Market Competition and Healthcare in America | Vol. 3 / No. 42.4

The economics of incentives | Photo: Ken Teegardin, CC BY-SA 2.0


Just yesterday, I posted two stories to the Facebook page that had to do with market competition — one about Google expanding its ISP ambitions to more cities and more technologies, and one about Intel getting into ARM mobile chipset manufacturing. Google’s play in bringing about Google Fiber (as well as their cell service Project Fi) is all about spurring innovation on the end-user internet access front: the more competition they provide to the stagnant ISP marketplace, the faster and cheaper internet access will get, which in turn drives the market for its latest products. Intel, of course, is feeling the pressure of an increasingly mobile-first technology market, and wants a piece of the pie.

Truth be told, many of the stories we cover here are rooted in the economics of market competition. Take the new commercial space race taking place in the post-Ansari X-Prize world: Virgin Galactic and Blue Origin are now vying for space tourism and edge-of-space science services, while thanks to NASA’s shift to public-private partnership development SpaceX and Sierra Nevada Corp. are competing with the likes of Boeing and Lockheed-Martin — and let’s not forget Bigelow Aerospace, which is the front-runner in commercial space habitats, but not the only one looking at them.

Yet there are things markets probably can’t help with — or, if they can, only in limited and not well-demonstrated ways. This is what we’re seeing in the US health insurance sector, with provider Aetna just the latest insurer to pull out of hundreds of Affordable Care Act “marketplaces,” limiting the choices of tens or hundreds of thousands of Americans to a single provider. This does not mean those markets have failed (in fact Aetna may simply be acting in response to the Department of Justice denying its merger with Humana), so much as, in those places where there’s only one option, right now there is no market.

Part of the problem is that healthcare demand is inelastic — when you need it, you need it, and the likelihood of needing healthcare across a population really doesn’t vary that much. People will always get sick and injured, and they can’t choose not to or even choose to do so later when it’s more convenient or when the prices are lower (like you would with, say, an Uber ride if you’re not in a rush).

But the converse is the same as well — people won’t go out and get more healthcare when they have disposable income. While a patient might be able to “shop around” for elective procedures, with the exception of purely cosmetic procedures, very few “elective” procedures are actually elective: what’s elective is whether they get the problem fixed now, or whether they get it fixed later when health outcomes are worse and the cost is greater. Add that to the fact that healthcare gets cheaper according to economies of scale (i.e. the more times the same service is offered in the same place, the cheaper it can be) and you get plenty of small markets that literally aren’t worth competing in — hence Aetna’s withdrawal.

There’s a moral issue at stake, too: allowing people to choose skimpier healthcare plans as a way of creating flexibility in demand inevitably means that poor people will get lower-quality insurance that covers less and at fewer facilities. And let’s not talk about the way healthcare “deductibles” (making the patient pay for their first few hundred or more in costs) produces negative incentives for getting procedures done at all, thus trading small problems now for big problems later.

The long and short of it is that patients aren’t customers. At least, not in the way that people who buy televisions or go on vacations or buy houses are customers. They’re people trying to access a basic right. And while we might like that access to be as inexpensive as we can make it, and that markets have a tendency to generate cost efficiencies pretty well, we can’t lose sight of the fact that efficiency gains really shouldn’t be made at the expense of human lives.

On the other hand, there are still market-based incentives that might work out. Instead of penalizing patients with a deductible, you could try what Vitals Smartshopper and companies like it are doing and actually pay people to go with the cheaper option. It certainly avoids the disincentive to seek care inherent in forcing the patient to spend hundreds of dollars to do so, and it does provide and incentive to care about the cost of one’s own medical care. But it’s unclear whether this would also have the effect on the other end of the equation, driving care providers to cut corners to save money, and thereby to lessening quality of care.

Since coming to America, I’ve seen a lot of reliance on market-based systems, and seen them create very tangible improvements in technology, quality, and price. I’ve seen the taxpayer saved millions in unnecessary spending that could be better spent on repairing crumbling infrastructure than on (say) overpriced Russian-provided trips to the ISS. But it’s probably fair to say that markets can’t fix everything, and don’t automatically make everything in this world better.

As for the American health care experiment, it continues apace.


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Richard Ford Burley is a human, writer, and doctoral candidate at Boston College, as well as an editor at Ledger, the first academic journal devoted to Bitcoin and other cryptocurrencies. In his spare time he writes about science, skepticism, feminism, and futurism here at This Week In Tomorrow.