This is part four of seven in a series on how Health Care breaks typical economic models. You may find it helpful to start at the beginning.
Economic models are based on certain assumptions, and all this week we're talking about how the Health Care industry, by it's very nature, violates those assumptions. The things that compel us to action, economists call "incentives". Today, the assumption is that participants in a market are guided towards efficiency by market incentives. The producer has an incentive to outsell the competition. The consumer has an incentive to get the most for his/her money.
So what kind of incentives are at play in the market for Health Care? Let's look at providers, insurers, and patients separately.
People pay for care, and doctors, or at least hospitals, are generally paid by the procedure. This means that there is an incentive for hospitals/doctors to over-test. Now it's not quite so cut-and-dry as that. Obviously the potential disaster of under-testing needs to be considered as well--doctor's have an incentive to cover their asses. Regardless of what happens, the incentive is in place for the doctor to check as much out as possible, just to be sure.
A similar, and perhaps more daunting, side of the incentive scheme is that treatment is far more profitable than prevention. And this is not to say that doctor's consciously neglect their patients for a future payoff, but the incentive is certainly in place for health care providers to focus more on making sick people well than on making well people healthier.
As for the insurers, they find themselves in the unique position of losing money when they do their jobs. They have an incentive to not pay anything, and this manifests a couple different ways. First, there's the huge traffic in recisions that I talked about yesterday. Second, there's the bargaining factor. Insurance companies pay substantially less to the hospital than an individual patient would. I've seen instances where, literally, a quarter-of-a-million dollar hospital bill to the patient translated to several thousands of dollars to the insurance companies once the paperwork got settled. Mind you, that's not thousands of dollars paid
to insurance, that's thousands paid
by insurance. That's a 99% reduction, give or take. The patient's (or rather her family's) co-pay was about $150.
Since medical costs are slashed for the insurance companies, it stands to reason that they would be inflated for the uninsured.
Lastly, insurance companies can at least delay payment (and also treatment) through red tape and obfuscation. Think that's not important? Then you don't know what the interest would be on $10,000 sitting in the bank for a few months rather than being paid to the hospital if they can put it off that long, or worse, if the patient gets so sick of paperwork that they forgo treatment altogether.
So between the doctors and the insurers, no one has an incentive to make the patient healthier. The doctors don't get paid as much for that, and the insurers lose money. It seems the only person looking out for the patient's interest is, in fact, the patient.
Trouble is, the patient is about the least qualified person in the world to be dealing in this market. Not only are patients chronically under-informed, but the proximity of the patient to their own health problems makes them act slowly, and the costs of inaction can far exceed the costs of action. What we have here is a variant of the classic
monopolistic monopsonistic bargaining problem. Monopolistic means that there is exactly one seller. Monopsonistic means that there is exactly one buyer. And in the case of a medical emergency (or perceived emergency), the market for your treatment for your problem is you, and it can only be provided by the emergency room that is nearest. Sure, doctors have other patients, and sure you could drive an extra twenty miles to the hospital (assuming you can drive), but essentially the monopoly/monopsony relationship holds.
Another example would be a hostage negotiation. And the hallmark of hostage negotiations is that they end up in a standoff that takes forever, despite the fact that a standoff doesn't do anyone any good. All parties are better served by negotiating quickly and resolutely and getting on with their lives, but because of the monopoly/monopsony relationship, negotiations are tedious, taking hours if not days. No wonder there's a growing industry in pirate-captive arbitration. So how does this play out for patients?
Let's say you start having chest pains. It could be acid reflux, but it could be a heart-attack. If you go the hospital, you're going to get billed. But if you don't go to the hospital, you might die. So the bargaining begins--do you, don't you? You put it off for minutes, maybe hours, maybe until your spouse gets home. That time could make the difference between life and death, but you bargain because you're dealing with what is essentially a monopoly on your health.
So let's say you decide to go the hospital. The hospital admits you and monitors you, but they don't know if you're going to pay. They'll treat you to make sure you don't die; they want to save your life, but they know that a lot of uninsured people get emergency care and then leave without paying. They know that their doctors have an incentive to over-test, so whatever is being prescribed (and might not get paid for) may or may not actually be necessary, and they also know that your insurance might get canceled and then you wouldn't be able to pay anyway. Once they've provided treatment, they can't take it back, so they bide their time, which might or might not be detrimental to your health, because they're bargaining against someone with a monopsony on your treatment.
So the doctors have an incentive to be over-protective, but the hospitals also have an incentive to be overly cautious. Patients have an incentive to be cautious, but mostly because they don't know any better, and insurers have an incentive to back away slowly, twiddling their thumbs, hoping no one notices. Again, I don't want to cast aspersions or make any assumptions about the way hospitals and doctors actually operate, but the market is creating these incentives for them, and incentives are not the same as action. But incentives
are important, and these are all pointing away from efficiency. So the model breaks and the market fails.
Just as a final word, it is extremely common for the government to intercede when incentives add up to the wrong conclusion. It's quite common for a market to produce incentives towards undesirable ends. In the market for wages, for example, buyers (employers) have an incentive to pay their workers the lowest wage possible, but that wage might be less than a person needs to survive, and indeed, when there was a surplus of labor around the turn of the 20th century, many people starved despite working sixty and seventy hour weeks. Therefore, we have a minimum wage. The precedent is there to adjust broken models.
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