This last summer saw a contentious political climate nationwide over the ever-heated issue of healthcare and insurance. In California, the state saw overwhelming support for the Healthy California Act, which would have provided single-payer insurance to all in the state, including undocumented individuals. On a federal level, the GOP unsuccessfully attempted to repeal the Affordable Care Act, which would have seen over 20 million individuals lose coverage. These heated discussions on the future of healthcare in America represent an interesting paradox. On one hand, you have the largest state in the union showing near unanimous state senatorial support for a more universalized healthcare system while the federal government attempted to get rid of a system that provides insurance to millions, in favor of a more market-driven insurance system. Naturally, one ought to ask the question of the favorability of a free-market system relative to a system built upon government interventionism. Looking at the arguments, the right insists that a free-market system gives consumers more options, provides greater levels of coverage, and will all together provide the most optimal healthcare outcomes. Opposing this, the left contends that a more universal system not only provides more coverage but will also reduce costs in the long-run. This dichotomous debate raises many questions but perhaps one of the most overlooked has nothing to do with merits or costs. Instead, we must ask how a free-market in medicine is possible all together.
As a commodity, healthcare is unique. To begin with, markets typically can be observed through a supply side (producers) and demand side (consumers). The healthcare system is not so simple as to have two agents. Instead, healthcare involves consumers (patients), insurers, providers, and suppliers. Further muddling this scenario is the fact that many consumers receive their healthcare through their employer, meaning they do not have the option to shop around for the least expensive or most optimal plan given their needs. This is one of the first discrepancies between economic theory and market reality. Without the ability to take an active role in the selection of their plan, consumers find that their needs are placed back seat to the interests of their provider of insurance, creating a gap between what is a desirable economic outcome compared to a desirable medical outcome.
As if the multitude of economic agents wasn’t enough to skew the ability for perfect competition, consider the nature of healthcare and medicine. In most circumstances, most individuals will only seek medical treatment with little warning. Save for chronic conditions, most individuals have perhaps a few days at most to seek medical treatment, whether it be a trip to the emergency room for a broken leg or seeing general practitioner for a bad stomach flu. As this is such, consumers do not have the option to seek out the best price and compare options, when their physiological well-being is at stake. This places undue power in the supply-side of the medical industry, as medical firms can charge for their goods and services, not based on production costs but instead on the intrinsic value that one places on their life. Exemplary of this was the recent price gouging of the life-saving drug EpiPen. In 2016, Mylan Inc., a pharmaceutical corporation, increased the price of an EpiPen, which is used to treat anaphylactic shock, from $100 to $700 per unit. Similarly, in 2015, Switzerland-based Turing Pharmaceuticals increased the price of toxoplasmosis treatment Daraprim, used by AIDS and cancer patients from $13.50 per pill to $750 per pill. The corporation claimed that the exorbitant price is needed to cover the costs of the production of the drug. The only issue with this is that the generic version of Daraprim is priced at about 7 rupees, equal to 10 cents, in India. Both of these pharmaceuticals are vital for the wellbeing of those who use them. Combine this with the fact that their are few available substitutes, the firms that produce these products are able to take full advantage of the inelasticity of demand by gouging prices to consumers.
Similarly, the healthcare industry is plagued by asymmetry of information. Medical doctors spend four years in medical school learning their profession while patients generally have whatever the internet has to offer regarding their disease or ailment. Thus, the degree of customer satisfaction is based off of negligible issues and concerns that are within the understanding of an individual outside of the medical profession. Indeed, it becomes dangerous to even begin to equate positive healthcare outcomes with quality care. The heterogeneity of issues within a single medical complication may see high-quality doctors with complicated cases that have a higher mortality rate and visa-versa. In this scenario, healthcare outcomes may have a negative correlation with the quality of care received. It is simply a matter of varying conditions of individual cases.
Facing up against the consumer is the supply-side of the market. Within the medical industry, we have seen a trend towards the monopolization of important medical commodities, particularly in pharmaceuticals. This corporate domination is reaching peak levels as a result of the Agreement of Trade-Related Aspects of Intellectual Property Rights (TRIPS), as passed by member nations of the WTO. According to a provision of the agreement, all member nations must incorporate a 20 year patent term for pharmaceutical developments, into their own patent law. Intellectual property laws, such as TRIPS, allows big pharma to become price makers, generating seemingly exponentially increasing profits due to high demand inelasticity This isn’t just an issue in the U.S. Last year, the UK government Pfizer was fined 84 million pounds for increasing the price of phenytoin sodium by 2600%.
Looking at these issues of price making, monopolies, and information asymmetry, one may conclude that the issue is large corporate villains that are solely interested in profiting off of patient’s needs for life-saving drugs. This is one of those situations where the old and shallow adage, “don’t hate the player; hate the game” holds well. A market-driven healthcare system, similar to the one in the U.S., not just facilitates these behaviors but requires them, in order for both progress to be made and for corporations to stay afloat. This is simply the paradigm of entrepreneurship that feeds off of a lack of a public funded healthcare system and a distinctive lack of bargaining power held by the consumer. Instead of a large, public entity tasked with price negotiation, possessing no ulterior motives, smaller providers must independently negotiate pricing schemes, resulting in high medical costs.
Considering the conditions of economic theory juxtaposed against the circumstances of market reality, the healthcare industry is not just distinct from other services and commodities but is also exemplary of the flaws of the field of economics.
The conditions through which the industry operates give undue power to the equivalency of the supply-side but also take advantage of the lack of consumer knowledge and power, leading to an inevitable market failure.
Very sensible article!