A Thank You Note to the Free Market


Dear Free Market,

Where have you been?  The latest news is that, when it comes to health care, you really haven’t been around. In fact, it seems there is no “free market” switch in health care – just competing economic sectors lobbying to protect their own margins at the expense of each other – and, ultimately, the consumer.  A New York Times article shows how pharmaceutical companies are pressuring state governments to make health insurers pay the price for  their own exorbitant margins.

Lawmakers in at least 20 states  have introduced pharmaceutical company designed bills to limit out-of-pocket payments by consumers for expensive drugs used to treat diseases like cancer, rheumatoid arthritis, multiple sclerosis and inherited disorders. The bills counter efforts by health plans to reduce the amount they pay for expensive medicines by making the patients pay 20 to 35 percent of the cost. To counter the increasing cost, insurers have to do this by putting specialty drugs into a fourth tier category with higher co-payments, or co-insurance.

Pharmaceutical companies benefit from this legislation because high co-payments discourage patients from taking medicines. So who do you think has actually been drafting and promoting these bills? Could it be…the pharmaceutical industry?

Pfizer has been helping the legislative drive behind the scenes, even drafting some of the bills, according to legislators and patient advocates…Mark Merritt, president of the Pharmaceutical Care Management Association, which represents pharmacy benefit managers, said the real problem was the price of the drugs. The legislation, he said, was an effort by the pharmaceutical industry to “turn a pricing problem into a coverage issue.”…Sharon Treat, executive director of the National Legislative Association on Prescription Drug Prices, an organization of state lawmakers, said that insulating patients from the cost of their drugs “gives the drug companies a free ride to charge as much as they want.

The “Free Market” Isn’t Dead – It Just Smells Funny

So “free market” really means one sector passing the cost of exorbitant mark-ups onto another by lobbying government to insulate themselves from responsible pricing.  And Washington lacks the will to do what every developed world economy that has gotten a handle on health care costs has done – to regulate health care costs.

Thank you, Free Market

Free market, here’s what you’ve done to US healthcare:

  • The U.S. is number 1 of the top 19 Western developed countries, in money spent for medical and health care, in absolute dollars and percentage of the Gross Domestic Product.
  • The U.S. is also number 1 in worst cost-effectiveness in reducing death rates.
  •  U.S. health expenditure as a share of GDP since 1970 has outstripped all other high-income OECD countries, with a five-fold increase in health spending per capita.
  • Health expenditure as a share of GDP was 40% higher than the OECD average in 1970 and is now 80% higher.

Why are health care costs in the United States so much higher than any other OECD country?

  1. High provider costs: It’s true that we use a lot of expensive diagnostic tests, such as MRI and CT scans, and perform a lot of interventions where it is not always clear-cut whether the procedure is necessary. But the primary reason is that care costs more here than in other countries. The same hospital care costs 60% more in the United States than in a cross section of other countries. 50 high-selling pharmaceuticals cost 60% more in the United States than in Europe.
  2. Administrative inefficiencies: A third of U.S. health care expenditures goes toward administrative costs (Canada spends less than half that — about 16%.) This also pays the salaries of everyone from phone operators to top executives, as well as for claims processing and sales.
  3. The fee-for-service model that most health insurance plans use, under which physicians make more money with every office visit and procedure they do – which gives them an incentive to push for more, not necessarily better, health care (Shannon Brownlee, “Overtreated: Why Too Much Medicine Is Making Us Sicker and Poorer.”)
  4. The lack of national price-setting to ensure low per unit prices for health care services. Demographic factors are the largest source of variation: Sicker people are costlier to care for and differences in age and gender matter as well. The differential price per unit of health care services is a much bigger deal than differences in the quantity of services rendered.

According to Matthias Rumpf from the OECD,

“…many people in the United States probably think that publicly-owned and operated health care is necessarily unresponsive to people’s wishes and the staff are undermotivated. This can indeed happen, but is far from being the general rule in many OECD countries, who have efficient, well-financed, responsive health care systems — but at much lower cost than in the United States.”

How Can We Control Health Care Costs?

Here are a few things that are common to the higher performing (lower priced) health systems:

  1. More emphasis on primary care, to ensure that most care takes place outside of (expensive) hospitals.
  2. Encouraging use of (cheaper) generic drugs, when there are alternatives to expensive brands.
  3. Adherence to clinical guidelines, so that excessive use of expensive diagnostics or unnecessary health care is prevented
  4. Tight regulations of prices and fees, for at least those services that are paid for by public programs.

In the meantime, health insurers have their hands full dealing with the problem of remaining profitable in such an environment, and will have to be innovative to control costs.

In Closing…

Here is an example of one family in which three family members  use about $13,000 worth of the drug Remicade each month for psoriatic arthritis.  Because of a change in the husband’s insurance, the family will have to pay 10 percent of the drug’s cost starting next year – $1,300 per month!  “I don’t know what we’re going to do,” she says.

Tell her to trust in the “free market.”


The real world


Snap principle of health insurance strategy:

The health care insurance industry as we know it is about to undergo big changes