Catastrophic Care – Part One

In his recent book “Catastrophic Care,” David Goldhill argues that the central problem with America’s healthcare system is the use of insurance to finance healthcare expen-ditures. According to Goldhill, insurance-based healthcare cannot control costs because consumers (i.e., patients) don’t directly pay for their healthcare. Rather, intermediaries such as health plans and government pay the bills, which Goldhill says is bad because they cannot effectively contain costs.

Goldhill points out that insurers seek profits, so their long-term goal is to increase prices and expand coverage for new types of care. Therefore, health insurers have what Goldhill calls a “fundamental disincentive” to restrain pricing and healthcare purchases and be-cause of this, Goldhill insists they will never be as effective as individuals would be if individuals themselves dealt directly with providers about their care.

Although many people seem to agree with Goldhill’s claim that profit-seeking insurers cannot contain costs, the claim is nonsensical. Firms in all markets seek to maximize profits, but fortunately for consumers, if markets are competitive, then market forces will restrain prices no matter how eagerly sellers seek those profits. Sellers are powerless to gouge customers in the face of alternatives. This is how competitive markets operate and it’s why we should like them.

If healthcare markets are not price competitive, then the answer is to tighten and enforce the antitrust laws in order to fix those markets that don’t work. A system that relies on individuals to purchase services isn’t going to bring about lower prices if markets are not competitive in the first place. Providers in highly concentrated markets aren’t going to lower their prices simply because the customers are individuals rather than health plans. One way to start enforcing the antitrust laws would be to break up the big hospitals and big insurers.

Goldhill also complains that the use of insurance creates a moral hazard that he defines as the “tendency of a person to make claims, inflate claims, or tolerate higher costs” when a third-party pays the bill. Because our health insurance covers too many types of medical expense, Goldhill argues that moral hazard has come to completely dominate the industry’s economics and pricing. To reduce moral hazard, Goldhill would allow insur-ance for the most catastrophic cases only (with health savings accounts to handle the remaining expenses).

But Goldhill’s concern with the health coverage would be less of an issue if antitrust enforcement resulted in more competitive markets and lower prices. Individuals have value scales by which they rank the importance of various goods and services. If some individuals prefer to spend more money on additional healthcare rather than additional units of other goods and services, then so be it. Prohibiting individuals from choosing the level of care they prefer and are willing to pay for would be difficult to defend on moral grounds.

If Goldhill is right that Americans are buying more medical care than we need, then we seem to be laboring under a false consciousness. But what is the source of this false understanding? One of the traditional liberal arguments is that advertising creates its own demand, but Goldhill specifically laments the lack of marketing in the healthcare industry, unlike firms in other industries that seek out customers. So apparently advertising is not misleading us.

Other causes of our confusion might be providers who influence patients by virtue of their superior knowledge or a government that is unable to control itself, as it relentlessly expands coverage of Medicare programs that the private sector is only too happy to mimic. No matter what the cause, the question is whether individuals purchasing care on their own would result in fewer purchases and lower prices. As we’ll see in the next post, Goldhill’s proposals don’t offer much hope on this score.

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