Monday, July 13, 2009

Profit and Medicine

The profit motive has been, to a great degree, responsible for lifting billions of people out of poverty and into middle-class life. Yet America, with the most profit-driven health care system in the world, spends far more than any other country and outcomes, by standard measures such as longevity and infant mortality, are among the worst in the industrialized world. Why?

The profit motive leads to over-all increases in wealth only when combined with the right kind of markets. Otherwise, it simply lines the pockets of the well-to-do and powerful at the expense of everyone else. Such markets were first described by Adam Smith in his much cited but seldom read "Wealth of Nations." The conditions necessary for the profit motive to work well are:

  1. All parties can walk away from any deal. This is often accomplished by having many providers and consumers, none of whom can control the market.
  2. All parties are well informed.
  3. Transactions have only minor negative effects on third parties. For example, if I buy a gallon of gas from Exxon, Exxon gets the dollar and I get to drive around, we win, but you (the unlucky third party) have to breath the fumes and get no benefit.

My hypothesis is that the profit motive doesn't work well in health care because all three of these conditions are seriously violated, at least in our system. In addition, health care has special properties that generate high levels of effort without the profit motive.

The first condition is violated in any medical emergency. You cannot walk away from a hospital in the middle of a heart attack because the one ten miles away is cheaper. If there is a patent on the drug you need for survival you must pay whatever the drug company wants to charge. The bottom line is that the medical field is not a single Adam Smithian market, it is a large collection of markets and many of them are monopolies. In monopolies, the profit motive does not have the good properties of Adam Smith's markets.

The second condition is violated in the medical insurance market. Try to get a list of the drugs your insurance company covers. You can't. Not only won't they give you a complete list, the list changes all the time both in coverage and cost. This makes comparative shopping essentially impossible, negating the advantages of the free market. Worse, many people discover, to their horror, that their insurance company can find a way not to cover them when they get sick. The companies have doctors on the payroll dedicated to denying coverage. In some cases they even have quotas (10% is popular) and get prizes for denying more coverage than their peers.

The third condition is violated by the basic structure of the market. Patients and doctors agree on treatment, and therefore cost, while the insurance companies have to pay up if they can't find a way to deny coverage; which is the case for most conditions.

There are also some pathological dynamics in the drug market, among others. The best, least expensive health care would be created by drug research that targeted vaccines and complete cures for serious, expensive diseases. However, the most money is made by drugs that can be used for pleasure (e.g., viagra or prozac) or that control -- but do not cure -- chronic conditions. For example, there are three standard drugs for multiple sclerosis (MS), each costing about $1,000 per month. None of these drugs cure MS or even reduce disability. They do reduce attacks and help people stay employed and insured. Meanwhile research into MS focuses almost entirely on a 50 year old failed attempt to disable bits of the immune system, an approach which generates a lot of revenue but has failed to cure; while research into mylin regeneration, which has some possibility of a cure, is almost ignored.

This is not because the drug companies are evil. On the contrary, they relieve human suffering on a huge scale. But when it comes time to decide where to put research and development dollars, they have a fiduciary responsibility to their stock holders to make money. Often that means choosing to develop a drug that the patient will have to take forever at great expense over a vaccine that only requires one dose per customer; remembering that either effort may fail completely and it will, at best cost, hundreds of millions of dollars to bring either drug to market. The net result is plenty of viagra and prozac, and no vaccine for malaria. Actually, the amazing thing is that the drug companies do occasionally develop vaccines even though they make little money.

It has taken a long time, but I'm coming to the conclusion that health care is one of those areas where the free market and the profit motive doesn't work. Other areas include firefighting, police work, and recruiting soldiers willing to die. Besides the theoretical arguments there is the unquestionable fact that America has the closest approximation of a free market in health care, doesn't get very good outcomes, and pays far more than anyone else.

Eliminating for-profit companies doesn't necessarily mean a single payer system, although countries like Canada and England with single payer have better outcomes than America for less money (1). There are a number of other non-profit models that might be explored. For example, France, with one of the best health care systems in the world measured by outcomes, is not a simple single payer system. I've been told it's employer based with the government paying for certain expensive diseases, such as cancer.

Eliminating the profit in many fields would also eliminate the motivation that sustains extra-ordinary effort by participants. Health care is unusual in that people will work very, very hard because they love to make sick people well. When Jonas Salk developed the polio vaccine he refused to patent it. His reward was the knowledge that he cured the sick -- not unlike Jesus himself but on a much larger scale. Health care for profit has been tried. It hasn't worked very well. We need a new approach.


(1) When confronted by single payer systems that work better and cost less than our system, it's common to claim that Canadians and Brits have to wait all the time and that socialized medicine means dealing with bureaucrats not doctors. The studies I've seen suggest that Canadians and Brits don't wait any more than Americans do; I've certainly spent many hours in the emergency room and getting an appointment with my family physician takes about six weeks. Furthermore, Americans and their doctors spend a great deal of time dealing with insurance company bureaucrats. The doctors hate it, and I feel the same. One example: we used to have Health Net. My wife has MS and takes Avonex, a standard treatment. When we were on Health Net, they initially refused to cover Avonex every year for five or six years running. Every year we went to the doctors, got letters from specialists, and tried to point out to Health Net that they ended out approving the drug year after year, but only after the annual bureaucratic battle. This charade ended when we finally changed employers and insurance companies.