Healthcare and the free market disconnect

Is the free market dead in healthcare?

The new issue of Health Affairs raises that question. It's devoted all its space to what is becoming a desperate need to cut healthcare costs.

It's a grim assessment. Healthcare cost growth over the past decade has consumed every cent of income gains for the average American family. Lower-income families pay more of their income toward healthcare than wealthier households. These trends are being exacerbated by the current grim economic climate.

Meanwhile, the United States pays their doctors far more than other advanced countries in the world--nearly five times more, in some instances. Primary care physicians here earn double what their counterparts command in France and Australia. A similar gap exists among orthopedic surgeons in the United States and Canada.

Considering I've had friends who have undergone spinal fusion procedures in their 30s and hip replacements in their 50s, while physician-driven litigation has made it illegal to divulge their specific practice patterns, it's not unreasonable to think some form of market imbalance exists. I have similar suspicions about the fact that it costs me about $75 every time I or a member of my family visits the doctor--on top of the more than $600 a month I pay for insurance.

Despite assertions by readers to the contrary, I believe in the free-market system. I also believe in the laws of supply and demand. But the incentives in healthcare have been so misaligned in relation to the needs of the market that such laws no longer apply. Chains like Wal-Mart and Target, whatever ill you might think of them, have striven to cut prices in order to draw customers. When those prices start creeping up, it'll be time to raise the antitrust issues.

This doesn't apply to healthcare at all--as a matter of fact, the trends are entirely in the opposite direction. Consumers are not armed with relevant price information. We're also in the middle of a physician shortage in this nation that is only projected to become worse over the next couple of decades, meaning they will continue to command premium compensation. Although producing more doctors might moderate this trend, few new medical schools are coming on line. The same applies for nursing and other highly-trained allied healthcare positions.

Absent the market tools needed to keep prices in check is why medical inflation continues to rise at a time when overall inflation is all but flat.

Meanwhile, even the barest regulatory checks that might keep costs down for consumers are defeated by special interests. In my home state of California, legislation that would have required insurers to justify double-digit premium increases was recently shelved, even though it had been passed by the Assembly and flew through three Senate committees. It turns out the five Democratic lawmakers insurers needed to neutralize their majority in the Senate received tens of thousands of dollars in campaign contributions, even in an off-election year. One of them also owns property which he rents to Kaiser Permanente to the tune of nearly $70,000 a year.

Interestingly, hospital costs as a percentage of expenditures are not out of line with the other comparison countries. The relative fiscal prudence they exercise is going to have to spread to individual physicians, whether through accountable care organizations or other financial devices.

There has been a lot of grumbling about this on the physician side, but it is going to be inevitable in order for their profession to properly function over the long-term. Healthcare reform, assuming it survives, will cover more lives, but its cost controls are minimal.

The alternative is simple: The healthcare industry will eventually reach a bubble stage and collapse of its own weight. Physician pay and hospital reimbursements will plummet far more under such a scenario than making some moderations now. We'll look better compared to the rest of the world on healthcare costs, but we won't feel better about it. - Ron