Conservatives and the Myth of the Market

Today’s Globe and Mail had an article about the upcoming collision between the as yet not implemented ‘Obamacare’ and the resurgent Republican ‘Boehnercare’ concept of a market-driven solution for healthcare. It was the phrase ‘market-driven’ that caught my eye and got me wondering why conservatives are so enamored of this idea.

The concept of a market, at least in my simple view, is one where informed buyers and transparent sellers agree on price for an exchange. To be able to agree implies that there is a choice that is open to the buyer and that the seller freely discloses all the information necessary for the buyer to make that choice. It also goes without saying that to be effective the buyer must be smart enough to understand the offered information and so make a rational choice based on their needs and desires. This process makes sense when I am trying to decide where to have lunch. Possibly even where I put my retirement funds for the next few hours. But it doesn’t make any sense if I am having a heart attack or want to turn on the light.

Healthcare and utilities seem to be two areas where right wing governments have been in love with putting in place the illusion of a market-driven process to improve cost-efficiency. But these areas both seem like the least suited due to the characteristics of the industry and the lengthy capital investment process needed before one is able to offer anything.

In the case of electric power, governments everywhere appear to be enraptured by the prospect of establishing competitive utility markets — and that this will somehow make power more available and cheaper to drive economic prosperity. We are doing this to make things better, right? The model for this was Enron, I believe. But building a power plant or electrical distribution network is not an overnight process — it takes years, even decades and is wildly expensive. So the only real incentive to get ‘investors’ interested is to raise prices and make it more profitable. That was the reason behind what Enron did, was it not? So with this illusion of competition being put in place we have rising prices, reduced availability, and not surprisingly, diminished economic activity as jobs move elsewhere. Seems that the original intent for establishing Ontario Hydro was right on, a pity we forgot…

There is the same kind of fairy story being tossed about down South regarding the healthcare system. That somehow market-driven solutions will make it more cost-effective that a government-operated monopoly. But as with Canada, there is an entangling of interests that obscure the different processes involved and make it more difficult to separate the variables. But I will try…

The key to the healthcare system is the trained practicing professional — doctor, nurse, whatever. These folks have invested 10, perhaps 20 years of their life learning a body of knowledge and acquiring skills to be able to heal others. Most of them paid their own way because of their vocational leanings. Their activities require a lot of special tools and workspaces — and because we currently believe in specialization, care requires a number of different specialities. So their aggregate workplace and dormitories for the people being cared for we call hospitals. This is also a convenient place to bring people in serious distress — the heart attack victim, for example.

Like a power plant, the hospital and the staff who work there require a long time to build and a huge capital investment. For this reason they typically cover a geographic area with little effective overlap — so for acute, critical care the opportunities for competition are limited. But from the perspective of the emergency patient, who may have limited opportunities for reflective contemplation of the alternatives, that is probably just as well.

But more important, the decision to engage the healthcare service is driven by urgent need, not volition. And the service makes precious little information available, and what is there is suspect, that would enable a prospective patient to intelligently choose the best outcome. Even the stock market that conservatives point to as a model of efficiency is rife with faulty information and often has the appearance of the deck being stacked in favor of the insiders. So being able to choose is of limited utility for the acute care-requiring person.

What gets substituted in both universes are a choice of payment systems — for utilities they are power marketers, for healthcare they are insurance companies. The power marketer, like Direct Energy or Bullfrog Power, provides the illusion of choice by offering a variety of purchase plans and prices — but in the end they all get electricity from the same generation stations and distribute it across the same wires. In theory the price we pay may be less (or more) that what we would otherwise have spent if we bought power directly from the utility distribution company. In practice it seems that all we do is provide income for these intermediaries and their profits are added to the underlying costs.

Insurance companies work much the same way. Remember, the idea of insurance is that we make a bet that something bad will happen. If we win, the insurance company will have to pay out a lot of money. But if we loose, we pay the insurance company a smaller fee over a long period of time and they profit. The fee is set by the insurance company to ensure that they will make money over time and build up a pool of capital that will allow them to cover the costs of the occasional winner. Regardless of how low the ‘premium’ on this bet is, it must always be equal or greater than the total cost of payouts plus operating expenses and profits. So there is an incentive for the insurance company to make it difficult to ‘win’. I guess this is the attractive part of the idea for conservatives — that the insurance company will fight to reduce payouts. But let us not forget that the recipient of the payment is the hospital, not the individual. And they can go after the individual for the deficit. So while the insurance payout is a constraint it does not really cap costs. Then add lawyers into the mix and allow legal action for imperfect results…oh, my.

My problem simply is that I don’t see how a market-driven solution will have a good effect in either the utility or healthcare areas. They are both areas with long lead times, huge capital costs and limited choices. And our knowledge of how to make the best choice is at best limited when we do have the luxury of reflective shopping. All it will really do, in my humble view, is to raise costs and reduce availability. The one job our elected representatives can do is build a mechanism do deliver good service at a cost we can afford — they are uniquely positioned to address the needs of many different communities. But I fear that what we will get is actually the opposite — ever higher costs and reduced availability. But then the real choice is who funds their election campaigns, isn’t it?

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