Can a free market in health care really exist?

by James Matthew Weber

Some like to talk about a “free market fix” to health care. However, health care and free markets are a contradiction.

A free market is an environment where neither the buyer or the seller is compelled to act. There is also an assumption of some level of transparency within the market. In other words, consumers and sellers know what goods and services cost, and can shop around for them.

Both features are notably absent in health care.

Most of the money spent on health care is spent on those who are compelled to act, or others who are compelled to act for them. If you are injured in automobile accident, will the ambulance allow you to shop around for the lowest cost treatment? Will they take you to the hospital of your choice? Of course not.

How much will your hospital treatment cost before you receive it? Call a hospital and try to get a price on a chest CT scan, along with a price on the radiologist’s professional fees. I wish you luck.

Consider another example I have witnessed, where hospitals within the same system can have large price discrepancies despite being just miles apart. Both are owned by the same not-for-profit corporation. Both use the same brand multi-slice CT scanner. However the “sticker” price on the scan from one is twice as much as the other.

And even if the hospital bills it, there is no relationship between the bill and what the hospital has agreed to accept as payment in full for those services.

The reality is that real pricing is anything but transparent, and both insurance companies and hospitals prevent consumers from having any idea of what health care actually costs. Worse, the uninsured are expected to pay the full, billed price, which is often several times more than what the hospital has agreed to accept from an insurance company.

So, anyone who expects a free market to fix health care simply doesn’t understand what a free market is.

Health care is not a free market, and certainly does not have transparent pricing.

James Matthew Weber is a regular reader
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  • Evinx

    The author accurately describes many problems that currently exist in our healthcare system – BUT, erroneously, attributes these to the free market. FYI – we have not had a free market in health care since the end of WWII when the govt (bcs of wage + price controls) allowed companies to offer a tax free benefit of health insurance.

    Once we stop the third party payment issues – from which the perception of free healthcare originates – we will make a huge step toward a free market system. Our present system is a defective mutation thanks to Uncle Sam.

  • http://drbrenner.blogspot.com irb123

    This is an important point you make. The current system is not a free market. It is now a socialized system. Therefore normal supply/demand/price movements cannot occur in this system. Which is evidenced by the fact that more competition does not lower prices (which are fixed by government/insurers) as should happen. Thus, “free” and “market” should never be used in the same sentence has healthcare.

    In my blog: http://drbrenner.blogspot.com/2009/06/dr-brenners-prescription-for-change_04.html I make some more points on why we don’t currently have a free market, which echos what evinx said above.

  • Jay

    It seems there is a large misunderstanding of what a free market is and a misbelief that our current heavily regulated government system is a “free market”… It is not. This is obvious in the lack of consumer facing price structures that you astutely address. I believe it was Nixon that passed the HMO act into law in the early 1970′s that has given rise to the government protected mega providers that exist today. We need to dismantle this sort of market manipulation and return to free markets and free choice.

    Further, to assume that healthcare as a business can not get it’s act together enough to provide pricing to consumers is very flawed. It has no need to do so in the current environment but this does not mean it can not do so. It used to be that doctors in private practice provided price to customers based on competition within their industry. Going back to a competitive and decentralized system has all the workings of bringing back price competition once again.

    We need to educate ourselves on issues of economics (preferably austrian economics) before we make rash collective decisions about any industry. In truth the fact that the economically illiterate can vote these types of changes over an entire industry is scary and will not result in anything good or functional. I will propose that precisely this has gotten us to our state of disfunction already. More will not fix it.

  • http://www.epmonthly.com/whitecoat WhiteCoat

    I disagree with the definition Mr. Weber uses for “free market.” If neither party is compelled to act, then how do transactions occur? Compulsion is required on both sides of the transaction. The buyer must want a product enough to pay the seller’s price for it and the seller must want to sell the product enough that he will meet the buyer’s price point. Want a Beanie Baby stuffed animal? Now they’re a dime a dozen. In their heyday, they were worth more than $50 each. Then, people were compelled to buy them so the price was high. Now, there is little if any compulsion and eBayers can’t give them away.
    Agree that price transparency is necessary part of the equation. How odd would it be to walk into the grocery store and pick things of the shelves without prices, then walk up to the cashier, have the cashier look at your cart, and say “that’ll be $305.47? There would be public protests if this scheme happened in a supermarket, but such “don’t ask don’t tell” pricing is business as usual in health care – because consumers aren’t directly paying for the services. The only consumers who care about pricing are those who have to pay for the services.
    Consider the effects of the free market on pricing for Lasik surgery and other plastic surgery procedures where no third party payors are involved and you’ll start to get the idea.
    As Evinx and Ilene alluded to above, before a free market can be effective, it first must be implemented.

  • Medical Student

    I think that there is, in general, a lot of misunderstanding as to what a free market is. A free market is not an unregulated market. In order to be truly free, a market has to be free of monopolies and it has to be free of externalities. Medicine can’t easily be either of these.

    As James mentioned, hospitals have a natural monopoly on healthcare in an area, particular for emergency care. In this respect, medicine is similar to bus lines and water pipes. People use the bus line that goes by their house and the water that flows through their pipes. When they’re having a heart attack, they go to the hospital in their neighborhood.

    And regardless of the system that we eventually adopt, health care will continue to be rife with externalities. The strength of our economy is directly related to the health of our people, and when americans get poor healthcare the economy suffers as a whole. In this respect health care is similar to education; just as individual americans are harmed when america as a whole is less educated, we are also harmed when america as a whole is less healthy.

    It may be possible to overcome these things to make health care more “free market”. We could have groups of doctors underbidding each other to receive privileges in a hospital, or we could institute some kind of tax incentives or vouchers to encourage americans to take care of their health for the sake of the economy, but in order to overcome the natural clash between medical ideas and free market ideas, it will take much more regulation rather than much less.

  • Bob

    The previous commenters have hit the nail on the head. There is currently no free market in health care and that is why it is we have the problems that we do. To blame the free market is to admit that you don’t understand economics. Of course, if you’re a doctor by trade I don’t blame you for not being familiar with the specifics of another discipline. But just like it would be ridiculous for an economist to being giving medical diagnosis’, it is equally ridiculous for a doctor to giving economic advise.

    If you are really curious and want to look into how to REALLY solve the health care problem then you should do as Jay said above and look into “Austrian Economics.” A great site to start is the Ludwig von Mises Institute at http://www.mises.org.

  • Med Student

    You are incorrect. You said in the article that an ambulance will not take you to a hospital of your choice. That is a false statement. Ambulances will take patients to whichever hospital they choose as long as the hospital is equipped to deal with the injury/insult. And of course, if the patient is unconscious, the medics will follow protocol and go to the nearest facility.

  • TwoFists

    great article and great comments. I would like to add that a free market could exist in medicine. yes there are going to be some areas of health care that you can’t shop around, or even make decisions for yourself, but these are not unique to health care. the majority of health care services could be well served in a free market system (if the law would allow it). patients do drive past several qualified doctors and hospitals to go to better ranked doctors and hospitals. hospitals, doctors, and health plans could post prices. you may get sticker shock the first visit but you can make a decision about where to receive future care (this is no different than going to one car shop and getting burned by the cost and service and going elsewhere the next time you have an issue. quality surveys, reviews are already making an impact on medicine. someone could have a card in there wallet that says what hospital they wish to go to if they are unconscious. (rural people often only have one grocery store in the area – no one is complaining that the government should come in and take over because there isn’t perfect competition.) the point is there are solution, many of them that can and would work in a truely free market system. we have haven’t had a free market in medicine for years, so how about some change and lets give it a try.

  • jsmith

    Free market is a non-standard term, typically not used in econ texts. A better term is perfect competition. A market with perfect competition has many buyers and sellers, so that no one entity can affect prices (no monopoly or monopsony power), where goods are all the same (as in the winter wheat market) ,where buyers and sellers know all prices, where there are no barriers to entry or exit, and no transaction costs. Such a market can be proved to be Pareto efficient, meaning that it is impossible to make any market participant better off without making at least one other market participant worse off. Better off is also strictly defined. The health care market does not even vaguely resemble perfect competition,as many posters on this thread have noted.
    I really don’t know what free market means and am not sure there is a precise economic definition. Please post a precise definition if you know one.

  • Med Student

    Wow Medical student. You seem to have the wrong idea. It is really frustrating that more and more young idealistic students are entering the field of medicine with little or no understanding of economics or the American way.

    We need as little regulation as possible and a free marketplace to produce the best medicine for the most people. If the product we offer is right, the people will want it. If not, another doctor will produce and the people will go to him/her. It is really as simple as supply and demand with respect to quality of care.

    The last thing I want to do is work in a medical system with more regulation…. I will walk the streets homeless before I let the government manipulate and distort the field of medicine anymore than the insurance companies already have. It makes me sick to see other doctors who actually think that government intervention is somehow a good thing… Boggles my mind. Tell me one thing the government has taken charge of that has worked. I have worked purely in government for 15 years. City, County, State and Federal. Government is inherently inept, fraudulent, corrupt and wasteful. Furthermore, their intervention in most matters only breeds a sense of entitlement to young generations who learn to depend on the government tit. You got me off on a tangent… Ok I’m done. Goodnight.

  • David

    jsmith,

    This definition will do:

    http://en.wikipedia.org/wiki/Free_market

  • Matt

    The argument for a free market in health care is that consumers need more information on 1) price and 2) quality so they can make an educated buying decision.

    This does exist in some corners of healthcare…cosmetic surgery, for instance.

  • TwoFists

    Simple put a free market is one in which there is:
    1) Freedom to set and change prices
    2) Two parties are free to negotiate, exchange, and contract on terms that bind the two parties. (the complete fulfillment of this point would mean the non-existence of a territorial based monopolistic legal system aka government as we currently know it)
    3) property right are respected, (intellectual property is not an inherently free market principle)

    free markets exist in a gradient as the nature and scope of these principles exist.

  • Matt

    There will never be a free market in medicine as long a the principal providers, physicians, keep agreeing to be paid in lockstep regardless of their particular skills. Physicians whine constantly about how they want a free market but precious few do anything about it.

  • http://linkedin.com/in/1samadams Sam Adams

    Kevin – great article but I’ll echo some of the comments here that the situation today exists not because of the free market but in spite of it. Obtuse federal and state regulations and collusion between certain parties in the healthcare vertical are keeping it locked away and mired in early 20th century modes of business, complete with robber barons.

    The loosers in this are the well meaning clinicians, hospitals and patients.

    A TRUE free market solution would do a lot to clear the sclerosis in the system.

  • jsmith

    David, If free market =no gov regulation and intervention, then …. you know the rest.

  • Medical student

    These discussions about free markets always make the same wrong assumptions about what makes a market “free”. A free market is not the same as an unregulated market. In order to achieve a free market we have to regulate. Markets are kept free by antitrust regulation and by using taxes to smooth out externalities (through environmental protection laws, for instance).

    Health care has more eccentricities than most other markets with respect to monopolies and externalities, so it will take a lot of regulation to make the market function the way we expect free markets to function. Regulation is not the same as socialization, and that seems to be the argument that people on the right make.

    Health care reform is designed to smooth out the externalities of health care. By subsidizing insurance for the poor we can ensure a healthier work force and grow the economy. This is a clear parallel to elementary education. If Americans in general aren’t educated, then we are harmed individual by a stagnant ecomony. We remove this externality by ensuring that all americans receive education through government-funded schools… Vouchers would work just as well, but the important thing is that markets with heavy externalities have to be heavily regulated to insure that they remain “free”.

  • Anonymous

    These discussions about free markets always make the same wrong assumptions about what makes a market “free”. A free market is not the same as an unregulated market. In order to achieve a free market we have to regulate. Markets are kept free by antitrust regulation and by using taxes to smooth out externalities (through environmental protection laws, for instance).

    Health care has more eccentricities than most other markets with respect to monopolies and externalities, so it will take a lot of regulation to make the market function the way we expect free markets to function. Regulation is not the same as socialization, and that seems to be the argument that people on the right make.

    Health care reform is designed to smooth out the externalities of health care. By subsidizing insurance for the poor we can ensure a healthier work force and grow the economy. This is a clear parallel to elementary education. If Americans in general aren’t educated, then we are harmed individual by a stagnant ecomony. We remove this externality by ensuring that all americans receive education through government-funded schools… Vouchers would work just as well, but the important thing is that markets with heavy externalities have to be heavily regulated to insure that they remain “free”.

  • Evinx

    @Med Student
    I think you are confusing health care and health insurance. Reform is essentially about health insurance. And there are tons of regulations (state and federal) on health insurance. Your argument seems to be that our existing health insurance industry is a free market that though it is regulated needs more regulation and more control by govt. FYI the govt already control 45% of the market now thru Medicare, medicaid + Schip. There are dozens of mandates by states and all mandates end up being promulgated by special interest groups.

    If you truly want more insurance options for consumers, more pricing choices, and more people covered, we need the govt to allow more us more freedom, not less.

    You mention anti-trust and yet, you seem to be arguing for govt monopoly/monopsony power.

    Who is responsible for business providing health insurance as a tax free benefit – distorting consumer choices?

    Who is responsible for the typical 50 mandates policies must have (ie, catering to lobbyist groups to include their clients)?

    Who is responsible for price controls on doctors and hospitals thru their reimbursement polices and the consequent cost shifting?

    Who compels that workers to pay nearly 3% of every dollar they earn to pay for Medicare – which is actuarily a disaster?

    I could go on but the answer is always the govt, ie political considerations drive policy, not ethics, not morality, not altruism.

    And then you need to explain why pricing for cosmetic procedures and lasik (which is actually cheaper today than even 5 years ago)are not increasing anywhere near other medical procedures.

  • Anonymous

    What is interesting is that the types of medical care for which the market is closest to a free market are those which are largely optional and not subsidized (by employer or government provided insurance schemes), like cosmetic procedures and vision correction procedures like LASIK.

  • jsmith

    Medical Student, You and Wikipedia disagree. It says regulation implies a controlled market. But thanks for making my point. It is impossible to have a discussion about free markets when people do not agree on the definition. I will note in passing, however, that no externalities is not a required assumption for the perfect competition model. If no externalities is a requirement for your definition of a free market, OK then.
    Free markets is a vague term, suitable for political rhetoric but not careful analysis. Better to specify the exact market conditions to avoid wasting time.

  • Medical Student

    Evinx,
    I’m not arguing for government monopoly power, I’m saying that framing the debate as (Free market = unregulated market) and (regulation = socialism) is disingenuous. Free markets, as we commonly use the term, don’t exist without regulation, and a great deal of regulation would be required to get health there.

    Actually, I believe that we can regulate health care in a way that brings it closer to the free market ideal, while still enacting the social policies that we desire. For instance, mandatory health insurance and health insurance subsidies help control the externalities in the same way that mandatory education controls the externalities of that market.

    Jsmith,
    I may be using the term “free market” in a non-standard way. I think that it requires perfect competition, which in turn requires regulation to prevent monopolies, and that it requires a lack of externalities. Maybe my requirement on externalities is not normal for this kind of debate, but it seems like an obvious requirement to me. At least, free markets are a known menace without controlling externalities. Who wants to repeal environmental legislation?

    By the way, if perfect competition implies pareto efficient, and pareto efficient implies that it is impossible to make any market participant better off without making at least one other market participant worse off, then shouldn’t perfect competition imply a lack of externalities? If there is a market with positive externalities, then each transaction that is made makes everyone better off to some extent. If the effect is big enough, then shouldn’t it be possible for everyone to receive a net benefit without anyone being worse off?

  • Evinx

    @Medical Student
    We have mandatory automobile insurance and yet 14% do not buy it. The market, on its own, came up with unisured/undersinsured coverage.
    How do you explain the 14% non-complance?
    The problem with intelligent people (I’m giving you a compliment) is that they think they can design something better than markets do. Sorry, it just ain’t so!
    Over-regulation got us in this mess and until the American populace realizes it, things will not improve.
    Politicians and regulators are not altruistic – they pursue their own interests. That is why govt programs continually fail and why markets keep evolving and succeeding.

  • Medical Student

    Evinx,
    Do you believe in antitrust laws and environmental protection? Those are two key government intrusions that allow markets to function. Now try to transplant those ideas to health care. That’s what I’m talking about. Not designing something better than a free market, but regulating the market so that it can approach being “free”.

  • Evinx

    @Medical Student
    OK, please be specific. What regulations do you want to make the market more “free.”

  • Jay

    “Do you believe in antitrust laws and environmental protection? ”

    Not to get off topic here… But no. the market is built to protect these concerns as well if allowed to do so. Private property and support of common law are great solutions to environmental issues.

  • http://linkedin.com/in/1samadams Sam Adams

    The problem is that there is a tendency in politics today to shift the pendulum, nay teleport it, to the opposite extreme. So instead of an intelligent (ha! DC!), appropriate set of measures we’re going to get hyper-regulation – and still numerous root causes are going to be glossed over, as patient rights, right to choose, tort reform, etc.

  • Medical Student

    Jay,
    Without regulation the free market does not have built-in environmental protections. This is a well-known fact, it’s called the tragedy of the commons. If profit can be made by damaging the ozone layer, then the market incentivizes corporations to damage as much as possible, because if they don’t do it, then somebody else will. As for monopolies, history clearly shows us that in the absence of outside regulation free markets develop monopolies. The health care industry has its own built-in problems of externalities and monopolies, which require that it be regulated.

    Evinx,
    I’m not proposing specific policies here. My point is that this debate is equating “free markets” with “unregulated markets”, and I think it’s a little naive. If your idea of a free market includes perfect competition, then the market must be regulated. Likewise, if you think that transactions in a free market should be free of externalities, then regulation is also required. I think that the health care market can be made more free, but not by deregulating it.

    Sam,
    Your point is well taken, but it’s an issue inherent in our political process and not an economic problem per se. I am a little tired, though, of the right-wing claiming that the government can’t run anything (not that you’re necessarily saying that). As a veteran of the army, I think that we do a pretty good job of winning our nation’s wars. The NIH has funded the best science in the world for decades, NASA got us to the moon… Frankly, it’s ridiculous to say that the government can’t do anything. Is that how we became the dominant nation on earth, because our government can’t do anything?

  • jsmith

    Med student, Pareto efficiency refers only to market participants. It says nothing about whether a given transaction affects the outside world. Externalities, by definition, are things that affect market non-participants. So a perfectly competitive Pareto-efficient market can have no externalties, positive ones, negative ones or both positive and negative ones.
    But wait, it gets worse. The Wikipedia article on free markets seems to suggest a free market need not be competitive (Ie need not be free of monopoly or monopsony power). It says the essence is no gov regulation or intervention. I’m sure others have their own definitions, hence the reign of confusion on this topic.

  • Evinx

    @Med Student
    Let’s not be purists. We are going to have Some regulation – everyone knows that. The question is What Regulations?

    You say you want more regulation so the market can be more free. I tink that is called a non sequitor. You offer no specifics. Come on, you know full well, its all about details and policies.

    Do you favor allowing insurance companies to sell accross state lines?
    Do you want community rating?
    Do you want to mandate every person in the USA buy or be given health insurance? What about HSAs?
    What do you propose to do about people who do not buy health insurance even though they earn enough to pay for it (like the 14% who fail to buy auto ins)?
    What about illegal aliens? If you give it to them, what about the externalities in terms of promoting more illegal immigation? If you do not, what about the externalities of them still going to ERs and having hospitals eat the cost? And what effect will this have on litigation?

    You remind me of the traditional religious who believe God will take care – only you seem to be saying Govt will take care. The fact is neither will. We need a system where we can take care of ourselves and help those who are too incapacitated to do so for themselves (but not those unwilling to do so).

  • Jay

    Medical Student.

    The tragedy of the commons comes when property lacks an owner or is owned by “the collective”. I stated above that under property rights based systems protection is built in. In a system of ownership the tragedy of the commons is avoided because there is no commons. This is why we do not worry about the extinction of cows but we worry about the extinction of whales. when things are owned they are protected. The stumbling block is switching from a system of current collective ownership (tragedy of the commons) to a system of purely private ownership. Make sense?

  • Evinx

    @Jay
    Your are very right – in fact, that is what happened with trees. For years, there was the concern that we would chop down all trees and then there would be no more. Didn’t happen. Why? Just like you siad. The large forestry companies needed to establish comprehenisve re-planting programs; otherwise, they were going to disappear. So they did and the result has been more, not less.

  • Medical Student

    Evinx,
    To be honest, I’m beginning to believe that you’re not reading what I’m writing. My blind faith in government reminds you of a religious fundamentalist? My point has always been that, just as other markets need regulation to prevent monopolies and externalities, the health care market needs the same. Think about the natural monopolies and externalities in the health care market… now think about how to prevent them. I’m not arguing for a specific plan, just a concept that should be obvious. A deregulated health care market is not the solution to our problems.

    Jay,
    I see what you’re saying in theory, but I’m afraid it doesn’t make sense in practice. You’re talking about private ownership of the ozone layer? A more sensible answer is to enact a cap-and-trade system, I think. How would your idea apply to the externalities of the health care market?

    Jsmith,
    Thanks for the clarification on pareto efficiency. Do you think that mandating and subsidizing health insurance is analogous to mandating and paying for K-12 education with respect to the externalities of those markets? In both cases americans outside of the respective markets are benefited by living in a healthy and educated country, and harmed if they live in a sick and uneducated country.

  • Evinx

    @Med Student
    Your argument is simplistic – govt should do something. You fail to see how govt DID the somethings that have caused the problem. Bottom line: I suspect if you were a Congressman, you would have voted for HR3200. Am I wrong?

  • jsmith

    Med student, I’ve been a family doc for 20 years and I do favor universal HI. Positive externalites certainly exist in HC (if everyone had HI my professional life would be easier, for one!), but, at bottom, economic arguments can be given on either side of the issue and the main argument for universal basic HC is a moral one. HC economist Uwe Reinhardt agrees. You might be interested in what he has to say: http://www.pnhp.org/news/2009/april/statement_of_uwe_e_.php

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