Monday, July 20, 2009

Massachusetts Health Reform

My post on Arnold Kling's blog on EconLog, "Massachusetts Health Reform, Version 2.0?"
Kling says, "With markets, trial and error takes place continuously. A lot more things get tried. Failure gets weeded out more ruthlessly."

However, I believe Kling would agree that to his Darwinian (Spencerian) evolutionary analogy, one must add the effects and distortion of the ecosystem. In an economy, government laws and government programs are part of the ecosystem.

A market based health system must conform to the distortions created by the employer tax deduction for health benefits, Medicare hospital and doctor pricing and reimbursement rules, Medicaid, state health insurance laws, etc. This is the ecosystem.

Our attempts at a market based health reform exist within this system. If we are unhappy with our health delivery or our health insurance and reimbursement system (which are often confused with each other in the debate), it is essential to change the ecosystem, i.e. our laws and government programs, to allow a health system to develop based on undistorted consumer demand and profitability. Undistorted is not the same as unregulated, but that is a separate topic.

One of the key differences between government attempts and private market based attempts is that the evaluation is sequential as opposed to parallel. In government, one system is set up and allowed to exist until outside pressures, such as costs, electorate dissatisfaction, etc., force a reevaluation and a modification to the system. Different attempts do not compete against each other within the same period. This is what is happening in Massachusetts' health reform legislation now.

In a market, different attempts are tried almost simultaneously (or within overlapping periods) so the user or consumer has choice. Continued existence requires the ability to attract users and the ability to be profitable. Maintaining costs levels to achieve profitability is essential for survival unless subsidies exist. Successful systems survive and unsuccessful ones wither away due to lack of demand (sometimes it is the product and other times it is the pricing), due to excessive costs or due to a competitor's better and cheaper product.

Government, at times, tries to be more like a market system through limited use of pilot programs. However, pilots are more like drug trials than a market-based economy. The participants and time are limited. Consultants then usually evaluate the program's success based on politically selected parameters instead of consumer demand and profitability.

Another difference between market-based and government-based programs is flexibility versus bureaucratic rigidities. If a business owner sees that a service or its pricing is not working, the owner has the control and power to attempt to make positive modifications as quickly as possible. In government, there are no owners. However, the programs must continue to meet rigid legal and regulatory requirements. Additionally, users usually do not have alternative options to a government program and can only voice, if at all, their dissatisfaction to the press and their politicians.

Consumer choice in an undistorted marketplace leads to consumer satisfaction. The result in not always the theoretical best or the cheapest, but it is the one that contributes the most to consumer satisfaction. If the consumer is not satisfied, the product and service will disappear and something else will replace it. If more consumer satisfaction is available at the same or lower price from a different product, it will replace what exists.

Undistorted consumer choice determines survivability in a free and competitive marketplace, and increases consumer satisfaction, even in a health care system.

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