The “free market” question

Free Market

There’s growing debate about the benefit of transforming health care in the US to a free market system where providers attract patients based on price and services.  The call for more transparency in pricing in the US is a result of the free market debate.  The problem is, health care in the US is not a free market system and not likely to become one.

In a true free market system the market sets the price, the laws of supply and demand come into play and the consumer and provider are able to negotiate a fair price for goods or services but that’s not the case in our current health care system.  The major consumer for health care services in the US is the federal government because the government provides Medicare and Medicaid and those two are the largest health care pay sources in the country.

Government run health care plans, Medicare and Medicaid, set prices and if a provider chooses to supply services to Medicare and Medicaid beneficiaries then the provider is agreeing to accept the payments  dictated by those two government-run programs.  There’s no opportunity for negotiation, it’s take it or leave it.

Supply and demand doesn’t work for health care either because supply for one provider can be very different than that of another provider.  If you have two providers who provide care to the same number of people but one provider has a population of 25% Medicare and the other only 5% Medicare with the balance of each being made up of commercial insurance or cash payment, there’s no way the two providers can compete on price.  The first provider is at a disadvantage because a higher percent of his patients are price controlled at government rates.

A free market system sounds good in theory but the population served tends to dictate the price paid for a service.  The same is true in other industries.  There’s a reason Clinton has three auto dealers and none are BMW, Jaguar or Lamborghini.  We don’t have the population to support a high enough volume of sales of those high-end cars to keep a dealership in business.  A place like Beverly Hills or Overland Park may and that’s why you’re more likely to find those type of dealerships in those areas.

Health care is the same.  The population served dictates the payment received.  Sure, every hospital has the ability to compete for patients who can afford to pay more for services but geography comes into play.  Why would someone from Beverly Hills or Overland Park come to Clinton for health care when there are perfectly good hospitals where they reside.  They wouldn’t and they shouldn’t.

Hospitals serve a community and hospitals resemble the communities they serve.  The population we serve is a high percentage Medicare, a lesser percentage of commercial insurance, a lesser percentage of Medicaid and an even lesser percentage of self pay so that’s our market.  A hospital whose market is primarily commercial insurance with little to no Medicaid has a huge advantage from a price stand point because they’re not stuck with dictated fees for service, instead they have the ability to negotiate.

Geography and population served tend to be the biggest drivers in price for health care not the market system.  A free market system will be impossible to achieve in our health care system unless we go to either a single payer system or start charging everyone cash for services.  I don’t see either happening anytime soon.

About Craig Thompson

I am a young professional with two great sons, and I work in the healthcare setting. I am employed in hospital administration and serve as Chief Operating Officer at Golden Valley Memorial Healthcare in Clinton, Missouri. These are challenging and exciting times in healthcare and my blog will focus on healthcare, raising boys or being raised by boys, and living in mid America.
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