The Economic Realities of Health Care

Adam Smith is credited as being the father of economics. He introduced the idea of the "invisible hand" where (as his thinking went) people pursuing individual self-interests simultaneously served the interest of society. He also introduced the initial thoughts related to "perfect competition" which has provided the basis for our own free-market thinking today. Perfect competition, however, had several key components required before a real free-market existed. These components included: 1. No single participant can influence prices, 2. a free-flow of information exists among all market participants, 3. There are no barriers to entering a market, and 4. There are a large number of buyers and sellers.

As our health care debate continues, and despite our preference for free-market approaches, it is fairly apparent that our health care economy isn't operating by any "invisible hand" and doesn't include any of the components of "perfect competition" so some level of intervention is likely needed. The level of that intervention is at the center of the debate today and the key is going to be striking the right balance between the two. This idea has been the centerpiece of the Collaborative Health Care System principles we established three years ago.

A study completed on behalf of the American Medical Association found that out of 314 metropolitan markets across the country, 94% are controlled by one or two health insurance companies, or fewer. In 15 states, one insurer has 50% or more of the entire market. While the insurance industry questions the methodology used in this study, other studies have supported the fact that limited competition exists in most markets for the delivery of health insurance services. And, as the consolidation of the health care market continues, these numbers will likely continue to increase. That's the reality.

On the other side, a 2006 study of hospital systems found that one or two hospitals controlled the market in 88% of the nation's largest metropolitan areas. When you have dominant carriers going up against dominant delivery systems, it's no wonder we have a difficult time in coming up with a "free-market" pricing structure that benefits the system as a whole. We're lacking the invisible hand.

We honestly don't know if a "public option" is the answer. Those supporting this approach are using the idea of introducing more competition into the marketplace as the reasoning behind it. We question whether a government injected solution is the right approach.

Once again, it's all about the message. It's not about whether we have a public option included or not. The real issue is about the need to change the basic economics of a system that desparately needs to change. Monopolies dealing with monopolies just don't work. So, if we're going to strive more closely toward a free-market, perfect competition approach, the free-market supporters had better come up with a better solution than what is being thrown around today.

We haven't heard it so far.