Health care is a big, fuzzy ball of misery and mystery. In my next few blog posts I'm going to explore some of the contradictions of the American health care system. Such as the topic of today's post, the myth that the free market will provide us all with affordable, reliable health care. To start, I'd like to share two stories from my many years working in high tech and associating with biotech "entrepreneurs".
On the board of one of the start-ups I worked for was a very successful health care executive. He had made millions $$ as the CEO of a company that made blood test systems for use in clinics and hospitals. To motivate me to come up with creative ways to increase our software revenues, he told me a story about one of the secrets of his own success. His company made a very nice profit on the sale of each blood analyzer, but he felt they were not making enough revenue from clinics and labs after the analyzer was installed. He knew that every test on one of his machines used several gallons of distilled water, but his customers weren't buying this water from him (because his company charged $10.00 a gallon). Instead they bought distilled water from the local pharmacy, for $2.00 a gallon, keeping lab costs down for their patients. To put a stop to this economizing, he came up with a new "maintenance" plan which promised to void the warranty on his customers' machines unless they used "certified" distilled water, which only his company sold. This resulted in a brisk business in his $10/gallon water (the same exact water that CVS sold, since distilled water is distilled water). He was quite proud of this plan, it made his company millions $$ more in profits (and incidentally increased the cost of every lab test by $20-30).
Another company I knew at that time designed a surgical robot. This robot gives surgeons precision control during delicate coronary bypass procedures (the company had done extensive market research and chose the coronary bypass market because it was so large). One of the key business aspects of their robot's design is its "disposables". Disposables are all the tools, instruments and accessories that have to be discarded after they've been used once on a patient. This company went to great lengths to design expensive (and profitable) disposables. They not only ended up with a robot that performs coronary bypass procedures extremely well and which is sold today for about a million dollars, but they ensured a significant ongoing revenue stream for the expensive "disposable" end parts of the robot which have to be replaced after every surgery. As they explained to me, "the magic is in the disposables".
These companies can get away with this kind of profiteering because they are not operating in a free market. One cannot shop at Walmart or Target for the best deal on blood gas analyzers. There are no coronary bypass sale days at the local hospital ("Come in today for great deals at our Presidents' Day Bypass Extravaganza, and get a free set of snow tires!!!"). Both of the above businesses knew that once they had gone through the lengthy clinical trails needed to have their system certified for use on patients, they would be granted a virtual monopoly for their system and would have tremendous leeway in setting prices and guaranteeing profit margins.
In a true free market, suppliers can freely enter and bid down the price of inflated products, like the distilled water or the disposable surgical tips. In a true free market consumers are well-informed and have a number of options to obtain the best product or service for the best price. But it doesn't work this way in the health care market. The extensive and expensive clinical trial process, required by the FDA for every new medical device or pharmaceutical, makes it extremely difficult for a competitor to enter a market. This means the "first mover" supplier has tremendous clout. And consumers have very little power. To become well-informed about treatment options, laboratory equipment or surgical devices takes years of medical school. Consumers have few or no choices in hospitals, doctors, medical technologies or prescription drugs. In the shoe business, customers who don't like $120 Nikes might buy $70 New Balance sneakers. The typical medical care "shopping" experience is "here you go, take it or leave it". Try shopping around for the best deal the next time you're in need of a heart stent.
The consumer price index, which tracks the prices of day-to-day goods and services in what are primarily free markets, has risen about 250% since 1980. In that same time the costs of health care have grown 800%. This is what a monopoly market looks like. When consumers are weak and suppliers have all the power, prices can be hiked with little risk of competition. Medical companies who want to ensure the continued flow of their "healthy" revenue streams will lobby to the death to protect the "free market" for health care, but it's time we all admitted that the free market for health care does not exist, and it is unlikely it ever will.
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5 comments:
It's enough to make you sick.
I've done work with insurance brokerages and agencies over the years, too. I developed financial systems to calculate, among other things, commissions. I remember one rep was making 17k a month in commission alone. The whole system is a mess and will continue to get worse if radical changes don't happen. Yes, the risks of the business are huge, but the profits are enormous. I feel that it shouldn't be a 'business' but a 'service'. And everyone needs to change...not only do away with $53.00 bandaids, but do away with billion dollar law suits, too. And why is dental care separate? People with good teeth are generally better tax payers, no? Everything about the system deepens the divide between those that have and those that do not. I'm glad candidates (well, democratic ones) have "plans" regarding healthcare, because I certainly have no suggestions for a viable solution. All I know is that it can't go on like this. I am an economic moron, but I knew the dot com bubble was going to burst, I knew the bottom was going to fall out of the housing market, and I know that any healthcare changes that come about are going to be cumbersome, expensive, and inconvenient, but they MUST happen.
Please excuse the rambling nature of my thoughts!
The shame of our health care system is that a consumer has to make a decision when they are their weakest. If your feet were bloody and in pain, you'd probably buy the Nikes rather than go to the next store for the New balances. That's where we are at a disadvantage. In addition to having few choices, you have to try to plow through the bureaucracy of insurance when you are least able to. How many of you have heard stories of someone putting a claim in that is denied only to be told that the co. routinely denies the first claim because many people will be too discouraged to refile? Maybe I'm too liberal but there is something immoral about making a profit off of sickness.
Christine
If the Free Market doesn't work in Health Care, then the opposite of that is government regulations. The irony is, being A-MURR-icans and all, we generally refuse government regulations.
So, no matter what idea the candidates have, the big health care lobbies a.k.a. known as Free Market Forces, never ever succumb, because the population at large will not demand government intervention.
In my opinion, all baseline services such as roads, schools and health care should be provided by the government and paid for through taxes and other creative revenues (what if the government built and sold a very basic, very economical, very ecological automobile and made a slight profit to fund roads?) Anything over the baseline could be purchased by those with means -- like private schools now.
I'm not against paying for what I receive -- so I don't think taxes are a bad thing.
I agree with Chrissybugs about making profit off of sickness being somehow ethically wrong. These claims rejections are the perfect example...They go to great lengths to not pay claims. If I have a contract with an insurance provider, and they try not to pay for things, isn't that a conflict of interest on the most basic level? Don't get me wrong, I'm grateful for the insurance I DO have...very grateful. It just seems that as far as the big picture goes, there ought to be a way to provide healthcare without profit being the key factor.
And Cynthia makes perfect sense, too. I have no problem with taxes either (though they are negligible at my rate of pay). However I keep hearing that "socialized medicine" would be a disaster and I"m not exatly sure why. Maybe this is the next myth for John to bust?
I think we value what we pay for. I'm not opposed to rewarding scientists and doctors and researchers for their expertise. Clearly profit margins in the health care industry are too high, but that doesn't mean these folks shouldn't earn a pretty penny for the work they do.
John frequently reminds me that Barack Obama's been quite fuzzy in revealing the details of his health care plan, etc. I don't disagree. But his idea seems the most logical to me, given the strong opinions Americans have about a free market system. Why can't we tighten up regulations on the industry a bit in an effort to lower that profit margin and make health care more affordable. Then a modest increase in taxes could even the playing field so that even the poorest will be covered. The rest of us can pay for whatever we feel will meet our needs. I think most of us lucky enough to have decent jobs will likely continue to receive some type of health care incentive through our employers, especially if it's more affordable to them, as well.
Some argue that we can't work our way into universal coverage; that unless we cover everyone up front, we'll never get affordable coverage for all. But I just can't imagine Congress passing a universal health care plan that will mandate coverage for all. Currently, Republicans refuse to raise taxes to support a war -- why should we believe they'll support a tax hike for universal health care coverage...? I think it's going to be difficult for either of the Democratic candidates (or Ralph Nader) to do much about health care coverage in their first four years.
What, you don't think Nader has a chance...?
;)
Lisa
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