On Market Failure and Public Health

Regulation is about making sure the system works. This means limiting market failures like uncertainty, information asymmetry, externality (positive or negative actions of individual on society), etc. There are several ways of mitigating market failures but different interest groups hold different views making it hard for governments to intervene. First, the public interest view states that the government is suppose to protect us so they hold the government accountable for redistribution and efficiency. This is the regulatory perspective. These individuals feel that government ran monopolies are cheaper then the market driven economy and they push for the government to find ways where marginal cost is small. To a certain extent, our government buys into this view because natural resources like gas, water, etc. are controlled by the government as is the VA system, state, county, and municipal hospitals.

However, the alternative view or economic view believes that legislators just want to maximize their chances of (re)election by analyzing the cost and benefits of political support which might not be in the best interest of public health. Thus, economist think market failure is due to government failure and the government may be too power hunger to do much. They cite Medicaid and Medicare as examples: Medicaid is not open to all poor citizens and Medicare benefits the rich. Redistribution to the poor offends the middle class so the generosity of Medicare and Medicaid hints at the legislator’s ulterior motives.

Thus, we have two competing models (MCMC and CDHC) which both try to make the medical market competitive without leading to market failures. Under both models, selective contracting can be used. In MCMC, selective contracting would force hospitals to negotiate with health plans which, to a certain extent, show that the managed care system is making choices for its consumer. Under CDHC, things like Medical Saving Accounts arguably put more emphasis on the consumers and it increases price sensitivity, information, and consumer search.

Enthoven described the MCMC system as a way for sponsors like employers, government, or purchasing groups to work and overcome attempts by insurers to avoid price competition. To do this, they would establish rules of equity, select participating plans, manages enrollment process, and creates price-elastic demands. The success of this system depends on a number of high-quality, cost-effective, organized systems already in place which we do not have. Limitations are seen in historic events. For instance, according to Feinstein Chapter 20, in the 1970s, the government tried limiting rising medical prices and failed. In terms of price control, hospital rates were set based on conditions at the time of regulation. This leads to problems like changes in demand over time, cost (supply) changes, product changes, and imbalance between demand and supply when price is set too low. This resulted in up coding, and created over payments to hospitals in the early 90s when DRGs became profitable. We saw an unbundling effect where prices were shifted to unregulated sectors like long-term and post-op care. Finally, in 1997, the government laid down the Balance Budget Act (BBA) that led to payment cuts.

On the other hand, there are also limitations to the CDHC system. Consumers lack information and choices while Robinson et al. clearly showed that costs were higher in hospitals operating in more competitive environments at the local level. Left unmanaged, consumer-driven health plans may result in more technological competitions rather then price-based competition. As such, my view is that there needs to be an integrated plan. I want to see an MCMC system that creates an agency which can manage a number of competing insurance plans like HMOs so that citizens get standardized benefits. But, at the same time, as proven by Melnick et al., consumers must be made aware of the consequences of their choices. Thus, competition must be regulated such that there isn’t a “medical arms race” competition (Robinson et al) while still holding consumers liable for their choices.