Here is an edited re-post about market failure that I have already written about here at the buzz. The original and some conversation that followed with others can be read here
The cause of the health care problem is market failure. Say whatever you like or dislike about the ‘free market’, but empirical evidence has shown us that it is not a good way to deliver health care
because that is not the market’s primary purpose – which is maximizing profits. If we all drop our partisan identifications as our basis in viewing this problem, and take a look at the economics, we might find better answers to the problem.
An efficient market requires these things to work properly: For the producers to operate under conditions of perfect competition – this requires a rigorous set of conditions (perfect information, a uniform product, many sellers and buyers and freedom of entry and exit) – which secures that sellers are price takers, producing at the lowest possible cost in the long run and earning profits. In the health care industry the number of sellers is limited and restricted, while the number of buyers is uncontrolled and could be considered almost infinite. Add to this fact is that the buyers have no freedom of exit from the health industry. (ie. The buyer says, “Well, I disagree with how much you are charging for a heart bypass, so I’ll just skip on down the street to the next guy who is doing them for cheaper.”) And, regardless of how healthy you are, we all know that all
of us will be forced to engage in this industry.
The above elements, along with the massive lopsidedness of information, the monopoly power of hospitals, and the atypical nature of health care are all clear violations of the perfect competition requirements for the market to function as the theory suggests.
Furthermore, in a market the price is supposed to be established not by the buyers or sellers, but through a thing called market forces (supply and demand). In the health care industry the market forces fail to institute either price or quantity because demand is price-inelastic. (ie. the seller controls the price absolutely and the buyer has no choice but to engage, unless they want to chance serious illness or death.) However, in America, the person will get treated with or without insurance, but those without insurance will get pushed over to the public sphere and the taxpayer will end up footing the bill. And as Dr. Steffie Woolhandler and Dr. David U. Himmelstein stated in their research paper, “We are already paying for National Health care, but not getting it.”
So the market has failed to establish price and quantity, and the health care providers have become price-makers and the buyer has little or no choice in the matter - market failure
. So why do the majority of DC politicians continue to promote privatization of health care if it is failing? Market reform is a joke because of the inherent non-market nature of this industry. And, this is all before
the insurance companies even step into the picture.
Next, we add the inherent function of insurance corporations: to maximize shareholder value, and not
provide health care, as their number one objective. The insurance corporations exacerbate the problem through exploiting the market failure to maximize profits for shareholders. The New England Journal of Medicine published a research article that explains how 31% of health spending in America
is wasted on administrative costs. To compare: The overhead cost of running the non-profit Medicare system is 2%. Another study done by the same authors provides empirical data to prove that the private health industry is increasing costs
, and not decreasing costs like the theory suggests it should.
Let's not forget this important point: All other advanced industrial countries throughout the world have already figured this out, so it is not as if we need to re-invent the wheel to solve our health care spending problems. It's as simple as this... we could take parts of that country's wheel, and the other country's wheel and create an even better wheel. It's possible. Hell, there are even some sane economists working for the U.S. Government Accountability Office who have already suggested such a thing. But, crickets are still chirping on that one...
Here is what the GAO wrote
"If the universal coverage and single-payer features of the Canadian
system were applied in the United States, the savings in administrative
costs alone would be more than enough to finance insurance coverage
for the millions of Americans who are currently uninsured. There would
be enough left over to permit a reduction, or possibly even the elimination,
of copayments and deductibles, if that were deemed appropriate.
If the single payer also had the authority and responsibility to oversee
the system as a whole, as in Canada, it could potentially constrain the
growth in long-run health care costs. Measured either on a per capita
basis or as a share of gross national product, health care costs have
risen at a dramatically slower pace in Canada than in the United States.
The difference reflects Canada’s low administrative costs, controls on
hospital budgets and on the acquisition of high-technology equipment,
and fee controls for physician services."
They go on to conclude that many elements of the Canadian system (universal access, uniform payment system, and expenditure controls) should be worthy of consideration for US reform and that they should take these worthy elements and combine and build upon the "unique strengths of the existing structure of US health care."