Tuesday, January 29, 2013

Not all markets are the same

Josh Barro gives a good explanation for why Ramesh Ponnuru's (one of the sane conservatives out there) health care proposal probably wouldn't work, or at least wouldn't work as well as Obamacare (I usually avoid using that term, even though it's probably going to shift to be a positive term. I guess I'm just being lazy today). Give it a read. If you don't want to read the whole thing, he basically says that the plan wouldn't work in part because it would require things Republicans don't want to do, regulate the market and increase both spending (for high risk pools) and taxes. He mentions another reason very briefly:

If that pitch sounds familiar, it's because, with the exception of cost control through competition, Obamacare will already achieve these goals -- and Obamacare has its own cost-control strategies. (The idea of cost control through competition is also far from a sure thing in health-care markets.) Why should middle-class Americans who either have health insurance or are about to get it through Obamacare be eager to junk that plan for an untested alternative that might actually make it harder to get insurance?

The health care market is much different than other "normal" markets. Take the restaurant market as an example of a normal market. You hear X restaurant is good from a friend so you go try it. Based on the quality of the food, the price, the service, the atmosphere, etc., you form an opinion about the overall product and in the future decide whether or not to buy that product again. Enough people have different enough tastes and purchasing power that there happens to be a lot of other restaurants out there that you can choose if you don't like the product restaurant X is offering. And access to those other products is pretty easily available. This isn't the case with the health care market.

First of all, before you even start the process of choosing which product (a doctor or hospital) you want to purchase, you probably have to buy an insurance policy that will help you pay for the product. That's because the product can be extremely expensive and not many people can afford it out of pocket. Sine the insurance company is helping you foot the bill, they try to minimize their risk when they afford you a plan. The greater risk you are to get sick the more likely the insurance company is to have to spend a lot of money on you. Thus they charge you more for a plan. Insurance companies used to be able to not offer you a plan or drop you from a plan you were paying for if they deemed you to be too high a risk. So by little fault of your own, you could be barred from or charged extremely high fees to just enter the market and start shopping.

Once you're in the market, it's kind of up to you which product you choose. It can depend on whether a doctor or hospital take your insurance plan or how much of the product your insurance decides to pay for. Unlike in a restaurant, you often don't have many choices as to which specific product you buy. If you need a triple bypass in order to save your life then that's simply what you have to purchase. If that's the case, you obviously want the best doctor available who can perform that procedure. But that's not really something a health care customer is well equipped to judge. Even if they were, they couldn't choose to get a discount for getting the "worse" doctor to do the procedure. From what I understand, the cost of a procedure doesn't vary much from hospital/doctor to hospital/doctor (someone correct me if I'm wrong). So you can't say, "Well, I want the lobster. But I don't have much money right now. I'll just get the catfish.".

The main point here is that your choices are greatly restricted in the health care market. And along with that, the information about the product you want to buy is restricted to your knowledge of modern medicine. Both of those things make the health care market different and inefficient to the consumer because the ability to choose between multiple options is what makes markets somewhat efficient. If restaurant X makes a bad product that no one likes people can just go to restaurant Y or Z. The gov't doesn't need to regulate that market because the costs to the consumers are low and they have a lot of choices. The gov't needs to regulate the health care market because insurance companies, hospitals, doctors, nurses, and the consumer inherently don't have the same choices and the product is too expensive. Most developed countries have figured this out and therefore allow their gov'ts to heavily regulate or control the market. I'm not sure Obamacare can do enough to avoid that type of future in the US.

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