insurance

Affordable Care Act: Changing costly care?

The ACA attempts to increase coverage and control insurance costs by working within the current "free market" health care system. However, many critics maintain that health insurance costs will continue to skyrocket, and outcomes will continue to decline under a free-market system. Can the free market produce the cost savings and quality improvements that America needs?

First of all, we don't have anything like a "free market" in the U.S. health care system, and I doubt that we ever will. The government -- through Medicare and Medicaid -- is much more involved as a purchaser of care than you would see in a typical market; in fact, the federal government acts as a monopsonist in the "market" for health care services to the elderly. As such, it will naturally distort the workings of that market.

Second, even if the government were not involved in the market for health care, I doubt that patients can ever be effective consumers of health care -- again, back to behavioral economics. One of the major findings of this field is that people make different decisions when they are in a "cold" state or a "hot" state, and -- more importantly -- they do not appreciate the differences. (Hence, the hangover after a night of drinking or the remorse over blowing a diet with a pint of Ben & Jerry's.) In health care, an individual can make considered, rational decisions about their demand for health care services when they are well (and thus in a cold state), but those decisions go out the window when the illness event occurs and the individual and his family demand that everything be done -- regardless of the cost. Of course, this hot-state demand is facilitated by health insurance, because the individual pays relatively little of the "everything be done" costs.

Third, on the supply side, I doubt that there could ever be a free market in health care. Of course, you have the usual concerns about supplier-induced demand, in which physicians have the ability to influence how much health care is demanded by patients. In addition, there are some behavioral economics phenomena that influence physician behavior in ways that limit the effectiveness of a "market" for health care. For instance, it is well-documented that physicians in different communities practice differently. Physicians learn the basics of medicine in medical school, but they learn how to practice medicine when they are in residency and fellowship, and more importantly when they are finally out on their own. And the community of physicians where a doctor practices exerts a powerful influence over the medical decisions that a physician makes -- when she orders a test, when she refers a patient to a colleague and when she performs a procedure. I would argue that this community has much more influence over the behavior of the physicians than any market pressures.

So, I would not put too much hope on a "free market" in health care to moderate the costs of care.

We would like to thank Douglas Hough, Ph.D., associate professor at the Carey Business School and Bloomberg School of Public Health at Johns Hopkins, for his insight. Questions for this interview were contributed by Jay MacDonald, contributing editor for Bankrate.com.

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