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Profits Do Not Make Health Care Unaffordable

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June 2, 2014

Tags Free MarketsHealthInterventionism

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I was recently told that I could clear up all of my misconceptions on the issue of health care by reading a single article by Steven Brill: “Bitter Pill: Why Medical Bills Are Killing Us.” Mr. Brill’s article, which graced the cover of Time magazine last year, weighed in at over forty pages. Expecting this volume to foretell a robust argument, and recognizing the impact that a prominent magazine can have on public opinion, I was surprised to discover an article with a glaring lack of substance.

The article relies largely on six anecdotal vignettes chronicling the experience of people seeking medical treatment interspersed with brief excursions into industry details focused largely on prices for services, facility expansion, and administrative salaries. From non-Hodgkin’s lymphoma and chest pains to routine backache, the article details a wide range of medical conditions of unfortunate individuals encumbered by health challenges. The author presumably means to use these vignettes as a method of building empathy with the reader. However, since the stated goal of the article is to explain “why medical bills are killing us,” and assuming “why” refers to process rather than motive, one expects something more than sad stories punctuated by a litany of high prices for services.

The stories offered are certainly unfortunate, as is the plight of anyone stricken with life threatening illnesses or confronted by high costs for what often amount to uncomplicated medical events. It is difficult to read such accounts without feeling some sympathy for those involved. Like statistics, however, emotionally compelling stories are readily available to support any side of the same issue, often with equal effectiveness. While emotions may help to explain how individual people choose to act in given circumstances, they are ill-suited to provide clarification concerning aggregate economic activity.

The author also repeatedly highlights the tax status of the facilities where the patients seek care. In the majority of these cases, the hospitals are classified as “nonprofit,” a point which inspires in Mr. Brill no lack of indignation. As it is the extent of profit which serves the author’s agenda, he does not explain why a given facility would choose to be classified as nonprofit. Since tax status is arrived at through a combination of voluntary application and state sanction, we can deduce that each facility discussed had some incentive, financial or otherwise, to pursue a nonprofit status. While the term “nonprofit” may carry moral significance to some, this has little bearing on its application by businesses seeking tax shelter or otherwise applying advantageous operating policies.

The industry details provided offer little more in the way of explanation for high health care costs. If anything, and perhaps unwittingly, Mr. Brill touches on two of the many drivers of high charges in the industry: government price ceilings managed through both the Medicare and Medicaid programs, and price insensitivity on the part of the consumer.

As for price ceilings, the author repeatedly compares prices charged to his sample patients against those permitted under the primary government programs, treating the latter as something more than the arbitrary pricing mechanisms that they are. To be sure, it’s not likely that a free market would support the exorbitant prices detailed in Mr. Brill’s account. However, rather than recognizing the price suppressing impact inherent in a free market, the author chooses to treat anything outside of government programs as the cause of the high prices. In fact, the price ceilings applied on behalf of consumers covered by these government programs force providers to recoup costs elsewhere, thereby driving up prices in the “free” market.

In an unhampered market for health care, price insensitivity would also be unlikely. Patients billed directly for services would be far more aware of the prices being charged and would tend to question everything from the necessity, alternatives, and efficacy of proposed procedures or products. In other, more free markets where government interference has the potential to impact prices, we see far less of the price inflation evident in the health care industry. When the minimum wage was raised nearly 40 percent from 2007 to 2009, we didn’t see a commensurate rise in prices from those industries most impacted by the change. The fast food industry, for example, might have been able to raise prices to compensate for the higher minimum wage, but any significant increase in prices would have sent consumers to more cost effective alternatives.

The fact of the matter is that government regulation and intervention have long been pervasive within the health care industry. Little of this is mentioned in Mr. Brill’s argument, presumably because he finds convenient the tired claim that greed is the source of all economic woes. Rather than showing how restrictive and bureaucratic accreditation requirements drive up the cost of acquiring and maintaining medical licenses with disputable improvements in quality, or how limits on the insurance market inhibit competition and innovation, the author focuses on the methods used to adapt to these restrictive policies in an effort to maximize profit. Rather than recognizing how federal drug approval processes drive up the cost of development while failing to protect patients, Mr. Brill chooses to elaborate on the size of ever growing facilities employing a beneficial tax status. Even when the author touches on such practices as defensive medicine in response to unreasonable tort, or the fact that taxpayer subsidies distort market dynamics, these are treated more as an afterthought.

Thanks to these oversights and what seems a myopic devotion to the supposed evils of greed, the author concludes that yet more government intervention is the answer to the problem. The better pill for our current health care dilemma would be a free market. Absent that, suppliers and consumers of the health care industry will continue to experience ever-rising prices.

 

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