Can the free market control health costs?

In a comment on the previous post, nonlemming quoted Reagan economist Art Laffer's recent op-ed from the Wall Street Journal. Laffer embraces the free market approach to health care which puts trust in health care consumers to control costs. Who better than the average Joe and Jane to know how their health care dollars are to be spent? He opines that the current Democratic plan will not cut costs, and indeed, is "worse than doing nothing." Is he correct? Let's go through it. Laffer is italicized, my comments are not.

The health-care wedge is an economic term that reflects the difference between what health-care costs the specific provider and what the patient actually pays. When health care is subsidized, no one should be surprised that people demand more of it and that the costs to produce it increase....

...The bottom line is that when the government spends money on health care, the patient does not. The patient is then separated from the transaction in the sense that costs are no longer his concern. And when the patient doesn’t care about costs, only those who want higher costs—like doctors and drug companies—care.

This is an intuitively sound argument, likening subsidized health care to an all-you-can-eat buffet. Since you're paying anyway, you may as well apprise yourself of the largest helpings. But is this how health care really works? I've yet to have a patient ask for an extra Pap smear just for fun, or request a cardiac catheterization without a recommendation because, what the heck, it's paid for already. Sure, some folks will want a certain necessary procedure or test before the end of the year when their deductible is re-set, but that is actually an argument against co-pays and deductibles: whereby the doctor can make decisions purely based on medical necessity and not be burdened with a time line.

Thus, health-care reform should be based on policies that diminish the health-care wedge rather than increase it. Mr. Obama’s reform principles—a public health-insurance option, mandated minimum coverage, mandated coverage of pre-existing conditions, and required purchase of health insurance—only increase the size of the wedge and thus health-care costs.

Laffer makes the jump in reasoning that if patients are required to pay for some services out-of-pocket, then health care costs will naturally come down. The power of the free market. Going to Crazy Lenny for the cut-rate colonoscopy. However, there is a large body of evidence that contradicts Laffer's thesis. People are notoriously bad judges of what is necessary in medicine. For example, some people will resist going to the doctor for routine screening visits if they are required to pay any amount of co-pay, therefore, necessary preventive measures will be neglected. The New England Journal of Medicine published a study that showed that women with higher co-pays were less compliant with recommended mammogram screening. Since mammography is the only way to detect breast cancer in Stage I, these women are putting themselves at risk of turning a completely treatable condition into a lethal and costly disease.

Likewise, patients who are required to pay out-of-pocket for medications are less likely to get prescriptions filled and are more likely to need hospital admission for a complication of this noncompliance. No individual thinks he or she will experience the adverse outcome, but, to paraphrase John Adams, facts are stubborn things. Bottom line: the health care product does not follow the simple economics that govern selling refrigerators and Toyotas.

Even highly educated patients may have little understanding of physiology and the need for screening or the schedule of various vaccinations or tests. Combine this with the natural human biases-- cancer? no way I could ever get cancer!-- and the huge number of just plain dumb people, and the fact that health care is a de facto right when things go undetected and untreated, and it's a recipe for disaster to leave these decisions regarding the management of scarce medical resources to individuals.

Laffer's ideological viewpoint is red meat for the small government conservatives, but it's being penny-wise and pound foolish. That frugal woman who eschewed Pap smears the last ten years to save $50 in co-pays may now be diagnosed with Stage 3B cervical cancer, when it could have been managed with a local excision 5 years ago. Now, the cost will be exorbitant, she will lose her job because of disability, which means she is now on the public dole with Medicaid and Social Security. There was no better investment for that $50 than her Pap smears, but, with Laffer's blessing, she made the bad decision that we all must pay for.

A patient-centered health-care reform begins with individual ownership of insurance policies and leverages Health Savings Accounts, a low-premium, high-deductible alternative to traditional insurance that includes a tax-advantaged savings account. It allows people to purchase insurance policies across state lines and reduces the number of mandated benefits insurers are required to cover. It reallocates the majority of Medicaid spending into a simple voucher for low-income individuals to purchase their own insurance. And it reduces the cost of medical procedures by reforming tort liability laws.

Yes, individuals must take responsibility! Even Medicaid patients will need to go to the market place and choose their insurance plan! High deductibles, yes- the people will just intuitively know how to spend their health care dollars. The same people who bought $700,000 homes on $30,000 salary? The same people who have $8,500 average credit card debt charging for McDonald's hamburgers, Trucknutz and American Girl products? Ri-i-i-ight. Who better to manage these scarce resources? And Medicaid patients... the retarded, the illiterate, the folks who couldn't somehow get through 6th grade... yes, they will certainly make perfectly reasonable choices in selecting a health care plan! No, the insurance industry salesmen will certainly not take advantage of them when they stumble into the office clutching their $12,000 health insurance voucher. How compassionate, Mr Laffer!

I'll give Laffer the benefit of the doubt and take him at his word that he believes his plan is the right way to go for the American people, but I have no doubt that there are nefarious industry forces at work that are actively lobbying to continue the status quo from which they benefit greatly, and the last thing they want is some reform of the current broken health care system. Physician reimbursement has not increased in the 15 years I've been in practice, yet insurance premiums have increased 130%, 5X the inflation rate. Who is benefiting?

Even Laffer admits that the costs are not sustainable. Even Laffer admits that employer based health insurance negatively affects job creation and employee autonomy. The solution is not a perpetuation of the maze-like array of competing interests, and certainly the solution is not to add vague incentives based on the market place which can be easily gamed by the big players... this only benefits big pharma, health insurance companies, and medical device makers to the detriment of small players like doctors and patients.

The solution lies in following standards of care and "best practices" to provide a more cost-effective health care product, and these do not easily translate to the free market. My feeling is that this can be done most efficiently in a single payer system, but since this is a non-starter politically, the next best thing would be a co-operative pool of private insurers that would be mandated to provide comprehensive health care with strict supervision, and everyone would be required to purchase a policy with government subsidies as needed. If an employer wants to kick in a percentage for the premium, fine, but if not, the individual should get the same tax deduction as the employer.

Laffer and the Republicans have had many chances to reform health care. This is their modus operandi: do nothing, allow their friends and clients to rake in billions of dollars under the inept status quo, do nothing, push through Medicare Part D that benefits big pharma at a cost of $600 billion over ten years, do nothing, pass legislation for Medicare Advantage that benefits private insurance companies (see slide #22 here) to the tune of $54 billion/ year... then when they lose control of Congress and the White House, and sensible people come in who try to untangle this Gordian Knot that the GOP created.... then stall, stall, stall. Call every viable plan "socialism", stoke the fears of the unsophisticated masses, convince people to vote against their own self-interest, come up with 11th hour "better plans" which are nothing more than smoke and mirrors that pay homage to pleasant sounding ideologies like "free market" and "choice", knowing full well that they never work in the real world of health care.

This is one issue of which I have some level of understanding. I can see the process having functioned as a professional within the crippled health care "system" my entire adult life and having navigated the system from the other side when family members had illness. This thing is a mess, and it's a mess by design. The enemies of comprehensive reform have created a Rube Goldberg contraption of options, and pharmacy benefits, and Medicare Advantage plans all for the express purpose, not of providing better care, but of grabbing every last nickel they can out of the cooling sarcophagus. It's not been a secret that Medicare and health care have needed a fix, but the last ten years saw nothing but dithering and obfuscating, and now more stalling. Now is the time to pass reform and it will be done-- unfortunately, the hew and cry from ideologues like Art Laffer and his ilk have now left us dwindling political will to do the right reform and we will be left with a continuation of costly half-measures.