Photo by Laurynas Me
With many left-of-center types coming up with their plans for reforming healthcare, in the event the Democrats retake the White House in 2028, I thought I would once again throw out my free-market schemes. If nothing else, a little clear thinking should help the debate.
We all know healthcare is tremendously expensive. Part of this is because it costs a lot to pay the people, doctors, nurses, technicians, and others, to provide care for patients. However, a big part of the cost is the money we pay for things, specifically drugs, and medical equipment and devices.
What we pay for the services can only be reduced by paying people less. That would be okay with highly paid hospital administrators, and also doctors, who earn on average more than $360,000 a year. It would not be okay for most people lower down the pay ladder, many of whom struggle to get by already. We can and should look to limit profits, but they are only around 5% of what is spent on healthcare services. There is also the cost of insurance, but I’ll get back to that.
Government-Granted Patent Monopolies Are Not the Free Market
But the big story that fans of free markets everywhere should be focused on is the money we pay for things like drugs and medical equipment. This year we’ll spend close to $750 billion on drugs and other pharmaceutical products. We’ll spend over $50 billion on various therapeutic devices used at home. Hospitals and other providers will spend over $130 billion on medical equipment.
This spending on goods comes to close to one-fifth of all healthcare spending, but it is an important fifth. Many of the items that require pre-authorization from insurers are costs associated with these items. This can mean starting on an expensive drug for treating a serious illness or getting a scan from the most modern MRI machine.
Insofar as drugs or scans are expensive, it is almost certainly due to patent monopolies or related protections. Drugs are rarely expensive to manufacture or distribute. Drugs that can sell for tens or even hundreds of thousands of dollars for a course of treatment would likely sell for just a few hundred dollars in a free market without patent monopolies or related protections.
It’s a similar story with medical equipment. The latest MRI, which could sell for several million dollars, would likely sell for a few hundred thousand dollars in the absence of patent monopolies. The same is true with most medical equipment.
When a doctor recommends a drug that a company is charging $60,000 for, it is reasonable to ask for a second opinion. Maybe this drug is not really the best option for a patient, or there is a generic drug that is just as good that may cost less than 1/100th the price. But if the recommended drug sells for just a few hundred dollars, there is little reason to second-guess the doctor’s opinion.
Similarly, if a hospital is charging several thousand dollars for an MRI, it would be reasonable to ask whether an X-Ray or some cheaper scan might be adequate. No one would second-guess the recommendation for an MRI if the cost was $200-$300.
The problem of patent monopolies goes beyond just the high price. As everyone who has taken Econ 101 knows, government interventions in the market encourage corruption. And there is plenty associated with patent monopolies on drugs and medical equipment.
They provide an enormous incentive to manufacturers to lie about the safety and effectiveness of their products. The opioid crisis was the most vivid example of this corruption, where the manufacturers misled doctors about the addictiveness of the new generation of opioids, leading them to be prescribed far more widely than otherwise would have been the case. But this sort of misrepresentation of the safety and effectiveness of drugs happens all the time.
Alternative Mechanisms for Funding Research
There are large costs associated with the development of drugs and medical equipment, but there is no reason that these cannot be paid upfront, as is already the case with the tens of billions of dollars that the federal government spends on research funded through the National Institutes of Health and other government agencies. It would simply have to increase the funding by a factor of three or four to replace the research now supported by patent monopolies.
The main argument against going this route is that somehow, upfront funding becomes wasteful when it involves the development of a drug, vaccine, or medical device, even though all parties agree that the funding of basic research is tremendously valuable. This requires some rather bizarre conception of human knowledge, since there is not a sharp divide between the two processes. We may want to have a different mechanism than relying on a single agency (I proposed long-term contracts with private companies), but there is no intrinsic reason that upfront funding should be less efficient than patent monopoly financing.
Upfront funding also has the advantage that a requirement could be that it’s all open source. This means that researchers could easily build on each other’s successes and be warned off pursuing dead ends by learning of others’ failures. This should eliminate much wasteful research.
Medicare for All: It’s About Efficiency
We have public police and fire departments because it is far more efficient than having everyone arrange for a private service. That is also why we have a public Social Security system. Its administrative costs are less than 1/40th of the cost of private 401(k)s.
This is also why it makes sense to have a universal Medicare system. The administrative costs of private insurers are around 20% of what is paid out in benefits. Adding in the indirect costs that insurers impose, by requiring more staff in hospitals, doctors’ offices, and other providers, and we get to close to a third of benefits paid out. By contrast, the administrative costs of Medicare are less than 2.0% of the benefits paid out each year.
The payments to private insurers make some insurance executives and shareholders rich, they don’t help to get patients good care. There will be tough calls about which care should be provided, but there will be many fewer such tough calls in a world with free market drugs and medical equipment.
We may have to debate whether to pay $100,000 for a cancer drug for an 85-year-old in otherwise decent health. If the drug sells for $500 in a free market, there is not much need for debate. We would pay for the drug.
The Self-Proclaimed Free Market Supporters in Healthcare are Liars
The key point that we should remember as we consider a new round of healthcare reform in a post-Trump world is that the so-called supporters of a free market are liars. It is fine to argue for government-granted patent monopolies as policies for financing the development of drugs and medical equipment, but it is a lie to say that these monopolies are the free market.
The market has many good uses. We could use much more of it in healthcare.
This first appeared on Dean Baker’s Beat the Press blog.
