In the United States our health insurance marketplace has a number of participants:

• Doctors
• Hospitals
• Insurance companies
• Employers
• Government
• Individuals

Each of these participants has constraints on what they can do. Insurance companies need to cover all of their costs and make a profit. So do doctors, and many hospitals. Employers, government, and individuals are getting squeezed by rising costs and finding health care more expensive to provide. Helping one group is likely to harm another unless the provisions are finely balanced. How do each of these groups try to improve their own situation?

Doctors face a basic problem in common with service-providing industries, which is that they cannot improve productivity easily. Most productivity increases come from automation, and that is not the way to provide quality health care. What all of us would love is to go to the doctor’s office and have a long, quality interaction with a caring, highly-trained professional, and that is expensive and doesn’t get any cheaper over time. What practices are doing is using lesser professionals like Nurse Practitioners to take over a lot of routine interactions. One thing that is getting more attention is moving more of the routine stuff out of the doctor’s office into clinics. Some of the larger Pharmacy chains see this as a growth area, and are already routinely offering services like influenza vaccinations.

Hospitals face many of the same pressures as doctors, since nursing care in a ward is also hard to automate. But in addition they face increasing costs for advanced medical equipment. Imaging, for example, is wonderful. We used to hear the phrase exploratory surgery, which meant cutting you open to take a look and see what is going on. You never hear that any more, because we have so many marvelous ways of imaging what is inside of you without cutting you open. But those CAT scans, PET scans, and MRIs all use very expensive equipment. In some states they try to hold down costs by limiting which hospitals can purchase this equipment. In many states, for instance, there is a process to require a Certificate of Need before a provider can spend significantly on plant and equipment. My own state does this for those very scanners ( CT scanners, MRIs, and PET scanners) as well as for certain units, adding more capacity, and so on.

https://www.michigan.gov/documents/mdch/2013_Brochure_409310_7.pdf

We are also seeing increased consolidation in the hospital sector with mega-chains developing by merging in smaller competitors. This is clearly a way to gain increased market power, though it is never overtly presented as such.

Insurance companies may face competition that limits premium increases, which suggests that increasing competition may be a good thing (it usually is). But if the costs they face from doctors and hospitals go up, they can be squeezed. If they cannot raise premiums, they have to reduce payments. This is where things like pre-existing conditions become relevant. That is simply a way to say there are certain things they won’t pay for. The other thing they love to do is negotiate package deals with providers to get lower rates. This is what they call their network, which are all the providers they negotiated good rates with. Any other provider is out-of-network, and they may refuse to pay for these services. The other technique insurers use is to shift some of the costs onto the individual through co-pays and deductibles. The next time you get an Explanation of Benefits notice read it carefully and you will see how this works.

Employers are primarily concerned with premium costs of coverage. These costs are, to the employer, just another line item in the cost of having employees, along with wages, payroll taxes, etc. Employers add all of these up to determine the cost of hiring people. If labor markets are tight there may be competition among employers to offer better quality of insurance.

Government has two primary concerns to go in opposite directions. One concern is to provide good services to citizens, which can lead to higher bills. The other concern is to reduce the tax bill, which can lead to reduced services.

Individuals also face conflicting concerns. Everyone wants high-quality medical care, which is expensive. And everyone want low-cost medical care, which is not high-quality.

And this all leads to some useful principles:

All medical care is rationed.

This one sometimes takes people by surprise, but all it means is that we do not have the resources to provide maximum medical care to every single person. Providing medical care costs money, and so does food, clothing, transportation, housing,…. You get the idea. There has to be some way of finding the right balance, and to anyone with economics training that means cost/benefit analysis.

So how in practice do we ration medical care? Generally in one of two ways:

1. Rationing by price/income – This is the most common method in a market system. Every bit of care has a price attached, and then you decide which ones you want to spend your money on. And even if you get it as a benefit it is a cost. I saw this very explicitly when I was working on contract: I was offered one hourly rate if I also wanted health insurance, and another higher one if I didn’t.
2. Ration by benefit – This is sometimes very controversial, and often sounds like the runaway trolley problem (https://en.wikipedia.org/wiki/Trolley_problem) . Do we spend money on providing basic care for large numbers of younger people (e.g. prenatal care), or on organ transplants for elderly people? If you are an alcoholic, for example, you may be turned down for a liver transplant on the not unreasonable grounds that are likely to destroy the new liver as well. Statistics show that a very large proportion of health care spending comes in the last months of life, and may not even prolong life by much if at all. Should we spend so much on this? Who decides?

Most other forms of rationing end up resolving into one of these two types. And again, it is clear that this problem cannot be avoided. There is no way to say “Health care is a right that should never be rationed” and turn that into a viable policy choice. One of the major drivers behind the Obamacare plan was the rate of increase in health care costs. This fundamental problem has to be addressed one way or another. And that is our next topic.

Listen to the audio version of this post on Hacker Public Radio!