A market like no other

This week, President-elect Trump released his choice for Health and Human Services secretary, Dr. Tom Price. Both Trump and Price favor “free market” healthcare reforms, such as expanding health savings accounts and creating individual tax credits for insurance. However, these “free market” policies fail to account for the ways in which the healthcare market is unique from any other market. Information asymmetry, a lack of cost and value transparency and the singular importance of the product mean that “free market” policies may not be an effective tools to drive change.

At face value the Republican proposals make sense. Opening markets to competition can drive down prices and add value. Take for example, the airline industry. Years ago, flying was a fancy affair. You got meals on domestic flights, could check enough bags to fill a bus, and enjoy a beer without having to pay $10. However, some people who just wanted to get from Durham to Phoenix as cheaply as possible. They were willing to fit an entire week’s worth of clothes into a carry on and accept legroom suited for a toddler in order to get where they needed to go. Introducing competition created a market that was more economically accessible.

Trump’s and Price’s proposals aim to spur the type of competition that creates a Spirit Air—where consumer demand drives lower prices. Their proposals achieve this by shifting costs onto consumers, through increased cost sharing, to incentivize them to make financially savvy decisions. Insurance insulates individuals from the true cost of the services they use. You may pay $20 a month for a $100 medication, or pay a $25 copay for a doctor visit that actually costs $150. I’ve had a patient ask to “add a vitamin D test to my labs, since I don’t pay for it.” Of course, consumers do pay for these services, in the form of rising premiums, but the link between individual actions and systemic costs is not always apparent. In theory, increased cost sharing is the equivalent of the $50 checked bag fee. The fee means that people have an incentive to pack lighter and planes use less fuel, you only pay for the extra bag if you need it and everyone has a lower base ticket price. Since about 10-30 percent of the care in the U.S. is unnecessary or wasted care, cutting back on excess could have a major impact on national healthcare expenditures.

However, we don’t want people to cut back on all healthcare services. We want people to use fewer low value services—unnecessary imaging, unnecessary specialist visits, expensive drugs with uncertain superiority—but use more high value services: screening tests, chronic disease management, effective contraception. Patients with diabetes, for example, should have regular visits with a primary care provider to ensure adequate disease control in order to avoid costly complications (the average cost for hospitalization for diabetic ketoacidosis, a serious complication, is over $10,000). Shifting the cost burden to patients creates an incentive to skimp on both necessary and unnecessary care. Patients who have a high degree of cost sharing are more likely to avoid, skip or delay recommended care, and this is more likely among those with low incomes, poor health and at least one chronic condition.

Furthermore, free market reforms only make sense if consumers can make an informed choice. Currently there are no comprehensive tools for evaluating the cost and quality of specific medical services. While some online tools provide insight into pricing, only savvy consumers are likely to use them. Developing comprehensive tools to improve cost transparency will be technically difficult and will require time and money to implement. It is currently incredibly difficult for a layperson evaluate the quality of one doctor or hospital over another. While Medicare publishes ratings for overall hospital quality, data for a particular providers and procedures is lacking. If your gallbladder needs to be removed should you head to the local community hospital or spring for a trip to a university hospital? Right now, it’s hard to say.

Most importantly, we’ve tried these ‘free market’ reforms before, without success. There are several parts of Medicaid; Part D is the program that pays for prescription drugs and was enacted by George W. Bush. The government does not directly ensure patients, instead, private insurance companies create plans that seniors can buy (with the government picking up 75 percent of the tab). Ideally, private companies would compete to create valuable and inexpensive plan to attract the business of seniors. However, studies show that seniors have incredible difficulty evaluating the dozens of plans, and on average spend $368 more annually than they would have spent had they purchased the cheapest plan that met their needs. To be clear, they’re not getting a benefit from paying more—consumers just struggle to identify the lowest cost option that meets their needs. The fundamental assumption of free market interventions—that consumers will identify, select and purchase the highest value services—was discredited by data from Part D.

It is also naïve to conflate healthcare with a typical product that a consumer buys. We’re talking about something a lot more important than a flight ticket for spring break. These services can profoundly impact quality and duration of life. The emotionality of purchasing decisions distorts the healthcare market from the rational market described in traditional economics. Some cancer drugs cost over $100,000—yet when the alternative is a more rapid death, patients are willing to pay the price.

The U.S. healthcare market is subject to much less government intervention than peer industrialized nations. However, compared to our peers, healthcare costs more, we have lower quality of care, we simply don’t live as long and we spend a lot more money. The relative laxity of our government intervention has not ushered in an era of low cost and high quality care. It is unlikely that new “free market” reforms will have any better success.