New Profit Opportunities In American Health Care

I notice there is a lot of handwringing over the Affordable Care Act’s “government takeover” of the health care system. So let’s take a look at some exciting new markets that are still thriving.

1) At the beginning of the summer, I noted some problematic drug shortages (bottom half of post). The problem keeps getting worse. There is a steady stream of heartrending stories about care being compromised. Reform measures to assure an adequate supply are moving at a snail’s pace, thanks both to truculent manufacturers and the bipartisan drumbeat to “cut health care costs.” But at least some folks are thriving: as the NY Times notes, ‎”Unscrupulous wholesalers have made matters worse by scooping up scarce drugs and offering them to hospitals at markups that often reach 20 times the normal price or more.”

What a great business model! So glad the “free market” is working its magic on health delivery. While we’re at it, let’s allow ER docs to force patients to sign over half their bank accounts before treatment. That will certainly increase the supply of emergency rooms, even if the transition is a little bumpy for some people.

By the way, I’m sure some will argue that, if only Medicare weren’t paying for many of these drugs, we’d be fine. (Or at least the “we” capable of paying for the drugs at a “market price,” whatever that is, would be fine.) Query: Would there have been adequate incentive to create the drugs if a major purchaser like Medicare hadn’t paid what it did while the drug was on patent? No, I didn’t think so. Income and wealth in our society is still equally distributed enough (and coordination problems severe enough) that the top 1% won’t sustain a thriving hospital and drug research system all by themselves, even if they are the critical factors in one’s policy calculus. As I noted earlier, it’s hard to imagine individuals, or even wealthy groups, stockpiling all drugs they might need, particularly the sterile injectables or biotech solutions that are critical to advanced medicine. Even the very wealthy must rely on a steady, more general demand for these products. They can’t just order them up for just-in-time delivery, like a Tiffany watch. Public subvention—ranging from research grants to Medicare and Medicaid funding for the products research generates—provides that demand.

2) Pauline Chen reports on an “insurance maze” for US doctors, based on a new Health Affairs study comparing their practices to those of their neighbors to the north:

Physicians in Canada, where health care is administered mainly by the government, did spend a good deal of time and money communicating with their payers. But American doctors in the study spent far more dealing with multiple health plans: more than $80,000 per year per physician, or roughly four times as much as their northern counterparts. And their offices spent as many as 21 hours per week with payers, nearly 10 times as much as the Canadian offices.

Clearly the US has a comparative advantage in generating insurance-based hassles. Maybe we can keep specializing there, and aim to spend five times as much as the Canadians by 2014. The more choice, the better, whatever the cost, right? Think of all the people employed by this gauntlet of private sector checks and balances:

A young patient complaining of extreme fatigue, for example, might benefit from a $40 blood test that could confirm infectious mononucleosis in 10 minutes. But a doctor cannot order the simple test without first checking with the insurance company to see if it is covered and if there are any constraints on where the patient’s blood can be drawn and the test run.

Tracking down answers often means phone calls with long periods on hold, digging up old patient information and even recruiting office workers to act as specimen couriers to other labs and hospitals in order to expedite results or save frail patients or harried family members the hassle of traveling to an “approved site” for a test or procedure. “If someone comes in with a sick infant who needs a test, we often eat the costs and draw the blood ourselves,” Dr. Star said. “We aren’t going to tell them to put that kid in a car seat, drive a mile to an approved lab, park, register, then wait in line.”

If you’re an insurer (or the insurance industry), you’ve “won” to the extent you’ve foisted these costs and inconveniences onto doctors and patients. You certainly don’t want to abide by new Medical Loss Ratio requirements that limit the extent to which you employ these strategies of cost-shifting, delay, and denial of needed care. The “free market” is your friend, as is anyone who insists that health care delivery can be guided by the same economic principles that govern every other commodity.

Ten Million Dollars Per Week

Last year I posted both here and on Balkinization on the not-progressive-enough surcharge on top earners to help subsidize the health care coverage of the uninsured. Some critics contended that the recession would make the very well off so much worse off that concerns about inequality were outdated. Unfortunately, the trend toward more inequality has instead continued and those numbers, along with extraordinary updates, are worth considering again. Last year, I wrote:

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Mirror, Mirror on the Wall–Who Has the Most Free Market Health Care System of them All?

St. George on Horseback, Albrecht Durer (1471 - 1528)

At least since legal realist Robert Hale published his Freedom through Law, the question of what constitutes state “intervention” in the market has been complex. For example: at what point does licensing of doctors move from being a natural aspect of any competent health system to being termed a suspect “intervention”? If there is to be free trade in services, don’t we at least need some information about what constitutes genuine medical care? “Perfect information” is a cornerstone of idealized markets—isn’t some baseline of information necessary to any actual market?

In health policy circles, the United States health care system is often seen as the most “free market” system internationally. But even the US would appear to be more interventionist than China, on a cursory reading of Blumenthal and Hsiao’s 2005 article in the NEJM:,

in the early 1980s, China virtually dismantled its apparently successful health care and public health system overnight, putting nothing in its place. In retrospect, this startling and almost inexplicable event seems to have been collateral damage from a much more carefully planned and successful policy strike: the privatization of China’s economy and a general effort to reduce the role of Beijing’s central government in China’s regional and local affairs. Only recently have Chinese authorities recognized the pain and the massive disruption in health care that they have caused.

By contrast, by some calculations, “the current tax-financed share of health spending is . . . 59.8 percent.” Very recent Chinese stimulus spending may be reversing prior privatizations there. But it’s clear that Chinese savings rates are still high, largely because so many citizens are scared of being sick and broke in a market-driven health care system.

Of course, it’s hard to develop any clear metric of private/public here; Blumenthal & Hsiao’s piece may only speak to financing and not other practices. Nevertheless, if Americare fails, the US and Chinese health care systems may be en route to superfusion.

What “Free Markets” Really Look Like

Garden of Death, Hugo Simberg (1896)

In health reform, as so many continue to extol the virtues of an unfettered private market– a “free market” if you will–it may be of some help to consider just what a free market is. What that calculus entails. Considered by many as the theoretical underpinning of the modern market (though, as Professor Frank Pasquale has noted, the economics of Health Care are decidedly “unconventional”) the work of Adam Smith is worth considering. Smith championed self-interest as the best means to societal benefit. “Self-interested competition in the free market, he argued, would tend to benefit society as a whole by keeping prices low, while still building in an incentive for a wide variety of goods and services.”  In Robert L. Heilbroner’s, “The Worldly Philosophers: The Lives, Times, and Ideas of the Great Economic Thinkers, we may find the following:

To Adam Smith, laborers, like any other commodity, could be produced according to the demand. If wages were high, the number of workpeople could multiply; if wages fell, the numbers of the working class would decrease. Smith put it bluntly: “…the demand for men, like that for any other commodity, necessarily regulates the production of men.”

Nor is this quite so naïve a conception as it appears at first blush. In Smith’s day infant mortality among the lower classes was shockingly high. “It is not uncommon,” says Smith, “… in the Highlands of Scotland for a mother who has borne twenty children not to have two alive.” In many places in England, half the children died before they were four, and almost everywhere half the children lived only to the age of nine or ten. Malnutrition, evil living conditions, cold, and disease took a horrendous toll among the poorer element. Hence, although higher wages might have affected the birth rate only slightly, they could be expected to have a considerable influence on the number of children who would grow to working age.

Hence, if the first effect of accumulation would be to raise the wages of the working class, this in turn would bring about an increase in the number of workers. And now the market mechanism takes over. Just as higher prices on the market will bring about a larger production of gloves and the larger number of gloves in turn press down the higher prices of gloves, so higher wages will bring about a larger number of workers, and the increase in their numbers will set up a reverse pressure on the level of their wages. Population, like glove production, is a self-curing disease-as far as wages is concerned.

And that is the free market calculus with regard to working people. Higher wages equals more food, better shelter and medical care and more babies living which in turn will produce more workers which in turn will force that greater number of living workers to compete for jobs which will then lower wages. Those lower wages will then produce less food, worse shelter, and less medical care which will produce less babies living– which in turn will produce less workers. A cycle of sweat, blood and tears unencumbered by the “distortions” of regulation.  That is the “human element” of a sheer free market calculus for workers. No regulation, no aid to dependent children or social security, no FDA–just the invisible hand of the market– that most efficient of instruments– “correcting itself” through infant mortality.

So as pundits, tea bag protesters and blog commenters across the nation call out in favor of “private markets,” “free markets” and the like, let us realize that few have the stomache for an actual pure free market. As is as it should be. So when we talk about governmental intervention in the market– let us be clear: we speak only of extent and degree– not principle.

This passage from Dickens, remembering life as a 12 year old boy working ten hours per day, 6 days per week in  early 1800’s industrial England gives some view of life under a veritable Laissez-Faire free market, as do many of his books:

As told to John Forster (from The Life of Charles Dickens):

Dickens at the Blacking Warehouse

The blacking-warehouse was the last house on the left-hand side of the way, at old Hungerford Stairs. It was a crazy, tumble-down old house, abutting of course on the river, and literally overrun with rats. Its wainscoted rooms, and its rotten floors and staircase, and the old grey rats swarming down in the cellars, and the sound of their squeaking and scuffling coming up the stairs at all times, and the dirt and decay of the place, rise up visibly before me, as if I were there again. The counting-house was on the first floor, looking over the coal-barges and the river. There was a recess in it, in which I was to sit and work. My work was to cover the pots of paste-blacking; first with a piece of oil-paper, and then with a piece of blue paper; to tie them round with a string; and then to clip the paper close and neat, all round, until it looked as smart as a pot of ointment from an apothecary’s shop. When a certain number of grosses of pots had attained this pitch of perfection, I was to paste on each a printed label, and then go on again with more pots. Two or three other boys were kept at similar duty down-stairs on similar wages. One of them came up, in a ragged apron and a paper cap, on the first Monday morning, to show me the trick of using the string and tying the knot. His name was Bob Fagin; and I took the liberty of using his name, long afterwards, in Oliver Twist.