If you don’t read Fred Reed then you should as he has some of the finest commentary on the web. But like all of us he sometimes gets things wrong, (we’re only human, right?), and this week he got it more wrong than I’ve ever seen on his blog. I was pretty surprised to tell the truth but also gratified; it’s nice when really good writers stuff things up on occasion. It gives hope to the little guys.
Fred was talking about healthcare and I started reading his piece with enthusiasm as I couldn’t wait to see what his thoughts were on the subject. But things took a bad turn not far into his article. After a couple of examples of friends getting major surgery done overseas and what it would have cost them in the USA he suddenly came out with this doozy:
I tell you, boys and girls, America is a collection of self-interested interests concerned with maximizing profits and nothing else. Hospitals are run for profit, with the result–surprise, surprise–that they charge what they can get away with.
Oh-oh I thought to myself. Please tell me that he hasn’t got this completely ass-backwards. The rest of the post is just a ramble as he goes from one thought bubble to another. Maybe it’s that time of the month for Fred, I don’t know. So let me do my bit to clear this up. To do so I’m going to enlist the help of the brilliant Dan Mitchell. His piece that I just linked is worth reading in full but I’ll quote here the relevant summation to keep things brief and not bore you all to tears:
Simply stated, doctors, hospitals, and other providers have very little market-based incentive to control costs and be efficient because they know that the overwhelming majority of consumers won’t care because they are buying care with other people’s money.
That’s really important to understand. A free market system works both ways. It’s not just the onus on the supplier to keep costs down but on the purchaser to seek out the best price as well. Mitchell gives a great example of this:
To get this point across, I sometimes ask audiences how their behavior would change if I told them I would pay 89 percent of their dinner bill on Friday night. Would they be more likely to eat at McDonald’s or a fancy steakhouse? The answer is obvious (or should be obvious) since they are in box 2 of Milton Friedman’s matrix.
The US government pays for nearly 50% of all health spending in the USA. On top of that are the huge amounts of money paid by insurers which are inflated due to a tax loophole called fringe benefits. The end result is that the consumer almost always pays nothing. It is the classic case of other people’s money. And when people pay with other people’s money they don’t shop around. And when people don’t shop around and will pay any price no matter the cost then the suppliers are going to charge whatever they can get away with, which is a lot. Plus the hospitals have no incentive to become efficient which is a primary feature of a healthy free market system. Efficiency, innovation, and the art of finding a customer, all of these go out the window when the market is wallowing in piles of money that bare no relation to the market needs.
So how does a good medical system work? To answer that question let’s turn to the country ranked number one in the world for their healthcare system – Singapore. They do a few things differently which are absolutely key to making it work for them.
A key principle of Singapore’s national health scheme is that no medical service is provided free of charge, regardless of the level of subsidy, even within the public healthcare system. This mechanism is intended to reduce the over-utilisation of healthcare services.
This is really important. No matter the level of coverage, patients still need to dip into their hip pocket in some way if they seek out a medical service. What else makes this system number one in the world?
The government regularly adjusts policies to actively regulate “the supply and prices of healthcare services in the country” in an attempt to keep costs in check. However, for the most part the government does not directly regulate the costs of private medical care. These costs are largely subject to market forces, and vary enormously within the private sector, depending on the medical specialty and service provided.
In other words, Singapore lets the free market decide what the price will be. These two features means that everyone has skin in the game, and when everyone has skin in the game then the system works. Nobody in the USA has skin in the game. The hospitals don’t need to be efficient or innovate and the consumer doesn’t need to shop around because it’s not their money. The USA healthcare system actually worked pretty well until the mid-nineties when some idiot broke it. I wonder who that was? (Hint – she recently had a shot at a national election).
So sorry, Fred, you got this one wrong. But hey, we all have our off days.