Well I wish I hadn’t hastily put up the last post and ended with a stupid comment like “And of course, none of this even deals with demand,” because investment in medical innovation is in fact a function of demand for medical services. So let’s take a look at the bigger picture! Here’s roughly what the health care market in the US looks like.
Demand for medical services is basically inelastic. That is, when we are sick, we will continue to consume health care services until we die, run out of treatments, or run out of money (there are exceptions, but generally, our desire for self-preservation is fairly limitless). This is true for all health systems: France, UK, Canada, you name it. The difference is that in the United States, we allow the free market to determine price, and since the United States is incredibly wealthy, this pushes demand to the limit of supply, driving the price of medical care with it. Of course, bargaining through large insurance pools — as happens in the employer and public markets — helps contain growth, but the trend still remains.
This unrestrained demand produces two bad outcomes. First, it creates a de facto system of health rationing by price. Because we consume medical services at the upward limit of supply, only those with enough money can afford it. The second problem is that because supply is finite, value generated by marginal demand approaches zero (again, consider that 10 to 30 percent of medical expenses are waste). This inflates prices, thus forcing even more people off the rolls (we’re now at 2.3 million per year).
The good news is that the solution is relatively simple. Pull back demand from the margin, and savings are large:
Health care reform, if it’s expected to be sustainable, rests on reducing demand for health care services. In the UK or Canada, this is accomplished through strict government rationing. In other places, it’s accomplished through risk pooling and bargaining (I’ll add this and hard-cap rationing aren’t mutually exclusive). The problem isn’t in the theory, it’s in the politics. In the United States, reducing demand for health care services will hurt the bottom lines of pharmaceutical companies, private insurance companies, and of course, doctors, nurses, and hospitals. And these are powerful people.