Economics - Supply and Demand

Martin Feldstein - A Better Way to Health Reform - washingtonpost.com:

A good system should not try to pay all health-care bills. That would lead to excessive demand, wasteful use of expensive technology and, inevitably, rationing in which health-care decisions are taken away from patients and their physicians. Countries that provide health care to all are forced to deny some treatments and diagnostic tests that most Americans have come to expect.

Here's a better alternative. Let's scrap the $220 billion annual health insurance tax subsidy, which is often used to buy the wrong kind of insurance, and use those budget dollars to provide insurance that protects American families from health costs that exceed 15 percent of their income.

From an economist's perspective, this makes sense. Fundamentally, there are two macroeconomic levers for keeping prices low: increase supply or decrease demand. A frequent criticism of "first dollar" insurance is that it makes health care consumers completely insensitive to price and consumption, and thereby encourages them to consume too much health care, and of the wrong types. Therefore, if you make everyone pay for the first "X" amount of their health care costs, you will reduce and rationalize demand because the consumers making the decisions will be exposed to those costs and therefore focus on and make better decisions.

Although that position is logically attractive and appeals to many Americans' sense of individual autonomy and self sufficiency, I think it is very wrong. Among the issues with that approach are:

1. For any market to work efficiently, the consumer making the purchasing decision must have full and complete information and be fully able, willing and qualified to assess the information and make rational cost-benefit based decisions. Lay people purchasing health care have none of this. Information about the relative efficacy of various options is very hard to come by and assess. Human beings who are sick, or whose loved ones are sick, are generally in a very poor position to make considered, rational choices. The information is concentrated with the medical professionals who, not coincidentally, stand to be paid more under the fee for service system based on the consumers' decision to buy their services.
2. Similar to 1, but worth calling out separately: theories of efficient markets assume that consumers are making voluntary purchasing decisions, that if the price is too high or the benefits too uncertain, the consumer will walk away from the purchase. It is easy to see the fallacy of that in many health care decisions. How much is too much for a parent to pay for life saving treatment for his or her child?
3. The "right" services may not be there to purchase. Our current health care delivery system is not set up to deliver services cost-effectively and efficiently to the retail market. Most parts of the country suffer from serious shortages of primary care providers, in no small part because we pay specialists so much more. Lower income areas may have few or no providers, other than emergency rooms. People who need health care will buy whatever is available, even if it's not efficient.
4. People making their own purchasing decisions will likely not go to the doctor unless they perceive that they are sick. The most efficient way to systemically reduce costs is to deliver the right preventative care and keep people from getting sick in the first place. It is demonstrably true that many healthy people will simply forgo the expense of the doctor, and therefore will not put themselves in a position to receive preventative care.

Those are just the high points. It's a bad pun, but I don't buy it. Market based efficiency focused on the individual health care consumer as the decision maker is a based on many false assumptions and will not work.