You Know Your Health Care Market Is Broken When ...

Fri, 18 Feb 2011 15:19:36 +0000

New Hampshire Public Radio ran a story yesterday about Governor Lynch's request that hospitals in the state stop building new facilities.  Normally, governors never miss an opportunity to encourage new business in their state, because in most markets, greater investment leads to better services or lower prices.  Finally, policy makers understand that the normal rules don't apply in health care:

[T]hese facilities are driving up utilization and driving up health care costs. Those are costs that we all see in our ever-increasing health insurance premiums. To that, I say enough.

What is missing from the health care market that causes the rules to be different?  There are a number of factors:

  1. Third party payment: The consumer doesn't pay the full cost of services at the margin.  Part of this is inherent in the nature of insurance.  But that doesn't mean that incentives for the consumer couldn't be better aligned.
  2. Poor cost controls by insurance companies: If the consumer isn't paying the full cost at the margin, the rest is being picked up by the insurance company.  I am often amazed at how poorly the insurance company monitors costs.  The usual procedure seems to be to just pay some portion of what the provider submits.  Though I have never received government health insurance, my observations of family members and others suggest that these programs are also poor at cost control.
  3. Lack of competition among providers: Many regions have few hospitals to start with, so there is little reason to believe that there will be any competition at all.  Even in places with lots of hospitals, competition is muted because individual providers within the hospital seldom compete against each other.

The combination of these is so pernicious that the consumer almost never sees the price that will be charged before the service is offered.  Even an ambulance chasing lawyer let's you know what you will be paying before he takes your case (e.g. initial consultation is free, we don't collect unless you do).  And the combination is such that the Governor is so convinced that unnecessary services will be provided by the new capacity that he would simply rather not have it in his state with direct access to his budget, despite the possibility that some of the additional care will be of value.