Free market for health care?

Economics Economics Questions
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1

A friend of mine (I know, again) made the following claim about medicine and free markets:

The fact is that, on average, Americans spend far more money on health care and don’t have a commensurate benefit in any measure of health.

In fact, Health Care is a great example of an industry that likely confounds the free market.

Consider: For thousands of years, health care operated with free market principles. Yet, there was very little relationship between the amount of money spent on a treatment and its efficacy. This is because health care providers have something I like to call a “Confuse-opoly”.

The product they are selling requires a lot of specialized knowledge to detect quality. As a result, customers have a very hard time making rational market decisions. The best treatments fail to work many times, and patients often recover without any medical care, so it is super-hard to separate out the value of the care being offered.

It is very hard to imagine an effective free-market in health care.

Obviously, what he is saying is quite ridiculous both empirically and theoretically: a person will know a difference between health care in China and in US. But to a certain degree, his point may have something to it, because the doctors practiced treatments like bloodletting, which were paid for by the customers, yet, as we know today, were actually harmful to the patients.

So, what’s the best way to show how he is wrong?

2

Well, the first, easiest, and best thing to do for someone like this is to simply ask him to back up anything he says. Ask him to provide any sort of evidence that supports what he’s saying. Or hell, even just explain what he’s saying. As in, define his terms, etc.

Thomas Sowell says it quite simply:

“There are three questions I think would destroy most of the arguments on the Left:”

  • Compared to what?
  • At what cost?
  • What hard evidence do you have?
3

Well, the poor pay for the medical care in countries that nationalize it. That is, their tax systems aren’t as progressive as the U.S. They also have a less heterogeneous population.

You can’t income tax the rich to pay for all the poor people. If spending were slashed in other areas and there was a VAT and a federal real estate tax, then it would be possible (at least for a few years), but still totally undesirable.

It would actually be less poisonous if people just got refundable tax credits so they could spend on whatever they wanted to. The Federal regulations don’t help, however.

The regulated system we currently have will have to get even worse than it is for the health care sector to be fully nationalized.

4

Well, I think he might bring bloodletting as an example. When a person felt sick, he went to a doctor. The doctor looked into the current medicine books (which were based on pseudo-scientific Aristotelean view of the world) and opened up the patient’s veins to let some blood out. Obviously, this did not help the patient, but he still paid for the service, because the doctor said it was the best treatment.

If a patient was richer, he might have ordered more blood-letting services, like leeches. Or maybe some smelling salts. Or, if he was in China, he might have ordered accupuncture or tiger-bones soup, which were also not helpful.

So, why were these patients paying for crap treatment? Well, the same reason why they pay for predicting future or why they go to casinos or to chiropractors. If I get a cold and someone puts some leeches on me, I will get better in about a week. And I will associate getting better with leeches. (Also, when an educated gentleman does something that he says will help, that makes me feel like I got a treatment, whether or not I am actually feeling better.) But if I do nothing, I will also get better in two weeks, but I won’t have the same memorable experience of being leeched to associate my getting better with.

This is why people have been paying (and still pay) for different pseudo-treatments that “work” because they associate natural self-healing result with some mumbo-jumbo ritual. So, how does free market improve quality in this service?

On the other hand, oftentimes, people get chemotherapy and radiation treatment already when they are sick with a very aggressive and dangerous disease. Oftentimes, they still die despite the treatment. Oftentimes, they hear of someone who went to a hospital because he had some “back pain” or a “heartburn”, then got a bunch of tests and treatment and promptly die. As a result, you can hear sometimes from uneducated people things like “hospitals give you tumors”.

This is what he might mean when he says that “patients make irrational market decisions”.

I personally see two answers to the above argument:

  1. Yes, some treatments hoodwink people into paying for them and thinking that they got better (as a result of the treatment). But some treatments do make them feel better because they treated the symptoms. So, just because people sometimes get confused about the quality of the service they are receiving, doesn’t mean that they are always confused.

  2. He is making a value judgement. It’s similar to saying: “Some people buy cars that have velvet seats and nice A/C and eye-pleasing color. Fools! A good car is a good engine, breaks, transmission, etc. How is the free market controlling for car quality?” Well, who says velvet seats and nice A/C are not products? So, going back to the medicine, maybe the doctors who did leeching and accupuncture provided the patients with a sort of psychotherapy or a comfort therapy. They did not cure the disease (because they didn’t know how), but they provided them with a peace of mind. It is not different from someone today doing pain management as opposed to curing the actual cause of the disease.

  3. What’s the alternative? Ivory-tower sages deciding what is “really” the best treatment and what is “really” the best hospital? But it’s these ivory-tower sages that have historically told their patients that bloodletting is the way to go.

5

@FlyingAxe

Take a look at the history of the AMA. That cartel, along with its pharmaceutical cousin, was founded because physicians of the day were better at killing their patients than treating them and people were opting for alternative treatments.

http://mises.org/daily/1547

6

No, the logic was you were feeling ill because of bad blood in your system (that got there for one of a number of reasons), and that letting your blood would allow the bad blood to get out. You felt better because obviously letting blood drops your blood pressure, so you do get a feeling of relief, initially.

Yes, there is a placebo effect as well.

Not necessarily. I would be willing to bet more people are drawn to alternative remedies through anecdotal evidence and tales of miraculous cancer cures and the like than any sort of “yeah man, I drank plenty of fluids, got plenty of rest, and downed my colloidal silver on a strict regimen, and in a mere 3 weeks, my cold was gone!”.

This is where question #1 comes in.

And oftentimes, they die because of the treatment. (As a sidebar on this subject, see here. Feel free to bump the thread. It’s time more discover it.)

I’ve never heard anyone say that, but I wouldn’t argue that it’s ridiculous or unwise to be cautious about medical professionals, facilities, and treatments. (Again, see the link above).

Again, question #1.

Friedman made a similar argument here.

Bingo. Question #1. What exactly is he suggesting? Again I yield to Sowell:

“Nothing is easier than to prove that something human has imperfections. I’m amazed how many people devote themselves to that task.”

7

But why didn’t the free market itself control for the physicans of the day being “better at killing their patients than treating them”?

I guess you might say that the people were not stupid and realized that the doctors of the day were bad, but the homeopaths and chiropractors were not any better?

8

Excellent. I read one of Sowell’s books (Economic Fact and Fallacies) and a few of YouTube videos featuring him (from Liberty Pen), but I haven’t come across those three questions. The first is the best.

9

Definitely check these out. Sowell conversations are gold.

Thomas Sowell: Uncommon Knowledge interviews

Thomas Sowell - CSPAN interview (1990)

Thomas Sowell: In The Right Direction

Thomas Sowell: Q&A

Thomas Sowell with Russ Roberts

Thomas Sowell on Prager (2008)

Williams is great too

Good Intentions with Walter Williams

10

I ought to get my wife to come on here and blow this topic wide open.

we have two cadillac insurance plans and medicare (because the federal govt required her to purchase medicare when her kidneys got bad enough to go on dialysis) and we cannot seem to get any kind of quality of service because, ironically, we have insurance. Because they have separated the patient from the purse, we have no leverage when it comes to dealing with the medical professionals and so we are at their mercy. And this is all perfectly legal because the law prevents people from practicing medicine without government approval.

so point out that the government has legal control over every aspect of the medical industry. They actually set a limit on the number of medical students per year. Furthermore, even if you go to school overseas, the law requires you to perform a residency here. The taxpayers are forced to fund the vast majority of these residencies, and so the doctor must either pay for his own residency (several hundred thousand dollars) or be selected by a bureaucrat. There is a bunch of other stuff, but since I spend 12 hours a day producing goods for people who have legal tender, I cant remember.

health care is a great example of an industry where the individual consumer ought to have complete freedom of exchange because no one else know what that individual is feeling. No one else knows how bad the chest pains are or whether thepatient is comfortable with a urethral stent

lies,lies, more lies. Show me a thousand year free market in anything. Also, this joker just ASSUMES that bloodletting was expensive or something.

yah, there is a lot of specialized knowledge involved in noticing that you are healthy or not healthy. Oh wait, if I dont have a specialist around to tell me I need to go see the doctor, then how do I go see the doctor instead of just bleeding to death right here because I am too stupid to notice the compound fracture in my arm?

if consumers of health care have a hard time making rational market decisions then how do you figure a bureaucrat in washington who literally does not care if any individual patient lives or dies (its pretty hard to care about someone YOU DONT KNOW) is able to make these decisions? Magical thinking. Everything your friend said is a mixture of magical thinking and misinformation and I am livid now.

I wonder how they ever managed to convince people it was a good idea to make it illegal to heal people without a license.

11

I’ll just leave this here:

In a 1992 study published by the Hoover Institution, entitled “Input and Output in Health Care,” Friedman noted that 56 percent of all hospitals in America were privately owned and for-profit in 1910. After 60 years of subsidies for government-run hospitals, the number had fallen to about 10 percent. It took decades, but by the early 1990s government had taken over almost the entire hospital industry.

http://mises.org/daily/3586/Socialized-Healthcare-vs-The-Laws-of-Economics

Excuse me, what free market?

12

This is my friend’s response (I wrote a combination of my few points above and some of the points raised in the responses):

To be sure, most government regulation and licensing is there to cartelize the industries, and make sure that incumbents continue to earn their share of the profits. And, for the most part, there is nothing wrong with the government saying that people can choose their own sources of goods and services and only intervene when fraud or mischief occurs.
However, there are certain factors that increase the need for governement regulation.
Those factors are:

  1. Informational assymetry.
  2. Degree of consequence for a wrong choice.
  3. The vulnerability of the chooser.
  4. The amount of time that the chooser will have to make his choice.
    When it comes to health care choices, all four of these factors are skewed in the direction of government regulation and price control being needed.

Needless to say, he doesn’t explains or provide evidence…

13

That’s just bare assertion. Why does it have to be the government? Why doesn’t he start a non-profit giving people advice? And price controls!? Are you kidding me!? sigh

14
  1. government reinforces and fosters this asymmetry. Doctors lie to patients ALL THE TIME. but since they are a government-protected cartel, they control the flow of information and nothing can be done.
    2)well I would say one risks their life and health any time they do anything at all. What is so different about medicine and how exactly is this mitigated or ameliorated by giving certain people special privileges?
    3)the chooser is made more vulnerable by their subordinate legal status, their restricted access to information, and the fact that they have little to no control over the payment for the procedure. In other words, govt makes them more vulnerable, not less.
    4)lol ok
15

FlyingAxe is right about science part. Alternative treatments most of the time do not work. But he is wrong about economics and morality.

16

Don’t let him get away with responses like that. There’s no point in spending time discussing this with him if he’s not willing to back up anything he says, so just give him the 3 questions and make him dig his own hole.

17

That is wrong as such, but close to a truth. I recently had a discussion with my dad about his decision to quit chiropractic. I had previously thought it was madness. He talked about how all through school they try to make you excited about all the good you’ll do. He ultimately concluded that there is not much that can actually be done alone as a practitioner to “fix” people. As in every other matter, people want magicians to wave magic wands and solve all of their problems without doing anything to help themselves. The market demands such deception whether practitioners idealize it or not. Aside from that, the main problem with what he says is that he believes there are angels that will wave magic wands solving the unsolvable problem of exploitation of ignorance/stupidity. How ironic.

For the record, bloodletting is still medically endorsed and practiced, though perhaps in a narrower scope of cases.

18

Here’s a good response from a thread similar to this one, made a while back.

[quoteuser=“Bogart”]

Here are my top 5 reasons in order of most significant to least significant. These are all caused by government intervention in the marketplace for health care:

  1. Price/Payment Fixing by Medicare, CHIP, Medicaid, etc make it difficult for people without insurance to afford health care. Moreover the government has laws about who care providers can serve and what they can charge if participating in these programs. So health care providers have no reason to to compete on price as all the folks using these services have no incentive to economize. The result of this fascism is predictable: Higher prices and Fewer Choices.

  2. Regulation of the development, manufacturing, marketing, distribution, advertising, etc of medical devices, pharmaceuticals, alternative medicine etc only helps those large organizations who have expertise in managing the process over those other providers. For example: Kellogs is removing a claim on cholesterol reduction under pressure from the FDA. Why, who does this help, it certainly does not help consumers of food. It does help cholesterol reducing pharmaceuticals.

  3. Licensing of doctors, nurses, etc. These licenses are extremely difficult to get. They are given out by “accredited” agencies to people they favor only. The medical industry would save billions by letting the licensing be done by private organizations. Then people would have the ability to request the certifications of their providers. You can have the following done by non-certified people: parenting, educating, communicating, manufacturing, producing food, etc. Why does the government need to license doctors when it does not license who makes your food?

  4. Regulation of insurers, people are not allowed to buy insurance across state lines and insurers have lots of mandates on them that increase costs. If the mandates were removed and people could buy insurance across state OR BETTER YET INTERNATIONAL boundaries then the price would be dramatically reduced.

  5. Insane liability system for negligence. This part is completely nuts. There is a weird lottery where the whole system is at the whims of a jury. How about a system where the two parties the plaintiff and defendant each select an arbitrator or agree on one to hear the case. Then the arbitrators would pick a third who has binding authority. This would not only save billions but would be much fairer to those who have been damaged.

[/quote]

19

What makes you think that anything has changed? Medical research is still essentially the same as it always was and still often produces wrong results that are continuously debated over in the journals. There is no such thing as a “view of the world” used by researchers in the entire profession. If I was in that field I would take a causal realist approach.

The “placebo effect” is far from proven to exist and is not even generally accepted. A causal realist would not prima facie favour the notion that you can “cure” yourself by sheer belief. Separated from the sensible concept of feeling better due to the relief of stress worrying about the illness, it is silly within the framework of current knowledge.

Your explanation demonstrates ignorance of why people go to casinos and of health related education. Gamblers are mostly aware of the law of averages being against them. Casinos advertise excitement, not probability of winning. On the other hand, chiropractic is designated as a primary care profession, as it obviously should be given that it shares about 90% of the education process with medicine, and the old feud over it started by medical doctors is mostly a relic of the past based on a particular aspect of its original theoretical foundation (which is non-essential and now often ignored).

The objection to chiropractic was never more empirical than the objection to anything new within the medical establishment itself. That brings us back to the original point that your friend made. As nearly everyone does, out of “rational ignorance” you automatically trust the assesment of both medicine and alternatives by an one group carrying the designation “M.D.” You had to choose someone to trust and you could not make an educated guess; if you could, you would know enough to not need to trust anyone. It’s a necessary, permanent situation that the one true way to protect yourself against deception is to study everything. The fault of your friend is presumably to attempt to solve that problem by introducing a new entity, the state regulation agency, which does not solve the problem because that merely becomes the new route through which special interests must act to market their products (and bar competitors).

20

There is a similar argument trending here: http://iamdavidhenderson.wordpress.com with regards to the FDA.

Any input would be GREATLY appreciated!