Joe Nocera and Bethany McLean The Great Failure: What the Pandemic Reveals About Whom America Protects and Whom it Leaves has many criticisms of how medical institutions functioned during the pandemic (and generally). One hears from time to time that the United States shows why the free market in health care cannot work. (I admit, this is a pet peeve of mine, because the health care system we have in the United States is not within a decade of the free market. Even if you’re convinced that a free market in health care can be honestly a bad idea, it’s still wildly dishonest to say that’s what the United States has.) Respectfully, Nocera and McLean never describe the health care system in the United States as an example of free market capitalism. The closest they come is to refer to the current system as “a distorted version of free market economics” or “capitalist abuse.”
Here is one example they give of this in action:
The second reason the poor and uninsured end up in safe hospitals is a series of public policy decisions that sound reasonable in theory but are both callous and misguided in practice. Take, for example, the decision by many states to reduce the number of hospital beds. They do so in the belief that fewer beds will help control Medicare and Medicaid costs. In theory, that makes sense. But the game was rigged: hospital closures were determined by their profits, which were already determined by government reimbursement policies.
Therefore, notes Alan Sager, an expert in health management at Boston University, the main effect of eliminating beds by closing all hospitals was to separate the rich hospitals, which were rarely affected, from the poor hospitals, which had the effect of reduction. . It was a good example of a policy presented by the elites that will never be affected and imposed on the people who have no say in the decision.
The result of this policy? “In fact, Medicare spending has increased.” Why did this public policy aimed at reducing spending actually result in increased spending? Here’s what the authors had to say:
The answer was very simple: the type of hospital that could be closed easily – one with little or no power and prestige – was not the type of hospital that was likely to save the government money. The same number of people would still need to visit the hospital; they will have to visit one that is still open…
…The same pattern played out across the country; Hundreds of hospitals in poor areas were closed, ostensibly to save money, yet hospital costs did not decrease. All that was really achieved was a significant reduction in hospital beds in areas that needed them.
Although the average reader may be blown away by the book and come away with the idea that it shows that markets do not work in health care, a more careful reading of Nocera and McLean shows the problems that they point out will occur precisely because of the unusual ways in which government regulations are made. health care market. A complete treatment of that issue can be found in Christy Ford Chapin’s book Ensuring American Health: The Social Creation of a Corporate Health Care System. As Chapin puts it,
Insurance companies have an important position in health care. Insurers decide which services and procedures are eligible for policy coverage, influence physician payment and hospital revenues by setting reimbursement rates, and shape medical practices by requiring health care providers to follow treatment plans for reimbursement. Many scholars have taken this authority for granted, assuming that insurance companies play a vital role in private medical care. Yet the insurance company model was only one option among an array of organizational possibilities that could have created the private market. And compared to other systems, the insurance company model delivered medical services in an inefficient and expensive manner.
So how did insurance companies get such a dominant role in health care? Politics — not market logic — put insurance companies at the heart of American health care.
Chapin shows how the health care system we have in America did not develop to its current state because that is how the market in health care naturally organizes itself. It was planned, step by step, from the top down through an endless series of policies and policy changes that created a system with the worst combination of compensations for all parties involved.
Nocera and McLean know this – they quote the book approvingly Overbilling: Why Americans Pay Too Much for Health Care, written by Charles Silver and David Hyman and published by the Cato Institute, they argue that the way the government manages and organizes health care payments has resulted in an incredibly inefficient system. Nocera and McLean write:
Indeed, errors in the payment system – and the government’s failure to fix it – actually encouraged hospitals to defraud the government. The basic issue was that hospitals were historically paid by performing procedures and the more procedures they performed, the more money they made. The 1965 law that created Medicare and Medicaid did nothing to change that; instead, instead of specifying what it would pay for a specific procedure, the government agreed to pay hospitals on a cost-effective basis.
(Besides, Nocera and McLean found the “fee-for-service” model, where “the more procedures they did, the more money they made” to be a major cause of inefficiency in health care. something – as Johnathan Gruber rightly put it, “This issue is best summed up in the saying that having a doctor tell you how much medical care is like having a butcher tell you how much red meat to eat The United States is a broken fee-for-service health care system where doctors and providers are paid based on their care, not how well they make you healthy.” as a result of government regulations, as Chapin writes in his book .)
Simplified, the basis for costing works something like the following. The government will pay hospitals whatever it “costs” to perform the procedure, plus an additional percentage. Let’s say 10% to simplify the numbers. So if the hospital did the procedure for $100, the government paid the hospital $110, and the hospital earned $10 that way. But if the hospital instead spends $1,000 to perform the procedure, the government will pay the hospital $1,100 — a $100 profit rather than a $10 profit. This payment method gave hospitals a strong incentive to increase costs as much as possible – which is exactly what happened.
A similar issue was brought up in an episode of EconTalk when Russ Roberts interviewed Keith Smith of the Surgery Center of Oklahoma. As Michael Huemer sums up the problem:
Later in the podcast, he explains some of the scams going on in the industry. If the hospitals say they were underpaid (the patient did not pay all the costs of the treatment), they get money from the government. That sounds reasonable, right? They should be compensated for their good work.
This has caused the hospitals to increase their prices to absurd levels, so that they can claim to be paid a small fraction of the costs, in order to get more money from the government.
Hospitals make deals with insurance companies where the insurance company pays only a fraction of the inflated price. All of this is good for insurance companies as well, because it allows them to claim to negotiate unbelievable discounts (like 80% or 90% off) for their customers. It also lowers the cost for the patient to receive health care without insurance, which is fair to insurance companies as well.
Now, you can look at how hospitals or insurance companies behave in response to these laws and feel like they deserve to be dumped. And you might read what Nocera and McLean say and feel the same way about the actions of the various medical organizations they describe. But I would suggest that this is the wrong reaction. To quote an old saying I used to hear as a teenager – don’t hate the player, hate the game. If the government writes a rule book that strongly encourages businesses to raise costs, and businesses respond to that incentive by raising costs, the best response is not to yell at the business in response to incentives. Instead you should be angry at the people who wrote the law and created those incentives.
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