Thursday, December 26, 2013

Free market visionary foresees healthcare apocalypse

Free market fundamentalist John H. Cochrane gave himself a Christmas gift on the Wall Street Journal op-ed page on Dec.25, allowing himself to anticipate the Affordable Care Act's certain imminent demise. Then, like a Left Behind acolyte imagining the apocalypse, he moved on to a vision of the new healthcare heaven and earth (liberally adorned with those free market halos, stock tickers):
We need to permit the Southwest Airlines, LUV -0.18% Wal-Mart, WMT +0.42% Amazon.com AMZN +0.95% and Apples of the world to bring to health care the same dramatic improvements in price, quality, variety, technology and efficiency that they brought to air travel, retail and electronics. We'll know we are there when prices are on hospital websites, cash customers get discounts, and new hospitals and insurers swamp your inbox with attractive offers and great service. 

The Affordable Care Act bets instead that more regulation, price controls, effectiveness panels, and "accountable care" organizations will force efficiency, innovation, quality and service from the top down. Has this ever worked? Did we get smartphones by government pressure on the 1960s AT&T T +0.30% phone monopoly? Did effectiveness panels force United Airlines and American Airlines to cut costs, and push TWA and Pan Am out of business? Did the post office invent FedEx, FDX +1.01% UPS and email? How about public schools or the last 20 or more health-care "cost control" ideas? 

Only deregulation can unleash competition. And only disruptive competition, where new businesses drive out old ones, will bring efficiency, lower costs and innovation.

Health insurance should be individual, portable across jobs, states and providers; lifelong and guaranteed-renewable, meaning you have the right to continue with no unexpected increase in premiums if you get sick. Insurance should protect wealth against large, unforeseen, necessary expenses, rather than be a wildly inefficient payment plan for routine expenses.
The argument relies a tad heavily on analogies with with other industries, does it not? Perhaps it would be instructive to consider the experience of other national healthcare markets. As, for example, Ezra Klein did in response to Avik Roy's similar recital of conservative healthcare nostrums, e.g., Singapore's mandatory health savings accounts:
Yeah, but let’s say what Singapore does, right? And I’m very interested in the Singaporean system. They set all the prices that hospitals can charge. They set all the prices that doctors can charge. So everything you’re doing, essentially the government has negotiated around the front end. They have an individual mandate, we can call it, to save 20% of your wages. Essentially 20% of your wages are directly garnished into a health savings account...

But in these systems, right, because when you talk about the one-seventh, Singapore is very cheap. Great Britain is very cheap compared to us. Canada is cheap. Sweden’s cheap. France is cheap. Everybody’s cheap. And what all of them do, the thing that they all do, is not health savings accounts, right? That is not the common denominator. The thing every single one of those systems do is the government is a primary negotiator. The government says how much can a drug company charge. The government says how much will a doctor’s visit cost. The government says how much a hip replacement will cost. And the per-unit price of health care in those countries is way, way, way down.
Cochrane does engage with this inconvenient reality, in his way.  His reaction is...more analogy:
No other country has a free health market, you may object. The rest of the world is closer to single payer, and spends less. 

Sure. We can have a single government-run airline too. We can ban FedEx and UPS, and have a single-payer post office. We can have government-run telephones and TV. Thirty years ago every other country had all of these, and worthies said that markets couldn't work for travel, package delivery, the "natural monopoly" of telephones and TV. Until we tried it. That the rest of the world spends less just shows how dysfunctional our current system is, not how a free market would work.
As an argument against relative success, that kind of beggars belief.  On Twitter, I struggled to encapsulate the logic before Christopher Flavelle did it better:
Ergo: If everybody else is doing it better, we should move even further away from what everybody else is doing.

As for the assumption that the ACA has dealt itself a death blow, Brad DeLong had a field day with it, as well as with particulars of Cochrane's complaints about the ACA.

None of this is to suggest that a well calibrated free market reforms can't improve U.S. healthcare. Employers, as Cochrane suggests, can be major drivers of healthcare reform -- the ACA doesn't stop them.  I agree that it would be great if hospitals posted their prices, and doctors too. I'm all for reference pricing, in which insurers offer a given procedure with no co-pay if patients choose providers who have signed on to the insurer's price, with the patient paying the difference if s/he chooses a non-preferred provider (and that price difference should be transparent). I find it frustrating that insurers offering high deductible plans can't/won't tell you the price of a doctor or hospital visit (their negotiated price, or at least the top dollar they pay) before you hit the deductible.  We should all have some skin in the game, some incentive not to choose wasteful healthcare.

But free markets and regulation are not opposites. The right regulation is a required condition for a functioning free market. Different industries require different kinds of regulation.  And in health markets as we know them, government control over pricing, or at least stronger government influence over pricing than the U.S. federal government wields, is the sine qua non of effective cost control.

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