Fundamental economic principles tell us that goods should be sold at their marginal cost of productionthe cost of producing one more unit of the good. If a company needs to pay twenty dollars for the material and labor used to produce one more shirt, then shirts should sell for twenty dollars plus a small profitearning markup. The priceequalsmarginalcost principle maximizes economic efficiency and limits opportunities for fraud and corruption. Building on this principle, economists also strongly advocate globalization: the elimination of trade barriers allows consumers to buy goods and services from where they are cheapest, thus maximizing global efficiency and output.
Unfortunately, when it comes to health care, these principles are routinely violated. Prescription drugs that could be manufactured and sold profitably for a few dollars per prescription may instead sell for thousands. Performing one more hightech scan or other medical test may require just a few cents of electricity and a couple of hundred dollars worth of a technicians or a doctors time. But diagnostic procedures can be billed at several thousand dollars a shot. Prices are often well above marginal costs, yet economists involved in health care reform rarely recognize this as a problem.
This article has become a book!
Dean Baker
MIT / Cloth / $14.95 / April 2010
There is nothing wrong with economics, but economists routinely ignore their own principles when it comes to policy. What would it look like if we took mainstream economics seriously and applied its lessons consistently?
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Dean Baker is CoDirector of the Center for Economic and Policy Research and author of The Conservative Nanny State, Plunder and Blunder, and Taking Economics Seriously, from Boston Review Books.
Dean Baker, FreeMarket Myth
John Geyman, The Common Interest
Barbara Starfield, The Primary Solution
Ezekiel J. Emanuel and Victor R. Fuchs, Getting Covered
John CanhamClyne, A Rational Option

The United States has already made a social decision that we're going to pay for healthcare no matter what. When someone comes to the ER, there are laws in place that MANDATE treatment. Under a free market model, that wont work. The consumer has to be free to CHOOSE not to purchase healthcare and not have society take on the bill instead. So if you want healthcare to be a free market, you have to repeal the EMTALA laws first.
The author of this article also terribly misunderstands the role of physicians in healthcare. Under his model, flooding the country with doctors would somehow lower healthcare costs because it would force free market competition among the doctors to lower prices.
Well, that doesnt work because again, doctors dont compete against each other because the consumers are not free choosers in a free market.
More doctors = more testing, more procedures, more surgeries, translating to HIGHER, not lower healthcare costs.
Lets take a look at rural vs urban medicine. Urban areas have many times the number of doctors per capita that rural areas have. Boston, Mass for example has 10 times the number of doctors per capita as rural Oklahoma. Under this author's model, that should mean that healthcare costs are LOWER in Boston because there are many doctors competing for the same pool of patients.
But is that what they are really doing? No, because more doctors in a given population INCREASES the demand for services. This is well documented. There's a study showing that as the number of doctors per capita in Boston started increasing in the 1950s, the following things happened:
1) The number of physical exams per capita went up
2) The number of specialists treating each patient went up
3) The number of cardiac bypasses, colonoscopies, heart stents, hip replacements, knee replacements per capita went up.
How is that possible in a market in which an increasing number of doctors should be competing against each other? Its because as more doctors arrive in the market, they trawl the market better for business. The people that would never have gotten a colonoscopy in 1950 before the surge of doctors arrived are now getting a crapload of tests.
NYC has the highest healthcare costs per capita in the world, DESPITE having the largest number of doctors per capita in the world. Manhattan literally has multiple doctors offices on every single block. Yet they arent competing against each other, they are simply expanding the demand.
Medicine is a supplier-induced demand model. Patients dont know what heatlhcare they need, and rely on their doctor to tell them what to do. Thats why all these theories based on a free market model fall apart.
Opening the USA to all the worlds doctors would make costs skyrocket even higher, it wont bring costs down.
He is confusing a question about the supply of medical care with a question about the pricing of medical care. Of course all sorts of statistics are going to increase when the supply of doctors increases!
As an intellectual exercise, suppose we are not talking about medical care, but stereo equipment. In the late 60s, the number of stereo stores increased. As a result, the number of people owning hi-fi systems increased, the number of steroes per capita increased, the number of speakers per system increased, etc., etc., etc.
So what!?! All joe blow is proving is that the supply of medical care in the Boston area had not already been saturated by the 1960s.
That does not, by itself, show that there is no relationship between supply and demand, or that supply could grow infinitely without any drop in demand.
"Patients dont know what heatlhcare they need, and rely on their doctor to tell them what to do."
That really has little to do with the price of pharmaceutical drugs. Drugs could be a lot cheaper if the government were not allowing monopolistic practices.
Another point the author touches on but doesn't fully explain is why physician salaries are higher in the US than in other countries. Part of it is due to our capacity to pay higher salaries. First, we have a higher standard of living in the US which translates into salaries that are higher than, say, Thailand. However, the second is that many other countries pay the cost of educating and training their doctors while doctors in the US are expected to pay for their own education.
The average medical student has forgone at least 8 years of productive employment while also incurring an average of $139,000 dollars in debt and 75% have more than $100,000 (Source: AAMC 2007 Graduation Questionnaire). How do you expect to pay doctors less and have them afford to practice?
Bringing physicians from other countries doesn't solve this problem, it only encourages fewer US citizens to become doctors.
The author also fails to recognize the cost of healthcare administration. Administrative costs in the US are twice what they are in many other developed countries. Private insurance administrative costs are 4x greater than Medicare. We need a single-payer system. A 2003 study (found on google, http://content.nejm.org/cgi/content/abstract/349/8/768) discovered admin costs $750 more per person in the US than in Canada.
Bottom line is that the US needs a single-payer system.
I say yes, but I'm afraid it could get messy...
We could also unbundle med school by putting all the academic, non-clinical classes into a regular college major (call it "Human Biology"). In doing so we do away with at least half the expense of med school because its cost is built into a Bachelor's degree. By doing this we would also greatly enlarge the number of people with medical knowledge that could perform many functions of health care without a full medical degree.
You are the one who is confused. The author's claim is that by massively increasing the number of doctors per capita, it will lead to competition amongst them, leading to lower healthcare costs per capita. As Joe Blow points out, this model doesnt hold. Urban areas have much higher numbers of doctors per capita, and yet healthcare costs are HIGHER per capita in urban areas. This is because doctors simply drudge up more demand in crowded markets.
"Similarly, U.S. trade officials can sit down with major hospitals and ask what prevents them from hiring doctors from Mexico, India, and other developing countries at much lower wages than U.S.-born doctors receive. Some obstacles are obvious. A hospital cannot legally hire a foreign doctor at a wage that is far below the market rate without first attempting to hire a U.S. citizen or green-card holder at the current market rate. Such protectionist barriers could be easily eliminated." - Baker
I find no wording in the article suggesting that the number of doctors will increase, only that qualified foreign doctors willing to work for less money will have the opportunity to do so:
"Compensation in the most highly paid medical specialties averages far above $250,000 a year, even after physicians have paid for their malpractice insurance. Many doctors trained outside the United States would find these positions attractive even if they paid $100,000 a year. Opening medical practice to foreign competition would allow for the same sorts of gains from trade that we have seen with opening trade in apparel and textiles- except that we spend far more on doctors each year than we do on clothes." -Baker
Again, Baker is not suggesting that competition will increase the number of doctors working in the U.S., but that a competitive market where qualified foreign applicants are considered for open positions will lead to gains for society.
And finally, to Joe Blow: stating that "There's a study showing..." and not citing a source is the equivalent of saying "I read on the internet..." or "I heard one time..." It is hardly a convincing argument. Please cite a source or don't make the claim.
Go ahead--tear the above analogy to shreds. I can tear the same shreds in the foreign physician argument. This erroneous solution fails to address issues of standardization of medical training and knowledge, the prohibitive and exhorbitant status of medical malpractice in this country, and the uncompromising demands of the US healthcare consumer. Besides, such a 'solution' spits in the face of the history of organized labor in this country, which establishes the rights of workers (and, yes, physicians are just workers in this system--workers who sacrifice the best years of their lives to train for and practice the most arduous and demanding career there is) not to have their livelihood usurped by cheap, commoditized labor wherever it may be obtained.
It's easy to assail the US health care system by looking simply at life-expectancy statistics for which there are multiple contributing factors, of which quality of health care is just a part. But the fact of the matter remains that the US system offers, in many respects, the finest health care in the world. This is a fact that most of us understand, yet spend a lot of time and effort flashing statistics and rhetoric to talk ourselves out of believing it. Here's the bottom line: Ask anyone -- American, British, Australian, Thai -- whether they'd rather be in the US or in Thailand (or in any other country) if they were to find themselves critically ill. What's your answer?
Clearly our health system carries a tremendous price tag, and a rate of growth of expenditure that we cannot maintain. However, we do get what we pay for. Cutting costs will require commensurate cuts in our expectations; glibly presented 'win-win' propositions fail to address the losses that we will suffer if we relax our standards of care.
First of all, the analogy between the market for physicians and the market for journalists is not merely bad. It's nonexistent. For one, you don't need a license to be a journalist, hence there is no legal mechanism in place to prevent a foreigner writing for an American publication. And guess what? They do it all the time.
Furthermore, reporters are lucky if they pull in $50K a year. Currently, competition for slots at daily papers is so fierce that a beginning reporter at a mid-size daily usually does with $25K or $30K a year. Senior writers and editors at major metros might make $100K. By contrast, medicine is the most highly compensated professional field in the country (http://www.forbes.com/2009/05/04/america-best-paying-leadership-careers-jobs.html).
The idea that physicians need to be paid more in order to compensate for debt incurred during medical school is a red herring. Medical school a) takes an unnecessarily long time (many students take classes as undergrads that they then repeat in med school) and b) is systematically overpriced PRECISELY so doctors can then demand higher pay. The profession is parasitic of aspirants, fleecing them in order to line the pockets of established physicians who get to cry about all the bills they paid when the previous generation of doctors got fat of their own misery. Med school would also be cheaper if med school faculty didn't routinely pull in multi-million dollar yearly salaries.
The point about malpractice is addressed in the article, so there's no need to go into it again. As far as professional standards, Americans routinely receive medical training in other countries including Mexico and, quite often, Israel, and return to the United States to practice successfully. If an American can train in Mexico and be up to snuff, there's no reason a Mexican can't. There is also no reason why a set of internationally recognized standards for medical training could not be developed. We are all of the same species, after all.
The whole point about medical tourism is that critically ill people often DO prefer to find themselves elsewhere. To pretend otherwise is sheer denial.
And Ian D. has obviously failed to appreciate Baker's point about comparative life expectancy and medical outcomes. We are demonstrably NOT getting what we pay for. We pay TWICE as much for health care as our nearest competitor in health care inefficiency, yet our results are not unequivocally better. Yes, as Baker acknowledges, international comparisons are fraught with difficulty. However, if we're paying twice as much, shouldn't we have unambiguously better care throughout the system?
Ian D. is right that cuts in expectations are in order. But the medical field, particularly drug marketing, is largely to blame for this problem. Doctors are unwilling to tell patients "no" mostly because the whole medical culture in the United States is one whereby everyone expects miracles and is suspicious of this thing called death—does it really need to happen? And patients think this way because doctors coddle them and pharmaceutical companies tell them that every ache, hiccup, and blue Monday is a disease and oh by the way there's a cure for that.
Critically important, but absent from Baker's proposals—many of which seem reasonable if somewhat nitpicky given the extent of this problem—is patient-level incentives and disincentives. We'll continue to spend too much if patients believe they're paying with someone else's money. Health care is a good like any other, and it is not costless. Patients need to spend their own money, and if they have less money, they will get lesser care. The question is how do we make even the lesser care "good enough" to satisfy ethical concerns. Basically, why can't medicare be truly competitive with private insurance? That, I think, is mainly the fault of Congress, which is in the pockets of the insurance companies, malpractice lawyers, pharmaceutical companies, and the AMA, all of which are invested in the status quo.
Moving on to other points now. Stu failed to realize that I provided my analogy between doctors and journalists not because of its accuracy, but because of its immediacy in highlighting the dangerous thinking of viewing workers as merely a commodity. All of us in this country are potentially replaceable by foreign individuals hailing from overpopulated, economically less prosperous countries. In ANY SINGLE JOB practiced in the US, whether it be neurosurgery, journalism, or janitorial work, droves of foreign workers would presumably enter the scene and work in our stead for a reasonable fraction of the compensation. We do not systematically encourage or even allow this both out of respect for the American worker, and out of a (possibly misguided) sense that the American worker can perhaps do a better job. Is this prevailing view flawed? Should we instead allow all American labor to be usurped by cheaper foreign workers? That's an unpleasant proposition, but perhaps one that Stu would prefer. With respect to health care, it would certainly help the American citizen get more for his money...only, wait a minute, if applied across society rather than selectively applied only to those terrible selfish crybaby rich doctors, this same proposition would undercut everyone's salary and render our country economically devastated in short order. But hey, it's a thought.
Stepping back to reality, though, we must realize that the suggestion to bring in foreign physicians is shortsighted, unrealistic, and selfish. This country has a higher per-capita number of surgical specialists than any other nation in the world. Is this because, as Stu would suggest, we're just treating imagined or exaggerated diseases (things like, in my specialty, cerebral aneurysms, brain and spinal tumors, head traumas, and other such complaints that Stu would deem frivolous)? No, in fact, it's because other countries operate well below margin in terms of how many specialists they need to treat the illnesses besetting their populations. Patients wait months or even years for elective therapies, and may even be denied emergency care on the basis of age or comorbidities; this is in part because there aren't enough physicians to treat them. When it comes to surgical specialties, the world lacks the resources to shuttle over to us even a small fraction of the practitioners required to meet our current demand. Having a Mexican heart surgeon come here means having scores of Mexican patients go without heart surgery. Sounds great if you're an American economist trying to cut costs, but not so much if you're in another country and are unable to receive the care you need.
As for malpractice, contrary to what Stu says it was in fact barely mentioned in Baker's article. Yeah, great, let's just gloss over the biggest threat to the existence of surgical subspecialties in this country. The $100,000 foreign practitioner salary proposed in the article wouldn't even cover the average malpractice premium for a neurosurgeon. And in general, if doctors didn't aggressively treat every "ache, hiccup, and blue Monday," they'd be sued for the omission.
Regarding training in other countries, I'm not sure what Stu is referring to. In fact one cannot complete residency in Mexico and practice here, period. Pointing to some track record of success in this regard is simply false.
And about life expectancy and other statistical medical outcomes, there wasn't anything I failed to appreciate in the original article; instead I disagreed with the validity of the metrics. To bring Stu up to speed, the principle determinant of life expectancy in this country and others is not the health care system at all, but rather public health measures such as adequate sanitation. Beyond this, the further drivers of longevity will be the most common diseases that shorten life: in developed countries, these include heart disease, cerebrovascular disease, and the major cancers (lung, colon, breast, etc.). As is always the case, not incurring these diseases in the first place is vastly preferable from a prognostic standpoint than treating them with even the world's best and most current therapies. The reason that America fails with respect to some of its peers is not that we treat these diseases less well, but that we do not perform as well in preventing them from happening. Blame your doctor all you want, but frankly it's the American diet and lifestyle--things that are largely culturally, not medically, impacted--that engender the disparity between this country and those that statistically outperform us.
Finally, Stu's suggestion that patients should spend their own money on health care leaves me flummoxed. Isn't access to care the principle problem with health care in this nation? Do we really want the indigent receiving "lesser care?" The criticism continually levied against our health care system is that it is not universal and egalitarian--yet here Stu suggests that we all need to pay out of pocket in order to learn how not to spend too much, and that the poor should suffer through life with just enough care not to set off any ethical alarms. Do I really even have to say anything about that?
One thing I do agree with in Baker's article is that we pay exorbitant premiums for pharmaceuticals (as well as medical supplies, radiological studies, and a host of other expenses incidental to the care of patients). We could make tremendous inroads towards cost reduction by bringing these expenditures into line with what other countries spend. What I will always fervently disagree with, however, is that somehow we stand to gain ground by paying less money to the physicians and surgeons who invest the best years of their lives working arduous hours and making endless sacrifices to care for their patients. Why is it that people seem to find offense when intelligent, capable, hard-working individuals are remunerated for their efforts? Take away the financial reward of practicing medicine and you'll soon see that many fewer talented people are willing to make the sacrifices attendant with a medical career. Attracting and retaining talent costs money.
Further, I have to take issue with Ian D.'s assertion that the U.S. has "the finest health care in the world" because it’s the best place to go for advanced medical procedures. This argument is made far too often and is utterly misguided. A country's health care system is about much more than the latest exotic surgery techniques developed by its elite doctors. Far less sexy medical interventions, such as regular checkups, are actually much more important for the overall well being of a particular population. They may not be the stars of shows like Grey's Anatomy, but Registered Nurses and General Practitioners are truly the backbone of any successful health care system. Of course, I'm not arguing that the United States doesn't have the best surgeons and specialists in the world. I'm sure we do. If I were diagnosed with cancer tomorrow, I would definitely want to be treated by an American oncologist. I'm just saying that their importance for the system as a whole is vastly overrated.
Finally, the most ludicrous comment of all which appeared above is Stu's argument that consumers ought to make more health care decisions and bear more of the cost of health care on their own. Stu, there's a reason doctors play an important role in both the supply and demand for medicine: when it comes to health care decisions, they know a lot more than the average person. As an average Joe, I'm just not qualified to make many health care decisions on my own. As for the cost, we have health insurance precisely because it's so difficult to rationally predict future medical costs. As a result of these and other peculiarities, the market for medicine simply cannot and ought not to function like the market for televisions or t-shirts. The problem is not the role of doctors as decision makers or insurance as a means of paying for health care. Rather, the real issue lies with the perverse, morally repugnant incentives created by our for profit health care system.
I accept a huge amount of bullshit care of this kind because I am afraid of my doctors, and of pissing them off by complaining that they are crooks. How do I know that these are ripoffs? I grew up in a medical household.
This is the richest and most corrupt system in the world. And nothing in any of these proposals addresses the real issues.
Gagnon M-A, Lexchin J (2008) The Cost of Pushing Pills: A New Estimate of Pharmaceutical Promotion Expenditures in the United States. PLoS Med 5(1): e1. doi:10.1371/journal.pmed.0050001
Published: January 3, 2008
But NAFTA has wiped out labor's ability to earn a living, and he doesn't seem to give a damn about that.
I don't believe in magic, but maybe Ian does when he thinks Americans are innately better at practicing medicine than the rest of the world. Sure. If it's not due to better training, there is no other reason.
And differences in training will be revealed in the market like any other good or service. It's hard to believe that most Americans wouldn't want a native doctor by default, our physicians would still have the home-court advantage.
The cost of medical school would have to go down and compete in the market, too -so debt would decrease due to supply going up.
So that $200k wouldn't be $200k, Ian.
And if there is a shortage in other countries of other surgical specialties, then the market would find and resolve that niche - because people will be tenacious to get medical care if they need it. Money's to be made, and surgeons will increase in number.
I understand Ian's reflexive elitism, it's our country's inbred arrogance to think that doctors are special and need to be coddled.
But it's time to let go of the illusions.
If doctor salaries go down but health care costs also go down, then let's see if Republicans really believe all that free market rhetoric or not.
The theoretical understanding of a free market economy is predicated upon certain assumptions. The first of these is that knowledge is abundant related to the products and services at play in the economy. This couldn't be further from the case with the medical field, particularly as we extend into the realm of highly specialized fields such as neurosurgery. Differences in training are far from apparent; the vast majority of consumers of health care know--at most--whether or not a surgeon completed training in an accredited residency program and subsequently obtained professional licensing. Most people don't know even this. If we just opened the doors--yay, free market, I'll surgerize your brain for cheap--then we'd soon note a tremendous decrement in the outcomes rendered. (In fact, students of medical history would know that we would have regressed by about a hundred years, back to the time before bodies of accreditation existed to ensure a requisite level of expertise among all practitioners). Unfortunately, this knowledge of who's good and who's bad could only really be obtained by having your head cut on. Could we have a real-time database of patient feedback on outcomes? Yeah--but then we've artificially created a pressure to cherry-pick the healthiest, least challenging patients, and we can imagine where that will go. Major barriers to knowledge dissemination about health care will always remain, simply because the topics at hand--as well as the backgrounds of the practitioners--remain so abstruse.
The second major assumption of a free market is that market behavior is economically rational. This assumption falls apart on many levels with respect to health care. Just to highlight one: doctors are not free to provide their services at a price dictated by relative supply and demand. Medicare dictates reimbursement rates that are subsequently utilized almost universally by insurance providers, and physicians have almost no bargaining power in the deal. They are probably overpaid for some services, but they are most certainly underpaid for others. Interestingly, it could be the case, in fact, that a free market would increase rather than decrease physician reimbursement.
The third assumption is the that in a free market, the market must truly be open. Even if we were to knock down any professional and regulatory barriers to market fluidity, we would remain far from the idea of an open market in health care--primarily because health care providers are not websites, but earthbound people with physical tethers. The customer--i.e. the patient--is in many circumstances even more restricted from moving, being immured by whatever potentially serious disease afflicts him/her. So the critically ill cardiac patient in southern Colorado goes to the hospital in Pueblo, and receives treatment not from whichever physician she selects from the pantheon of medical heroes, but from whichever physician happens to be there. Being "tenacious to get medical care" isn't a possibility if you're too sick to travel.
But hey, maybe I just need to "let go of the illusions." I'm sure in no time we'll all receive our health care over the Internet, and surgeries will be performed by infinitely dexterous robots controlled by artificially intelligent supercomputers thousands of miles away.
As for the 'reflexive elitism' comment--it's far from reflexive, though I might admit to the elitist element. If I operate on people's brains and spines, I need to believe that I'm better than 99.9% of the population would be given similar opportunities and training. If not, how can I in good conscience open up a patient's head to extirpate pathology while attempting to leave unperturbed the very neurological substrate that gives that person his memory, emotion, perception, thought, will, and action? This sort of skill is highly specialized, highly delicate, and highly cognitively and manually demanding. Do I think that having undertaken--and succeeded at--the arduous training necessary to acquire the ability to do this sort of thing would make me in some way special, at least within the professional realm? Yeah, I suppose I do. Is that arrogance or just a requisite confidence?
[For the record, though, a careful reading of anything I've written will show that I never said I believe Americans to be better than anyone else. In fact, I believe strongly that Americans are no better--technically or cognitively--than any physician/surgeon of another nation. Our training is just more rigorous and highly regulated than that in other countries, and so an American doctor can, a priori, be assumed competent--an assumption that can not as robustly be made about all other physicians in other countries.]
One final note for 's' above, relating to the following statement:
"And if there is a shortage in other countries of other surgical specialties, then the market would find and resolve that niche - because people will be tenacious to get medical care if they need it. Money's to be made, and surgeons will increase in number."
Ever heard of Africa? Know the per capita number of surgeons in Africa? Yeah, now you're getting it...you were wrong.