Wednesday 4 January 2012

Market Failure in Healthcare Part 2: Market failure in practice

Market failure in practice

The most significant piece of evidence that supports that view that market failure is an inherent problem in healthcare delivery is the widespread recognition that price competition worsens healthcare outcomes.
According to Zack Cooper from the London School of Economics:

“Economic theory predicts that price competition is likely to lead to declining quality where (as in healthcare) quality is harder to observe than price. Evidence from price competition in the 1990s internal market and in cost constrained markets in the US [United States] confirms this, with falling prices and reduced quality, particularly in harder to observe measures.”
It is therefore apparent that the price mechanism, which is the “invisible hand” of the market is fundamentally flawed in healthcare markets. This is why there has been a drive towards a system of fixed prices or “tariffs” in the NHS market. However, price fixing makes the whole concept of using a market system defunct. On this basis, is it even worth having a debate about market failure in healthcare? Considering the fact that market ideology in healthcare systems remains so dominant on a global level, I think some more proof is required with real world examples. So where better to start than the US healthcare system!

1. Market failure in the USA

The United States Healthcare system is a shocking $2.3 trillion example of market failure in practice.
Despite spending 18% GDP on healthcare, there are 50 million people uninsured and up to 100 million “underinsured”. According to a recent study by Harvard researchers, medical problems caused 62% of all personal bankruptcies filed in the U.S. in 2007. And in a finding that surprised even the researchers, 78% of those filers had medical insurance at the start of their illness, including 60.3% who had private coverage, not Medicare or Medicaid.

It is estimated that 30%-40% of the total healthcare budget is due to transaction costs of the
market. It is therefore even more alarming that 80% of healthcare bills contain errors. Insurance claim errors are estimated to cost $17 billion a year. There is also a huge problem with healthcare fraud, which is estimated at $70billion a year for Medicare and Medicaid. It is also somewhat revealing that US insurance companies refer to payouts for medical care as “medical loss”!

The cost of healthcare is rising dramatically in the US. The Milliman Medical Index measures the total annual cost of healthcare for a typical family of 4 covered by a preferred provider plan (PPO).  In 2002 it was $9,235. For 2011 it was $19,393. By 2025 the average annual cost of family healthcare insurance will equal the average annual household income.

The system also places a huge cost burden on employers, which is recognised as a major reason for poor competiveness of major companies like General Motors.  

However, the US market’s profit motive has resulted in huge gains for some individuals such as the CEOs of the major Health Maintenance Organisations. Stephen J Helmsley of United Healthcare is the world’s highest paid CEO. The former CEO of UnitedHealth was Bill McGuire was involved in $1.5 billion stock options scandal.

The Executive Vice President of UnitedHealth is Simon Stevens who was a former health advisor to Tony Blair. UnitedHealth has NHS contracts and is a member of the Framework for External Support for Commissioning (FESC), which was created by New Labour to supply commissioning support for Primary care Trusts (PCTs) and is now going to do the same for Lansley’s Clinical Commissioning Groups (CCGs). This is one of the mechanisms through which NHS privatisation will occur and was highlighted by a recent leaked document about Commissioning Support Units

Other examples of high CEO pay include Michael.B.Mccallister of Humana with a 2009 compensation package of $5 million with $50 million stock options, and Ronald A Williams with a 2009 compensation package of $24 million and stock options worth $170 million. (Source: Forbes website)

Despite the huge cost of the US system and the fact that the US has some of the best hospitals and medical care in the world, the US has poorer outcomes for life expectancy and infant/maternal mortality rates compared to other healthcare systems. This graph produced by the OECD is a shocking indictment of the US healthcare system.

Professor Allyson Pollock has eloquently described the US healthcare system as “islands of excellence in a sea of misery”.
Nowhere does that sea of misery look starker, than in the images of the charitable free healthcare camps that have sprung up throughout the US for the poor and uninsured, creating images that are more reminiscent of the Third World, than the world’s richest country. No wonder professors’ Woolhandler and Himmelstein from Harvard Medical School famously stated in a BMJ article, “Competition in a Publicly Funded System” that:
 Only a dunce could believe that market based reform will improve efficiency or effectiveness”

What is even more worrying is that it is difficult to envisage how the US can ever move away from a market driven system. James K Galbraith (son of the famous economist John Kenneth Galbraith) made a remarkable observation in his book the Predator State (p132). He stated that no serious US politician would ever consider transforming the US healthcare system into a replica of Britain’s NHS:
“Such a move, if it reduced American Healthcare costs to British levels, would entail reducing total healthcare spending by nearly half. That would cause the medical sector to collapse and the economy to implode”

2. Market failure in the UK

The problems of market failure are already well recognised in the UK. Firstly, Scotland and Wales have both abandoned the purchaser-provider split.  In England, the problem of price competition is well recognised and most hospital tariffs/”prices” are fixed. Hence we don’t even have a proper market system in England - it is a “quasi-market”. This is a clear recognition of the problems with the free market in healthcare. However, any form of control over the market immediately makes it inefficient and price fixing is a bad as it gets for a market.

Thatcher’s purchaser provider split (1989) has been well critiqued in the literature and the recent
Health Select Committee (HSC) report on the current commissioning model was even more damning, suggesting that:
 “if it does not begin to improve soon, after 20 years of costly failure, the purchaser-provider split may need to be abolished.”

The HSC report also stated that research commissioned by the Dept Health from York University (Karen Bloor), estimated the administrative costs of the purchaser-provider split to be as high as 14% of total NHS budget compared to 5% prior to the purchaser-provider split. However, it should be noted that the DH doesn’t actually have any accurate figures because it hasn’t measured these costs. This was severely criticised by the committee.

Other examples of where the market has failed the NHS include the use of the Private Finance Initiative (PFI), the use of costly Independent Sector Treatment Centres (see Colin Leys and Stewart Player’s book, Confuse and Conceal and the National Programme for IT or Connecting for Health (CfH).
The NHS IT disaster is a classic case of market failure. One of its main aims was to help stimulate the NHS market by making information widely available to “consumers” (ie patients) so they could choose hospitals to be treated in. Electronic booking of appointments was part of this process and hence electronic transfer of patient records was also a key objective. This was clearly a highly complex task fraught with difficulties. In addition, collecting accurate outcome data in healthcare is extremely difficult and prone to error. This was clearly a gargantuan task, which was doomed to fail. In fact, there is evidence that the whole process was rushed by Tony Blair following a successful FOI Act request for secret Downing Street papers by Computer Weekly magazine. One of the slides that was published showed an IT structure with Payment by Results at the apex.

I believe that another key piece of evidence about market failure in the NHS is the problem of multiple re-disorganisations that have taken place since the introduction of market ideology. Nigel Edwards produced a fascinating report for the NHS Confederation, Triumph of Hope over Experience about learning the lessons from the history of NHS reorganisation.
A key statement was as follows:
“From 1948 to 1974 there was very little change in the institutional architecture of the NHS and relatively few organisations were created or abolished. From the mid 1980s onwards the pace of change has increased significantly.”

I thought Nigel Edwards was close to hitting the nail on the head when he said:
“The reasons for the increase in the pace of restructuring since 1980 are not very clear, but it may be that structural change is one of the few big levers available to policy-makers who find it very difficult to intervene in the ‘black box’ of clinical decision-making. It may be associated with the growth in popularity of the ‘new public management’ philosophy which prompted interest in the use of market mechanisms, the outsourcing of delivery functions and a general trend for previously neglected parts of the public sector to become subject to more direct managerial control.”

Rightly or wrongly, I would have taken the conclusion much further than Nigel Edwards, because I believe that market ideology is so flawed in healthcare, that there is a need for constant reorganisation to counter the problems of market failure.

I think another interesting point to ponder in the causes of multiple NHS organisations is that fact that Sir Keith Joseph (one of Thatcher’s key advisors) introduced the American Management Consultants, McKinsey, into the NHS in 1973 and they have been there ever since. Was it a coincidental that the reorganisations started to occur from 1974 onwards?
See this fascinating letter in the BMJ by Greenholm and Draper in 1973 about this issue
They quote John Cunningham in the Guardian (22 January 1973):
". . . more and more people are realizing that Sir Keith Joseph's managerial revolution - drafted by McKinsey's, the management consultants will take health care in all its aspects even further away than it now is from public surveillance and interest."

Market failure also results in the need for oversight by regulators (QUANGOs), such as the Care Quality Commission (CQC), Monitor, the Competition and Cooperation Panel (CCP), and the Reconfiguration Panel, none of which have covered themselves in glory to date.  Professor Chris Ham once described the Rules of the CCP as “written by a neoliberal economist on speed”! In fact, these Quangos might be considered as a form of market failure themselves and they certainly don’t come cheap.

The outsourcing and privatisation of Social Care is yet another topical and typical example of market failure in the English NHS. This is a whole issue in itself, which I may come back to one day.

Even the pro-market thinktank, Civitas, recently concluded in a recent report that improvements in the NHS were "not attributable to the market" and that the NHS was taking on extra costs "without realising the benefits" of the private sector.

There are plenty more examples, but in the interest of balance I should make the point that some research by Zack Cooper and Carol Propper has concluded that competition in healthcare saves lives. However, both authors recognise that price competition is harmful to patient care, which doesn’t help the pro-marketeers.
Government failure is also a problem and I will come back to that to.

3. Market failure in Holland

The New England Journal recently published a fascinating review of the Dutch system, which changed to a mandated private insurance system in 2006. It has not been a success:
“The Dutch experience provides a cautionary tale about the place of private insurance competition in health care reform. The Dutch reforms have fallen far short of expectations — a reminder that policy intentions should not be confused with outcomes and that managed competition is hardly a panacea. The idea that the Dutch reforms provide a successful model for U.S. Medicare to emulate is bizarre. The Dutch case in fact underscores the pitfalls of the casual use (and misuse) of international experience in U.S. health care reform debates. Before we learn from other countries' experiences with medical care, we first need to learn about them.”

Another paper in the Journal of Health Policy, Politics and Law (2008;33;1031) showed that the Dutch pro-competition reforms were also very unpopular with the public

4. Market failure and the Medical Profession

I have discussed this issue is some detail in a previous post about Clinical Leadership, but it’s worth summarising again because of its relevance to market failure in practice:

One of the less talked about aspects of market failure in healthcare is that fact that medical professionalism is intrinsically anti-market in nature. Doctors place the needs of patients first before their market power wants. Doctors also control access to the healthcare market, which becomes a fundamental problem to the proper functioning of a market if GPs prefer to refer patients to their local hospital. I therefore subscribe to the views of Professor David Marquand who stated that public service professionals “....are in a profound sense not just nonmarket, but anti-market”.

It is interesting that market theory in the form of Public Choice Theory rejects the idea of the public service ethos and medical professionalism. This theory views public service professionals as “rent seeking knaves” whose real purpose is to make money and legitimise monopolistic cartels. Professor James Buchanan of the Virginia school of Public Choice Theory (and Nobel Prize winner in Economics on this subject) famously stated in a fantastic Adam Curtis BBC documentary called "The Trap" that the public service ethos did not exist!

Professor Julian le Grand's "Knights and Knaves" analogy in his books Motivation
Agency and Public Policy and The Other Invisible Hand, explains how the "trust" (professional)
model of delivering healthcare is therefore problematic and best solved by using a market model, where the user (e.g. patient) is "Queen". Interestingly, Le Grand has admitted that in order for patient choice to work well, patients need “choice advisors”. I must say that I thought that GPs were choice advisors!
Paradoxically, this view of medical professionals as “rent seeking, knavish” self-interested agents
of business, feeds on itself. In the United States, where the commercialisation of medicine exists
in its most extreme form, the American medical profession has lost public support faster than any
other professional group. (Blendon R. JAMA 1989).

The attack on the medical profession over the last several years is consistent with the demands of
the market, which favours narrow economic priorities over the social contract and patient needs. This is also reflected in medical training, where there is significant evidence that Modernising Medical Careers was politically engineered to produce a flexible, “fit for purpose” medical workforce to
facilitate NHS market-based reforms:
“...most importantly, (MMC) will deliver a modern training scheme and career structure that will
allow clinical professionals to support real patient choice” (DH Website)

An editorial in the British Journal of General Practice described how the proposals for the
establishment of the Medical Education Standards Board (which later became Postgraduate Medical Education Training Board):
“…. are clearly intended to enable the Secretary of State of the day to direct that standards can
be lowered to meet the manpower demands of the NHS”

Since doctors and clinical leadership and followership are so crucial to successful healthcare reform, the market’s corrosive effects on medical professionalism, the social contract, and what it means to be a doctor, is clearly yet another example of market failure.


It seems there is overwhelming evidence that market failure is an intrinsic problem to healthcare. It creates a culture of citizen-consumerism that will only drive up healthcare costs leading to more expensive private insurance systems, which disadvantage the most vulnerable people in society that need healthcare the most. This is where the Inverse Care Law is most powerful. The market even rejects the public service ethos and social contract, which is so fundamental to the doctor-patient relationship – the very essence of medicine.

So if market driven healthcare is so problematic and prone to failure, why is it the dominant healthcare system model around the globe?
You can read my answer to this question in my next blog, but here is a clue:

It’s the Economy stupid! (and some philosophy and politics)!


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