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THE ECONOMY – A Competitive Market for Healthcare?

Jul. 26, 2010 3:13 PM ET
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Signature Update June 30, 2010 Edition, Volume IV

In 1993, when then First Lady Hillary Clinton took on healthcare reform, the nation’s policymakers simply couldn’t reach an agreement over what healthcare and health insurance should look like for the 21st century.  Now, some 17 years later, after the healthcare debate has been put in front of the American people repeatedly, we’re coming to grips with what American healthcare coverage should look like and how it may efficiently and equitably cover the majority of US households. 

Over the years, the make up of the House and Senate has changed and changed again, and with each successive rotation of legislators, voters have formed a congressional body prepared to tackle an issue that has grown from consuming barely 14% of US GDP in 2000 to almost 17% in 2008, with projections of as much as 21% in 2010: remember, that’s a growing share of a growing number as GDP increased from $9.76 trillion in 2000 to $14.6 trillion in 2008.  In virtually every measurable way, healthcare usage and healthcare costs have risen such that there is no longer any debate over whether or not the American system of healthcare is in need of dramatic change.  The only debate is what those changes should be and how they might best be implemented. 

Free market proponents continue to promote competition as the way to bring healthcare costs and utility in line, while advocates of government intervention look for ways to standardize by fiat.  The recently passed healthcare reform bill does less to address changes in healthcare than it does address issues surrounding health insurance, but it’s an important step in reigning in a system that proved impossible to deal with less than twenty years ago. 

From a purely economic point of view, the wrangling of the political right and left are unimportant.  What is meaningful is that healthcare issues are addressed efficiently and equitably.  Economists and policymakers agree that the current healthcare system represents a “market failure”; that is, a system in which free market, competitive forces may play an important role, but one in which market competition alone isn’t up to the task. 

To have efficient and effective market competition a number of conditions must exist for firms and consumers.  From the provider (firm) standpoint there must be: perfect competition, perfect information, firms must be price takers – that is they aren’t able to set market prices, firms must have freedom of entry and exit, goods and services must be homogenous, supply and demand must be independent, and firms must exist to create profits.  At the same time, consumers are assumed to be: utility maximizing, perfectly informed, rational, self interested and always wanting more. 

Even a casual examination of the requirements for free market competition uncovers a myth of free markets and leads to the conclusion that in truth, free markets don’t exist.  All markets have some level of regulation and all firms and consumers have inhibitions of one form or another.  Even still, market competition works in most cases, but falls flat in the case of healthcare as the single largest inhibiting influence, the one that virtually assures a market failure, includes the lack of perfect information for both firms and consumers. 

For the consumer this is manifest through the inability to adequately diagnose oneself and confidently know what the best course of treatment might be.  From the provider standpoint, the failure is not dis-similar: in all but the most common of cases, healthcare providers lack important information without essential patient examination and testing - which happens to be where much of healthcare’s costs exist. 

There are other factors that limit meaningful competition in healthcare, just as there are facets of healthcare that might be benefited by competitive influences, but as a whole, competition in the healthcare market can only serve as an influencing factor rather than a core principal, and this is where the debate heats up over and over again.  It’s also where the issue of equity comes into play.  

Absent a social mandate to provide coverage on an equitable basis, taking into account one’s ability to afford and participate in diagnosis and treatment, the American healthcare system will continue to represent a market failure as it fails to plan for cost effective treatment and prevention options for all.  Though there’s been substantial disagreement as to whether or not the healthcare reform bill adequately addresses this issue, most of the bill’s detractors either haven’t read the bill carefully or misunderstand some of its essential elements.   

Case in point: In a June 17th Wall Street Journal article, former presidential advisor Karl Rove makes numerous erroneous points regarding the healthcare legislation as he discusses the bill’s potential impact on American business.  The errors aren’t interpretive; rather he misstates the amount lower income workers are expected to pay for their coverage (the target is 8-9.5% of their income, not 8-9.5% of the cost of care), incorrectly addresses the impact of part-time workers (part-time workers are aggregated into full-time equivalents under the bill rather than exempted from it), misstates the number of workers for which a large employer might not be fined (the bill imposes fines under certain circumstances but exempts the first 30 employees rather than 40 as stated in Rove’s article) and incorrectly identifies Medicaid as “second class health care”, when Medicaid is more accurately identified as a form of healthcare coverage, not healthcare itself. 

The point here isn’t that Rove sought to misrepresent the bill’s tenants in his article.  Rove is as intelligent and careful a political operative as one might find.  Rather, the point is that most executives, policy makers and decision makers haven’t read the entire bill or depend too heavily on others whom they expect to be better informed when forming their positions on important issues addressed by the bill.  In short, what is misunderstood about the bill may be as great or greater than what is widely and accurately known about it.  

Those potentially influential decision and policy makers who dismiss the bill’s working parts out of comparison to other national healthcare systems, such as that experienced in Canada, or out of ignorance to what is actually in the bill, run the risk of selling it short.  Perhaps more importantly, they’re likely to miss out on an opportunity to help shape the debate over the next stages of what is almost certain to be a multi-phase, incremental implementation of a complex system intended to improve the quality of Americans’ health as it transforms funding, prevention, treatment and research options in what has arguably become one of the most important issues of the day.




Signature Update is offered by Richard Haskell, Managing Director of Signature Wealth Management  and CEO of Signature Management, LLC

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