Rethinking health care
Is the free market really working for you?
John Erik Stacy
The Norwegian American
This may sound crazy, but what if the free market drives the cost of health care up? That must be a nutty idea, right? We all know that a free market allows consumers to choose and companies must compete with each for those customers. So, why does health care in the United States cost so much?
Here, I want to suggest that the reason American health care costs much more than anywhere else is because market forces are all stacked against the consumer. I will agree that the market for health care is not truly “free,” because there is government involvement at almost every level. But I will argue that “nanny-state” meddling is not the primary cost driver. Rather, I assert that consumers have virtually no meaningful choices to make about the products they purchase, and that that important market action happens at other levels.
Consider how you get your health care. What choices are presented to you? It’s not like buying a flat-screen TV, is it? You don’t walk into a shop and see all your choices lined up, ready to go. Most of us don’t shop for health care at all. We get it from our employers. Well, most of us don’t get health care directly from an employer, but instead we become part of an insurance plan purchased by the company we work for.
Conundrum one: your company has you over a barrel
Now, I want you to consider how market forces work when insurance is a “perk” provided by your company. The “good” thing is that the company has some bargaining power when it buys health insurance for its pool of employees. Is that a savings for you? I don’t think so. The company just bought something that would cost you more to get without them. Will the company pass that savings on to you? I suppose it could, but it can also pocket the difference. The company can reckon that your “real” pay is about $6,000 a year more than your wages. Maybe what it costs them is $4,500. That difference is their advantage, not yours.
Sure, employer bargaining must create some downward pressure on the insurance market as a whole. But, clearly, the interest of the company and the employee are not wholly aligned here. In fact, the company is in principle able to profit on the difference it can negotiate in the cost of health care to its employees. Consider also how the many people stay in low wage jobs to keep their insurance, and how small-business owners are at a serious disadvantage in this game.
So, I argue that employers “profit” from high insurance premiums because their bargaining power allows them to “buy low and sell high” in the market of wages and perks.
Conundrum two: insurance isn’t simple
If insurance were a simple game, then the money made by insurers would be the difference between what is paid in premiums and what goes out in claims. But insurance is not simple. It would be stupid if insurers simply collected premiums and put the money in the bank for the inevitable rainy day. So, instead, they invest the money that comes streaming in from virtually every employer and self-insured household every billing period throughout the wide land and make it grow like only professional managers of massive portfolios in big American insurance companies know how to do. As well they should. Because making more money out of the pool is a good thing. Except they can make even more money if premiums are higher. Since when premiums are higher, the investment base is higher. And then they have more money to make more money out of. Hmm.
Here, the market force at work that drives up the cost of health care is that very one that insurers exploit to make money from money. Nothing in this part of the insurance game incentivizes bargaining with health care providers. Rather, high costs for drugs, doctors, and hospital stays allow insurers to charge more in premiums and feed more money into the pipeline. More money in the pipeline means more money to generate profit through investment. The insurance business does not want to pay big claims, no doubt about that. But it really loves having a substantial flow of money from you and me and Bobby McGee.
That is, insurance companies benefit from high premiums even if claims are proportionally high, because they profit from managing money. Insurers do not bargain to lower the cost of health services because it is not in their interest to reduce the stream of dollars that flow through their institutions.
Stating the obvious: everyone likes money, especially lots of it
Doctors deserve lots of money, because they went to medical school and that granted them superhuman powers. Drugs are expensive, because drug companies need to pay armies of eggheads to come up with new drugs. The same for medical devices, lab-tests, etc. And hospital stays, well, think of the number of people involved in any ward at any time of day, and you can guess why the bill is about 10 times what it would cost to stay at a Holiday Inn. On top of that, there is liability insurance in case someone screws up. We accept that, because we know that is just the way it is.
On the other hand, we hear rumors of other places where health care costs about half as much, and people still get their ailments treated.
I have heard experts say that American health care is twice as expensive as the same thing anywhere else because everything costs twice as much here. That is, every visit to a doctor, every lab test, every X-ray, every pill—double what it costs in other countries. And we Americans accept that, because we know that—hey—that’s just the way it is. Besides, insurance covers it. There may be a co-pay. But most of us ignore the roughly $6,000 a year paid (directly or “deducted” from your salary) for health insurance (which if it had stuffed into a mattress over 40 years would total $240,000, and had it been invested and earned 5% per year would have grown to about $720,000).
The market force at work here is that providers price for what the market will bear. And in the United States, the market will bear a lot. We experience a sort of learned hopelessness about the cost of medical care. The perception that the costs are beyond our control is largely true. The folks on the receiving end of this have a good thing going—everyone likes money, especially when there is a lot of it.
We also pay a lot to support Medicare
I have also heard an expert say that Americans pay just as much to Medicare as Europeans pay for their entire health care coverage. For people that read their W2 form, they will see the cost of Medicare. That is another chunk of change. Why is it that we only get to use that once we are old? And not for assisted living or nursing home care? It seems to me that where the government is involved, its effect is to keep a sweet-deal happening for the health care industry.
To sum up, my thesis is that market principles are at work in the American health care system, but these are largely between institutional actors and exclude the end user of health care services from meaningful decision-making power. Employers exploit the system, as do insurers and providers. No one really wants to talk about it (especially if they are on the “right” side of the equation), so it is likely to stay the way it is. Unless…??
This article originally appeared in the February 7, 2020, issue of The Norwegian American. To subscribe, visit SUBSCRIBE or call us at (206) 784-4617.