Health care is not a commodity

By George Schwarz - Guest Column
Feb. 8, 2018 at 5:57 p.m.

George Schwarz

George Schwarz   Contributed Photo for The Victoria Advocate

The Amazon, Berkshire and JPMorgan Chase vague insurance "health plan" that drew recent attention won't reduce costs unless their leaders and public policy makers understand health services.

To do so, they must understand what happened after World War II. People demanded easy access to a full range of services, resulting in federal funding that exploded hospital construction from the late 1940s through the mid-1970s. Policymakers soon realized supply created its own demand: If a hospital built the beds, operating rooms and x-ray suites, they had to be used to cover the costs and debt, leading to overuse of those services.

Medicare and Medicaid, in 1966, created more revenue for the system, driving more demand. They inflated health care costs while caring for pent-up demand for those who previously couldn't get medical care. As technology drove up costs in the late 20th century, Congress passed laws requiring coordinated planning to ensure services were justified by community need and that competition would not trigger duplicated services. Many felt the legislation offered a rational distribution of resources that reduced health care inflation, if only a little.

But in 1982, the Reagan administration claimed the health care industry's rising costs could be stemmed by a "free market" - dismantling regulations and promoting competition. The competitive free-for-all had consequences: overbuilding meant oversupply, and costs continued to rise. The insurance industry saw this as a way to shift the burden of cost to consumers, blaming patients for their diseases. That was easier than telling stockholders lower profits came from paying medical bills. This led insurers to deny coverage or payment for pre-existing conditions or certain illnesses - a practice the Affordable Care Act sought to stop.

The economic delusion hasn't changed since the 1980s. Politicians and others continue to misinform the public that health care is a "free market" and competition is inherently good. But it's not because the basic free market, supply and demand rules, don't apply. Here's why:

• Classical economic theory holds that an excess of supply over demand lowers prices. Not in health care. Supply creates its own demand because the incentives are to use the excess resources to spread overhead to the largest possible patient base. This raises prices, which all insurers pass on as premiums. Furthermore, prices don't change because (a) patients/consumers don't have the transparent knowledge of the products and prices a free market requires, (b) patients/consumers can't or won't price-shop because they don't choose their providers that way - even if they could, and (c) because insurance companies set the prices through negotiation with providers.

• There's no free entry into the market, another free market requirement. Providers are licensed and must graduate from accredited schools and pass licensure exams. The libertarian argument of free entry, that the market and lawsuits would work against bad outcomes, is illusory. It's hard to sue someone richer with more resources, and conservatives managed to pass so-called tort reform, capping awards for a provider's negligence or malpractice.

• There is no true freedom to choose licensed providers, another free market condition. Insurance plans impose strong disincentives for patients going "out of network." Some restrict certain procedures - a decision not necessarily made by a qualified clinician.

• Buyers and sellers don't have equal knowledge of the product or service - unless the patient is another clinician. Generally, the consumer can't choose by quality, which means "competition" is based on non-rational factors while the marketplace is said to be rational.

In 1982, Dr. Rashi Fein, a health care economist, wrote in the New England Journal of Medicine, "A new language is infecting the culture of American medicine. It is the language of the marketplace, of the tradesman and of the cost accountant. It is a language that depersonalizes both patients and physicians and describes medical care as just another commodity. It is a language that is dangerous."

We won't control the cost of health care until we realize it's not a commodity. It's not regressive to become rational with Medicare-for-all and regional health planning. Those who scream "socialism" and say it's a government takeover of health care are wrong. Medicare and Medicaid, with plenty of private resources, are far from a government takeover and have saved lives since 1966. How we handle health care policy in the future will reveal our values as Americans.

George Schwarz worked 25 years in health care after earning an M.A. in hospital administration. He retired to Victoria after a 20-year career as an award-winning journalist. He may be emailed at



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