The Healthcare System Is Not Perfect, But Free Market Solutions Exist

by: Paul Nouri, CFP

The typical talking point about the U.S. healthcare system starts with citing a World Health Report (WHO), issued in 2000, that ranked the overall healthcare system in the U.S. 37th, while also ranking it most expensive. When commentators cite this statistic, they leave out the fact that the U.S. was ranked No. 1 in responsiveness. Also, the ranking system is skewed toward fairness in financial contribution, as well as distribution of health services.

When this report is cited, people should keep in mind its context. In the director's comments, the first bullet point says that responsibility for the performance of a country's health system lies with the government. The second point speaks of the efficiency of dollars spent in the system. It is likely that the proponents of this report favor the Patient Protection and Affordable Care Act because it puts a greater onus on government to manage the system and attempts to cover as many people as possible through an expanded state system. However, the U.S. is unique from almost all other countries.

Good, bad or indifferent, critics need to recognize that the cure for the U.S. is not to make the healthcare system similar to that of France, which was ranked No. 1 in this report. While France spent the fourth most amount on its healthcare, its responsiveness compares poorly to the U.S. at 16th. Similarly, Italy was ranked No. 2 overall and 22nd in responsiveness. It's also surprising that the organization would list three countries -- San Marino, Andorra and Malta -- whose combined population is less than the smallest state in the U.S. (Wyoming). Clearly, managing the health of a 300-million-person community with millions of different providers is far different from managing populations with less than a million people.

Overall System Performance


Overall Goal Attainment

Health Expenditures Per Capita














San Marino


















United States






Source: World Health Organization, World Health Report, 2000 (full PDF).

It is also impossible for the report to be able to accurately compare the prevalence of diseases in different countries and how they are treated. The acuity of care is far more complex than determining how many people die from a particular disease in certain regions. The author of the report admits that it was only meant to be an initial look at the system, the first of many -- yet many quote this piece 12 years later.

The fact is that when patients end up in hospitals in the U.S., they are treated expediently. While healthcare insurance may not be affordable for the entire population, there are many ways in which the system currently takes care of those who cannot afford the rising costs of healthcare, including community clinics, Medicaid and a law requiring patients coming through the emergency room must be cared for. Practitioners in this country are not forced to balance the cost vs. the benefit for patients nearly as much as in other countries. There is typically a very short lead time to surgery from the time the doctor decides it is necessary. Additionally, part of why our costs are higher is that we end up funding the preponderance of research in drugs and devices for other nations. If this system was not in place, who would fund new innovations in medicine?

The point of this article isn't to trash the report put out by the WHO in 2000, but to point out that its goals were not as simple as ranking the quality of care. The significant weightings in fairness in financial contribution and distribution of care do point to a system in the U.S. that does not provide a high level of care for all. Both of the developed countries ranked at the top of this report have histories dating back thousands of years. The U.S. has been settled for a much shorter period of time and has its most recent roots in capitalism and a belief that those who can do for themselves should provide for themselves.

The U.S. and its citizens are currently at a crossroads in deciding how Americans should live and be cared for. There are two primary sides of the argument. There are those who think people should work for what they have. These folks typically think there should be a limit to how long benefits, including unemployment, welfare and Medicaid, are dolled out. The other side thinks that it is incumbent upon the successful citizens (and the government, judging by the $16 trillion of debt on the books) to take care of those who are unable or unwilling to take care of themselves. Each side has become increasingly vocal as the presidential election nears and healthcare legislation faces a significant challenge in the Supreme Court. How the healthcare law ends up being implemented (or not) will largely go a long way in shaping the future of our country.

Prior to recent legislation, the current system is represented by more than 50% of people on employer sponsored or individual plans, 30% on Medicare or Medicaid, 4% on military plans, and the rest are uninsured. Currently, those who don't have insurance will still be cared for under the Emergency Medical Treatment and Active Labor Act. However, those who do not have insurance and are billed after emergency treatment more often than not fail to pay. This leaves the hospitals having to increase rates on everyone else who does pay.

The Affordable Care Act would have a chance of doing some good if it didn't rely heavily on Medicaid significantly increasing its role as a health provider. This implies that the solution to high (unaffordable for some) healthcare costs is for the government to pay. One of the most significant effects of the legislation is that hospitals will begin to get paid on patients that they previously received $0.10-$0.20 on the dollar for. If implemented, it would benefit hospital operators including Community Health (NYSE:CYH), Health Management Associates (NYSE:HMA) and others. This increased scope of government would have it paying for nearly as much of healthcare as the private sector.

The solution is likely something entirely different than what the Affordable Care act proposes. If we chose to accept that America is a capitalist economy, we should be working toward private market solutions, not a solution that only makes the government a bigger part of the equation. The healthcare market is probably the least competitive market in the U.S. We pay premiums to health insurance companies and rely on collective bargaining power to contain costs. However, this clearly has not worked out. If providers -- including all types of doctors, radiology centers and hospitals -- were forced to compete on price, a fair market value would be reached for the services and goods being provided. In the context of the Affordable Care Act, its possible that the increased reliance on government healthcare will only lead to more apathy on the part of the individual regarding his or her health. If a person is guaranteed to be taken care of, its not clear what his or her incentive is to be healthy.

Creating more competition among health providers and holding people accountable for the healthcare they consume are only the first steps in providing a more level healthcare environment. There will always be people in society who are either unwilling or unable to pay for their own healthcare. For this reason, Medicaid should continue to be part of the solution. However, more likely than not, a revamped version of Medicaid is what the system needs. Currently, each state has a personalized Medicaid "solution" on how to deal with its respective populations. However, as with most government-run systems, there are great inefficiencies involved. If Medicaid was a nationalized system, perhaps the administrators could manage it more effectively. It could be seen where the dense areas of Medicaid population are and create centers of health in those areas. This would cut out the excessive executive pay and administration that some speak of in the system. Also, people would be able to visit the center for front line care and not have to worry about not being covered for whatever might follow. This would be somewhat similar to the system crafted by Veterans Affairs, which is generally highly regarded among medical professionals.

Reasonably so, when people pay what has become a high premium for health insurance, they expect whatever medical service they need in return. However, there have been many different and expensive diagnosis and treatment options that have come out the past 10 years. These advances in technology complicate the idea of lowering costs. For procedures that should not have much inflation associated with them, due to the lack of real innovation, Medicare has already started to lower reimbursement. Long-term care companies, including Sun Healthcare (NASDAQ:SUNH) and Skilled Healthcare (NYSE:SKH), were hit with Medicare rate cuts north of 10% last year. Home health service companies including Gentiva (NASDAQ:GTIV) and Amedisys (NASDAQ:AMED) not only saw rate cuts, but a congressional investigation into their practices. Finally, Alliance Healthcare Services (NYSE:AIQ), providing MRI and PET/CT imaging services, has been experiencing rate declines for a number of years on its services.

However, in the diagnostic space, for example, there are new breeds of tests out from companies like Myriad Genetics (NASDAQ:MYGN) that charge upward of $3,000 for a single test. Edwards Life Sciences (NYSE:EW) has developed a transcatheter as an alternative to heart surgery with a sticker price of $30,000. As they are available, everyone expects that because they pay healthcare insurance they are entitled to these services. But insurance companies have been poking their head more and more into the care of patients, telling them what is a reasonable expectation of care and what constitutes a luxury. For example, many molecular and genetic testing companies have to go through a series of discussions, negotiations and trials before being approved for reimbursement by insurance companies.

The question is: How will the U.S. deal with these new therapies? There really are three options. Everyone can receive them, in which case premiums will likely go up for everyone. Under the Affordable Care Act, with government having more control of the acuity of care, these types of treatments will likely not be covered. This option will contain costs and likely shorten life spans. Or they can be paid for by those people who can afford to pay for them. The latter is where the conflict really lies. Is it acceptable to our society for some people to be able to pay for a better quality of healthcare or not? I don't have the answer, but there clearly are steps that have not yet been taken that show promise in terms of improving the efficiency with which care is delivered.

If the discussion at the government level moved to free market solutions, where competition was greater and insurance companies started pricing to a greater degree on individual health, there would likely be a major shakeup in facilities, device and pharmaceutical stocks. Already, pharmaceutical benefit managers push their customers into generics whenever possible. This could also start happening in radiology, where insurance companies inform their clients that they need to visit centers with which they have negotiated favorable terms. Additionally, the more that healthcare consumers would have to pay out of their own pockets, the more vigilant they would be on what tests they did or didn't need. The reality is that doctors generally are on the side of extreme caution in order to avoid possible liability and, in some instances, to benefit their own practices.

Disclosure: I am long CYH, GTIV, HMA.