Medical Care and the Free Market

This post started as an appendage to the previous post regarding Medicare, but I decided it would stand better as a separate piece. (I hope this will either be read carefully or not at all.) We discuss the virtues of the free market often on this blog, and The Citizens are varied in their responses to its siren's song. Raised by Republicans is more enamored with the free market than I am, I suspect, but I believe I might be a close second. Which leads me to the question: how can we harness the free market better than we have to provide for America's health care?

The insurance model treats the most worrisome of health care expenses--medical emergencies--like wildfires, but there is a critical difference: the potential liability of the insurer's obligation is unknown. Unlike a building, which can be restored for a predetermined price, medical costs associated with injury or illness are open-ended. To manage this sort of risk, the insurer uses medical examinations and actuarial tables: ultimately the insurer would like to segregate the insurance market into individual "pools" of one, where each person's premiums would equal the expected cost of their medical care (plus some profit margin). Thus the free market approach naturally drives the health care system toward an equilibrium wherein those who most require medical insurance will least be able to afford it. (Not to mention all the associated problems of moral hazard, adverse selection, racial discrimination, and simple abuse.)

We accept this sort of outcome when it comes to homeowner's insurance because (a) those who own the most expensive buildings are also the wealthiest, and perhaps we imagine they could make do with less, and (b) because building in a fire zone or floodplain is often a choice for which extra insurance is best considered just another part of the construction cost. (For poor folk whose home was not much of a choice, note that the State often provides emergency relief funds.) In the case of health care, however, the correlation between income and medical needs is often negative, and there is precious little one can do to avoid random injury or diseases with unknown causes (all health and medical fads to the contrary). In other words, market forces drive the insurance market toward an equilibrium that is acceptable in many cases but offends our sense of social justice when it comes to health care.

The HMO model treats the other main variety of health care expenses--preventive and routine health care--rather like buying a car. You choose your options, choose your level of service, and (hopefully) agree to regular maintenance which will keep your costs lower in the long run. The trouble is, the body is not a car. You cannot start over with a new one: The expenses just keep coming. As soon as it becomes clear that the monthly repair bills will always exceed the premiums received, market forces push the HMO to give up and take the car off the road. In other words, the service plan approach naturally drives the health care system to an equilibrium where those who are healthy are encouraged to stay healthy and those that are sick are encouraged to die. We accept this when it comes to auto insurance but it offends our sense of social justice when the health system writes someone off as "totaled."

The answers as I see them involve using the free market better than we have. To manage catastrophic health risks, society should take the opposite tack and expand to the largest pool possible: a national health insurance pool where no one can be denied coverage everyone is treated and charged equally regardless of age or medical history. The free market may be used within this defined arena to ensure responsiveness and efficiency that a monopoly would not provide. To handle preventive and routine health care, we should liberate patients from individual doctors and hospitals and make all plans fully fungible, which can be (and must be) accepted anywhere. Patients will then finally be free to use the free market to their advantage to obtain the best quality care. If done correctly, a combination of moderated insurance payment constraints plus patient empowerment should reward doctors and hospitals with a balanced scorecard valuing both patient well-being and low costs.

Such a system is no doubt tricky and expensive, but so is the current one. It is a question of social justice whether we are willing to change it. I know I am.