Mind Your Own Business: Health Care Economics

Regardless of funding levels or overhead, health care must be provided ethically. The goal of the health care industry is to improve health, and unlike other industries, this market is driven not by choice but by need. Other markets perform, according to Friedman and Friedman (1980) and Smith (1910), only when mutual benefit can be achieved, that is, without external force, coercion, or unnatural limitation. Penner (2004) presents the economy of health care representative of many of the ideals that were accepted at the turn of this century. However, the current state of health care economics is the result of the unnatural force of these ideals in attempting to mold the market against natural market pressures, as described in detail and warned against by Friedman and Friedman and Smith.

Health care demand is based on need. Within that need, demand is reflective of pricing. For example, patients do not elect coronary bypass surgery, but if needed, the demand could be reflected by pricing constraints realized in negotiations of hospitals and insurance carriers. In this case, the patient may be transferred to a center that has negotiated reduced rates with the carrier for coronary bypass procedures. Ergo, health care demand is reflective of patient need and is variable only in the context of insurance pricing. It is within this negotiation that the aspects of quality, access, and cost are accounted. Government policy, however, has a negative and downward effect on these negotiations. If health care institutions are perceived to be able to provide the same services at discounted prices for government payors, then the institution should be able to provide these same services to private payors for the same or similar cost. This cost adjustment conversely affects quality and access.

Penner (2004) makes a logically flawed argument in respect to regulation arguing that increases in skilled nursing facility (SNF) safety regulations created a demand for more nursing assistants; however, this is an increased input to be provided by the SNF, not an output to be demanded by the patient. The cost will be borne by the private insurance payor, ultimately, and not the regulatory agency or the patient, which increases premiums decreasing access to private health insurance. Regulations negatively impact the relationship between supply/demand, quality, access, and cost. This is not to say that safety should not be a concern, as it is one of the few areas that I agree should be regulated, though, minimally.

Penner (2004) goes on to state “one role of government is to intervene in cases of market failure” (p. 21), using the pharmaceutical industry as an example. Unfortunately, with the focus on the new and significant health care and health insurance legislation and regulation, many academic discussions surrounding health care economics are now outdated and trivial. Without entertaining a constitutional debate, recently, governmental involvement has shown to have a negative effect on the health care industry actually causing market failures instead of alleviating them. Recent over-regulation by government on the pharmaceutical industry has resulted in a significant and dangerous shortage of life-saving emergency medications (Malcolm, 2012). This economic constraint will lead to higher demands of other, inferior, medications and increase the price, effectually increasing cost and decreasing both access and quality. This effect is also seen in the emergency medical services when states fix the price that can charged to users leaving the municipal taxpayer to face tax increases or decreases in access to emergency services and the quality of the services delivered (American Ambulance Association, 2008). Over-regulating an industry without regard to survivability is inefficient and unethical, limiting access and quality while increasing costs.

Insurance companies have sought to minimize their exposure to the rising costs of health care (Penner, 2004). By developing common sense incentives, insurers can advocate for their customers financially while expressing desire for optimal outcomes. By maximizing consumer and provider choice, these incentives can be used as natural pressures within the market to improve upon cost, quality, and access (Penner, 2004). This realization, according to Penner (2004), resulted in the emergence of the health maintenance organization (HMO) — the first widely accepted form of managed care. Unfortunately, HMOs faced scrutiny in the 1990’s and later augmented business models to reflect newer preferred provider organizations (PPO) and point-of-service (POS) plans. PPO and POS plans were created to promote the more inexpensive use of general providers and those providers that have negotiated fees. Unfortunately, Penner writes, the pressures of these PPO and POS plans on the consumer limit choice within the market; however, the consumer still has a choice of insurance carrier, which minimizes the pressure faced within each plan. This freedom is not expressed in governmental plans, such as Medicare and Medicaid.

As health care costs rise, the writings of Friedman and Friedman (1980) and Smith (1910) would suppose that we lessen regulation within the industry, allow new and novel approaches to insurance paradigms, and create an environment with as little unnatural market pressures as possible in order to allow natural market pressures to ensure equitable cost, access, and quality through competition


American Ambulance Association. (2008). EMS structured for quality: Best practices in designing, managing and contracting for emergency ambulance service. Retrieved from fitchassoc.com/download/Guidebook-April08-V2.pdf

Friedman, M. & Friedman, R. D. (1980). Free to choose: a personal statement. Retrieved from http://books.google.com/

Malcolm, A. (2012, January 4). Vast web of federal regulation causing drug shortages. Investor’s Business Daily. Retrieved from http://news.investors.com/article/596775/201201041859/big-government-behind-drug-shortages.htm

Penner, S. J. (2004). Introduction to health care economics & financial management: Fundamental concepts with practical applications. Philadelphia, PA: Lippincott Williams & Wilkins.

Smith, A. (1910/1957). The wealth of nations (Vol. 1). Retrieved from http://books.google.com/