“Gotcha” Number 1

Several months ago, in a long discussion on Facebook in which I defended the idea of an actually free health care system (and then blogged about it here), one person gave me the following thought experiment (which I have restated and condensed).

A woman needs serious medical help. 911 is called. After paramedics arrive, just before going unconscious, she reveals that she has no health insurance.

The pointed question which followed was essentially: If the emergency providers are not required to help her (because she has no insurance) doesn’t that lead one to say that health insurance is a human right?

The context was explicitly about health insurance. Thus, the very formulation of the thought experiment creates an error: that the only way to pay for healthcare is via health insurance. Many people do not have health insurance and yet still pay for their healthcare. However, it is likely he intended for the thought experiment to include the idea that she is too poor to even buy health insurance, and therefore also too poor to pay for whatever treatment she immediately needed.

In any case the response to this thought experiment is the same:

Divide every American into two categories: those who can afford health insurance without government assistance, and those who cannot. If the woman in the thought experiment could not afford health insurance, it should be provided by the government. In the US we call this service Medicaid, and it will cover emergency room visits such as the one described. Thus, the thought experiment, at least in the US, is essentially bogus:

  1. Those too poor to afford health insurance will be covered by Medicaid as they are now.
  2. Everyone else buys private insurance.

If she is not poor enough to be covered by Medicaid, and has not bought insurance, then the ER personnel would still treat her. Emergency responders don’t ask about payment options during a life-threatening crisis, they ask about potential allergies (if you are conscious). Indeed, turning away someone in need of life-threatening medical attention is almost certainly against the law, and if not would be headline news accruing a whirlwind from pundits – on the left and the right – writing lengthy opinion pieces about the failure of this facet of our medical system. That doesn’t happen, because emergency rooms don’t turn people away during life-threatening moments, and they do not worry about whether someone is covered by insurance in those life-threatening moments. Even if there were no laws against it (which I doubt), no hospital – public or private – wants to find itself in that position.

Full stop.

The thought experiment fails.

Let’s explore just a bit more.

The hospital and ER treat her for her life-threatening situation. If she survives, the hospital administrators will deal with her payments – again, not the paramedics, emergency doctors, and nurses. They will simply render aid in the moment of crisis. Hospitals negotiate payment plans with patients if need be.

If she were a rational, functioning adult human in the United States, and knew she was not covered by Medicaid, she made the conscious choice to spend her money on things other than health insurance. And by so doing, she knowingly placed herself in the potential position of having a lot of medical debt. Turns out choices have consequences. It is not my duty, as a separate tax payer, to pay for that person’s neglect. That may sound harsh, but I am sympathetic to a great variety of misfortunes that can occur in this life – not just medical ones. Perhaps she will even have to declare bankruptcy. If I knew her personally I would likely donate money to help her out. I donate more than a tenth of my gross income to various charities.

Medical bankruptcy is a real thing. But socialized medicine is not the best solution to eliminate its possibility because it ultimately raises the costs of health insurance for everyone, including the poorest.

“Gotcha” Number 2

In a different conversation, not about health care but the free market it was stated, “If I’m having a heart attack, I ain’t gonna price-shop between the 3 nearest hospitals.” This was presented as an example of “market failure.”

I took it as a “gotcha” implying that the free market is not well suited for health care. Fundamentally, this is presented as an extreme example of a disparity in negotiating power between buyer and seller. The person experiencing the heart attack doesn’t have the luxury of comparing pricing; it is implied that the ER staff can charge whatever they want – they have all the power!

This formulation implies that the factors determining the price for treating a heart attack are effectuated at the moment someone experiences a heart attack. Is that likely?

Most individuals in the US have some form of health insurance. The elements determining the price to treat a heart attack are a complex negotiation between hospitals, doctors, nurses, paramedics (healthcare providers in general), and health insurance companies and patients (those who pay for the healthcare in general), and often complex government regulations (which are legion in the health care industry). It is not at all certain that the healthcare providers wield the most leverage here.

Even if many health insurance plans don’t cover heart attacks, enough of them do to significantly influence the price of treating a heart attack. And as stated above, during an actual heart attack emergency, the patient will be treated regardless. And because the payment terms will often become a negotiation after the fact (also as stated above), the price to treat a heart attack is subject to all the same influences that most goods and services are.

Here’s an easy example showing that emergency rooms in general – which are the first places to treat heart attack victims generally – are influenced by market forces. When I was at university in the late 2000s, I recall seeing, for the first time, billboards for (private) hospital emergency rooms advertising their (very low) average wait times. If the market for ERs weren’t influencing them they would never bother to advertise this. Such billboards are still quite common.

But is this even a “Market Failure” at all?

Even if the price to treat heart attacks were set by the “point of sale” as it were – the moment someone is having a heart attack – this would not be a market failure. This is because the existence of unequal negotiating power is not market failure (which expressly does not imply equality of outcome in the market anyway; an impossibility).

A market failure is when the market participants’ incentives lead to a poor outcome for the market as a whole.

To understand what it means, let’s first describe the most basic form of a “market” – a single, voluntary transaction between two individuals. The buyer pays $5. The seller provides a hamburger. Both sides are better off, or else they would not have made this trade. The buyer would rather have the food than the money, and the seller would rather have the money instead of the food. The point is that markets are positive sum – both sides are better off after the trade than before.

A market failure in its simplest form is defined as when the participants are not better off after the trade. Market failure means the transactions are zero sum, rather than positive sum. In economist terms, the situation is not “Pareto efficient” – when improvement for someone implies deterioration for someone else.

The bottom line is that many people have heart attacks, survive after receiving medical attention, and do not go bankrupt (my own grandfather is such a person). Given the stark choice between dying and paying whatever they paid – even if it did result in bankruptcy – virtually all would choose life. This is a positive sum situation, and therefore, by definition, not a market failure.

An important note about the term market failure:

While I believe that portions of a market or economy can be Pareto inefficient (The traditional definition of market failure), I do not like the term market failure because it implies that a market can succeed or fail at something. A market has no purpose, plan, or goal – so it’s hard to say that it ever succeeds or fails in any meaningful sense.
Individuals, communities, institutions, and organizations can have purposes, plans, and goals. But the billions of voluntary transactions that occur daily, comprising “the market” cannot – in their totality – be said to move towards the accomplishing of a goal, plan, or purpose. Only each voluntary transaction can be said to further a purpose. Not their aggregate.