Running a health care service business is hard. Very hard. It is real-world and messy. It is a man with no insurance and a heart attack on your doorstep. It is an elderly woman who arrives senile with a broken hip and no caretaker. All of the clean simplifying assumptions written on the chalkboard at the start of my economics classes (perfect information, infinite buyers and sellers, rational players, elastic curves, a lack of externalities, homogeneity of goods or services) simply don’t apply to medicine.
Below are some useful considerations:
· Externalities & the Common Good: Libertarians argue that if a person can’t afford health care, they shouldn’t receive it. However, U.S. society does not seem prepared to turn away the desperately ill. The Emergency Medical Treatment and Active Labor Act (EMTALA) requires most US hospitals to provide care to anyone needing emergency treatment regardless of citizenship, legal status or ability to pay.1,2 Similarly, community hospitals can be considered a “public good”, which should fall outside of traditional market forces.
· Perfect inelasticity of demand: Health Care is often life and death and demand curves become perfectly inelastic (straight up and down). How can you put a dollar amount on someone’s life? When you or a loved one is in the hospital, rationality is thrown out the window as fear takes hold. This reality, combined with a limited amount of suppliers, puts dramatic upwards pressure on prices.
· Risk-pooling and third-party payers: The third-party payment system arose to pool catastrophic health care risk amongst many consumers. Now, the consumer (i.e., the patient) is not the payer (i.e., the insurance company) and the employer usually sits between the two. The relationship hinders price transparency, i.e. the relationship between subsidized premiums paid by patients and cost of services provided by hospitals & physicians.3
· Physician/Hospital fiduciary duty: In most industries, the payer for and provider of a service agree to price ahead of time. Not in health care. Physicians and hospitals have a fiduciary duty to *rapidly* decide what and how many services to provide while ultimately receiving a financial reward for those services and potentially incurring legal liabilities if they miss something.4
· Medicine is not a commodity: Medicine is complicated. It is not like drycleaning or babysitting or getting your car fixed. It is constantly advancing and certainly not a commodity. All patients have unique issues and, while there are standard treatment protocols, doctors have to quickly use their discretion and judgment at all times.
· Lack of perfect competition: On the one hand, the government is a quasi-monopolistic buyer. Private payers often follow its lead. On the other hand, due to high infrastructure and licensing requirements, many US towns only have one or two hospital networks to supply services. There simply aren’t thousands of payers and providers driving marginal cost to equal marginal revenue, nor is there the time or inclination to shop around.
These are a few of the ways in which the simplifying assumptions of free market capitalism do not apply to health care. There are many others and they all interact with each other. The business of medicine is complicated. The better the BioPharma, Med Device, and Health Care IT industries understand this, the more likely they can all work towards driving efficiencies into and waste out of the health care system.
Notes:
2 However, often no one reimburses hospitals for many of the related costs – it is essentially an unfunded government mandate. Many hospitals write off such care as charity or bad debt for tax purposes. Besides causing some hospitals to go bankrupt, this law has led to cost-shifting and higher rates for insured hospital patients. There are, in some cases, funds form the city or county to remunerate hospitals for indigent care. Many times these funds do not come close to completely covering the deficit. Also, not for profit hospitals have to do a certain amount of charity care to qualify for their tax exempt status.
3 Consumer-directed health plans aim to ameliorate this situation.
4 This is why insurance companies often pay hospitals fixed DRG payments for a given diagnosis regardless of the actual cost of treatment to the hospital. This results in a large administrative effort to prove after the fact that the services they provided were appropriate and necessary.
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