It's the costs, stupid

In my last entry I wrote:

Now, are health-care costs spiraling out of control? That's the impression I have. So I'm more than sympathetic to the urge to do something to get those costs under control.

...

If the movers of this misbegotten legislation (from both houses) genuinely want to keep ordinary people from feeling pain, they will have to do real work to understand why costs are spiraling out of control, and take on those root causes.

I'm pleased (and sorry) to say my impression is correct: just read Sarah Kliff's piece in Vox, "The Senate bill does nothing to fix America's biggest health care problem". That problem is, of course, cost.

The biggest problem facing American health care is our prices.

In the United States, we pay outlandishly high prices for our trips to the doctor, hospital visits, and prescription drugs. In the United States, an MRI costs, on average, $1,119. In Australia the scan costs $215, and in Switzerland $503. It is the exact. Same. Scan.

She goes on to list a sorry number of instances where costs in the U.S. are outlandishly out of line with the rest of the developed world.

Incidentally, as Kliff noted at the very start of her piece, Obama's Patient Protection and Affordable Care Act didn't address the insane costs of medical care, either. That's a major reason people have legitimate grievances against it.

However, before you sharpen your pitchforks and ready your torches, don't demonize the medical community. The situation in the U.S. is a byproduct of the majority's conviction that the free market should not be curtailed unless it's absolutely necessary. Other nations have decided that only the entire nation's population can negotiate fair prices for medical care. Those nations thus have sharply reduced the room health care providers have to jack their fees.

If you're a free-market supporter you may recoil from this heavyhanded approach. You may think that people should take greater responsibility for their own health care; that they should wield their small leverage as individual consumers to reward the providers and private insurers that best balance service and cost.

The thing is, we used to have much greater market freedoms — until the expense and frustration drove a critical mass of voters and legislators to create the PPACA. As a free-market enthusiast you may hate the PPACA, but you must acknowledge that the status quo ante was dismal.

The lesson I take away from the history of how we got to where we are, politically speaking, is that people are not able to optimize for their health care. This doesn't mean people are stupid or lazy. Rather, it means health care is a hard subject for people to reason about because it's fraught with uncertainty.

You know you're not going to live forever, but do you know how sick you're going to get? Do you know when or if major illness will strike you or your family?

Of course not!

That uncertainty makes the kind of rational economic planning that the free market requires all but impossible for individual consumers.

Furthermore, the health care available to us isn't a function of how sick we're likely to get, but rather how much money we make and whether we're fortunate enough to work for an employer large enough to negotiate favorable rates with insurers. (Or, of course, we could be lucky enough to be independently wealthy, making health care accessible no matter how sick we become.)

Finally, when we do need medical care, we're frequently not in a position to bargain for it. If you're bleeding because of a car crash, you need surgery and you need it now. Will your insurance cover it? Ultimately that's a function of

• what insurance plans were available,
• how much you could pay, and
• how carefully you read the fine print

when you signed up.

The first two factors were mostly or entirely out of your hands. The third, as a rule, overwhelmed you because you're not a lawyer, nor could you afford to hire a lawyer to read through it for you. Insurers, meanwhile, employ squads of lawyers to ensure they pay out only what they absolutely must in claims.

And what happens when, as almost certainly will happen, you and your employer part company? If you're lucky, you'll go to work for another employer large enough to have negotiated good insurance. If not, you're on your own. Do you know more freelancers than you did a decade or two ago? So do I. Draw your own conclusion about whether the segment of the working-age population that is covered by large-employer health insurance is growing or shrinking.

The idea that a fully free market will result in the most efficient, lowest-cost health care on average is no longer credible. I think the experience of the U.S. is proof enough that individual consumers have no chance in the free market when it comes to health care. The deck is stacked against all but the wealthiest of us.

So when free-marketers like Rand Paul and his quasi-libertarian compatriots in the Republican Party demand that health care be liberated from government interference, I can only conclude they're blinded by their unthinking faith in the principles of the free market. They haven't thought through what our experience as a nation has been, nor have they themselves had to make the hard choices the rest of us have, constrained by market forces we can't tame.

Health care is simply too expensive in the United States, and it's not because of the PPACA's taxes. It's because as a nation, we have not chosen to understand the unique characteristics of health care that make it impossible for individual consumers to tame the market.