The Republican Party recently came out with their replacement for the Affordable Care Act, also known as Obamacare. It has stirred massive discussion, but some key points are missing from the debate. Analysis using political economy can help cut through the polarized rhetoric on both sides of the health-care debate in America. Most of the rest of the world must be looking at this debate feeling somewhat confused since most wealthy countries provide free or heavily subsidized health care to all residents and consider access to health care a right.
Of course, economists are fond of saying there is no free lunch (or free medical care). This is true from the standpoint of society as a whole. Free health care is possible only because most people are taxed to pay the cost. According to economic textbook orthodoxy, health care should be cheaper when the free market provides these services rather than the government. Republicans depend on this claim of market efficiency to contend that their plan will lower costs. If it does not lower costs significantly, then its main result will be lowering taxes on the rich while leaving tens of millions without health insurance. This is the main thrust of the counterarguments by Democrats.
What few Democrats and few in the media are discussing is why the Republican faith in free market solutions is misplaced. Democrats want to spend more government funds to subsidize insurance for more people, but they are not effectively countering the Republican claim that the free market will do a better job of lowering costs. The Democrats’ political strategy is thus weaker than it might be because it relies on empathy with the millions who will lose under the Republican plan, but most voters who will retain insurance under the Republican plan are at least promised lower taxes, if not lower health costs. The Republican plan will pit insured taxpayers against the poor and uninsured, which could actually be a winning political strategy.
The only way to make health care more affordable is to reduce the costs of providing it. If you do not reduce costs, then either the taxpayers or citizens seeking health care will pay more.
The Republican plan is not only unfair—it is also inefficient. It will result in increased health-care costs for nearly everyone. Yet, Obamacare was also not very effective at cutting medical costs, which is why so many voters were convinced to reject it. Lowering costs significantly depends on understanding why health-care costs are so high in the U.S. to begin with, about double those of most other developed countries.
There are two main reasons American health-care costs are so high: first, the administrative complexity of providing care, and second, the monopoly pricing power of pharmaceutical and medical device manufacturing companies. Most other countries have enormous savings in these two areas compared with the U.S.
Republicans and conservatives generally understand only half of the issue of administrative complexity. They understand only the part that occurs within government, especially the federal government. They do not perceive the bigger issue of the administrative costs of private corporations. The direct providers of medical care and equipment cost only a fraction of the health bill. A vast portion of the cost is added by layers of administration, marketing, and other overhead costs. Republicans would solve this by removing regulations. But this would not solve the problem entirely, because much of existing administration is dedicated to the objective of maximizing profits for all the many corporate players in the health-care system, rather than delivering health care efficiently.
When I grew up in small-town America, many things were different. Consider just three: First, most hospitals were owned by municipalities (as in my home town) or religious charities and were administered locally and not for profit; second, most drugs and medical devices were generic, not patented; and third, advertising prescription drugs was banned. The technologies were not as advanced as today, but health care was also more affordable, even without insurance.
Since then, health-care outcomes have improved somewhat, but costs have surged much faster than this improvement. Probably the greatest boost in health-care outcomes over the decades has resulted from much-reduced rates of smoking, so not all of it is the result of better health care or improved drugs and technology. In recent decades, health care has gotten vastly more expensive but only marginally more effective.
The great increases in cost occurred because of the reversal of the three points above that kept health care local and efficient when I was young. Since then, most hospitals were privatized. Their primary concern became maximizing profits rather than health outcomes. Expensive treatments that were more profitable were substituted for cheaper ones that were more cost effective. In a true free market, the rising costs of such health care might have made such a business strategy fail, but it worked because most people were insulated from the true cost of their treatments because insurance companies paid most of the bill. Furthermore, the administration of hospitals focused more on the provision of services demanded by the rich, such as plastic surgery, and less on common but less profitable treatments for ordinary people. I saw some of this change myself when I worked part time as a data scientist for the health-care consulting division of a major insurance company.
During the Reagan deregulations of the 1980s, aggressive marketing of prescription drugs to both doctors and consumers was permitted to the point where advertisements of patented medicines now dominate many prime-time TV slots. Pharmaceutical companies transformed from primarily manufacturers to primarily marketers of profitable, patented medicines. Of course, this is great if the new drug is a miracle cure, but many of the most profitable treat marginal problems at great cost or are minor improvements on vastly cheaper generic drugs, yet if consumers can be trained to ask for patented medicines or doctors to prescribe them, profits will jump for pharmaceutical companies, but so will the insurance costs for all of us.
The greatest weakness of Obamacare is that it lacks sufficient incentives to lower the costs of drugs by avoiding the marketing overhead costs and monopoly pricing power. Most other countries have a national health service that can bargain directly with drug companies to lower monopoly prices. This is not interference with the “free market” since monopolized markets are not free markets.
The cost-curbing conceit of the current Republican health-care bill is that allowing insurance companies to cross state lines (i.e., to bypass state regulations) will provide more competition. However, having more insurance companies offering plans does nothing to reduce the monopoly power of pharmaceutical companies, unless an insurance company offers a “bare-bones” policy that does not cover patented drugs, which is unlikely. Furthermore, whenever the incentive is private profit, companies will focus especially on the most lucrative high-paying customers rather than those too poor to matter. Certainly, we can expect a variety of plans for wealthy consumers. Those with less means will likely need to understand the fine print in their insurance policies to realize (often too late) the many things that are not covered and the many ways they can be denied care. When votes are cast by dollars rather than by ballots, health care is sure to be skewed toward the whims of the rich rather than the needs of the majority.
Originally posted on World Policy Institute blog on March 16, 2017 – Affordable Health Care.