Health Care is not like other products...

We here a lot, that we just need to open health care up to the "free market". That the "invisible hand", will do wonders for the health care market.

The problem is, as many have pointed out patients are not consumers (in the normal sense of the word). This is an excellent graph that gets to the kernel of the issue.

This graph was part of an excellent post on the subject here.

Shadowfax list 3 compelling reasons why health care expenditures are not like any other market. Amongst those reasons are:

1. health care is generally not a refusable or electable
2. asymmetry of information (doctors don't know how much a procedure will cost to a given consumer, consumers have no good way to judged varying costs between providers)
3. purchasing power is concentrated in the hands of a small number of "consumers".

While all of the points mentioned are important, the third one is perhaps the single most compelling one.

This is the wooden stake through the heart of the idea that consumer behavior can effect cost containment. The functioning of a free market is dependent on the ability of consumers to vary their behavior to force suppliers to compete. However, you and I can be as scrupulous and cost conscious as we like. We are not sick. (Well, I'm not anyway. I hope you're OK.) The driver of cost is the small fraction of people who have serious medical conditions. It's the old 80/20 rule writ large.

Though the data is a few years old, I doubt the distribution has changed. To emphasize, HALF of all health care costs in the US is concentrated in only 5% of the population, and 80% of costs are accounted for by the top quintile! (source: Kaiser Foundation PDF)

So the effect here is that with such a concentration of costs in such a small segment of the population, the ability of the larger population to move the market is highly restricted. You can make 80% of consumers highly price sensitive, but they can only affect a tiny fraction of healthcare spending. And for the generally well, their costs are probably those which are least responsible for the spiraling inflation. They're not getting $30,000 stents or prolonged ICU stays, or needing complex chronic disease management.

Conversely, those who are high consumers of health care simply cannot be made more price sensitive, since their costs are probably well beyond what they could pay in any event, and for most are well beyond the limits of even a catastrophic health insurance policy. Once you are told that you need a bypass/chemo/stent/dialysis/NICU etc, etc, etc, the costs are so overwhelming that a consumer cannot possibly pay them out of pocket. Since, by definition, these catastrophic costs are paid by some form of insurance, the consumer cannot have much financial interest in cost containment. For most, when they are confronted with a major or life-threatening illness, their entire focus shifts to survival, and they could care less about the cost. Further, many who are in this sick/expensive category have some diminished capacity with regard to their information gathering and decision-making.

So yeah, if ever there were an argument for some sort of single payer/hybrid/NHS style health care system this would be it. Individual "consumers" simply do not have the power to shift costs much, even with perfect information. You need a system which allows the entire market to be affected as a whole. Competition over state lines simply won't accomplish that.

-Cheers