Real World Economics: The enigma that is our US health care ‘system’ –

As an economist and columnist, every time I interact with the U.S. health care system, I get inspiration. Expenditures on health approach a fifth of all economic activity. Our “system,” such as it is, affects everyone. Yet most people are frustrated by it at one juncture or another, driving some to desperation. Why can’t we get it right?

Edward Lotterman

The first answer is that we do get many things right, particularly in care itself. The things we get wrong and that create greatest frustration are in administration and financing. The U.S. has a complex crazy-quilt of public and private programs. Frustration leads some to call for near-complete federalization of all health financing and administration. Others advocate a vastly reduced role for government as key to improvement. Both viewpoints ignore complex issues. One of these is the pervasiveness of what economists call “information problems.”

Take my recent overnight in the hospital. Apart from bad knees, my major health problem is hypertension, for which I take a combination of meds. Occasionally, during extreme blood pressure spikes, I take myself to the ER.

Not so this time. At bedtime, I did not feel well with a cold sweat, nausea and faintness. Things went downhill so fast and I got my first-ever needed ride in an ambulance. (The unneeded one, a decade ago, merits a column in itself.)

United, in St. Paul, has been my hospital of choice for 20 years. Their ER staff was magnificent. I had a heart rate of 43, blood sugar of 46 and a deep body temperature of 93.8. I was not fully cognizant, but a team of five people got two IVs started, put on two defibrillator pads, and myriad other leads, cocooned me in a BearHugger warming device, took an EKG and numerous blood draws, a chest X-ray, some CT scans and I am not sure what else. They had access to notes from visits to my home clinic, also in the Allina system, my current meds, and all my vitals for the last decade. They were competent, compassionate, had all sorts of equipment, worked as a team. It was U.S. medicine at its best.

Five hours later, with everything stabilized but not really explained, I was on the cardio ward. The nurses were skilled, efficient and compassionate. Sundry specialists started to come around. One was a cardiologist who, knowing I was an economist, made a friendly opening by telling me how much economics he had learned from writings of Thomas Sowell, a former student of Milton Friedman, who follows his mentor’s devotion to free-market solutions.

Most economists do think markets can solve many resource allocation problems well. But Friedman and Sowell tend to paper over problems that can impede the efficiency of pure market approaches. When I mentioned “information” problems, it was a new term for the doctor. He asked, “what’s that?” The irony here is that the most intractable economic problem in his field escaped him.

Econ students learn that markets can only be assumed to work well in the absence of government action when a number of conditions apply: There must be many sellers and many buyers in the market. None can have any degree of pricing power. All must have good information about all factors relevant to the market. There must be no spillover costs or benefits. There must be no barriers to entry or exit of sellers, et cetera. If these are not true, a market may well fail to result in an efficient use of resources without government action. However no particular government action is a guaranteed remedy.

It turns out that this doctor represented my first information problem. My search for a cardiologist who really listened to me had led me outside of the Allina system. I found an excellent one who matched my preferences. Alas, she, with a Yale residency, is at a HealthPartners Clinic. When the cardiologist on rounds whom I had known for five minutes said: “We are going to cut your Co-Reg,” I replied that, no, I was not going to do that without consulting my own cardiologist. That abruptly ended the consultation.

When the EMTs had loaded me up and asked where I wanted to go, I had said United because that is where I have gone for decades and gotten good care. In a faintly cognizant state, I had not thought through the crucial information that if one’s primary problem is cardiovascular, it is wise to go to an ER that is in your cardiologist’s system.

But that is only one incident among many. At my wonderful primary care physician’s office the next week, she mentioned I should get the new Shingrix shingles vaccine. But, with its manufacturer enjoying monopoly pricing that comes with a patent, she noted that it was expensive and that Medicare did not cover it. My military retiree Tricare program might, but it still could have a stiff co-pay. And it probably would be cheaper at a pharmacy. Could anyone tell me exactly how much it would cost me at my clinic? No, not really.

Tricare, with over 8 million beneficiaries, 2.2 million of whom are also on Medicare like me, is a huge federal program. It contracts with private health care firms, like Minnesota’s own UnitedHealth, to administer the program day-to-day.

These in turn select pharmacies. For me, the Express Scripts mail order giant is one option. For some time, CVS was the designated physical chain. Then contracts were re-bid and it became Walgreens. The private “transaction cost” of millions of households shifting from one drug provider to another was ignored.

The Tricare website said if I went to a Walgreens, I could get the shingles shot with zero co-pay. At my local Walgreens, I asked if they could verify this was indeed true. The response was “the only way we can tell what your co-pay would be is if we give you the shot and then submit it.” Really? Talk about an information problem!

So I went to Walgreens’ national website and entered a customer query. A week later I have gotten no response. However, when I left a meds container behind when we went on vacation, a couple of phone calls and I was told I could pick up my “vacation courtesy” supply at their store 20 miles away. And I did. That seems the pattern across all U.S. health care, amazing efficiencies punctuated with mind-boggling Catch-22s and inefficiencies.

Increasing concentration at all levels into fewer and fewer firms with increasing market power is a “market failure” visible across health care and growing. CVS  is acquiring Aetna; Cigna is acquiring Express Scripts; UnitedHealth is acquiring everything from clinic systems to physician recruiting services to pharmacy managers. And is considering getting into the game. Hospitals and clinics being rolled into fewer and fewer larger systems via mergers continues apace.

The key problem is that we now not only have an oligopoly, a market system in which there are only a few sellers and a few buyers, but we have that at several interacting levels — providers of drugs, care and insurance. And the resulting market power, especially in pharmaceuticals, is increasingly exercised.

Introductory econ students learn how to evaluate the outcome of a pure free market situation meeting all assumptions versus that of a pure monopolist, with only one seller. Students can identify the inefficiency and transfers of money that occur under a market monopoly.

However, oligopoly always has been near-impossible for economists to evaluate. The introduction of game theory 50 years ago provided a tool, but one that is limited in assessing the complex, multi-tiered, intermeshing set of oligopolies that we have across our nation’s health sector today. Uncontrolled pricing power across several levels is one reason why we are approaching 18 percent of the value of total output.

So it’s naive to think that getting government out of health care will work miracles. But so-called “single payer” (meaning “government pays”) or “Medicare for all,” is a panacea. But the details of this debate require further columns.

St. Paul economist and writer Edward Lotterman can be reached at