, say, car salespeople. We expect doctors to guide us in making the best possible healthcare choices, but I have no such expectation when I buy a car. Doctors could sell all sorts of unnecessary tests, follow-ups, etc. to unwitting consumers – think of all the unnecessary add-ons you are pressured to purchase after agreeing to buy a car – but we expect more from medical professionals.

In this regard, Professor Arrow made an interesting comment in an interview in 2009 when asked if anything had changed since he wrote his path-breaking paper on health economics decades ago:

“If you look closely at my argument there is a sociological structure. There is a kind of sociological thesis. The market won't work -- it doesn't work well in the health context. But something else supplements the market, and the thing I put stress on in the paper are the elements that put a non-economic influence on the market: professional commitments to provide a service, to engage in services that aren't self-serving. Standards of caring decided by non-economic actors. And one problem we have now is an erosion of professional standards. In a way, there is more emphasis on markets and self-aggrandizement in the context of healthcare, and that has led to some of the problems we have today.”

Another way to overcome the information problem is to let an informed agent make decisions on your behalf. This is the role that institutions such as HMO’s are supposed to play. But HMOs make less money when consumers receive more care, and consumers do not trust HMO-type institutions to make important decisions about their health. Thus, regulatory oversight is needed to make sure that insurance companies are delivering policies that provide adequate coverage, and that consumers can get the care the pay for.

Related: Will CBO Deal a Death Blow to the GOP Health Care Plan?

That does not end the long, long list of problems in healthcare markets. For example, if everyone around me is healthier, I am less likely to get sick, so there are what economists call “externalities” in these markets. When externalities are present, the private sector will not produce the socially desirable quantity of a good. Government mandates that, for example, require people to be vaccinated against some diseases can overcome this problem.

When you put all of these problems together, especially the information problem, professor Arrow’s assertion seems clearly true. The market for healthcare does not operate like most markets. Government involvement is needed to ensure consumers get the care they need, and to ensure that care providers are not taking advantage of consumer’s lack of knowledge.

Once the need for government involvement to overcome market failures is accepted, and to me, it seems impossible to deny, the question is how well a particular healthcare proposal addresses these problems. Obamacare is not perfect, and some tweaks were needed. But it did a pretty good job of tackling these varied and difficult problems in healthcare markets.

However, the Republican plan does not even seem to recognize the full extent of the problems in healthcare markets, and when it does, the remedies are far from adequate. Anyone who is serious about a delivering broad-based, affordable healthcare insurance should give it two bigly thumbs down.

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Socialism for the rich

If two people are dying from the same disease, and require the same operation to survive, and one can pay and one cannot, is it okay for the poor person to die? After talking ourselves hoarse about health reform in this country for nearly a century, we still have no definitive answer to this question, because the main players in the debate keep dodging it. President Trump himself has said: “There was a philosophy in some circles that if you can’t pay for it, you don’t get it. That’s not going to happen with us.” Well, it certainly will happen to a lot of people under the GOP plan — at least 10 million will be thrown off Medicaid according to the Congressional Budget office... 

Part of the problem, believe it or not, is communism. Ronald Reagan, in his efforts to torpedo Medicare in the 1960s, proclaimed government support of health insurance “socialized medicine,” turning a big part of the health care debate into one about the American capitalist ethos and patriotism. (Even before Reagan, the American Medical Association had been sounding this particular alarm). The resonance of Reagan’s message is an important reason why the United States is highly unlikely to ever have a single-payer system, such as a Medicare for everyone. It’s why we keep hearing the term “liberty” to — ironically — justify massive cuts that will have terrible effects on people’s lives.

To be sure, there are good-faith reasons to object to some socialized public policies, particularly the idea that relying on the market, rather than government, can lead to higher efficiency and better results. But we too seldom get to the point of analyzing whether that claim holds true in specific cases, because of the ideological baggage.

The US government has played a far greater role in American health care, well before the ACA, than many people know or, in the case of pro-personal-responsibility conservatives, like to admit.

Many average, even rich, Americans may think that they get no federal aid in this area, but they probably do. They may disdain Medicaid — the low-income insurance program for the poor — but do they realize that approximately half of Americans get their insurance from private companies through work, and that system includes a substantial government “handout” too? We call this the “private payer” system, and it feels like capitalism, not socialism. Since the 1940s, however, US employers have been incentivized to offer health insurance through a massive federal tax exemption for that benefit. Indeed, our current system was largely created by that policy. But the fact that the government involvement is concealed makes it palatable to our ethos.

(Although an GOP draft bill flirted with cutting back on that benefit even slightly, the absence of any cuts from the final version brought to the House makes clear just how much well-off Americans, and employers, like their health-care handout.)

On the other hand, we do not give the same help to everyone. Do all single males making $10,000 annually get health care from the government? Most people think the answer is yes, through Medicaid. That’s wrong. Medicaid initially covered only mothers of dependent children, the disabled, and low-income elderly — the so-called deserving poor. While some states stepped up and voluntarily expanded their programs over time to include single adults, including men, many did not. As a matter of national health policy, in short, those adults were deemed undeserving of the community’s support until the ACA tried to cover them.


The Supreme Court stymied Obama on that front and made the ACA’s Medicaid expansion optional. So it was up to individual states to determine whether low-income single men deserved help. In states that answered that question with a “No,” we rely on charitable hospitals to pick up the slack for these uninsured — but the federal government makes special payments to those hospitals to compensate them. Which approach does that policy exemplify? Socialism or capitalism?

America needs to decide: is health care something we owe our citizens? - Vox

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Mr. Ryan insisted that by relegating health care to private insurers, competition would lead to lower prices and higher quality. Economic theory tells us that this is a reasonable expectation when certain conditions are met. A crucial one is that buyers must be able to compare the quality of offerings of different sellers. In practice, however, people have little knowledge of the treatment options for the various maladies they might suffer, and policy language describing insurance coverage is notoriously complex and technical. Consumers simply cannot make informed quality comparisons in this industry. 

In contrast, they can easily compare the prices charged by competing insurance companies. This asymmetry induces companies to compete by highlighting the lower prices they’re able to offer if they cut costs by degrading the quality of their offerings. For example, it’s common for insurance companies to deny payment for procedures that their policies seem to cover. If policy holders complain loudly enough, they may eventually get reimbursed, but the money companies save by not paying others confers a decisive competitive advantage over rivals that don’t employ this tactic.

What Comes Next for Obamacare? The Case for Medicare for All - The New York Times

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No better explanation than from James Kwak:

Say you have treatable cancer. Your expected medical costs are $50,000 for the next year. In a functioning market, your health insurance policy should cost about $60,000. (The extra $10,000 covers administrative costs and the cost of capital.) It’s still insurance, because you’re protected against the risk that your medical costs will unexpectedly be $100,000. That’s the right product for you: it’s the one you need, and it’s priced appropriately. That’s what markets are supposed to provide.

The world where you can buy an individual policy for $3,000 because the insurer doesn’t know you have cancer, or because Obamacare prohibits the insurer from using that information—you may get treatment in that world, but only because we prevent the market from functioning the way it’s supposed to.

The core problem, of course, is that cancer treatment isn’t like a BMW that can go 150 miles per hour; we’re not willing to call it a luxury that most people can’t afford. Most people can’t afford to pay $60,000 for a health insurance policy. A world in which sick people are priced out of health care is not a world we want to live in. And that’s why markets are the wrong way to distribute essential health care (something I discuss at much greater length in Economism.)

How Markets Work | The Baseline Scenario

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In case you didn't believe us, believe Greg Mankiw, he's a famous economics professor and a Republican, from the NYT:

Why Health Care Policy Is So Hard

Economic View
By N. GREGORY MANKIW JULY 28, 2017

“Nobody knew that health care could be so complicated.” President Trump said that in February, yielding more than a few chuckles from pundits and late-night comedians.

In fact, anyone who has spent some time thinking about the issue sees its complexity. With the collapse of the Senate health care bills this week, the president has certainly been reminded of it.

But Mr. Trump’s epiphany raises some questions: Why is health care so complicated? How does it differ from most of the other goods and services that the economy produces? What makes health policy so vexing?

In Econ 101, students learn that market economies allocate scarce resources based on the forces of supply and demand. In most markets, producers decide how much to offer for sale as they try to maximize profit, and consumers decide how much to buy as they try to achieve the best standard of living they can. Prices adjust to bring supply and demand into balance. Things often work out well, with little role left for government. Hence, Adam Smith’s vaunted “invisible hand.”

Yet the magic of the free market sometimes fails us when it comes to health care. There are several reasons.

Externalities abound. In most markets, the main interested parties are the buyers and sellers. But in health care markets, decisions often affect unwitting bystanders, a phenomenon that economists call an externality.

Take vaccines, for instance. If a person vaccinates herself against a disease, she is less likely to catch it, become a carrier and infect others. Because people may ignore the positive spillovers when weighing the costs and benefits, too few people will get vaccinated, unless the government somehow promotes vaccination.

Another positive spillover concerns medical research. When a physician figures out a new treatment, that information enters society’s pool of medical knowledge. Without government intervention, such as research subsidies or an effective patent system, too few resources will be devoted to research.

Consumers often don’t know what they need. In most markets, consumers can judge whether they are happy with the products they buy. But when people get sick, they often do not know what they need and sometimes are not in a position to make good decisions. They rely on a physician’s advice, which even with hindsight is hard to evaluate.

The inability of health care consumers to monitor product quality leads to regulation, such as the licensing of physicians, dentists and nurses. For much the same reason, the Food and Drug Administration oversees the safety and effectiveness of pharmaceuticals.

Health care spending can be unexpected and expensive. Spending on most things people buy — housing, food, transportation — is easy to predict and budget for. But health care expenses can come randomly and take a big toll on a person’s finances.

Health insurance solves this problem by pooling risks among the population. But it also means that consumers no longer pay for most of their health care out of pocket. The large role of third-party payers reduces financial uncertainty but creates another problem.

Insured consumers tend to overconsume. When insurance is picking up the tab, people have less incentive to be cost-conscious. For example, if patients don’t have to pay for each doctor visit, they may go too quickly when they experience minor symptoms. Physicians may be more likely to order tests of dubious value when an insurance company is footing the bill.

To mitigate this problem, insurers have co-pays, deductibles and rules limiting access to services. But co-pays and deductibles reduce the ability of insurance to pool risk, and access rules can create conflicts between insurers and their customers.

Insurance markets suffer from adverse selection. Another problem that arises is called adverse selection: If customers differ in relevant ways (such as when they have a chronic disease) and those differences are known to them but not to insurers, the mix of people who buy insurance may be especially expensive.

Adverse selection can lead to a phenomenon called the death spiral. Suppose that insurance companies must charge everyone the same price. It might seem to make sense to base the price of insurance on the health characteristics of the average person. But if it does so, the healthiest people may decide that insurance is not worth the cost and drop out of the insured pool. With sicker customers, the company has higher costs and must raise the price of insurance. The higher price now induces the next healthiest group of people to drop insurance, driving up the cost and price again. As this process continues, more people drop their coverage, the insured pool is less healthy and the price keeps rising. In the end, the insurance market may disappear.

The Affordable Care Act (a.k.a. Obamacare) tried to reduce adverse selection by requiring all Americans to buy health insurance or pay a penalty. This policy is controversial and has been a mixed success. More people now have health insurance, but about 12 percent of adults aged 18 to 64 remain uninsured. One thing, however, is certain: The existence of a federal law mandating that people buy something shows how unusual the market for health care is.

The best way to navigate the problems of the health care marketplace is hotly debated. The political left wants a stronger government role, and the political right wants regulation to be less heavy-handed. But policy wonks of all stripes can agree that health policy is, and will always be, complicated.

N. Gregory Mankiw is the Robert M. Beren professor of economics at Harvard University.

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Republican efforts to build a more laissez-faire health system are “doomed to fail,” conservative health policy writer Philip Klein admitted in a candid column last month, unless they are willing to state an uncomfortable truth: Republicans must acknowledge that they “don’t believe that it is the job of the federal government to guarantee that everybody has health insurance.” A handful of GOP lawmakers are now taking up Klein’s charge — with one of them even claiming that a Republican plan that leads to a higher national uninsurance rate would be a good thing. “If the numbers drop,” Rep. Mike Burgess (R-TX) said Thursday at the Conservative Political Action Conference, “I would say that’s a good thing.” He went on to argue that more people without health care would be a positive thing for the United States because it would mean that “we’ve restored personal liberty in this country.”

GOP congressman says fewer people with health insurance is a ‘good thing’ – ThinkProgress

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Working fantastic, the free market in healthcare..

Between 2002 and 2013, prices tripled for some insulins. Many cost around $300 a vial, without any viable generic alternative. Most patients use two or three vials a month, but others need the equivalent of four. Self-rationing has become common as patients struggle to keep up. In the short term, fluctuating blood sugar levels can lead to confusion, dehydration, coma, even death. In the long term, poorly controlled diabetes is associated with heart attacks, strokes, blindness, amputation and the need for dialysis. The exorbitant prices confound patients and doctors alike since insulin is nearly a century old now. The pricing is all the more infuriating when one considers that the discoverers of insulin sold the patent for $1 each to ensure that the medication would be affordable. Today the three main manufacturers of insulin are facing a lawsuit accusing them of deceptive pricing schemes, but it could be years before this yields any changes..

But the real ignominy (and the meat of the lawsuit) is the dealings between the drug manufacturers and the insurance companies. Insurers use pharmacy benefit managers, called P.B.M.s, to negotiate prices with manufacturers. Insurance programs represent huge markets, so manufacturers compete to offer good deals. How to offer a good deal? Jack up the list price, and then offer the P.B.M.s a “discount.” This pricing is, of course, hidden from most patients, except those without insurance, who have to pay full freight. Patients with insurance live with the repercussions of constantly changing coverage as P.B.M.s chase better discounts from different manufacturers...

My patient’s “preferred insulin” changed three times in a year, so each time she went to the pharmacy, her prescription was rejected. On the doctor's end, it’s an endless game of catch-up. Lantus was covered, but now it’s Basaglar: rewrite all the prescriptions for all your patients. Oops, now it’s Levemir: rewrite them all again. NovoLog was covered, then it was Humalog, but now it’s Admelog. If it’s Tuesday, it must be Tresiba. It’s a colossal time-waster, as patients, pharmacists and doctors log hours upon hours calling, faxing, texting and emailing to keep up with whichever insulin is trending.

Opinion | The Insulin Wars - The New York Times

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A Pennsylvania man whose son's medicine isn't covered by their family's health insurance plan says he has been traveling to Canada multiple times per year to purchase medicine. Jon Yeagley told CBS News on Wednesday that because the drug used to treat his son's illness is not covered by his health insurance plan, he has chosen to travel to Canada four times per year to purchase it for a substantially lower price than he can find in the U.S. "Right now, I'm paying $15,000 a year for this medicine, which costs in the United States $53,000 a year which I feel is at best, criminal," Yeagley told CBS News.

Father says he traveled to Canada for son's medicine that would cost $53K in US | TheHill