ACA/Obamacare: Healthcare Supply-Side and The Story of Telemedicine v. The Angels of Mercy

“The goal of health care reform is to provide better health care to everyone at a lower cost, year after year. The solution is not to provide a better third-party-payer system — e.g., health insurance or government-provided health insurance — but instead to allow technological development and entrepreneurship to improve the current business model through groundbreaking innovations that empower consumers, improve quality and cut prices. We have seen it happen in many industries, such as transportation, room and board, and tech.

Of course, special interests benefiting from the old model do not appreciate being challenged. As a result, rather than make it easier for new models to thrive by ensuring that rules and regulations do not stifle innovation, politicians often choose to protect established industry players at the expense of consumers.”

“Some services strive to do something even more impactful by making health care more affordable and accessible, yet they are held back by outdated rules and hostile competing industries. Take, for example, telemedicine — the use of modern communications technology, such as videoconferencing and using smartphones, to facilitate patient care. It has the potential to help millions of Americans struggling to pay the skyrocketing costs of health care. But instead, some politicians are siding with their campaign contributors in the health care industry and not the constituents they supposedly are in office to serve.”

“The California State Board of Optometry used taxpayer dollars to engage in a public relations campaign against one telemedicine startup. Indiana enacted a law last year to prevent the use of online eye exams. Georgia and South Carolina have also enacted bans, and the Virginia Legislature just sent a bill to the governor's desk that would do the same.

All of this is done not to safeguard patients but to protect older and more expensive business models. This is highly unfortunate. Telemedicine not only can help reduce health care costs but also has the potential to greatly expand access to care — something politicians claim to care about. Yet many states nevertheless prevent doctors licensed in other states from offering telemedicine services to their residents. This makes it more difficult for poorer citizens living in medically underserved areas to achieve the same access to care that their wealthier neighbors can discover by traveling out of state.” - Cronyism Thwarts Telemedicine and Other Innovations, mercatus.org, 02/23/2017

Link to the entire article appears below:

https://www.mercatus.org/commentary/cronyism-thwarts-telemedicine-and-other-innovations


　

　

　


　

After the Affordable Care Act? After Obamacare? Part Two: Supply and Competition

In reviewing part one, John Cochrane professor of finance at the University of Chicago Booth School of Business wrote a recent essay entitled After ACA: Freeing the market for health care. The essay is very interesting as it makes the case of the need for decoupling health care from health insurance when discussing the demand and supply for health care and insurance merely being a mechanism to address catastrophic losses. Others have also pointed out the need to decouple the two concepts, however Cochrane does so in such a way that points out that the supposed market failure in health care is directly related to government failure in the realm of health care due to government lead market distortions on both the demand and supply side of health care.

Supply and competition is now examined. Cochrane uses several examples of firms in sectors other than health care that have pushed the cost, innovation and quality frontier “out to its limits, and then discovering where  people really want to be”.  That is, what does the consumer value and at
what price and hence what part of the cost, innovation and quality frontier creates maximum utility. Further, the cost, innovation and quality frontier has been pushed out to “choosing a different point on a far better frontier than we faced 20 years ago.” (1)

Problem is, the cost, innovation and quality frontier in health care is not reacting to generate what the consumer values and at what price and hence what part of the cost,innovation and quality frontier creates maximum utility for the consumer. Why? Cochrane’s explanation is very public choice theory oriented: old status quo suppliers within the health care sector are protected by government regulation and new competitors have massive barriers to entry and hence the protected firms merely collect rents with little incentive to find what part of the cost, innovation and quality frontier creates maximum utility for the consumer.

In order to change the situation, Cochrane states:

 "How will this change come about? My examples share a common thread: Intense competition by new entrants, who put old companies out of business or force unwelcome and disruptive changes. Microsoft displaced IBM, and Google is displacing Microsoft. Walmart displaced Sears, and Amazon.com may displace Wal-Mart. Typewriter companies didn’t invent the world processor, nor did they adapt. The post office didn’t invent FedEx or email. Kodak is out of business. Toyota gave us cheaper and better cars, not Ford/GM/Chrysler competition. When the older businesses survive, it is only the pressure from new entrants that forces them to adapt.

My examples share another common thread. They remind us how painful the cost control, efficiency, and innovation processes are. When airlines were regulated, artificially high prices didn’t primarily go to stockholders. They went to unionized pilots, flight attendants and mechanics. Protection for domestic car makers supported generous union contracts and inefficient work rules, more than outsize profits. A look at a modern hospital and its supply network reveals lots of similar structures. “Bending down cost curves” in these examples required cleaning out these rents, through offshoring, elimination of union contracts and work rules, mechanization, pressure on suppliers, and internal restructurings.

　

The fact that so much cost reduction comes from new entrants, not reform at the old companies, is testament to the painfulness of this process, and the ability of incumbents to protect the status quo.” (2)

Cochrane is correct that the process which is very akin to Schumpeter’s creative destruction is by no means painless. However, it’s totally painless to status quo old firm protected by government regulation that merely pass on higher and higher prices with little or no interest in finding what part of the cost, innovation and quality frontier creates maximum  utility for the consumer.

Finally, Cochrane makes an excellent point if government regulation was removed protecting old firms and allowing new competitors to enter the market at will: “The fear, so often expressed in medical contexts, that unregulated competitive suppliers will pawnpawn off shoddy merchandise on consumers seems exactly false.” Cochrane is correct. The argument is merely the argument put forward by the old firm collecting rents under the protection of government regulation. The same argument has been put forward many times by old firms in protected industries. It is by no means a new argument. His point is very correct and he points to examples such as Toyota dislodging the Big Three Auto makes was not done by selling shoddy products. Nor did Southwest airlines gain market share from United and American by selling shoddy product/service. Rather, Toyota and Southwest actually exposed the shoddy product/services of the old firms. (3)

　

Notes:

(1) After ACA: Freeing the market for health care, John Cochrane, 10/18/2012.

(2) Ibid.

(3) Ibid.