No Con Economics

A number of pundits, including Jack Hough in a recent column in Barrons, believe in an optimistic future for health care in America.  They opine that some combination of market forces and the power of innovation will rescue this country from our outsized expenditures on medical care.  I too believe in market forces and the power of innovation; however, the economic and political dynamics of medical care in the US make the case for optimism far from compelling.

Hough makes three claims as to why he is optimistic:

• The high cost of medical care in the US relative to that in other high income countries provides an opportunity that will bring forth powerful forces that will tame this cost beast.
• Based on other countries’ experiences, and even to some degree what already exists here, competitors and innovators in the U.S. have the information needed to unleash the policies and economic activity that will markedly reduce wasteful spending.
• High prices (and expenditures) will give rise to a reversion to a mean that will save us roughly 4% of the 18% of GDP the U.S. presently spends on medical care.

None of these claims is supported by compelling evidence.  Furthermore, Hough makes no attempt to identify the barriers to change that have inhibited health care reform over at least the past half century. (See the above graph.)  The assumptions of low barriers to entry and abundant competition appear to be driving Hough’s optimism.  He makes no mention of the rapidly growing consolidation of health systems that has yielded vast market power in many markets (See M. Gaynor’s testimony to Congress.)  Such market power matched with the dominance of fee-for-service payment provides strong incentives for health systems (which are almost exclusively “not-for-profit” organizations) to expand their domains and market share rather than seek cost-effective means to improve the health of the populations they allegedly serve. 

To “flatten the cost curve,” we must find ways to assist those with chronic diseases, who account for roughly 90% of all medical expenses, to better manage their conditions .  High (and increasing) deductibles in fee-for-service based insurance plans will push us further away from the world of cost-effective medicine.  Since significant portion of the American population is underinsured and lack the means to meet an expense of $500 or more (see KFF.org study on Americans’ Challenges with Health Care Costs), Hough’s notion that we already have universal health care because “emergency rooms must treat everyone” is both laughable and dangerous.  Since emergency rooms can turn away stable patients, does he really believe that having access (perhaps at a considerable distance from where they live) to such services when they have unstable conditions means universal access and can have any positive impact on bringing down health care costs?

A case can be made for both the use of market forces and disruptive innovation to tame the health care cost beast; however, it must overcome the market power and rent-seeking behavior of the current suppliers of the vast majority of medical services.  Since most care is provided locally, that’s where the vast majority of the costs are incurred, and without a change in incentives and reduced barriers to entry by competitors, cost-saving innovations will not be very potent.