Recycle your bits, as well as your atoms

This is something I posted a while back on Stayin' Alive. I think it will help establish the foundation that Blake is building here.

Here's a little essay I wrote with my colleague Anthony Schlaff, MD, MPH. (He asked me to tell you that the MPH is the important part.) We couldn't get it published anywhere respectable, so you'll just have to put up with it here.

Lost in Space

Imagine you are on a scientific team planning a trip to Mars. NASA tells you to prepare based on the following assumptions:

1) There is a breathable atmosphere on Mars

2) There is drinkable water on Mars

3) The temperature on Mars averages 60^o Fahrenheit.

4) You can travel faster than light

Edgar Rice Burroughs did exactly that. But would you sign up for the trip?

Those who claim we can solve the problems of health care access and cost through the “free market” are thinking like Edgar Rice Burroughs. If you ever took an economics course, your teacher probably introduced you to the key assumptions of market systems. They include:

1. Perfect information – Buyers know everything, or at least enough, about products offered for sale and the possible alternatives to make a “rational” decision.

2. Consumers generate demand, all transactions are voluntary – Buyers decide what they want, and when to buy it.

3. Balance of market power – There are many sellers and many buyers for every product, who freely compete.

4. No externalities – All of the costs and benefits to society that result from a transaction are felt by the buyer and seller.

5. Adequate circumstances and justice.

Do any of these apply to health care delivery? Not a one!

Information: Fundamentally, what we buy from our health care providers is expertise. Because we usually can’t assess their competence ourselves, doctors, nurses and therapists have to go through legally approved training and be licensed by the state.

Demand: Imagine if Ford and GM could decide when we needed to buy a car – that doesn’t sound much like anybody’s idea of the free market. But doctors tell us we need surgery. That’s called provider-induced demand. While doctors try to be responsible and objective in their decisions, it has been shown that the way in which they are compensated does affect the amount and kind of medical services that they prescribe.

And our consumption of medical services is frequently not voluntary at all. If we have a dissected aorta, you could argue that in some abstract sense we could choose whether or not to have surgery, but common sense tells us we are compelled. We could even go into the Emergency Department unconscious, and only find out later what services we had received.

Market power: We can go to the supermarket and pick from a dozen brands of toothpaste, and most of us can also choose where to shop. But outside of the major cities, most regions are served by only a single hospital. Hospitals are very expensive to build, equip and operate, so it would be wasteful to have more, but that means our choices are limited. There are also structural reasons why most of us have at most two or three insurance companies to choose from, and of course many drugs are patented.

Externalities: Although we are most familiar with so-called negative externalities, such as air pollution from automobiles, medicine actually has many positive externalities. Treating and preventing infections benefits people who would otherwise catch the disease. People who can’t work due to preventable or treatable disease and disability contribute less than they could to the economic support of their families, the net economic production of society, and non-monetized but socially important activities such as child rearing, homemaking, etc. And there are what might be called moral externalities. Most of us would be troubled by large numbers of people with treatable illnesses in our midst, and even more distressed if those included people we knew and cared about.

Justice: We never know when we or our loved ones might suffer from a serious disease or an injury. Most people cannot possibly save enough money to pay for their care if they are badly injured in a car crash, or their child is diagnosed with leukemia. Such events can bankrupt people and destroy their lives. That is why we have insurance – to spread risk, so that everyone pays an amount they can afford, and those of us who suffer misfortune are taken care of.

Last year, our old friend William Frist, M.D. (of the long distance diagnostic powers), in a lecture at the Massachusetts Medical Society, said, “We must agree on a guiding principle: all Americans deserve the security of lifelong, affordable access to high-quality health care." It's nice to have a principle that says people deserve it, but it's even nicer to have a plan that will give it to them. This Senator Frist does not have. His system of "consumer driven health care" is driven by consumers in the sense that they pay for it, out of their own pockets. People who earn more than $40,000 per year "should be encouraged, through changes in the tax policies, to buy themselves and their children high-deductible catastrophic insurance coverage." They would then pay for routine care through tax-free Health Savings Accounts (HSAs). Frist also wants to eliminate the tax policies that encourage employers to provide insurance. He says that the system of employer-provided health care "has been universally blamed by economists for inflating health care costs." However, the reference he gives says no such thing, and the assertion is false.

The truth is that economists blame our fragmented system for our high costs, but Frist's solution is to make it even more fragmented. The other wealthy countries spend much less on health care than we do, and get better results, because they have concentrated market power on the purchasing side, either single payer systems or multiple payers who work within budgets established by governments (e.g., Germany). By driving a bargain, they get lower prices for drugs, medical devices, etc. Also, in our complex system, each provider needs systems for billing dozens of different payers, while the payers have their own overhead and marketing expenses. A quarter of total U.S. health care spending is on administrative costs. Note that in our public insurance programs -- Medicare and Medicaid -- administrative costs are far less.

In the real world, the people who establish HSAs will mostly be healthy and wealthy. These people will no longer be in the pool for comprehensive insurance, the price of which will then rise. Although Frist appears to believe that insurance will be more "affordable" because of competition among providers and health plans, the fact is, they already compete in a market with many large, powerful corporate buyers. By phasing out employer-provided insurance, leaving individuals try to buy insurance on their own, this concentrated purchasing power will disappear. Frist's world is a jungle in which the fortunate will be rewarded and the rest of us will be unable to pay for health care.

Medicine is not just a private good, it is also a public good, like park land, national defense, or law enforcement. It is in fact a mixed good, like education, benefiting both the individual and society. Hence, if we leave it up to the consumer to decide when and what to buy, the public good represented by medicine will be underproduced. Imagine if the "Ownership Society" included the elimination of public education -- the logic is the same.

Champions of market reform in health care have been getting away with proposing fiction as reality for far too long. Both theoretically and empirically, the key market assumptions described above have clearly been shown not to apply to health care. Let’s come back to earth and stop pretending that they do.