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Republican efforts at health care reform have been and will continue to be, undermined by the same fundamental reality: the basic economic concept of efficiency.

Republican rhetoric on health care reform centers on a core conservative orthodoxy: that efficient markets, free of government interference or regulation, invariably solve societal ills. Simply put, Health and Human Services Secretary Tom Price and many other proponents of the Republicans’ approach to health care argue that an unfettered free market structure will lead to lower premiums, engender greater access to care, lower overall health care costs, and--through competition--lead to both better coverage and better health care outcomes.

From the conservative perspective, unfettered markets are the health care panacea.

Yet, every iteration of the Republicans' bill to repeal and replace the Affordable Care Act has been scored by the Congressional Budget Office (CBO) as dramatically reducing the number of people covered and causing premiums to rise. Indeed, it seems that the more aggressively government is removed from the equation, the worse it becomes.

Why the discrepancy between the rosy Republican predictions and the more moribund forecasts of not only the CBO but the great majority of independent analysts? Why doesn’t market efficiency augur better outcomes, rather than worse? The answer lies in an inherent incongruity between the very concept of efficiency as it applies to a market for a good or service, and what market efficiency means for a societal imperative like health care.

The Indispensability of Markets and the Meaning of Efficiency

Markets generally are the best way to manage society’s ubiquitous problem of scarcity. Nearly everything in the world is ultimately finite, making trade-offs imperative for everyone. People have no choice but to choose. Value reflects something's desirability. Couple desirability with the cost to produce something and its (or its components') relative abundance or scarcity, and one then has the price. Thus, how widely or narrowly anything of value in a market is distributed is almost invariably contingent upon the price level. Prices reflect value.

But, one's desire to consume or utilize something is one thing; having the means to pay the price is entirely another. Academically defined, economic demand is comprised of only those who have both the willingness and the ability to pay the market price. Markets--when left to their own devices--are amoral, systematic, dispassionate and, perhaps most significantly, efficient.

For conservatives, market efficiency is key. Government impedes natural market forces when it regulates markets beyond simple rule enforcement. Republicans argue that the health care market’s inefficiencies (and there are many, to be sure) stem directly, and only, from government involvement. Governmental “meddling” in health care markets, as exemplified by Obamacare, serves governmental goals and government's goals are assumed to almost always be antithetical to the goals of members of the public; government does not operate under the same incentives as private market participants.

The health care market must be unshackled; freeing health care markets from the yoke of government will allow the efficiency of markets to diminish, if not wholly resolve, the American health care system’s problems naturally. Government is the problem; market efficiency is the solution.

Efficiency, however, is a tricky term. Certainly, market forces have a history in a multitude of cases of lowering costs for desirable items over time, which in turn allows prices to fall and consumer participation to rise. That is clearly the Republicans' desired outcome with health care. But, market efficiency does not always produce such outcomes. Economic efficiency in markets can just as easily mean that multitudes of people are excluded as the market makes its natural movement toward equilibrium.

Markets price-ration. From societal staples like housing to luxury items like high-end cars, free, unregulated markets sometimes limit access to those with actual economic demand.

Efficiency and good societal outcomes are thus not always the same animal. Allowing the market to naturally price-ration a societal want is efficient and usually economically desirable. Allowing the market to price-ration a fundamental societal need is decidedly undesirable--even though it reflects economic efficiency.

Health Care’s Dual Market Identity

The Republicans' bet--that unfettered market forces will drive down health care prices to the point where virtually everyone will have access to care--is mistaken. History has already demonstrated that free and unfettered health care markets tend to be exclusive.

It is indisputable that if the health care market were innately inclusive--whereby prices naturally fall over time, availing services to more and more people--there would never have been any need for an insurance market to develop. Indeed, the incongruity between the health care market’s exclusivity and society’s need for accessible health care services is the very genesis of the health insurance market in the United States.

Exacerbating the need for insurance is the fact that the market for health care services is in and of itself not a “normal” economic market. Its chief abnormality is that economic demand and supply are in many ways upside down: Those who need services most desperately should be the least desirable for practitioners to serve precisely because it is unlikely these patients will be able to ultimately pay for services. And, yet, when services are rendered, it is solely out of the recognition of the patient's need. Practitioners are not in the moment thinking of remuneration at all.

What's more, unlike most economic markets, price serves as an impediment to patient demand for health care only until services are most needed. When people are most desperate and the medical problem is most dire, people obtain health care--price be damned. In some cases, practitioners without any consent or communication administer health care services when a patient is unconscious or incapacitated. Such emergency care is often the most expensive, with long-running cost implications that last beyond the initial treatment.

The market for health care services is thus unsustainable without insurance precisely because of its imbalance between price, need and consumption. And, to that end, insurance has become its own market.

For-profit insurers also price-ration, but they do it much more effectively than the market for health care services. As health care services become costlier, premiums and deductibles for insurance naturally rise for everyone because insurance markets are pooled. However, those most likely to require expensive health care services are themselves either charged more than other members of their pool or are rejected outright for coverage. Until the ACA outlawed it, insurance companies could deny coverage to anyone. This was effectively a denial of access to health care services--at least until catastrophic care is needed (in most cases, the state and/or federal government ultimately pay the cost when such care is administered).

Many American employers offered to pay for insurance coverage as a fringe benefit to employment. This filled a gap. Over time, employer-provided health benefits became an American expectation of a "quality" job. Today, some 177 million Americans obtain health insurance this way. But some employers, due to their own cost concerns, have historically not offered insurance benefits. Their employees, similar to many retirees, struggle to afford coverage in the individual insurance market. Here, the government stepped-in during the mid-1960s with Medicaid and Medicare.

Yet, even with these programs, some 15 percent of Americans did not have health insurance prior to the ACA. The law sought to fill this gap by acting largely within the health insurance market structure, using government subsidies to stabilize prices paid by consumers most in need of assistance. It also mandated coverage, in order to stabilize prices market-wide, by instituting a tax on those who choose to opt out of purchasing coverage--mostly the young and healthy. Many see this mandate as an egregious government intrusion on one's fundamental right to buy only what one sees fit to purchase.

The ACA's failure to reduce the continued growth of premiums and deductibles is a significant problem. People with higher incomes have felt the sting of soaring premiums most acutely; they do not receive subsidies and thus are price-rationed out of the market equation because they have no desire to participate at such prices. The ACA certainly needs repair.

The Orthodoxy of Market Efficiency: A Paradox for Health Care

Many conservatives focus upon the ACA's internal inefficiencies but offer a solution that would actually exacerbate many of its problems. They often tend to confuse, or perhaps conflate, the sort of market efficiencies that typically produce exclusive markets with the sort of internal market efficiencies that can make a regulated market function better. There is a fundamental difference. In the former, price is the sole stabilizer of the market. The latter requires the government to set rules and create incentives to widen access to the market while (ideally) keeping its price and cost structure stable.

Conservative rhetoric also seems too often to conflate the market for health care insurance with that of health care services. As part of their pitch for market efficiency as the answer, Republicans conjure an image of a simpler, more transactional market that harkens back to some sort of good ol’ days when health care was cheap and abundant before government ruined it. Republican legislation, it is claimed, will reinvigorate the “one-to-one between doctors and patients to make health care decisions.” While that is a vital and fundamental relationship, it exists within the market; it does not define it.

Insurance exists precisely because there never was a viable transactional health care services market. That market is exclusive by its very nature. The problem has been that the health insurance market, left unfettered, is also by nature exclusive. Conservatives seem happy to declare that the simple existence of the health care insurance market connotes access and availability. That is not accurate; price-rationing is real in the insurance market, too, and this is reflected by each of the CBO’s analyses predicting lost coverage and higher premiums.

The crux of conservative health care policy is well intentioned. But, it is based upon a misperception.

Health care is a societal need and a public good. It was the very force of market efficiency and price exclusion in the health care services market that society has, over the years, sought to overcome rather than perpetuate--first through the creation of an insurance market and then (when that fell short) through government participation. Unfettered markets resolve many problems in society, but the unfettered efficiency of the market is not an elixir for America’s challenges with access to health care. Health care markets will always price-ration unless they are regulated or somehow subsidized to be more inclusive. The Republicans' solution is ultimately quixotic, continuing to put orthodoxy before common sense. And that is precisely why GOP health care rhetoric continues to be contradicted by credible economic analyses.

Dennis R. Bullock recently ran for the California State Assembly 43rd District seat. He contributes to The Hill and continues to teach AP government & politics and AP macroeconomics in Burbank, Calif.

 

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