By Don Vernier

Most people believe that since the cause of the health care crisis is obscure, it must be an impossibly complex mystery, and the notion of a simple primary cause is preposterous. I disagree. I believe there is a simple primary cause, hiding in plain sight as the absence of an economic principal so fundamental it’s been taken completely for granted.

The cause of the health care crisis is the absence of price competition between the providers of goods and services that doctors prescribe for their patients.

In most markets, customers make their own buying decisions, and spend carefully, to keep as much of their hard-earned money in their pockets as they can. This consumer’s sense of thrift is what creates price competition, and through price competition, prices are kept down and businesses are forced to serve the market efficiently.

The health care market is unique because doctors make the buying decisions, and the insurance companies assume responsibility for paying. Consequently, buying decisions are made without the same sense of thrift that typical consumers demonstrate, and therefore businesses in this market have no incentive to engage in price competition.

For example, if a provider of prosthetic limbs cut their price, doctors would be no more inclined to choose their product than before, since doctors are not concerned with price. The only result would be less income for the provider. On the other hand, if that provider raised the price of prosthetic limbs, doctors would be no less inclined to prescribe their product, since they are unconcerned with price, and the company would make more money. Obviously, nothing can be gained through price competition, and the only logical course is to raise prices as high as possible, since it won’t hurt business as it would in other markets.

This incentive to raise rather than cut prices is common to all the business in the market, including drug companies, hospitals, surgeons, specialist MDs, labs and virtually anything else a doctor might prescribe. Over time, this has produced a tremendous inflationary force, which explains the runaway inflation in health care costs that is the primary symptom of the crisis.

To be honest, this is all a bit oversimplified, since nowadays prices are negotiated with insurance companies, and a bit of price competition is generated by the option to buy generic drugs at less cost. However, the principal still holds true; that unless the health care market develops the same intense price competition as the grocery or electronics markets, prices will not be held in check. Consider the grocery ads in this very newspaper, which emphasize low prices. Then compare ads for hospitals, prescription drugs or nephrologists, which never mention price at all. This illustrates that these businesses are not engaged in price competition.

Most patients who undergo procedures don’t have any idea what the costs are beforehand, only to be astonished by the charges when they receive the explanation of insurance benefits afterward. This again demonstrates that price is not a factor in decision-making, and therefore price competition is not generated in this market.

In addition to creating runaway inflation, the absence of price competition also eliminates many of the efficiencies of the free market. In a properly functioning free market, businesses need to cut costs to the bone or be forced out by their competitors. Businesses also gravitate to underserved areas of the market where demand is higher. In the end, the entire market is evenly served by only the most efficient businesses, and only to the extent that they can earn a normal profit without attracting more competitors. Unfortunately, these great efficiencies of the free market are driven by price competition. Without it, inefficient businesses thrive by passing costs on to consumers, and MRI machines may be on opposite street corners, but not within a hundred miles of other areas. Simply put, without price competition the market is as sick as any patient in intensive care.

As if all that wasn’t enough, the lack of price competition is one of the main reasons medical technology is so expensive. In other industries, if a company made the second-best product at a very low price, the company would do well. In health care, no market exists for the second-best of anything no matter how inexpensive it is, since doctors don’t care about price. Consequently, research is driven to produce bigger and better, rather than more cost-effective options.

The good news is that it can be fixed, by giving the decision-maker a financial incentive to be thrifty, thereby generating price competition in the market. The difficulty arises from the fact that doctors are the most qualified to make decisions, but giving them a financial incentive to be thrifty would create a conflict of interest between their wallet and the patient’s health. It’s important to note that that same conflict arises with insurance companies in managed care, or the government in socialized (single payer) medicine.

Space prohibits me from going into detail, but the solution is to give those patients who are willing and able the financial incentive to be thrifty, and a way to have a greater role in their own health care decisions. If patients could choose from a list of options that their doctor approved, and had a convenient way to compare price and quality, they could operate safely and with the sense of thrift necessary to generate price competition, thereby correcting the underlying cause of the health care crisis. In addition, the conflicts of interest mentioned above would be avoided, and patients would benefit both financially and by having more control over their own health care.

Vernier, a registered nurse who lives in Linesville, can be contacted at dvernier@zoominternet.net.