It is a dysfunctional market. Buyers lack the market power to control their costs. Sellers have no incentive to lower prices.
Beyond that nothing is simple. But we badly want it to be simple. So we seek villains. We look for someone to blame. (Picture from Frugal Cafe, a conservative blog.)
Both sides have their favorites. Republicans blame trial lawyers. They don't like government. Democrats also have their favorite villain, the insurance companies.
Recently the Administration focused on Wellpoint, which has been pushing rate hikes of 40% on the West Coast. Difficult to understand when Wellpoint made $2.7 billion in the last quarter of 2009. In addition to raising rates, Wellpoint is also fighting hard to avoid paying claims.
How can this not be proof of villainy?
Well, if Wellpoint is a villain it's not a very good one. The company trades at a price-earnings multiple of about 6. For most of the last decade the price-earnings multiple of the S&P 500 has hovered around 20.
Eliminating Wellpoint's profits won't solve the problem. Neither will getting rid of trial lawyers.
Why did Wellpoint raise its prices? Because it had a shrinking client pool. As prices rise, people with a low risk of getting sick drop out, leaving only those who have a high risk or are already sick. Wellpoint isn't selling insurance -- it's pre-selling health care services at a markup.
How do other countries manage to cover everyone for 8-12% of their gross domestic product, while we pay 17% and leave one in six out? It's because, whether their systems are public as in Canada or private as in the Netherlands, someone has the power to say no.
This is done through standard formularies. If a patient displays with this condition, this is what you do first. Some countries let their citizens go outside the standard with their own money. Others don't.
Comparative effectiveness is an attempt to gather data and come up with these standards. Find out what works best and do that first. Don't pay for what isn't proven to work -- not with the public's money. That's what the health IT stimulus is all about, gathering data so the answers we come up with are as right as possible.
While denying data, and the power of data, health reform opponents knew exactly what they were doing. The best-known of these early critics, Betsy McCaughey of the Hudson Institute, was quite upfront about it:
The health-care industry is the largest employer in the U.S. It produces almost 17 percent of the nation’s gross domestic product. Yet the bill treats health care the way European governments do: as a cost problem instead of a growth industry.
Any real reform program will do that. When you reduce costs, you squeeze down the size of the industry. When you intervene in the market on the buyer's side, you cut what sellers can charge.
But if you don't you make care unaffordable for all but the wealthiest. And in the end that cuts the size of the industry, too.