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Has "Market Failure" Caused High Health-Care Prices?

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With premiums rising an average of 22 percent and as high as 116 percent on Obamacare’s 2017 government exchanges, it seems surreal to read journalists attributing the economic pathologies of US health care to market failure. Yet that is essentially the perspective being driven by the Associated Press and NBC with approving input from industry economists and consultants.

While not a new narrative, the most recent version begins with the observation that patient co-payments and deductibles have failed to control costs. According to a Mercer consultant, "It's not human nature to be rational thinkers about health care cost decisions. … It will never be just like buying a lawnmower."

In popular and academic literature, this is a common assertion that is never explained in much detail, never mind rigorously proven. And hilariously, it’s still regnant dogma even as American consumers, right before our very eyes, continue their abandonment/avoidance of Obamacare because of its increasing costs.     

Myth: Health Care Is Important, so Health-care Prices Rise Faster than Other Goods      

The second factor posited as driving market failure is "purchase priority." After food and shelter, consumers prioritize health-care purchases over other purchases, we are told. No evidence is provided for this claim either, other than a question from the Altarum Institute’s Charles Roehrig, "What good is a better house if you are too sick to enjoy it?"

But Roehrig’s witty question doesn’t settle anything. Clothing and transportation clearly holds purchase priority over health care. How can a patient gain access to a physician’s office, treatment center, pharmacy, outpatient clinic, or hospital without both? Yet the higher priority held by clothing and transportation in purchase patterns has not driven up their prices or costs to the levels of those found in health care. 

RELATED: "How Government Regulations Made Healthcare So Expensive

The third factor? Technology. Technological development brings about improved products, lower costs, and lower prices in just about all industries but health care. When new technological innovations appear in health care, however, they have the opposite effect.

The reason for this is a lack of market processes in the health-care industry. In a functioning marketplace, instead of new products being subject to market competition, new drugs and medical devices are brought to market at exorbitantly high prices and insurance companies pay them with little haggling. Consequently, costs explode.

RELATED: "Drug Shortages, Price Gouging, and Our Broken Health Care System

At the root of this phenomenon is state-protected Big Pharma and state-mandated health insurance. In a "market" with government-mandated coverage and little competition (brought about by government restrictions), technological progress in health care doesn’t lead to falling prices as it does in every industry with more-free markets. 

Health Insurance Isn't Really Insurance At All 

Imagine a new state-mandated auto insurance that not only covers all liabilities, collision expenses, and improbable comprehensive risks such as sinkholes and building collapses, but also routine expenses such as weekly gasoline fill-ups, oil changes, tire rotations and balances, and all regular maintenance expenses with little in the way of price and cost oversight.

Imagine that insurance companies are forced to issue these new policies to drivers with "pre-existing conditions" such as extensive records of habitually reckless or drunk driving. It is easy to see how this new auto insurance would quickly become as expensive and unaffordable as health "insurance."

Notice something else: our hypothetical insurance is no longer really insurance. Genuine insurance covers policyholders against predictable risks. Forced coverage of routine expenditures and pre-existing conditions renders that null and void. The coverage of routine expenditures and pre-existing conditions is what health economists refer to as "pre-paid consumption." Whatever it is called, it is not insurance.          

Given the factors alleged to lie behind medical market failure, what are the proposed solutions besides steadily increasing premiums and deductibles? Runaway costs require limiting patients’ choice of plans and doctors (as on the Obamacare exchanges), direct contracting between big employers and hospitals (which is of no use to small businesses and the self-employed).

Some policymakers have even suggested limiting technological innovation in health care as a cost-cutting measure. But just imagine any other industry — the computer industry, for example — being told that it must slow down innovation to make its products more affordable. 

An Industry of Rent Seekers 

The health-care industry has become so regulated, in fact, that it has virtually ceased to exist as a true private-sector industry in the traditional sense. Just as the American Medical Association, Blue Cross Blue Shield-driven health care industry is built on powerful rent-seeking special interests, so too is the derived health-policy, health-consulting industry surrounding it. These industries, which would not even exist did the state not so heavily control and subsidize health care, is devoted largely to issuing long monographs that no one reads, holding interminable symposia at five-star hotels and resorts, and securing lucrative consulting deals drafting "solutions" to the growing number of problems created by the corporate-state industry. 

RELATED: "The Myth of Free-Market Health Care

Should it therefore be a surprise that so many health economists — some earning impressive six-figure salaries from consulting groups, think tanks, and Ivy-League universities — know so little if anything at all about or see any relevance in US medicine’s greater and greater dysfunction as it has increasingly abandoned free markets? Is it surprising that so many of today’s health economists embrace half-baked explanations involving capricious rationality, purchase hierarchies, and technological curses while proposing ineffective to harmful solutions as well?  Not at all.

In the decision tree that begins with a choice between the branches of market failure and markets, market failure represents résumé-building and luxury vacation condos on Florida’s Atlantic coast. The free market is none of that, which is why the true economics of US health care will continue to remain mostly hidden from the American public and health-care consumer.


Dale Steinreich

Dale Steinreich is an economist and an Associated Scholar of the Mises Institute.

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