How healthcare in the U.S. does not follow the free market principles

The business of healthcare delivery is one of the most difficult and complex businesses to operate. This is especially true for hospitals and healthcare delivery systems (a combination of hospitals and healthcare delivery services (e.g. surgical centers)).

While we are all concerned about the availability, quality and affordability of healthcare services, the vast majority of not-for- profit hospitals, continue to lose money on an annual basis or survive on razor thin margins. These hospitals represent 58% of healthcare systems in the U.S. (American Hospital Association) These organizations teeter on the precipice of financial failure relying largely on charitable contributions and their endowment funds. These additive sources of income keep the doors open and buffer hospitals from larger financial losses. With challenging economic times, these sources of supplemental income are reduced.

So why is one of the most demanded and largest industries in our country struggling to survive without the appearance of getting any better? The complexity of this problem and a framework of solutions are beyond the scope of this blog. I will be sharing over the month’s insights the business of healthcare, and how it contributes to this problem with suggested solutions and thought provoking ideas.

The following is an analogy of the complexity of the healthcare business, and how it does not follow the principles of a free market.

Let’s say you are an entrepreneur and you want to open a restaurant in Anytown U.S.A. The local government dictates if a restaurant can be opened and location in the town. So after years of working hard and saving to open your dream business, you need to spend a substantial amount of your money and time to convince the local government that a restaurant adds value to the community. After satisfying the local government’s requirement of demonstrating a need in the community (called a certificate of need), you learn that there are regulations on how much you can be paid for your meals. The entrées on the menu will only be paid at the price dictated by the local government. It just so happens that the price is just at or below the cost of delivering the food and service. Additionally you learn that the price of the food may be adjusted by the local government based upon what they feel the community can afford.  

You are also required by local laws to hire a licensed chef. This individual has spent years studying at great personal and financial cost. The chef expects to be paid a premium salary for his services. Through years of studying at culinary school, suppliers of products have convinced the chef that their products are the best and anything else would deliver inferior results. Therefore, your chef dictates which products will be used while you pay the bill. Given your chef’s requirement of certain brand products, your negotiating power with the suppliers has been significantly diminished.

So now you are the owner of a restaurant which has no control over what you are paid for the meals from your customers, and you have limited control over the products used. Your key personnel are well paid, and they dictate premium priced products that must be used or they will not work at your establishment. Given this business model, we wonder why not-for-profit hospitals are losing money and are about to go on life support.

5 comments Add your comment

Bill Fricke

June 3rd, 2011
11:00 am

An example of not following free markets … I called my insurance company and asked how much a knee MRI would cost at a specific provider. It would fall under my deductible, thus be out-of-pocket, so I wanted to budget accordingly. The insurer would not tell me, and said ask the provider. The provider refused to state how much the agreed upon charge was with the insurer, saying it hurts their “competitive advantage”. So, even though I — not the insurer — would pay for this commodity procedure, neither party would tell me the true charge for which I would be liable. It was a matter of wait for the mail and see what surprises lurked in the envelope.

While I admit it may be an oversimplification, we can determine in advance the cost and quality of a meal at one restaurant vs. another and make an informed decision, it is difficult to do the same thing with something far more important, our healthcare.

Ron Barton

June 9th, 2011
9:32 am

The fundamental issue that Americans struggle with in Healthcare is the concept of letting market forces work. This is not complicated, but the vested interest groups are spending billions of dollars to make it appear so. Market forces only work if the consumer has the ability to make a decision on what they need and has data on relative cost/value and “quality” to make an informed decision. In some aspects of HC, Cosmetic and Lasik surgery, this does work because the patient is an informed consumer. You make the decision about what you need and when you will have it, and you have competitive data on the market quality and cost/value.
If you get cancer that is not how your treatment will work, you are not qualified to know what is the best treatment for your symptoms. You may get several opinions from physicians because you have the time(in an emergency situation you probably wouldn’t have) but even then the physicians cannot give you relative cost/value data on different options because they do not have it. I have worked with many hospitals and I know how they price things, it has nothing to do with competitive pricing, I can show data where there is typically over 300% difference in pricing for the same service.

I am the first to say we should be letting market forces work, but they don’t unless you can present the consumer with data on cost/value and quality for the market relative to their need and they have the time and understanding to interpret it. In most cases they don’t and they have to trust healthcare professionals to make cost effective decisions that are in their best interest.
They Don’t. They make decisions that are in their best interests!!

Every other major country in the developed world regulates their HC market in different ways to protect the consumer, it is not because they stupid! Our current legislation regulates the consumer because our politicians on both sides of the aisle sold out to the lobbyists this is the wrong side of the equation.
If we are being driven by “Government” can’t run anything as an emotive soundbite then remember the Government is paying for HC for about 50% of the US population, including politicians and prison inmates with your tax dollars, over 30% of the Federal Budget.If they can’t run anything we need to vote in a government that can, not ignore the facts of HC. We have the worst most wasteful and most expensive HC System because we are dumb enough to listen to emotive soundbites not facts. There is no need to reduce Medicare benefits we need to regulate the HC Industry to deliver it more efficiently. There are 36 other countries that do it better than we do. Do you think we might learn something from them?


June 19th, 2011
7:56 pm

Well said Ron martin


June 19th, 2011
7:57 pm

Well said Ron Barton


March 7th, 2012
10:45 am

Ron, interesting thoughts you share. We are working on a panel to share ideas on this topic. How can we get you possibly as a speaker to share your thoughts.