Mr Market vs Mr Obama

Written by Bloomberg | Updated: Aug 27 2009, 03:31am hrs
Caroline Baum

Healthcare is ill-suited to market mechanisms because it deals with matters of life and death. Ive heard this so often that I was starting to believe it. Then I asked myself, why

The market does a fine job when it comes to basic necessities, such as food and shelter. Why is it that prices, the mechanism for allocating goods and services in a free market, arent up to the task when it comes to medical care For starters, there arent many observable prices, at least to the end-user. Consumers have no idea what a procedure costs, and no incentive to look beyond their co-payment.

A market cant function without prices. The only way to contain costs is to make sure consumers of healthcare have access to prices and some skin in the game. But this is life and death were talking about, I can hear you say. How can I worry about what a procedure or surgery costs when Im critically ill

No one is suggesting individuals comparison-price shop via BlackBerry in an ambulance en route to the emergency room. We can, however, make those choices when were healthy.

Those who prefer their health-care reform the free-market way envision an online mart where individuals can shop for an insurance plan, across state lines, offering the same tax advantage as employer-based coverage.

A healthy man in his 20s might choose a low-premium, high-deductible plan, opting to pay for an annual physical out of his own pocket while secure in the knowledge he has a safety net in the event of an accident or illness. He could then purchase a health savings account, allowing him to set aside pretax dollars to pay for current and future qualified medical expenses. Those who cant afford to buy insurance would receive some form of government subsidy.

What about the idea that we cant put a price tag on life We do it all the time, says Michael Tanner, a senior fellow at the Cato Institute. If we outlawed cars, we could save 38,000 fatalities a year. We make decisions about risks and rewards every day. When it comes to choosing a plan or a provider, we should think about our options before were in pain, sedated or frightened.

Then theres the claim that we cant research and choose a doctor or surgeon in the same way as a household appliance. Why not When I wanted to buy a paper shredder, I went to Amazon.com, looked at the options, compared the prices, read the reviews, asked Dave, who sits next to me (The really cheap ones dont last), and made my selection. Im very happy with the shredder I bought, but if I wasnt, I could return it.

Granted, its harder with a doctor, where personal chemistry is a consideration. A physician may look good on paper (nice smile, good education and training), excel as a diagnostician and be a total dud when it comes to communicating with the patient. You may opt for smarts over bedside manner in some cases, in others not.

Nowadays there are guides to the best doctors nationwide, statistics on risk-adjusted mortality rates for surgeons, lists of complaints against doctors. More information will lead to better, more informed, more cost-effective choices.

On the provider side, the issue is how to reduce supplier-induced demand, says Paul Feldstein, professor of health-care management at the Paul Merage School of Business, University of California, Irvine. The goal should be to structure incentives to get a better outcome. Medicare has used a fee-for-service model since its inception in 1965. It encourages volume (more tests, procedures, surgery) over results, rewarding incompetent doctors and bad hospitals, according to Irwin Savodnik, a psychiatrist and philosopher at the University of California at Los Angeles. Poor diagnosis and treatment may mean more tests and additional surgeries. The worst rise to the top.

And Medicare-for-all is President Barack Obamas model for healthcare reform Healthcare is a complicated issue, which is probably the best reason the task of reform should be assigned to Mr Market rather than politicians. The market would respond and develop tools to make price and value decisions, Catos Tanner says.

Such a system would be far from perfect. One of the obvious problems is what Tanner calls steeply sloping elasticity, which is another way of saying that younger, healthier people are more responsive to cost incentives than those who are elderly and ill. Demand is also inelastic when youve been hit by a car and are being rushed to the hospital.

What we have to dowhat every system has to dois deal with the problem of moral hazard. Once you have insurance, theres no incentive to use less care. Obama would have us believe a low-cost public option will solve the problem. Mr Market is shaking his head.