Free-Market Healthcare is an Illusion

The proposed Republican healthcare plans rest on the assumption that our entire health care system should be run by private for-profit healthcare businesses and government should get out of the way. In their market-driven healthcare system, Republicans believe that the free markets will work to drive healthcare costs down through competitive forces. One problem with this assumption; namely, free-market healthcare does NOT exist in reality! The Republicans are trying to sell us a false bill of goods.

Republican free-market healthcare

What Exactly is Free-Market Healthcare?

According to Wikipedia, free-market healthcare is defined by the following:

“In a system of free-market healthcare, prices for healthcare goods and services are set freely by agreement between patients and health care providers, and the laws and forces of supply and demand are free from any intervention by a government, price-setting monopoly, or other authority.”

Therefore, in a free-market healthcare system, health insurance companies do NOT play a role. This is obviously not the free-market healthcare system the Republicans are trying to sell us, because under their plans, private for-profit health insurance companies (intermediary payers) take center stage. The Republican healthcare plans have incorporated many “tweaks” to the free-market healthcare system defined above. They claim their pseudo-free-market healthcare plans will lower healthcare costs.

free-market healthcare plan "tweaks"

Let’s look at how our healthcare system would function under the pseudo-free-market Republican (“tweaks” included) plans in more detail so that we can determine how (and if) they will drive down the cost of healthcare.

  • Under their pseudo-free-market healthcare plans, Republicans define competition ONLY between private for-profit health insurance companies.  Unfortunately, health insurance companies do NOT provide healthcare services—healthcare service providers (doctors and hospitals) do. Competition among health insurance companies is therefore only half the equation for bringing down prices.
  • Under their pseudo-free-market healthcare plans, Republicans assume that many competing health insurance companies will have price negotiating power over local doctors/hospitals. The opposite is in fact true. One health insurance company per locale would bring down prices faster than many competing health insurance companies.
  • Under their pseudo-free-market healthcare plans, Republicans do not address the scarcity (supply) of healthcare providers and how it affects healthcare costs. In many parts of our country, many types of doctors (e.g. general practitioners) are in short supply allowing these doctors to demand higher salaries that increase healthcare costs. For healthcare prices to decrease under free market forces, the supply of doctors must be increased.
  • Under their pseudo-free-market healthcare plans, Republicans assume that demand for healthcare services (not healthcare insurance) is comparable to demand for other goods and services. In reality, sickness does not lend itself to price comparison and shopping for the best deal. Demand for healthcare services is usually immediate, local, and largely out of the consumer’s control.
  • Health insurance and healthcare provider businesses across the country create natural local “monopolies” that are immune to free market forces. The business of healthcare in the United States is based on local conditions like demographics and population density (see Health Insurance Marketplace Competition Really Necessary?) where individual companies carving up the customer pie among themselves.

Let us look at an example of how free- market healthcare actually works in the United States.

Medicare Advantage–Free-Market Healthcare

Medicare Part C (called Medicare Advantage), the part of Medicare Part A and B that is managed by private for-profit health insurance companies across the country, enrolled 17.6 million Medicare beneficiaries (31% of total) in 2016. The Medicare Advantage program today represents a marketplace where the Republican’s pseudo-free-market healthcare principles currently function (more or less) and gives us a window into the Republican’s proposal to completely privatize Medicare  (0% beneficiaries in original Medicare) and things to come. My discussion on Medicare Advantage competitiveness and healthcare costs below uses the data provided by the Commonwealth Fund (see the sources below).

Free-Market Competition?

The analysis by the Commonwealth Fund  found that Medicare Advantage (MA) markets (in 2012) were highly concentrated in both urban and rural counties across the nation and that there was little competition anywhere in the entire country.  In fact, 97% of the 2,933 counties studied met the criterion for highly concentrated markets. By 2016, the MA marketplace had become dominated by only six large companies (or their affiliates) — UnitedHealthcare,  Humana,  Blue Cross Blue Shield (BCBS) affiliated plans,  Kaiser Permanente,  Aetna, and Cigna with 73% of the total MA market.  In other words, the health insurance companies that sell Medicare Advantage plans have evolved into natural local “monopolies” as one would expect given similar findings in the employer and non-group health insurance markets. Republicans can release health insurance companies from “onerous” regulations so they can compete in a “free-market healthcare system” but expect these companies to create local “monopolies” in the process.

Free-Market Healthcare Costs?

Recent data from the Commonwealth Fund showed that the cost per enrollee in Medicare Advantage plans was less than the cost per enrollee in original Medicare ONLY for plans structured as HMOs in 25 urban counties across the country.

free-market healthcare Medicare Advantage lowest costs

If you do not live in one of these 25 urban counties, Medicare is paying Medicare Advantage plans more for your coverage than if you had remained in original (traditional) Medicare.  These urban counties are demographically suited for creating economically feasible and longstanding HMOs; namely, there are enough customers with excess cash to spend and a good supply of doctors. What works in these 25 urban counties simply does not translate to the rest of America in the for-profit world of Medicare Advantage. All other Medicare Advantage plan types (local PPO, regional PPO, and PFFS) had higher costs than original (also called traditional) Medicare. This is not surprising given the fact that the private insurance companies pay for separate administrative costs and maximize profits/income for their companies.

How are healthcare costs reduced in the 25 urban counties?

Is there any downside to the patients in these 25 urban counties?  Of course there is. The patients have to receive care under an HMO structure where the choice (and quality?) of doctors is limited to a subset of the total locally available. Unlike Medicare beneficiaries under the original (traditional) umbrella, the Medicare Advantage HMO beneficiaries cannot get healthcare from the “best” doctors/hospitals across the country unless they pay for it 100% out-of-pocket.

Perhaps in the future the doctors in these 25 urban counties will wrestle negotiating power from the insurance companies by consolidating and thus gaining the upper hand in price-setting negotiations as have their fellow doctors in other parts of the country.

Summary–Republican’s Pseudo-Free-Market Healthcare

When Medicare is fully privatized under proposed Republican healthcare plans, the healthcare costs will escalate well beyond the differences seen in the Commonwealth Fund study because the brakes on healthcare costs that original Medicare had provided would be a thing of the past. After Medicare privatization, the Medicare Advantage plans will no longer have to “compete” with a fairly efficient single-payer Medicare program (original Medicare with some of the lowest fee-for-service rates in the country).

Republican’s pseudo-free-market healthcare plans call for competition among health insurance companies and NOT among doctors (of adequate supply) to bring down healthcare costs. If one wants to argue that free-markets can bring down costs, then insurance companies should NOT even exist in the Republican plans. Only competition between a large supply of doctors will bring down healthcare costs in our present healthcare system where free-market healthcare is the goal. The Republican’s pseudo-free-market healthcare plans are designed to increase doctor’s incomes, not decrease them.

Unleashing more of our nation’s health care onto private for-profit companies without extensive regulation is a recipe for higher costs, not lower costs. Reality does not support the Republican contention that increasing competition among health insurance companies will reduce healthcare costs. In the Medicare Advantage program, insurance companies have only been able to reduce costs in 25 urban counties across the country by restricting doctor choice and possibly by restricting the use of expensive treatment options. Evidence shows that health insurance companies create natural local “monopolies” and carve up the marketplace among a small group of large companies.

When Republicans use the words free-markets or market-driven, run the other way—you are about to have your pocket picked.  Don’t be fooled by plans that only serve to enrich private healthcare businesses at the expense of the American consumer.


Does Medicare Advantage Cost Less Than Traditional Medicare?, Commonwealth Fund

Competition Among Medicare’s Private Health Plans: Does It Really Exist?  Commonwealth Fund

Health Care Market Deviations From the Ideal Market

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