Health Care Costs: Don't Blame the Free Market

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Sunday, 02 June 2013 07:36

The NYT has a very interesting piece documenting how much more people in the United States pay for a wide variety of medical procedures and drugs. While the article provides much useful information, it badly errs in telling readers (in a quote from David Blumenthal, the President of the Commonwealth Fund) that the cost problems stem from a free market.

In fact, one of the main reasons that the United States pays so much for health care, including the items listed in this article, is precisely because it does not have a free market in large sectors of the health care industry. Of course it severely restricts the admission of immigrant doctors into the country, driving up the pay of physicians to two or three times what they would receive in other wealthy countries.

Perhaps more importantly, it grants patent monopolies to drugs and medical devices. These monopolies allow pharmaceutical companies and manufacturers of medical devices to charge prices that are many thousand percent above their free market price. Not only does this raise the cost for these items it also perversely is likely to lead to unnecessary procedures, like the proliferation of colonoscopies that are a main theme of the piece.

Because the equipment used in colonoscopies is subject to patent protection, hospitals and other medical facilities are able to charge exorbitant prices. Since colonoscopies provide large profits (which would not be the case in a free market), there is a strong incentive to push their use on patients in circumstances where they may not be needed.

This is a more general problem in U.S. medicine. Because drug companies can sell drugs for hundreds or even thousands of dollars per prescription, when they can be profitably sold for $5-$10, they have an enormous incentive to mislead the public about the safety and effectiveness of their drugs.

This is why we regularly see stories about drug companies concealing evidence that their drugs are ineffective or even harmful. That is a direct result of the enormous mark-ups that are provided by patent monopolies. If drugs were sold in a free market these incentives would not exist.

Patent monopolies are one mechanism to provide an incentive for innovation, however they are a tremendously inefficient mechanism. There are other possible routes for financing innovation (the government already spends $30 billion a year on biomedical research through the National Institutes of Health).

Of course the industry will fiercely contest any changes that threaten their profits, but no alternatives can even be considered until the public understands the nature of the problem. This piece missed a great opportunity to inform readers.