NCPA - National Center for Policy Analysis

Can Markets Work in Medicine?

August 27, 2012

There exists a sharp divide in the realm of health care over whether the market can fairly and accurately provide health care to consumers. Those in favor of government regulation are often cited as saying that leaving health care to be provided by powerful vested interests will result in increased prices and complexity for the average consumer, says Christopher J. Conover, a research scholar in the Center for Health Policy & Inequalities Research at Duke University.

However, just as with other complex issues such as cellphone or automobile shopping, the consumer benefits from a market that lowers prices and improves quality of services, despite not being very knowledgeable about the products. The facts suggest the same result would occur in a health care services market.

A 1974 RAND study tested the efficacy of the market in health care.

  • 7,000 individuals were randomly assigned different health policies: ones with free care, ones with a $200 deductible and 25 percent cost sharing, and finally those with high deductible policies.
  • The cost-sharing policies had an upper limit on how much the consumer spent. Once a family had spent 10 percent of its income on health spending the insurance policy would cover the rest.
  • Those with free health care had 32 percent higher average spending than those that had to pay some, and 93 percent of that spending was from waste.
  • Finally, there was no difference in the health of the average patient between those groups.

A policy that allows consumers to be responsible for paying for some of their health costs causes them to shop around for the best policy. This creates competition on the end of the health care providers to give better quality care for lower prices.

Source: Christopher J. Conover, "Can Markets Work in Medicine?" American Enterprise Institute, August 20, 2012.


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