A free market will help fix health care

Neurologists are about to feel the sting of the Affordable Care Act. Beginning Jan. 1, Medicare will be paying them less for electrodiagnostic procedures used in identifying and treating a wide range of nerve and muscle disorders. Reimbursement rates for some tests will be slashed by more than 50 percent, and the Centers for Medicare & Medicaid Services estimates that payments to neurologists overall will shrink by 7 percent next year.

Medicare’s cuts will be implemented by changing the way fees for the diagnostic procedures are calculated. Instead of reimbursing neurologists for each nerve analyzed, the new billing codes will henceforth bundle multiple nerve-conduction tests into a single fee. The Obama administration claims that under the current system Medicare has been paying too much for neurologists’ overhead costs. But the American Academy of Neurology, in an advisory to its members, warns that the cuts will devastate “neurology practices large and small.” Patients will be hurt as well: As Medicare squeezes neurologists, seniors’ access to neurological care will dwindle.

Might as well get used to this. With a long-term unfunded liability of $38 trillion, Medicare will go broke if it isn’t fixed, and compelling providers to accept lower fees is how Obamacare proposes to fix it. Yet if government technocrats could keep health care affordable by paying doctors and hospitals predetermined fees for each service they provide, Medicare wouldn’t be going broke in the first place. When it turns out once again that Medicare’s budget can’t be tamed through stringent price controls, regulators will inevitably look for other ways to ration health care.

In 2009 President Obama suggested that maybe his sick grandmother’s hip replacement wasn’t something “society” should have had to pay for. Americans, he said, needed “some independent group” to make those “very difficult” decisions.

Obamacare creates that independent group. But the Independent Payment Advisory Board can’t alter reality. Medicare is dysfunctional not because it lacks wise overseers, but because it is severed from normal market forces. Patients don’t spend their own money. Providers are paid by the government. Doctors and hospitals have little incentive to compete on price, or to ensure that patients get the most value for their money. So health care inflation goes through the roof, regulators try to impose stronger controls, and Medicare patients have trouble finding doctors willing to treat them.

What Medicare really needs is the flexibility and competition of a consumer-driven free market. What works for food, shelter, energy, clothing, and other essential needs could work for health care too — if only the government would relax its grip. But suggest such a thing and the rejoinder is immediate: When it comes to health care, markets don’t work.

The argument, forcefully made by liberals such as Paul Krugman, is that health care simply “can’t be marketed like bread or TVs.” Medical emergencies are too unpredictable, and health care too complicated, for consumers to rely on comparison shopping. Because patients rarely know as much about medicine as doctors, trust is critical to their relationship. Someone who needs an operation can’t just find a surgeon through Craigslist.

It’s true that markets for medical care can’t be perfectly free. If you have a heart attack and collapse, you can’t shop around for an ambulance or an emergency room. We can agree that crisis situations may require special regulation. It doesn’t follow that market forces should be suppressed for all health care decisions.

Complexity and asymmetries of information are not unique to medicine. Most of us have no idea how to fly an airplane or judge a pilot’s credentials, but that doesn’t prevent vigorous competition in air travel. Trust is critical to the attorney-client relationship — how many laymen know enough to devise a litigation strategy or draft an effective contract? — yet no one thinks a free market in legal services would be unworkable.

Is it really so obvious that health care “can’t be marketed like bread or TVs”? In the niches of the health care industry that have escaped government domination, providers avidly seek out ways to provide better care at lower cost. A classic illustration is Lasik corrective eye surgery. “Technology is constantly advancing, price competition is fierce, and the consumer is king,” writes Sally C. Pipes of the Pacific Research Institute. “In the past decade, more than three million Lasik procedures have been performed. During that time, the average price of Lasik eye surgery has dropped nearly 40 percent, from $2,200 to $1,350 per eye.”

If markets work for eye surgery, they can work for neurological services — and for most other forms of medical care. Overregulation is no substitute for choice and competition. Not even when it comes to health.

Nothing contained in this blog is to be construed as necessarily reflecting the views of the Pacific Research Institute or as an attempt to thwart or aid the passage of any legislation.

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