Saturday, April 11, 2009

The Free Market Does Not Work In Health Care

By Igor Volsky

Competition without meaningful regulations incentivizes companies to only offer insurance to the healthiest Americans. How else could they beat the insurer across the street? Offering coverage to sicker Americans would attract a sicker pool of enrollees and serve as a competitive disadvantage. In fact, free market health care fits the definition of a failed market. A market fails if:

1. Monopoly — occurs if a single buyer or seller can exert significant influence over prices or output: In health care, “insurer and hospital markets are increasingly dominated by large insurers and provider systems.” “The increased concentration has made it difficult for the nation to reap the benefits usually associated with competitive markets.”

2. Negative Externalities — occur if the market does not take into account the impact of an economic activity on outsiders: In the ‘wild west’ environment of the individual health market place, companies leave the sickest patients without coverage. Health care costs increase for everyone when patients are forced to forgo early and appropriate care or visit the emergency room once a condition becomes unbearable.

3. Asymmetric Information — occurs when one party has more or better information than the other party: Americans looking for coverage in the individual market have no way of comparing different policies or rarely know what the plans actually cover.

Conservative health proposals double-down on this broken marketplace. They: 1) eliminate the employer tax exemption for health benefits, 2) provide everyone with a refundable tax credit to go out and purchase individual coverage, and 3) loosen the already lax insurer regulations. The results are predictable. Not only will Americans with pre-existing conditions go without coverage — or, at best, be offered very expensive plans — but as healthy Americans with bare-bones policies fall ill, they’ll discover that their insurer has little enthusiasm for paying claims.

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