The Myth of “Markets” in American Healthcare

Stop using that word: It doesn’t apply

For the benefit of the author of this Atlantic article, (esp paragraph 3) not to mention legions of pundits, analysts and policymakers who misuse the word ‘Marketplace,’ I refer you to the above photo of the famous the Djemaa el-Fna market in Marrakesh, Morocco. A market is a place where buyers and sellers, functioning as independent agents in pursuit of their self interest, meet to negotiate a mutually agreeable exchange of money for products/services. At Wharton, they taught us, furthermore, that an efficient market has three basic qualities: A critical mass of buyers and sellers, low transaction fees, and information transparency between buyers and sellers. Do either of those two scenarios remind you of the American healthcare system?

As a VC, I find it offensive when journalists and politicians claim that ‘markets aren’t working’ in solving America’s healthcare challenges. How would one know??? There hasn’t been a true marketplace economy for healthcare insurance in the US since 1965 when Title XVIII (Medicare) was passed, or for hospitals starting 1946 with the Hill-Burton Act. Healthcare in America has evolved into a command economy the likes of which 20th Century Soviets could only dream.

Participants in the ACA operate according to expansive, complex, and comprehensive regulatory constraints at the local, state and federal levels that render participants little more than public utilities, diligently executing against a detailed state-issued RFP. It is amazing to me that anyone is surprised the big insurers are consolidating, it was an obvious result of federal law regulating profit margins. If your income growth is capped by regulatory mandate, your next best option is to grow the top line and enjoy geographic monopoly power.

While the ACA contains market-like elements, it fails as a market economy experiment on many levels. Some of them, like affordability, information transparency and the ‘critical mass’ problem could resolve themselves, but it’s biggest flaws are fatal.

1) Sellers are not free to compete for customers based on core elements of price, quality, differentiation or distribution.

2) Buyers are not free to select among vendors based on their own needs/preferences/circumstances or tastes.

But I’ve digressed. This is not the post that outlines a comprehensive critique of the ACA, or proposes a policy prescription alternative. It is merely a plea on behalf of us ‘applied’ economists working in the trenches of business creation in healthcare to quit abusing the word ‘Market.’ As the immortal Inigo Montoya said to Vizzini, “You keep using that word. I do not think it means what you think it means…”

Show your support

Clapping shows how much you appreciated Brandon Hull’s story.