Right, but Wrong

From Hot Air:.

Rep. Anthony Weiner (D-NY) returned to the ObamaCare battle on MS-NBC’s Morning Joe today, preaching the public-plan gospel just as he did yesterday on CNBC. However, this time, Joe Scarborough goaded Weiner into a little more honesty than he’s offered on the effort to “reform” health care. Declaring that “health care is not a commodity,” Weiner says his aim is to eliminate all private insurance — which is why he will not yield on the public-plan option.

Weiner repeatedly says “health care is not a commodity.” The article tries to refute this by saying that anything with a cost is a commodity… but that’s not really true. Health care is a service, health insurance is a good, and aspirin is a commodity.

The essential characteristic of a commodity is fungibility. We say that X has been commodified if there is little to no difference between the utility of the product across suppliers. That’s obviously not true of services. The utility (quality, effectiveness, price…) of health care depends on the abilities of individual health care providers.

So Weiner is right. Health care is not a commodity. It’s a service.

But what does that mean for the “reform” debate?

Does it mean that we should try to treat health care as a fungible commodity? Or does it mean that we should respect the individual services provided and work to improve the quality and availability of those services?

If we work to eliminate private insurance (a good that increases utility by spreading risk) and force all service providers to negotiate with a single payer (a monopsony) then we are saying that while Health care is not a commodity, we sure wish that it was.

The monopsony power of a single payer system works to bring the price of the good/service in question down. But good intentions don’t exempt markets from economics. Prices cannot be arbitrarily lowered without affecting supply. In the case of services, especially in the case of capital intensive services (where the providers require years nad years of expensive training), monopsony price controls result in an overall reduction of the supply and quality of available services. Expensive services are eliminated and the numbers of service providers dwindle in response to market pressures.

Finally, because monopsony power in health care generally fails to distinguish between the quality of health providers (every doctor is paid a fixed amount per procedure), it reduces the incentives for providers to improve the marginal quality of their work.

Weiner also asks, “What is [the health insurer’s] value? What are [the health insurers] bringing to the deal?”

This is, I think, a common concern. It doesn’t seem as though health insurers do very much other than collect large premiums and deny coverage. Partly this is because for the average American, the actual cost of health care is a mystery. $20 co-pays and $8 prescription fees mask the actual cost of providing those services. Health insurance hasn’t actually been insurance for a long time. For most of us, the bulk of our annual health care costs are paid for directly out of our premiums. What would otherwise have been deductible expenses are simply front-loaded in higher premiums. Since we often don’t see actual health care bills (until payment has been denied!) we don’t get that the money we’ve paid as premiums has actually been used as a deductible.

But there’s another reason why I think we’ve come to distrust health insurers (in a way that we don’t distrust our flood insurance providers or our fire insurers): health insurance has in many ways already acquired a kind of monopsony power. Because we have so tilted the tax codes to favor employer provided coverage, health insurance has become structured around actuarial pools (an employer’s workers) that are in many ways arbitrary. Sensible regulation concerning privacy and portability has meant that insurers have had a harder time finding accurate actuarial tables against which to price health insurance, which increases the cost of insurance. Additionally, employer provided insurance has mean that a disproportionate amount of purchasing power has been placed in the hands of insurers with large group policies. The insurer who covers 40% of a community’s workforce, for example, is in a strong position to dictate prices to providers. (But as I’ve said, that power comes with a cost of its own: decreased supply and quality.)

In essence, when you buy your health insurance through your employer, you’re trying to treating health care as a commodity! The insurer packages your care with the care all your coworkers will receive into a big bundle, prices the total bundle of services, and then splits the cost more or less evenly among the subscribers. That’s treating individual services as a kind fungible commodity. If health insurance were really insurance–with reasonable deductibles–then this kind of packaging would work primarily to spread risk, but since we’ve increasingly started using premiums to pay for maintenance and routine care, we’re not so much spreading risk as we are spreading cost–and ultimately–quality.

The solution to this mess is to stop treating health care as a commodity. Increase the number of insurers, increase the numbers of providers. Extend the health care tax deduction to individuals and allow insurance companies to package products that account for real actuarial differences. Increase deductibles, reduce premiums, and extend catastrophic insurance.

The solution to monopsony power is not to increase the power of the monopsony. The solution to a commodification of services is not to increase the commodification of those services. The solution is to increase the number of players in the market and allow specialization, competition, and innovation to increase product differentiation and serivce quality.

Weiner’s right, health care isn’t a commodity. But he’s wrong to try and treat it as one.

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One thought on “Right, but Wrong

  1. My sense of Rep. Weiner is that when he says, “health care is not a commodity,” he means that health care is not something that should be bought or sold, but rather something that all people have a right to, and therefore something that must be provided by the state. Problem solved for Rep. Weiner!*

    *Problems begin for the rest of us.

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