Normally, a market with no monopolists in it is assumed to make anything that can be made affordable, and for which there is a wide demand, to become affordable rather sooner than later, since anyone offering it at an unsustainable margin would be quickly underbid and outcompeted.
The health insurance and healthcare market in pre-Obama USA is often described as one in which this did not work at all. Why?
It's not that the market was failed. The problem was the market was distorted and Democrats had some ideas on how to fix it (there wasn't a broad consensus on Single Payer, but Obamacare instituted Community Rating and Universal Coverage). Consider the following problems
A California website shows that hospitals in San Diego County charged anywhere from $52,010 to $98,327 for [knee replacement] in 2014, but that’s just the list price. Each hospital brokers its own deal with each insurance company. The public never really gets a full picture of what insurance companies pay behind the scenes, though the amount of information available is gradually increasing.
The system essentially provided "free" healthcare to some, with insurance and those who could pay making up the difference. I once lost coverage right after a major, scheduled surgery. I received bills for over $10,000 in total. You know what was shocking? I called the hospital up and they told me they'd take 70% off if I paid one lump sum. Now, in other settings people would call that a fleecing or a scam (that's a steep interest rate for financing, if you consider that all finance charges), but the 70% was clearly for not only the finance charges, but people who didn't pay at all (Emergency rooms all have signs saying they will treat you regardless of your ability to pay). This problem has diminished some, due to the expansion of Medicaid, but it's still there.
But in new research—based on decades of previously confidential data—Kellogg School assistant professor of strategy Craig Garthwaite and his coauthors find that when the population of uninsured Americans increases, hospitals end up bearing the cost by providing uncompensated care. In fact, their results suggest that each additional uninsured person costs local hospitals $900 per year.
That means hospitals are effectively serving as “insurers of last resort” within the American healthcare sector by providing care to uninsured patients who cannot afford to pay their medical bills. “People are still going to the emergency room,” Garthwaite says, “and they are still receiving treatment—so the cost is still there. When governments do not provide health insurance, hospitals must effectively provide it instead.”
50 markets, with 50 sets of rules. This is the Republican issue, more or less. There's no way for me to buy health insurance outside the market I live in. Even if I did, my remote insurance would not have the same discounts local insurers do, thus ensuring it's more expensive. Obamacare actually made this worse, by helping to drive some carriers out of some markets. For instance, Obama noted that some states had few choices. Not only did Obamacare not address it, but it drove some lesser insurers out of those markets, so there really is only one insurer now in 5 states.
On top of that, states have their own arcane rules
Buried deep in the October 2004 supplement of the Alaska Administrative Code are a few sentences a lot of Alaska health care experts are talking about right now. It’s called the 80th percentile rule. It was adopted as a consumer protection measure, but insurers say it’s encouraging excessive prices for specialty care.
So in 2004, the division adopted the 80th percentile rule. It requires insurance companies to pay 80 percent of the reasonable market rate for a health care service. On an insurance statement, you may have seen this called a UCR for ‘usual, customary and reasonable rate.’ Insurers calculate that rate twice a year after surveying the market.
“Every year that providers continue to raise their rates, all they’re doing is bumping up that 80th percentile. There’s nothing holding them back, in other words,” he says.
The primary problem with insurance (not just health) as a market is that people have very little idea of what the risks are. Since insurance is about protecting yourself against risks, not understanding the risks means that you may buy insurance that you don't need and not buy insurance that you do need.
In the United States, most health care insurance is actually purchased by employers. Since businesses can hire an actuary to examine their risk pools, this partially offsets the problem from their perspective. However, this makes the individual problem worse. Since more established, older people are more likely to get their insurance through their employer, they don't develop the wisdom to advise younger relatives or acquaintances.
The US system involves children getting insurance from their parents, young adults skipping insurance, and older adults getting insurance from their employers. People who buy their own insurance are often lower income people who use a lot of health care. They have not yet made it to the point of getting a good enough job to get employer-paid insurance, but they have immediate needs. And they may not know how to play the tax system as well as employers. Wages are taxed but benefits often are not. So employer insurance is untaxed while individual insurance is paid out of taxed wages.
Another problem is that the US system is disconnected. A doctor works for a practice where a nurse bills an insurance company which is paid by an employer who employs the patient who needed the care. That's four steps from doctor to patient in payment. But the doctor provides care to the patient directly. This leaves both rather insulated in terms of payment.
Several times the relationship goes the wrong way. The nurse who bills the insurance is an employee of the doctor's practice. She can't tell the doctor what to do. And the patient can't tell the employer to pay more money for insurance except in terms of salary negotiations--when we get back to the problem of people not understanding risk.
The employer bears the burden of costs, but it's the behavior of the employee/patient which incurs them. Bad diet, not enough exercise, live in a bad environment, not take recommended pills. All that causes health to worsen but they can't offset increased costs vs. behavior changes, only behavior changes vs. health. A market where cost doesn't matter isn't much of a market.
Usually a market is where you can either participate for benefits in exchange for money or not. But in health care, you choose an insurer and pay before you need the product. How do you evaluate that? Particularly when if you wait until your child is sick, you'll be willing to pay anything. But it's too late then. You've already chosen not to purchase the critical coverage or only have the bad doctors from which to choose or whatever.
A final problem is that medical care is too expensive. In Iowa, there is a single patient who costs $18 million a year. That's $820 for every enrollee before they can pay any money towards their own care. So if people are asked to pay for their own insurance, they consistently say it's too expensive.
When people buy insurance, they look at expensive but unlikely to use coverage and figure that they can do without it. Which works fine most of the time, but when the giant bill goes to you, that's your problem.
It's also worth noting that the Obamacare "fix" for this has been to make insurance more expensive, pushing deductibles and copays higher to keep the premiums low. So Obamacare plans cover less than the plans that they replaced. But this cuts down on the number of people involved in paying. For most people, the insurer doesn't pay anything. They pay for their care directly to the provider (or more likely the doctor's office manager). The provider just reports the amount to the insurer in case the deductible gets met that year.
Health industry is heavily regulated in the united states, much more so than even the Scandinavian countries. Because of the high cost and liability associated with running a hospital, clinic, producing drugs, it bars new players from easily entering and reducing costs. Because health industry is in a semi monopoly where clinics, hospitals, and drug companies know they can jack prices without worrying too much about competitors - they do.
Because of this semi monopoly and high prices, it's not viable for poor people to get health insurance at a reasonable price, because it would be untenable for health insurance companies to charge so little for such expensive prices that the hospitals/clinics/drug companies charge them. After all, the profit margins for health insurance companies averages at 3%.
Many will claim this is a "failure of the free market", without even realizing just how complicated, expensive, and libelous it is to enter the health industry in America. Supply and demand laws still work, even in healthcare industry. If you make it difficult to produce a product, there will be less of that product. And it's very difficult to produce healthcare in america.
