Artificial barriers, real consequences

It’s common knowledge by this point that in the United States, healthcare is more expensive and harder to access compared to similar societies, such as Western Europe or Canada. What’s more is that despite our higher spending, we are no healthier than our counterparts. The political polarization around healthcare policy has resurfaced again with the American Health Care Act now forming in Washington, and basically nobody is happy with the status quo or all of the proposed changes.

I won’t attempt to answer the socialized versus free-market medicine debate in this column. Instead I’ll be pointing out a few ideas that, independent of the future path of the American healthcare system, should reduce costs and improve outcomes.

The first issue surrounds the practice of third party payment. Whether that third party is a government agency or an insurance company, it will have the ability and incentive to delay payments to healthcare providers. This forces providers to increase their prices just to keep their doors open: A service that might have cost $20 had the provider been paid up-front might be inflated to $80 if the provider doesn’t expect to be compensated until months after the procedure. Cash clinics can be notably cheaper for exactly this reason.

Additionally, the intermediaries, be they government bureaucrat or insurance agent, between the patient and the provider result in the healthcare consumer becoming desensitized to supply and demand for services. Healthcare providers build their billing and business structure around the needs of insurance companies or government agency, not the needs of the patient. Often, health insurance companies don’t even interact with their users directly, but rather with their customers’ employers, adding another middleman. On top of this, insurance agencies have been allowed far too much influence in the legislation of medical regulations, and their financial interests have shaped the system more than patient interests. An emergent property of these conditions is an awkward and wasteful healthcare rationing strategy where, generally speaking, the poor and uninsured are undertreated, causing them to develop chronic conditions or rely on costly emergency rooms visits, while those who can afford decent healthcare must also receive wasteful and unnecessary treatments and procedures—further driving up the cost for those who can least afford it. Basic economics and game theory predict that if you want a service tailored to your needs, you’re best off paying for it yourself. Today’s rules make doing that extremely difficult and costly.

Former CEO of Turing Pharmaceuticals Martin Shkreli and others like him have made headlines for ‘greedy’ price gouging of medicines. The moral debate about these events is not the point here. The important question to ask is why pharmaceutical companies are even able to do this. Part of their power comes from the fact that the demand for lifesaving medication is usually very inelastic—a large change in a drug’s cost won’t greatly affect your willingness to buy it if you absolutely need it to survive or live a comfortable life. The solution then is to keep prices low by competition—the price of a good in a free market with many buyers and sellers will naturally tend toward its cost of production. But once again, bad policy makes a big difference. Intellectual property laws and prohibitions on the imports of medicines artificially enforce monopolies, driving costs up and quantities down.

Intellectual property laws are on some level necessary because the costs of the research and production of a novel treatment are large, and a temporary monopoly ensures that companies actually have an incentive to keep searching for better treatments. We often forget, however, that IP laws also have an effect on the costs of drug research and production as well. Restrictive IP laws drive the potential profit of creating a new drug up, increasing the demand for the inputs of creating new drugs—increasing the incentive for drug companies to lobby for even more restrictive IP laws. In at least some cases we should be able to put this vicious loop into reverse, improving health outcomes and lowering costs without completely removing the financial incentive to innovate.

A similar line of thinking can be applied to the training of medical professionals. The cost of medical school and other health-service education is extremely high. The debt that is, for most students, associated with education is only accepted because the expected earnings for a physician are also high. Of course, there’s hardly a monopoly on physicians to the same degree as there is on novel drugs. Nonetheless, reforming malpractice and licensing laws that restrict the supply of healthcare worker labor can only help reduce prices. Physicians, now accepting lower pay, will in turn demand lower costs of entry into the medical profession, changing another harmful cycle into a beneficial one.

Healthcare is complicated, and it’s probably wise to ignore anyone who boils the issues down to one or two basic problems. While it’s easy to get lost in the details, I urge anyone interested in grappling with healthcare policy to remember the one rather obvious principle behind every point I have just brought up: An easy way to get goods and services where they are needed is to simply remove the political barriers already in place.