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The US Healthcare Market Debate, Explained Through Economics

Posted on by • Posted in Competition, Competitive Market Conditions, Health Policy, Healthcare Economics, Healthcare Market, Lack of Competition, Market Failure, Standard Competitive Market Model, Uncategorized • Leave a comment
The US Healthcare Market Debate, Explained Through Economics

Everyone agrees that the US healthcare system is not working so great. Compared to the rest of the world, our healthcare is extremely expensive and yet we suffer worse health by many measures. And we can’t seem to agree on what’s to blame, or what we should do about it. Do we have too much, or not enough, competition? Should the government intervene in health care markets more or less? 

Basic economics can help us better understand what’s happening.

As with any exchange of goods and services, the standard competitive market model has the familiar upward sloping supply curve and downward sloping demand curve, illustrating that when prices are higher, demand decreases and supply increases as sellers are incentivized to produce more of that good or service at its higher price. Sellers and buyers arrive at what quantity to produce and consume and at what price based on where these two lines intersect, called the equilibrium. Both buyer and seller are happy with the deal they’ve struck!

But not every market works this way. There are actually standards that need to be met in order for a market to fit this model and for it to work efficiently for both the buyer and seller. 

First, there must exist multiple sellers competing to sell the same goods or services and new sellers must be able to easily enter the market.

There must be a sufficient open exchange of information between buyer and seller about price, availability, and value of a service or good.

And buyers must make, or be in a position to make, rational decisions using the information they possess about the market.

Healthcare does not meet these standards and when these standards are not met, the equilibrium cannot be reached or accurately known. Any price and quantity that falls outside of the equilibrium is considered a market failure. Using only this model, we can see how healthcare’s market failures contribute to high prices. 

To start, it’s true that healthcare is failing the market standards when it comes to competition. The number of sellers in the market is decreasing due to both an increase in barriers to entry and due to consolidation, including hospital mergers. This causes an imbalance in power of the seller over the buyer that can begin to reflect what economists call monopolistic competition where sellers can charge a price above the perfect competition equilibrium. In the extreme, when there is only one seller, the market is a monopoly.  

So then, don’t we just need more competition? Unfortunately, a lack of competition isn’t the only reason that healthcare fails the market standards.

Another failure is that consumers in healthcare, patients, do not have all the information that providers, like doctors and hospitals, do. This is known as asymmetric information. Patients often have no idea before getting care how much it will cost, what the prices available to them elsewhere are, or what the quality will be. When consumers are in the dark about these basic features, the true demand and supply will be different than the model. The true demand may be lower if patients knew ahead of time how much it cost or how much less valuable the service is compared to how it is promoted. This means prices can be set higher than they likely would be if the true demand was known.

Even if patients had full information, they are not always in a position to act as rational consumers. A patient’s decision may be influenced by their concern for their health, or their ability to think rationally may itself be affected by their condition. 

So, as you can see, the problem is that a lack of competition only accounts for part of the reason why healthcare doesn’t meet the market standards. No matter how much the government either steps back to allow for more competition or invests to foster competition, the market will never fix ALL of these failures on its own. Healthcare is not and can never be a free market. It simply does not fit this model.

In 1963, economist and later Nobel prize winner, Kenneth Arrow, warned us about this looming healthcare crisis. He explains that “If the actual market differs significantly from the competitive model […] coordination of purchases and sales must take place”

That coordination he is referring to is government intervention.

Dr. Mike Chernew, Health Economist and Professor of Health Policy at Harvard Medical School agrees…“an unregulated health care market is unlikely to lead to desired outcomes.” 

In reality, health care always has, and always will, involve a combination of both government intervention and market forces to control prices and increase quality. The debate isn’t really whether or not the government should intervene, but by how much and in what way.

FDA authorizes second booster shot for people age 50 and up

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https://thehill.com/policy/healthcare/600076-fda-authorizes-second-booster-shot-of-coronavirus/?utm_source=Sailthru&utm_medium=email&utm_campaign=03.29.22%20JB%20Health%20Care&utm_term=Health%20Care

The Food and Drug Administration (FDA) gave the green light on Tuesday to a second coronavirus vaccine booster shot for people aged 50 and older in an effort to ward off another potential spike in infections due to a subvariant of omicron.

The agency said anyone aged 50 and older can get a second booster dose of an mRNA vaccine at least four months after the first booster, regardless of which vaccine was administered the first time. 

FDA granted emergency use authorization to the vaccines from Pfizer as well as Moderna. Pfizer had initially requested authorization for people aged 65 and older, while Moderna requested broader authorization for all adults.

Peter Marks, head of the FDA’s vaccine division, told reporters Tuesday the agency went with the lower age limit because those people are most likely to have medical conditions that put them at high risk of serious outcomes.

The Centers for Disease Control and Prevention (CDC) director Rochelle Walensky updated the agency’s guidance to match FDA’s action, though the agency stopped short of making a full recommendation. The CDC said anyone age 50 and older who wants a second booster is now able to get one.

“Boosters are safe, and people over the age of 50 can now get an additional booster 4 months after their prior dose to increase their protection further,” Walensky said in a statement. “This is especially important for those 65 and older and those 50 and older with underlying medical conditions … as they are the most likely to benefit from receiving an additional booster dose at this time.”

The FDA said there’s emerging evidence that the effectiveness against symptomatic infection and severe disease caused by the omicron variant wanes three to six months after receipt of an initial booster dose. 

“Based on an analysis of emerging data, a second booster dose of either the Pfizer-BioNTech or Moderna COVID-19 vaccine could help increase protection levels for these higher-risk individuals,” Marks said in a statement. “Additionally, the data show that an initial booster dose is critical in helping to protect all adults from the potentially severe outcomes of COVID-19. So, those who have not received their initial booster dose are strongly encouraged to do so.”

Health officials did not convene any advisory panels on the applications for second booster shots. In the past, an FDA panel of outside experts has disagreed with the decisions of agency leaders to broadly expand access to booster shots.

Marks said there wasn’t a need to convene a panel because the move was a “relatively straightforward” data-based decision.

The evidence in favor of the extra booster came primarily from Israel, one of the only other countries that has already authorized a fourth dose for people aged 60 and older. But the results were mixed at best. The studies showed an additional booster for that age group was lifesaving, and kept people out of the hospital even if they got sick.

In younger people, the booster was not effective at preventing symptomatic infection, and breakthrough infections were common. People also were observed to have large viral loads, even with mild infections, meaning they could easily spread the virus to others. 

Marks indicated federal officials could broaden the recommendation in the fall to include all adults, including those who get boosters in the coming months, because the next phase of the booster campaign could be variant-specific.

“At some point we’re going to have to realize that this is a virus that’s going to be with us and that we have to come to grips with dealing with it on a regular basis,” Marks said.

But there are major questions hanging over the decision, including how long protection from a second booster will last. The move is likely to reignite a heated debate about who might need booster shots and the broader goals of the U.S. vaccination campaign. 

Much of the debate has centered on whether the goal is to prevent people from being hospitalized with COVID-19 or to prevent them from getting sick at all, even if symptoms are milder. 

There’s clear evidence that the vaccines’ protection against infection wanes after several months across all age groups. Still, many health experts have questioned the effectiveness of repeated booster shots in younger, healthy people. 

Booster shots are currently authorized for everyone 12 and older on an emergency use basis, and people who are immunocompromised are already eligible for a fourth dose. The FDA and CDC on Tuesday said those people are also eligible for a second booster— a fifth dose.

The authorization comes as COVID-19 cases have been falling in the U.S., and the CDC said most areas in the country no longer need mask mandates indoors. 

However, officials are carefully watching the BA.2 subvariant of omicron, which is responsible for a major spike of infections in Europe. 

The omicron subvariant is now the dominant strain in the U.S., according to the CDC, responsible for about 55 percent of all new infections. There’s no evidence the BA.2 version of omicron is any more severe, though it is more contagious.