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Market-Driven Health Care Is Worth the Effort

The alternative to Medicare for All is a market-driven health system, but, at the moment, it has few champions. Republicans in Congress and officials in the Trump administration will fight “socialized medicine” in its many forms, but they show little appetite for advancing policies that would move decisively in a less governmental direction.

Their reticence, though regrettable, is understandable. An unavoidable lesson from other high-income countries is that voters like government-run health care. Conservative Prime Minister Boris Johnson, fresh off of securing a substantial majority in the U.K’s December election, has stated that his number one priority is securing more funding for the National Health Service (NHS). Voters see personal autonomy and responsibility as non-negotiable on most matters, but when it comes to their health needs, they want others—mainly their physicians—to make the majority of decisions for them, and the government to take care of the bills.

It’s not an irrational point of view. Consumers grasp that, when it comes to medical care, they don’t know what they don’t know. Even in the internet era, most lay patients are not in a position to second guess what their doctors recommend. Further, health care consumers have little faith that “the market” will offer them acceptable low-cost options, as it does in other sectors of the economy. To consumers in the U.S., billing for hospital, physician, and other medical services and products is an irrational and exploitative process to be avoided if at all possible. They want no part of it.

So, if voters are skeptical, and elected officials unenthusiastic, what’s the point of advocating for a market-driven health system? Isn’t this a hopeless cause? Why not make the best of government-run health care, as other rich countries have been trying to do for decades?

Growth and Value in Health Care

The reason is that the market, despite the political difficulties, offers something that the government cannot deliver: productivity improvement. Productivity growth is what allows enterprises to generate more value each year at the same cost, or the same value at less cost. The added value from productivity improvement goes to higher wages for workers, improved products and services, and rising standards of living. With productivity improvement, cost discipline in health care is possible while maintaining or improving the quality of services provided to patients. Without productivity improvement, cost control, imposed either by the government or private payers, will, by definition, lead to diminishing quality, likely in the form of waiting lists for care, undercapitalized facilities, and more restricted access to beneficial treatments.

Fifteen years ago, the McKinsey Global Institute released an analysis of the economic performance of thirteen countries across a dozen years. The principal finding of the report was that countries that opened their markets to competition saw the largest gains in living standards, and countries that tried to protect industries with regulations and barriers fared much worse.

Competition fosters productivity improvement because it allows entrepreneurial firms to introduce new ways of delivering higher value to consumers. In well-functioning markets, costly and inefficient enterprises fail because customers take their business elsewhere. The pressure to continually innovate and improve performance is a defining and pervasive characteristic of competitive markets.

While it is theoretically possible for productivity to improve in sectors with heavy state regulation and control, the track record here is not encouraging. A common problem with state control is the excessive power accumulated by incumbent providers of services, who use their leverage to prevent potential competitors from disrupting the status quo.

Waste and Bureaucratic Inefficiency

Proponents of Medicare for All argue that it is U.S. consumers, not those the residing in other high-income countries, who are suffering the most from a flabby and inefficient health system. They have a point. There is abundant evidence of costly waste and inefficiency in U.S. medical care. But that’s not because market-driven health care cannot work. The U.S. doesn’t have a market system, as consumers have almost no role in directing where resources are spent. Among other things, relevant price information is almost non-existent in the U.S. Most bills are paid by the government or large insurance plans, and so hospitals and physicians have little incentive to disclose pricing in a manner that would allow for ready comparisons with their competitors. New transparency tools are attempting to give consumers better information, but the process is too slow and partial to make a difference.

Critics of the U.S. system also point out that the controls imposed by governmental systems lower costs for patients and taxpayers. In 2018, Canada spent 10.7 percent of GDP on health care, while the U.S. spent 16.9 percent.

While it is true that tightly-run governmental systems tend to spend less than those with looser controls, that does not mean that tighter controls always and everywhere will produce more efficient systems for delivering services to patients. In Canada, the U.K., Germany, and many other countries, costs are lower than in the U.S. because the central governments have imposed price limits on what can be charged for the services provided to patients (in the U.K.’s case, the government essentially owns the hospitals and employs the physicians, which allows for an even stricter level of control).

Price setting lowers observable costs but does not translate automatically into productivity improvement. Indeed, in many cases, measured health spending will fall, but efficiency will suffer because of hidden costs. Among other things, price limits frequently push some suppliers out of the market, as the regulated price is no longer attractive enough to continue operations for some firms. With fewer suppliers, patients must wait to get the care they need. There are more than 1 million people on official wait lists in Canada. The average time to see a specialist after a referral from a general practitioner is now 10.1 weeks, up from 3.7 weeks in 1993. For an MRI, the average wait is 9.3 weeks. And these are the official measures, which may understate the extent of the problem.

Patients wait for care in the U.S. too, but not as long as they do in Canada. More than 60 percent of Americans requiring surgery are able to schedule it within a month of being advised that they need the procedure. In Canada, only 35 percent of patients are able to get surgery performed as quickly.

When patients wait for care, there are real costs, in the form of unnecessary suffering from untreated symptoms and prolonged anxiety about whether problematic conditions will be successfully addressed. One way to understand this cost is by considering what patients would be willing to pay for more timely service. If patients could speed up the care they receive in Canada and the U.K. by spending their own money, the cost differential with the U.S. would narrow.

Price and regulatory controls also limit innovation and quality improvement. Investors may pull back from putting capital into risky ventures, such as new drug and medical device products, if their returns depend entirely on payments set by the government rather than private payers. Moreover, with price controls, firms that otherwise might enter the medical services market with disruptive ideas or products might forgo doing so, as the potential returns might be too uncertain to take on the risk of failure.

Innovation and Incentives

The U.S. has been, far away, the world’s leader in medical innovation, owing to its relative openness to new products and its less constrained payment systems. This conducive economic and investment environment has led to the development of close to half of world’s drug products in recent decades, well ahead of the output of Japan, the U.K., Germany, and other high-income countries.

The world’s most talented physician candidates often want to emigrate to the U.S., because of its prestigious academic and clinical institutions and the higher salaries doctors can earn here. The average salary for U.S. physicians was $313,000 in 2019, far above what their peers earned in Germany ($163,000) and Spain ($63,000). While large numbers of foreign-born physicians are able to satisfy the requirements necessary to become active practitioners in the U.S., tight immigration rules and professional licensing hurdles prevent many other qualified candidates from serving U.S. patients.

The challenge for advocates of a market-driven system is to create the conditions that allow consumers to fulfill their necessary role. It is not as simple as pulling back on existing government regulations and subsidies. Sending consumers out into a completely unregulated market will only compound their disillusionment. The market for medical care has characteristics that requires some public regulation. Patients have limited capacity to question the judgment of physicians, which means there is a public role in enforcing high standards on the profession. Further, individuals with elevated health risks would pay more for their insurance, and may not be able to get insurance at all, if public regulation did not put some constraints on the market practices of private insurance plans.

Public policy can increase the role of consumers, and enhance their confidence in a market system, by providing structure around their choices.

The Role of Prices 

A good starting point would be to make it much easier for patients to compare prices for services that are amenable to such comparisons. These would be routine services and procedures that are self-contained and can be scheduled, like necessary but non-emergency surgeries. The federal government could strengthen the consumer role by forcing all providers of these services to disclose “walk-up prices” for a standardized list of interventions. Standardization will allow consumers to compare pricing on an apples to apples basis, which will intensify competition among those providing the services. The pricing should include all of the needed services to fully complete the interventions successfully.

The government also should require insurers to make available to consumers fixed dollar payments for the services covered in the standardized pricing list. The payments would equal the amounts the insurers would make for the same services to in-network providers.

These two changes would allow consumers to easily see if they might save money by going to low-cost providers. And it would encourage providers to set their prices low to attract patients.

Using Premium Support

For medical care that is not amenable to price shopping, consumers should be able to hire agents to manage costs on their behalf, and share in the savings when those efforts are successful. This is the essence of the managed competition theory of health reform, the key to which is conversion of government subsidies for enrollment into health insurance into defined contribution payments that do not increase with the expense of the plans consumers select (this reform is sometimes called “premium support”). Consumers would be free to select any insurance plan they find suitable, but if their choice charges premiums above a benchmark, they must pay the full difference themselves. Conversely, consumers selecting low-cost, high-value plans would benefit from the reduced costs.

With this reform, managed care plans would have strong incentives to continually cut their costs, with more efficient operations and by keeping their patients healthy.

Despite the resurgence of strong anti-market sentiments in some parts of the U.S. electorate, most Americans still see free markets, and not government policy, as the key to ever-increasing standards of living.

The challenge is to bring the dynamism and creativity that is evident in so many other sectors of the economy to the vast and expensive network of hospitals, clinics, physician groups, and other providers who are delivering high-quality care to U.S. patients but in a manner that is wasteful and expensive. Government cost controls could impose artificial limits on what is spent on these services, but that’s no guarantee of a more efficient and higher-value system.

Strong competition can work in health care like it does in many other sectors of the U.S. economy, but only if policymakers are willing to structure the market to present consumers with clear choices to get higher value care from providers who practice more efficiently than their competitors. While challenging politically, the payoff—better medical care at much lower costs—is too substantial to abandon for a lower-performing alternative.

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