Letters

From the March 1997 issue

(Page 2 of 2)

Space limitations preclude a rehearsal of the enormous and often complex economic literature on health care markets. But a few points are worth noting. First, contrary to Dr. Smith's assertion, health care markets, while distorted by the tax code, are in fact markets. What matters most is competition, and there is plenty of that. Doctors compete for patients. Insurance providers, including managed care organizations, compete for customers and physicians. And, believe it or not, employers compete for employees. Anyone who actually hires people knows that one of the first questions a prospective employee asks after a salary offer is, "What sort of health insurance do you offer?" It is not the case, as Dr. Orient suggests, that employers can just stick employees with lousy health care benefits and never pay the consequences. Her class-warfare story of evil managers and downtrodden workers doesn't wash. Even Dr. Schiller's thoughtful letter, with which I largely agree, ignores the very important effects of competition. It is not exactly accurate that "employers...are the real consumers of health care, not patients." Employers who want to keep their employees- -and most do--have strong incentives to act as reliable agents for their interests, and company benefits specialists may actually have better information about health care plans than workers could gather individually.

Second, in a competitive context, "rationing" is another word for trade-offs. We make them every day in every kind of market. Physicians may wish they could have a blank check to get paid for every possibly beneficial procedure, but as long as someone is paying the bill, that someone will impose limits. Medical savings accounts, if they work as advertised, would encourage patients to consume less in medical services--to self-ration. Dr. Orient argues that this check would prevent the extremely well-documented overtesting and unnecessary surgeries associated with fee-for-service medicine. Certainly, direct payment would have some effect. But who pays is not the only issue. Patients don't have as much medical knowledge as physicians, on whom they must rely to recommend treatments, and physicians are not immune from economic incentives. This doesn't mean that they deliberately overprescribe, only that they do not scrutinize costs as carefully as they might otherwise. Back in Dr. Orient's good old days, to take a famous example, there were an awful lot of unnecessary hysterectomies.

Third, there is considerable evidence that patients want both first-dollar coverage (hence, for instance, the large market for "Medi-Gap" insurance) and someone else's expertise in helping them buy health coverage. The model that says that in an undistorted "free market" everyone must buy his or her own personal insurance and only in large-dollar "catastrophic" form is dictatorial. It ignores the advantages of specialization--I might very well want my employer, or some other group I trust, to act as my agent in dealing with health insurance--and it pretends that everyone has the same risk preferences. Why exactly is catastrophic coverage the only acceptable kind? The life insurance market is diverse, as is the mutual fund market or, for that matter, the haircut market. The notion that health care must be delivered in only one form may suit the tastes of some physicians, but it ignores their patients.

Trying to redistort the health care market, through new tax gimmicks or regulations on managed care practice and contracts, is tempting for physicians who would prefer to practice fee-for-service medicine. It is not, however, good policy. Dr. Schiller's prescription is correct: Our policy goal should be to remove distortions, not to dictate the shape of health care delivery. As he suggests, we don't know what medicine would look like in an undistorted market. But it might very well include managed care.

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