Free Market Ideology Doesn’t Work for Health Care

Costs imposed by ‘medical industrial complex’ defy reason.

In my column last week I suggested that one of the reasons Americans tolerate paying so much more for health care than citizens of any other country — and getting less to show for it — is our gullibility. We’ve been far too willing to believe the self-serving propaganda we’ve been fed for decades by health insurers and pharmaceutical companies and every other part of the medical-industrial complex, a term New England Journal of Medicine editor Arnold Relman coined 35 years ago to describe the uniquely American health care system.

One of the other reasons we tolerate unreasonably high health care costs is gullibility’s close and symbiotic relative: blind adherence to ideology.  By this I mean the belief that the free market — the invisible hand Adam Smith wrote about more than two centuries ago and that many Americans hold as a nonnegotiable tenet of faith — can work as well in health care as it can in other sectors of the economy.

While the free market is alive and well in the world’s other developed countries, leaders in every one of them, including conservatives, decided years ago that health care is different, that letting the unfettered invisible hand work its magic in health care not only doesn’t create the unintended social benefits Smith wrote about, it all too often creates unintended, seemingly intractable, social problems.

In a commentary for The Catholic Spirit, Jason Adkins, executive director of the Minnesota Catholic Conference, wrote after the 2011 government shutdown in Minnesota that, “The inability (of state lawmakers) to compromise (on the budget)…was not based so much on stubbornness or sheer partisanship as it was on adherence to ideological principle.”

He went on to note that “an almost slavish adherence to ideology in politics can and does inflict harm to the very people public officials claim to serve.”

That certainly has been the case in health care. Adherence to ideology has made it impossible for Democrats and Republicans in Washington to even have a civil conversation about how to expand access to care and reduce costs.

Meanwhile, the price tags for drugs and a stay in an American hospital have become so astonishingly high they can take our breath away.

In his recent book, America’s Bitter Pill, Steven Brill described in almost painful detail his analysis of the hospital bill he received last year soon after surgery to repair an aortic aneurism. The cost of room and board alone at New York-Presbyterian hospital was $63,000. The hospital also charged thousands more for things like “patient education,” which Brill said he doesn’t even recall receiving.

As Brill noted, not only were the charges far higher than they would have been just a few years earlier, his insurance company, UnitedHealthcare — the country’s biggest — was not able to negotiate much of a deal. “UnitedHealthcare’s discount for the total of all of these crazy charges was just 12 percent!” he wrote.  (Emphasis his.)

Why? Because New York-Presbyterian had become so big through mergers and acquisitions that insurance companies could not exclude them from their networks. And the hospital’s massive size meant insurance companies had little leverage to ask for substantial discounts.

Brill has feigned pity for insurers. “Nothing has been done to curb the marketplace of exorbitant bills and exorbitant profiteering on the part of hospitals, medical device makers and obviously the drug companies,” he told NPR. “They’re incompetently managed; they’re not very nice people when you get them on the phone. But they’re sort of stuck in the same ditch we’re in, which is being forced — unlike the payers for health care in any other developed country on the planet — being forced to pay uncontrolled, exorbitant prices and high profits that are generated by nonprofit hospitals and by drug companies and medical device makers. In that sense, I kind of feel sorry for them.”

At this point its worth noting that in an attempt to convince us that competition in the insurance industry is robust and proof that the free market is working, America’s Health Insurance Plans, the industry’s biggest trade group, brags that it represents more than 1,300 companies.  The problem is that there are far too many insurers. There are so many that not a single one of them is big enough to reduce hospital charges the way Medicare can.

Matthew Herper, who covers science and medicine for Forbes, explained in an article last week why the free market doesn’t work in the drug industry, either. He used the skyrocketing costs of many cancer drugs to illustrate his point. When the cancer drug Gleevec was launched in 2001, it cost $24,000 a year. Fifteen years later: $90,000. “It happened partly because competition increased and, as new drugs entered the market at higher prices, Novartis raised its price, too,” Herper wrote. “The normal law of supply and demand worked in reverse.”

If it weren’t for our gullibility and our “almost slavish adherence to ideology,” we might be able to make progress on health care costs.

Wendell is a senior analyst at The Center for Public Integrity where this first appeared on 6/8/2015.

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