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When Markets Attack

April 5, 2005

Yesterday, AOL hero turned villain Steve Case announced his next new thing. Launching a company called Revolution with $500 million of his money, Case has the outsized goal of transforming the health care system for American consumers. But while the health care market may succeed in making Steve Case richer still, it will almost certainly continue to fail millions of Americans.
Marrying his unique combination of consumer zealotry and business opportunism with an apparent growing awareness of his own mortality, Case is pursuing his slice of an American health care market that now accounts for one-sixth of the U.S. GDP. Based on his own personal experiences and consultations with witness malpractice expert Senator Bill Frist, Case believes he can bring "disruptive change" to address the glaring inefficiencies in health care delivery to the mutual benefit of American consumers and himself alike. "It is the largest industry in the country," he notes, "and almost everyone is unhappy with it."
Revolution's current holdings to date, however, speak loudly about which American consumers it is targeting and how. They include Wisdom Media Group, a radio and television network focusing on health and wellness and Exclusive Resorts, a luxury vacation club featuring about 175 mansions with concierge service for members who pay $375,000 to join. In an interview with National Public Radio, though, Case spoke of his vision to empower average American health care shoppers by providing everything from "Quicken" for managing health care spending to one-stop clinics in Target and Wal-Mart stores offering 15 minute service.
Unfortunately, for the 45 million Americans without medical insurance and the millions more for whom health care is source of constant insecurity and even bankruptcy, the issue is not making the health care market more efficient and consumer friendly. Simply put, this is a case of market failure. And the sooner we abandon the misguided application of pure market theory to health care, the better off we'll all be.
The need for government to balance market incentives and market limitations is a recurring theme here at Perrspectives. As discussed previously, Perrspectives' Iron Law of Markets states while free markets produce economically optimal results, they can also produce disasterous consequences for society as a whole. While energy, education, and media ownership are some examples, health care is the clearest case of an ill-suited market model leading to socially unacceptable outcomes. Spiraling costs, the de facto rationing of health care, and the degradation of American performance relative to comparable nations is testimony to the irredeemable failure of the market model in the United States.
A flurry of recent books and articles thoroughly detail these failings, In The New Republic ("The Health of Nations", March 7, 2005), Harvard's Arnold S. Relman traces the rise of the medical market model beginning in the 1960's. He covers Wall Street's rabid enthusiasm for managed care and corporate ownership in the late 70's and 80's, leading us to today's fascination with "customer-driven health care" (CDHC). Given the wide imbalance in information and expertise between doctor and patient, as well as the mandatory nature of medical care, there can be no concept of an exchange freely made by equals. No fan of the incremental reforms of Democrats like John Kerry or the market mantras of association health plans and medical savings accounts of President Bush and the GOP, Relman concludes that:

A real solution to our crisis will not be found until the public, the medical profession, and the government reject the prevailing delusion that health care is best left to market forces. Once it is acknowledged that the market is inherently unable to deliver the kind of health care system we need, we can begin to develop the "nonmarket" arrangements for the system we want.

Another powerful indictment of the American health care "market" is Critical Condition (2004) by Donald L. Barlett and James B. Steele. Tapping both rich data sets and citing extensive anecdotal evidence, Barlett and Steele show the failure of the insurance system, Wall Street ups and downs with managed care, the power of the pharmaceutical industry and why costs are climbing, especially for the uninsured. As health industry profits grow, access for American citizens is reduced, benefits cut, and both their care and physician practices compromised. In important ways, Barlett and Steele, as well as Relman, build on the central observation of Robert Kuttner in his 1997 book, Everything for Sale: the market model just does not work for health care.
What do some of their solutions look like? Barlett and Steele foresee a Federal Reserve System for health care, a quasi-government, non-partisan body acting as a single insurance payer and pharmaceutical formulary. Relman sees a similar Fed-like National Health Agency. His system would feature a taxpayer supported system providing basic coverage for all Americans, who can choose from among different non-profit physician networks and not-for-profit health care facilities. All hospitals, clinics and facilities, whether public or private, would be non-profit and would have no alliances or financial relationships with the medical groups.
All admit that the political challenges to such a dramatic overhaul are daunting, given the financial threat posed to investors, insurers and providers alike. Short of the complete failure of the system or an extreme case of "Euro-Envy" by the American populace, the prospects for such reform are grim indeed.
Whether or not Steve Case makes billions in health care is irrelevant (except perhaps to paid market cheerleaders like Lou Dobbs, Larry Kudlow, and Neil Cavuto). Americans need a health delivery system that prioritizes access to quality medical care. They can look elsewhere to maximize profits and shareholder value.

One comment on “When Markets Attack”

  1. I don't think that the application of Free Market Theory to the Health Care industry, in itself, is the problem.
    The problem is that the Free Market Fundamentalists keep insisting that the market is free, when it's clearly NOT.
    If the market were free, the AMA would stop trying to supress the "Doctor Supply" by limiting medical school enrollments artificially (ie. based on quotas, not merit). A more robust "Doctor Supply" means more competition, which should equate to downward pressure on prices (and, unfortunately for the doctors, their income) - same principle worked when America's IT industry turned to India to increase the supply of IT staff. The AMA also has to start being more vigilant at removing doctors who commit malpractice. Currently, they do not- and this is what causes 99% of malpractice; a few bad doctors that keep doing it, because they have insurance (which just spreads the cost to consumers, whether they choose good doctors or bad ones), and they're not risking getting kicked out of their profession.
    This alone probably won't translate to lower prices at the consumer side, there are other factors:
    Drug patent law - drug patents are clearly out of control. We need to go back to the constitution, and look at the language behind the original intent of patent and copyright: ". . . for a limited time. . . " and ". . .to promote the useful arts and sciences. . ." - drug patents have been unconstitutionally extended and handed out like candy to corporations, in order "to guarantee a certain level of ROI from R&D and Marketing expenses" - which is NOT the original constitional intent. A patent is inherently an ANTI-Free Market idea. It's interventionist in nature. It is, in my opinion, a necessary measure - but it has been abused and stretched beyond any reasonable measure. It no longer serves the intent of the founding fathers.
    Also, revokation of patents should be a tool for government. Instead of giving $15 Billion taxpayer dollars to Glaxo to provide aids drugs to Africa (Bush's proposal, never funded), the government should relax patents on such drugs, to allow them to be manufactured and provided cheaply. One may argue that such a move would disincent Glaxo to do R&D on new drugs. I would answer that they're already disincented to do R&D on new drugs. I can buy a drug that gets my willie hard, but I can't buy a pill that cures cancer. Or lower back pain. Because only ongoing treatments for diseases or conditions are profitable. Not cures. This is where the government should step-in, and fund independent research. It's not a place where public investment is going to compete with private industry, because private industry is clearly not interested in such a market, where there's such an obvious need to be fulfilled.
    Hand in hand with drug patent law, is the absurd regulatory environment that allows the drug industry to freely segment (manipulate) the market to maximize profit. If they can hire Indians for 1/10th the cost of what an American worker would get, then I should be able to go overseas and import drugs safely, myself. If the problem is adherence to safety regulations (which is what opponents falsely claim) then foreign drug companies should be allowed to register for safety certification, pay the necessary fees to get products certified, and then be granted access to the lucrative American market.
    These are just some of the glaring examples. If the system could be adjusted to be a truly Free Market, I think we'd be far better off with Health Care. It's these abuses which are causing the outcry for single-payer health care. And what I'm frightened of, is when it gets so bad that a majority of Americans are BEGGING for it, they'll get it. And that will give the power-mongers in government yet another system to abuse us with (as they currently abuse the Military/Media Industrial Complex. It will just become the Military/Media/Medical Complex). Imagine a "Flu-threat Level of Orange" from the Department of Homeland Health Security. Imagine ten-trillion dollar budgets for DHHS, justified by trumped-up threats. Imagine people infected with AIDS, rounded up and put in quarrantine camps, for "more effective treatment". Imagine being fined for eating a cheeseburger. That's where we're going with this. Just because it works in Europe, doesn't mean it's going to work here.


Jon Perr
Jon Perr is a technology marketing consultant and product strategist who writes about American politics and public policy.

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