Health care reform

Markets, Not Politicians, Control the Law of Supply and Demand

By trying to control markets, lawmakers only make problems worse.

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When I was pregnant with my first child 16 years ago, I asked my doctor how much it would cost to pay for the birth out-of-pocket. He had no clue. The truth of the matter is that in most cases, neither doctors nor their patients have any idea what their treatments cost. That's because the health care market is not a real market.

The prices that emerge in this "market" aren't the result of supply and demand, influenced by innovation and competition. Instead, they're the product of a bunch of legislators who want to create a system where anyone but the consumers pay the costs of health care. To achieve that goal, politicians distort the market process with regulations, restrictions, and price controls. At the same time, they placate providers, doctors, hospitals, and drugs manufacturers with goodies of their own to help providers swallow this command-and-control pill.

The most recent example of politicians trying to force others to pay for your health care is a piece of legislation introduced by Rep. Michael Burgess (R-Texas). His statute would lift the Medicaid Drug Rebate Program (MDRP) cap. Three decades ago, Congress created the rebate in response to the pressure that rising prescription drug prices put on Medicaid. It required drug manufacturers that want any of their drugs covered by other federal programs, like Medicare Part B or the Veterans Affairs health care system, to rebate Medicaid costs to the government based on a complicated formula.

The basic rebate is determined by that which will provide the lowest price—either a percentage of a calculation called the average manufacturer price (AMP) or "the lowest price available from the manufacturer during the rebate period to any wholesaler, retailer, provider, health maintenance organization, nonprofit entity, or governmental entity within the United States." Moreover, if drug manufacturers increase their prices faster than the rate of inflation, they must pay a penalty. This penalty is meant to increase the size of the rebate by an amount equal to the difference between the price increase and the rate of inflation.

When created, the rebate was capped at 25 percent of a drug's AMP. In the second year, it was raised to 50 percent. Later, the Affordable Care Act, or "Obamacare," set the cap for the total rebate, including the inflation penalty, at 100 percent. As a result, some drugs are now provided completely free of charge to Medicaid. Tara O'Neill Hayes of the American Action Forum documents the flaws and unintended consequences of these rebates, like twisting manufacturers' arms so that Medicaid pays a pittance for their drugs, while manufacturers then have to make themselves whole by inflating the price that everyone outside of Medicaid pays for those drugs.

Enter Burgess. He now wants to eliminate the cap altogether under the premise that being able to impose a higher penalty discourages manufacturers from raising prices.

At first glance, this one makes just enough sense to gain politicians' support. On paper, forcing manufacturers to pay more if prices increase faster than inflation is certainly a disincentive to raising prices. Or not. Because cost-shifting depends on the overall competitive structure in a given market, lifting the rebate cap might not automatically and fully convert into higher insurance costs. But it will increase someone's cost, and that will have consequences—maybe higher insurance costs, maybe fewer investments in drug development. There is no free lunch. Indeed, the growing, increased market share of Medicaid makes it harder to extract sizable discounts without seriously distorting the market.

Politicians aren't as creative as markets. By trying to control markets, they make problems worse. This is yet another instance of a regulatory proposal to "fix" a problem that the government helped create. It stems from a chronic delusion that when it comes to health care, almost everyone can take advantage of somebody else, paying the bill through regulatory means without any real harm being done to our ability to get quality health care when and how we want it.

Real reform comes only when we untangle the many ways in which government interferes in the health care market. Instead of fighting markets, legislators ought to unleash them. There are many government restrictions and regulations that limit competition, reduce consumer choice, and keep prices higher than they would otherwise be in a competitive market. Eliminating those barriers to competition—not creating new ones—offers the proper path to affordable drugs.

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  1. No politician actually wants to control supply and demand. None. Not one. This issue has fuck all to do with the efficient allocation of limited resources across a vast continent full of people.

    This issue is about power. Raw goddamn power, and the ability to get away with using it to eliminate any person or group of people who stand in the way of the politician getting whatever she wants. (Generally more power.)

    Much like arguing with my ex, trying to rebut the words coming out of a politician’s mouth is an exercise in losing before you even start. By accepting the premise you’ve lost. Seize upon the actual issue at hand, however, and you just might win.

    1. Please explain how control of supply differs from allocation of resources.

      1. It doesnt. That is still not the issue. Politicians don’t care about supplies, they care about what effects their manipulation of supplies can have on those whom they seek power over. If politicians could just order people around like robot butlers they would never even dream of trying to manipulate markets, it would be too much work.

  2. The doctor is by choice separated from cost and all that billing stuff. It is not something he or she cares about. Not what they signed up for or know much about.

    There are a bunch of other people who deal with that and determine what the doc or nurse, tech whoever gets out of what is left.

    That is as it should be. You do not want the people who are going to give you anesthesia or removing your gallbladder to be thinking about that the way a car salesman does selling you a used Volvo.

    It not a market I agree.

    1. The idea that someone who has spent years memorizing every part of the body and its ailments cannot memorize a menu of services is pretty silly.

    2. This. Compounded with the reality that they have no intention of incurring the risk that some procedure won’t conform on the cost side to some fixed price. He’s not gonna withhold the sutures because the operation took a bit more time than expected. That’s an entrepreneurial decision and doctors are not – and generally do not want to be – entrepreneurs. Nor is medicine ever going to be that sort of fixed price market. Not because of ‘gummint’ but because there’s a TON of markets that work like that. And for those markets, the worst contractual approach someone on the other side of the transaction can do is a fee-for-service individual transaction approach. One side of that transaction has to take on the risk.

      THAT is the recognition that WE voters need to make. If we accept that some portion of the population – the poor, the elderly, the disabled, etc – is not in a position to incur a financial risk that doctors themselves are not willing to incur — the worst approach we can take is to treat everything as a transaction. We need to treat that population, statistically as a group – and use the law of large numbers to manage that risk.

      In the days before govt, this is exactly how ‘the market’ did it. Religious denominations took on that risk with members of their own congregation – and ‘pre-paid in bulk’ for the expected level of services by building hospitals, putting doctors/staff on salary, etc. The risk that was left – the difference between actual and expected utilization at a group level – was dealt with by opening that hospital to the broader community and having them pay a bit more than the variable costs.

      Carnegie and Rockefeller set up our entire medical training system on a similar basis in 1910. Where they (thinking like individual billionaires) created a system where there were very few GP’s (they only needed one each) and a ton of specialists with the latest tech in hospitals. They were perfectly willing to build those hospitals/etc and deduct those expenses as charitable donations. And those hospitals would be open to others. Not as real charity – but so that those specialists could practice on the riffraff and rats so that when the Carnegies/Rockefellers needed their services, they would be able to identify the best and most-practiced of the specialists.

      Henry Kaiser did the same to manage the workers comp risk of his companies that were in isolated locations. Pre-paid the capital investment to build hospitals, put doctors on salary, etc. Opened that capacity first to his workers – then more broadly – and it became Kaiser Permanente.

      The failure of Medicare is precisely that we have failed to insist that govt programs be managed the same way. After 50 years, Medicare has precisely ZERO capital investment to show for that 50 years of transactional activity. And having managed no risk, now has no control of the cost curve either.

      1. By managed the same way I mean managed as a covered group. Not managed the same way by making the same decisions. The group that ‘govt’ (taxpayer) is going to cover in any system where a private market exists is always going to be the residual group. And that sort of residual sub-group is not statistically similar AT ALL to the whole. If I were to guess, the residual group has exactly the opposite medical needs of the ones that Carnegie/Rockefeller identified for themselves. They need tons of GP’s to do the preventive/minor stuff while they are healthier/younger – and build a relationship of trust with the GP so that the GP can be their advisor/gatekeeper when it comes time to need the specialists.

        As a perfect example of how eg Medicare has failed. Medicare has known since inception roughly how many elderly it would be covering A, B, and C years into the future. It should have been easy as pie to roughly predict that it would need X Y and Z geriatricians (GP’s for the elderly) for those years – and to pay to train them so that they exist when they are needed in future. Esp since Medicare covers virtually 100% of the elderly so there is NO possible ‘other’ market out there that will train geriatricians. ‘Boomers’ were not aliens who invaded from another planet. We knew how many there were from the day they were born – we knew they would all age exactly one year every year – and could reasonably predict how many would reach 65 and when. The result? Medicare has trained pretty much zero geriatricians – the number is going DOWN – and we have fewer geriatricians than Denmark. Which is why they are limited here pretty much to hospices and alzheimers patients – rather than to the far more effective GP for the elderly.

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  4. The flaw in this article is the assumption that all markets operate in the same way. Health care is outlier for several reasons. First in many cases you do not have the option to forgo treatment. If you break your leg you can not say I have it fixed when I get paid in two weeks. Second the demand can be external to you the patient. If a hospital invests in new equipment the physician will be encouraged to use that equipment to help cover the cost. The hospital creates the demand to pay for the equipment. The final reason I will mention is the supply demand curve is distorted by the profit motive. So its more lucrative to create a medication that a patient takes for years than to create a vaccine given once. Or the insurance will pay for a device or procedure, but is reluctant to pay for open end treatment for mental health. This does not mean that government is the answer to health care but that government has a place at the table.

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