The Economics of U.S. Health Care Policy: The Role of Market Forces

The Role of Market Forces

Frank W. Musgrave

• Publisher: Routledge
• Year: 2015
• eBook ISBN: 9781317457244
• Topic: Business
• Subtopic: Business General
• Index: Business

Designed as a primary text for courses in health care economics and policy analysis, this comprehensive work places the issues and economic analysis of the health care industry in the context of market forces driving the industry, including negotiated markets, managed care, and the growing influence of oligopolies. Written in accessible prose, without the aid of technical jargon and mathematical formulations, the content is rich with applicable, understandable economic concepts and analysis, and examples of market failure and government involvement. Some of the major policy issues covered are drug pricing, Medicare and Medicaid reform, the medically uninsured, for-profit hospital monopoly price power, managed care competitive pricing, and new negotiated markets. The relevant economic concepts employed in the text include price elasticity of demand/supply, market structure from competitive to oligopolistic markets, monopoly pricing power, measures of health care inflation and the biases of the CPI, demand and supply factors, inverse relationship of present health care expenditures as a percentage of GDP, measures/concepts of efficiency, and the role of government in a market era.

1

Introduction

Health Care Choices, Trade-Offs, and Ownership of Health Care Resources

As a fool is about to dive into a pool of shallow water, an economist says in a whispered voice, “Someone is going to get hurt!” When the fool completes his dive by hitting his head on the concrete bottom of the pool, the economist shouts, “I told you so!”

Life is full of choices, costs, and trade-offs. To complicate matters, we want to have some control over our lives, the ability to have some say, or empowerment of the resources that we own, for example, human resources and those resources that affect us. This command of resources is a central issue in health care policies today. Do we want government to be in command of all health care decisions, that is, as a single buyer of all health care with a global budget that determines what, how, how much, when, and for whom health care services are produced? The economist would likely say, “You can take that path, but I will tell you what it will cost you.” There are trade-offs. The National Health Service (NHS) in the United Kingdom is an example of a socialized, or nationalized, health care system. In 1999, the NHS spent 450 million pounds (about $792 million) on contracts with private health care providers at competitive prices. Additionally, some NHS physicians are taking private patients in NHS hospitals for extra fees paid by NHS. Tony Blair, the prime minister, indicated that he had “absolutely no ideological problem” with these arrangements (Rogers 2000, p. 2). In other words, the U.K. government is the producer with the NHS hospitals and physicians (state operated and employed) and the provider of services through private contractors. This is explicit recognition of the inherent rationing of services in a nationalized system that has a budget constraint. However, in this situation the United Kingdom has allowed the underutilized private system to complement the constrained public system in order to accommodate the demand for health care services. This adjustment by the U.K. nationalized system is evidence of emphasis on access to health care with an acknowledgment of a private system’s ability to respond to consumer demand. Some in the United Kingdom are suggesting that their system is modeled like the former Soviet command economy, which was inefficient and not responsive to consumers. One of these critics, David Smith, suggests that “patients should have a price on their heads, and GPs [general practitioners] should compete to retain or attract them. The more explicit the fee, the more the new GP practices would be encouraged to move into the market and compete aggressively for patients” (Smith 2000, p. 6).

What does all of this have to say about choices, costs, and command of health care resources? Do we choose a nationalized health care system with a global budget and a single payer (the U.K. model)? If so, we are assured of financial access to services but are denied the choice of kinds and amounts of medical services, products, and providers that would be integral to a private market system. The market could spur a better connection between supplier decisions and preferences of consumers for a menu of medical services at prices they are willing to pay. Indeed, the purpose of markets, operating on a competitive basis, is to allocate scarce resources to their most productive (efficient) and desired uses. So, while nationalized systems emphasize equality or fairness in the form of access to services via a single payer with a global budget (one source-government), market-based systems emphasize responsiveness to consumer needs with financial incentives to suppliers. The market system engenders consumer choices predicated on individual preferences and constrained by prices and incomes. Perhaps, one consumer would prefer spending more on nutrition and exercise; a different consumer would prefer to forgo some current consumption on health care in order to save for the possibility of the need for long-term care; another consumer would prefer a variety of paraprofessional and electronic sources for health care, and so on. Theoretically, this market system, if competitive, would direct suppliers to produce services that consumers demand at the lowest possible cost in order to continue supplying the services with a resultant profit or surplus. The United States has the highest portion (over 50 percent) of health care expenditures that are privately funded compared to all other major industrialized countries (see Table 1.1 in the next section of this chapter). The United States produces over 50 percent of new pharmaceutical products and has the highest percentage (14 percent) of the gross domestic product (GDP) devoted to health care expenditures. In other words, consumers want to spend more on health care and they get more health care. Thus, the market system reflects consumer priorities and encourages more diverse and productive responses from suppliers of health care. However, just as the nationalized systems seek ways to satisfy consumer demand that gets rationed, market systems face the need to provide more access, particularly in the form of additional or universal insurance coverage. There are major gaps in the United States for the medically underinsured and the uninsured. Employers, faced with increasing premiums for employee health insurance benefits, have been reducing benefits for employees and increasing the share of costs borne by employees. Some small businesses have stopped all health insurance coverage for their employees. Some young adults have forgone insurance coverage. This topic will be covered more completely in Chapter 5, on the uninsured.

Early in 2004, the Institute of Medicine publicly issued a report recommending universal health insurance coverage in the United States by the year 2010. The report indicates that 43 million Americans are uninsured, including 8.5 million children (Institute of Medicine 2004, pp. 1–3). The government role would be to require coverage for everyone with vouchers, or tax credits for low-income families or individuals. The insurance would be through private insurance companies with government oversight. This universal coverage for insurance should not be confused with universal care with nationalized insurance. The latter in Canada has caused considerable trade-offs in the form of long queues for some surgeries such as heart bypass surgery, even to the extent of waiting in hospital corridors for hours or days and, sometimes, having the surgery in the corridor. When forced to operate at capacity to accommodate patients, the Canadian system rations care in the form of deciding who on the long list for surgery will fill the allotted surgical times for the day (Cherney 2003, p. 1). Thus, the United States has few waiting or queue problems but, as indicated previously, there are many who lack the financial means or the insurance coverage for health care. The Canadians have universal and nationalized insurance coverage but face the rationing of long waits. Another model of health care is a nationalized or socialized health care system where most of the care is extended through public (state owned and operated) hospitals and physicians and other professional staff who are state employees. This model of health care, or variations of it, is present in the United Kingdom, Australia, Italy, and Sweden. In these nationalized systems, there are also considerable waiting times for elective surgery. The United Kingdom has also experienced considerable loss of health care professionals to positions in the United States where pay is higher and the available state-of-the-art technology is attractive. Thus, even when nationalized systems are present, health care is not always available when and where patients seek it.

The Uniqueness of the Health Care Industry (Sector)

There are many features of health care that are unique with respect to institutional framework, role of government, and market initiatives. Although these differences are present in health care systems in many nations of the world, they are very evident and pronounced in the United States. We find that some of these features are being challenged by an ever-evolving system with more emphasis on market forces and institutional change than on government micromanagement. These features include:

• asymmetry of information

• the public-good nature of health care

• the inverse relationship between public funding and shares of GDP for health care services

• heavy regulation of the health care industry

• third-party influences

Asymmetry of Information

For markets to work well, even under competitive conditions, there must be information available to both buyers and sellers. However, in health care markets, there are pronounced differences between buyers and sellers with respect to possession of information. This asymmetry is clearly in favor of the providers of health care, that is, the physicians, hospitals, pharmaceutical companies, and the financiers of health care including insurance companies, pharmacy benefit managers, health maintenance organizations (HMOs), preferred provider organizations (PPOs), and managed care companies. This imbalance of information allows prices for health care to be set independently of the values that consumers place on health care services and the quantity demanded of those services. Therefore, prices cannot act fully in accord with consumer preferences, nor can consumer preferences act as a discipline on providers’ prices.

The Public-Good Nature of Health Care

The extent to which health care is viewed as a public good depends, in part, on the success of market-oriented systems relative to the success of government as a provider/producer/financier. Market directions in health care reform have taken place in many countries that had previously been examples of government-managed or nationalized systems. In Chapter 2 there is more extensive discussion of these matters. Suffice it to say that there is agreement that health care is a public good, but major disagreement on whether the government or the market should be the allocator of health care services. In many European countries, government-managed or nationalized health care systems have looked to the market for efficiency-based reforms while holding on to the role of the government in assuring equity, including financial access and macromanagement of payment systems. In contrast, the United States is looking to national (federal) direction to solve the problems of the uninsured and the underinsured as well as national assistance for seniors in the procurement of pharmaceutical products. Some of the public goods in the United States are really quasi-public goods, as in the case of Medicare (federal program of health insurance for older Americans). Medicare is a price-excludable public good since seniors must pay the first part of their hospital care as a deductible. Therefore, many low-income people consider this deductible as a barrier to health care; some low-income people are excluded from receiving some health care. The public-good nature of health care is evident in the heavy regulation of the industry.

The Inverse Relationship Between Public Funding and Shares of GDP for Health Care Services

For most of the advanced nations of the world, as the percentage of GDP devoted to health care expenditures rises, the percentage of public funding (as opposed to private funding) of health care expenditures falls. The converse holds as well. This is illustrated in Table 1.1. This inverse relationship may be attributable to the constraining effects of governments that assume major and increasing shares of the financing of health care services. These constraints take the form of placing limits on the quantity, types, and availability of health care services. In contrast, those countries that have r...

Table of contents

• Cover
• Half Title
• Title Page
• Copyright Page
• Dedication
• Table of Contents
• List of Tables and Figures
• Preface
• Acknowledgments
• 1. Introduction: Health Care Choices, Trade-Offs, and Ownership of Health Care Resources
• 2. The Mix of Health Services: More Market and More Government?
• 3. The Pricing of Drugs: Who Benefits and Who Pays?
• 4. Managed Care: Revolution, Evolution, or Devolution?
• 5. The Four “Cs” of the Uninsured: Causes, Characteristics, Consequences, and Corrections/Choices
• 6. Medical and Health Savings Accounts: Schemes That You Can Love!
• 7. The Medicare Reform School: Who Pays for the Rehabilitation?
• 8. Conclusions and Policy Implications
• Bibliography
• Index