A Market Model for Health Care


medical_heartOn January 6th, the House and Senate passed a bill to repeal major parts of the Affordable Care Act (ACA).  While several Republicans have proposed “market-based” alternatives to the ACA, none of them had sufficient support to be a feasible replacement for the ACA. Unsurprisingly, Obama vetoed the bill.

How do those proposals differ from the ACA? One, for example, would replace the ACA subsidies with tax deductibility of individual health care insurance premiums. Another would replace subsidies for insurance premiums with age-based refundable tax credits.

Is either proposal better than the ACA? And why? Would either actually alter the quality of health care (for good or ill), or will it just change how we pay for it? Would either slow the explosive growth in insurance premiums and the health care costs they pay for? Would either proposal affect your health care—or just those insured under the ACA?

If your head is spinning, you’re in good company. Few of us understand the finer points of either the ACA or the “market-based” alternatives. But a key difference is whether you see health care as a private or a public good. Market based models assume that health care is a private good and that people purchase it in pretty much the same way they buy cars.

Stanford economist Kenneth Arrow argued that this analogy doesn’t really work.

First of all, buying a car is usually a discretionary decision. Except in rare instances, you don’t have to buy a car today, and even if you do, you still have a host of makes and models to choose from. You can test drive several models to see which one you like best. You can read consumer reports and check with your friends to see how different cars perform and compare the quality of support from different dealers.

Not so with medical care. Apart from preventive care (e.g., vaccinations), routine screenings, and discretionary things like plastic surgery, the need for medical care tends to be unpredictable in both timing and treatment. While you can choose a family physician based on recommendations from friends, you can’t “test drive” the relationship until such time as you are actually sick. And once you are sick, your ability to explore treatment protocols, hospitals and/or specialists beyond what your doctor recommends is limited, in no small measure because, when you are sick, you probably don’t have the time and energy to do so.  In an emergency — a heart attack, a broken hip, or an automobile accident—you may have no choice at all as to the hospital or the doctor.

Another issue is price. You can compare prices for different cars, or for the same car from different dealers.  You can try to negotiate, and sometimes succeed.  You can buy the cheapest car, or you can pay more to have a more reliable dealer. You can add optional features. If you’ve done your homework, you know the cost of the car before you sign on the dotted line.

That’s not how health care works. Do you know what your doctor charges for different medical services? Would it make a difference if you did? When you are faced with excruciating pain in your gut or your chest, you’re not going to start shopping for the lowest cost physician.

The situation gets even more complicated if you’re hospitalized … you may know what your doctor will charge for, say, repair of a broken hip, but you will probably not know the cost of other hospital services—anesthesia, lab work, x-rays, physical therapy, and the inevitable “misc. charges”—until long after the event. If your insurance company refuses to cover a particular service or an “out-of-network” doctor, you, of course, are stuck with the bill.

A third leg of this stool is medical expertise. You can study up about the differences in quality and performance for cars that interest you. But how do you study up on a disease you don’t know you’re going to get or an accident you don’t expect to have. And once you’re sick, you rarely have the luxury of time to become an expert on a complex disease, particularly if you have no medical background. Think about the lengthy and small print inserts that come with your prescription medicines—do you ever read them? Do you actually know what they mean?

My final observation is that inherent in the market model is the notion of profitability—of pricing the service to cover not only direct and indirect costs, but also to provide a return to the owner of the service. In the absence of some degree of regulation, owners of most medical services can charge whatever the market will bear.

You can see this feature of a “market model” with drug prices over the past couple of years. If you google Valeant Pharmaceuticals, you will learn that this Canadian company has been steadily acquiring the rights to older drugs, many of which were relatively low cost generics. In February 2015, Valeant acquired the rights to two generic heart drugs for which there are no ready substitutes. The very same day, it increased the price of one from $215.46 to $1,346.62, an increase of 525 percent.  They increased the other by a mere 212 percent from $257.80 to $805.61.

A company spokeswoman justified the increase by saying that Valeant’s “duty is to [its] shareholders and to maximize the value” of its products.  Clearly, maintaining the health of the patient was not part of its duty. Taking advantage of someone’s misfortune clearly was.

Most people would agree that our current system, a mix of regulated and market models isn’t working very well. Most observers of the health care market agree that the ACA got quite a few things wrong, and needs to be fixed. But fixing the ACA is not the same as scrapping it for a market model.

While I don’t pretend to know what the “right” health care system looks like, I’m not yet convinced that a pure market model—with no government intervention at all— is where we need to go.

What do you think?


  1. Thanks for laying this out so clearly, Mary. Part of the problem I see is that in the Republican’s fervor for repealing the ACA, they’ve never presented a plan for what happens when it’s gone. Or what would happen to all the people who are insured under it. The transition from public to private (should it happen) is fraught with difficulty as we see here in Iowa with Governor Brandstad’s plan to privatize Medicaid.

    • Mary Gottschalk says

      Carol … thanks for your input. As I noted, I don’t know the answer, but what concerns me is that the Republicans (at both the state and federal level) want to undo Obamacare, with no workable solution to provide health insurance to low-income families.

  2. I echo the comment above. One problem in society is that people are moved to action with little/no understanding of implications of policy change. The insurance industry wants paying clients who are healthy and never need healthcare. ACA gave those with prior “conditions” an opportunity to enroll in health program. Republican governors successfully fought to reject Obamacare in their states. Wish ACA would have included a “public option.” People would have flocked there. Keep writing. I’m a new follower. But enthusiastically so.

    • Mary Gottschalk says

      Gerald … would love to have you comment more on the “public option” … I think I know what you have in mind, but I don’t want to assume. I’t would be of benefit to my readers to have you explain what you have in mind. I would be most grateful.