Is Healthcare a Market? Does turning health care into a market lower the cost (and increase the quality) of health care?

Rising cost of health care is a major crisis faced by different countries around the world especially the U.S. In an attempt to reduce the rising costs of health care, many governments are considering embarking on a path of turning health care into a ‘market’ which is expected to lower costs while improving the quality of health care. Considering the rising cost of health care in the U.S. there are basically two arguments – a. The rising cost is due to too much market. b. the rising cost is due to too little market or in other words due to government regulations. The aim of this thesis is to understand whether and how turning health care into a market would help bring down cost and raise quality. As a first step in answering this question first the concept of ‘market’ is defined. For this purpose a neoclassical model of health care ‘market’ is developed as a theoretical framework and explained how it is applied to health care and how this is expected to reduce cost. Neoclassical economics is an economic theory or model originally developed for the analysis and design of trade in goods, that is, for the production, exchange and consumption of goods. A first question that arises is whether neoclassical assumptions are compatible with the nature of health care. For example, is profit maximisation by producers reconcilable with the Hippocratic Oath taken by doctors, and is utility (or consumption) maximisation by consumers reconcilable with ‘satisficing behaviour’ by patients? To further investigate whether market can bring down cost, the main components leading to high cost in health care have been identified as pharmaceutical industry, medical technology industry, physicians, and hospitals and cost developments in each area are analysed. Although the focus of this thesis is on the U.S. health care system, the Canadian and Dutch health care systems are also briefly studied for comparison. As a next step the claims made by critics of a market-based health care system – that the rising costs of health care in the U.S. are due to the opening up of health care to the (neoclassical) market is investigated. Regarding the cost of medicine and medical technology, three ‘neoclassical market’ factors contributing to rising costs are identified: the patent system, ‘direct-to-consumer advertising’, and lobbying (although whether the third is acceptable from a neoclassical point of view is debatable). Regarding the health care provided by doctors and physicians, three ‘neoclassical market’ factors have contributed to rising costs: the introduction of competition between health care providers which has resulted in a ‘technology arms race’ and an increase in expensive high-tech based treatments; ‘direct-to-consumer advertising’ which has increased the demand for medicines and treatments; excessive treatments resulting from lack of divisibility and substitutability; the establishment of Preferred Provider Organizations (PPOs) directed at bringing about competition between physicians but leading, in practice, to monopsonistic rents on the part of insurance companies rather than to lower costs of the care provided. Regarding the quality of health care, two major factors of concern are (1) the exclusion from medicine and treatment of individuals who do not have the ability to pay (in neoclassical term, meritocracy) and (2) the introduction of (Taylorist) ‘scientific management’ which has led to standardisation and protocol¬isation of treatment (in neoclassical terms, a homogenisation of the product of health care) and an increase in (expensive) robotic surgery; the quality effects of both are still debated. As a next step the claim made by proponents of a ‘free market’-based health care system – that the U.S. health care system is not (yet) a free market and that the rising costs of health care are the result of government intervention and over-regulation is investigated. Five factors contributing to rising costs are identified: (1) a restriction on free entry of new doctors due to licensing of doctors; (2) an insurance system that (a) supports medicine use and medical treatments by introducing a ‘soft budget constraint’ and, moreover, (b) places a heavy burden on physicians and hospitals in terms of time- and cost-intensive administration and negotiation; (3) the costs of research procedures for testing the safety of drugs (ensured by the Food and Drugs Administration); (4) ‘managed care’ by Health Maintenance Organisations leading to monopsonistic rents with insurance companies; and (5) standardisation or protocollisation leading to over-use of technology in health care. Regarding the first factor i.e. High cost is due to restriction on free entry of new doctors due to licensing of doctors, my thesis has found out that in reality, however, in the U.S., the number of doctors (per 1000 inhabitants) is found to be larger than in other countries (where costs of health care are lower), and other factors appear to be more important in determining costs, such as the high price of patented medicine (in comparison to generic medicine) and the increased over use of the newest technologies. These cost factors, however, are unlikely to disappear with the introduction of a neoclassical market; rather, they appear to be a result of the introduction of the neoclassical market. Significantly, however, although the rising costs of health care are related in part to the introduction of the neoclassical market model in health care, it should be noted that the system as implemented in practice in the U.S. (and elsewhere) is in many ways quite far removed from the pure neoclassical model. Neoclassical elements such as competition, homogenisation of products, and the commercial development and patenting of knowledge have been introduced within a larger system of ‘managed care’ regulated by a mix of public and private parties including government and insurance companies and behind these, (medical) industry. For example, competition between doctors and hospitals does not take place in a ‘free market’ context, but within an organisational framework managed by Health Maintenance Organisations run by insurance companies supported by regulation and legal adjustments. Therefore, it is not possible to draw simple conclusions such as that the rising costs of health care are due to either the introduction of a neoclassical market or government regulation. What has emerged in practice is a particular market-state mix which in the literature has been named ‘neo-liberalism’. Policy Implications & Recommendations Though my analysis about the way in which the pharmaceutical and medical technology industry as well as the health care provided by physicians and hospitals are organised in the U.S., I arrive at several questions which needs deep analysis and consideration by the policy makers while designing a health care system. The questions can be summarised as follows: If the aim of health care is to provide people in need of health care with the required medicine, medical technology and physician care, and if the commercial development of knowledge leads to (a) prices that are too high for many to afford, (b) a neglect of diseases experienced by people who do not have the ability to pay, what would be a better way or organising the development of knowledge? Should knowledge development remain within the boundary of economy or should it be considered as a separate sphere by itself? Most important question is whether in reality patent system which is allowing monopoly for the industries actually leading to knowledge development as claimed by neoclassical economics (in theory) since evidence suggest that most of the research and investments in developing knowledge is done by the government and the companies are just claiming the right to it (right which they acquired through lobbying). It is very important to note that, when ‘market’ is proposed as a solution, a careful analysis of what is claimed in theory (theoretical explanation of market) and what is happening in reality (when market is implemented) need to be done before any policy decision is taken. My thesis while investigating the reasons for the rising cost in health care, whether it is due to market or due to government regulations, came to the conclusion that what has emerged in practice is a particular market-state mix which in the literature has been named ‘neo-liberalism’. I feel that the impact of this new market-state relationship on justice (e.g. the impact of legal changes on access to health care) and freedom (e.g. freedom of choice in medicine and treatment) is an under-researched area and it is here that further research appears to be most urgently needed and considered by the policy analysts. Analysis of the health care services has led me to three questions I would like to raise, which needs careful analysis by the policy analysts. When it comes to health care services, it has been found out that it poses certain features that makes it a lesser candidate to fit into a neoclassical market which as already mentioned has been developed for the buying and selling of material goods. This leads to the question whether health care should be treated like any other good? Can health care service (interaction between doctors and patients) which is not uniform or homogeneous in nature be standardized without the loss of quality of it? Is it right to consider health care as a good and try to fit it into the neoclassical model? As we can see, health care is a growing domain (e.g. as a share of GDP) involving increasingly large sums of money. My thesis raises a very important question that need to be analysed by the policy makers. For what purpose are these resources being used? Apart from health, do other motives also play a role in the allocation of health care resources? For example are rules and regulations regarding health care (including medical industry and health care services) are implemented in s

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