Contemplation: Why People Don’t Trust Markets

You hear it all the time — the market doesn’t work.  We can’t count on the market.

The market is supposed to pick up signals and the prices are supposed to reflect those signals. That’s how it’s supposed to work. When it fails, it fails spectacularly, in the largest, most important markets – housing and health care, for instance — not the trivial ones.  One might conclude they are not  inherent market failures, but failures because congress (or some force with equivalent power) is scrambling the signal they were supposed to hear.

Take the case of the lost eyeglasses, for instance.  After frantically retracing the day’s activities, the Reasonable Reporter accepts the loss, and heads for the one-hour frame store where the prescription is on file, and the whole transaction can be put to bed quickly, if expensively.

For years, this store has offered fashion frames and excellent service at truly exorbitant prices, when one considers that the product is nothing but molded plastic. For years, the self-insured Reasonable Reporter paid for the frames, the lenses, and the eye exams. They call it fee-for-service, which, loosely translated, means “nobody is helping me pay for this.”

For a dozen years, the Reasonable Reporter had a medical savings account.  The accounts were conceived as part of a scheme that was supposed to tame the cost of health care and put power in the hands of patients by making them responsible for their own health spending decisions.  The law allows a tax-free deposit annually into a medical savings account that can be used for any health-related purpose, combined with a high-deductible insurance policy for hospitalization and catastrophic illnesses. The benefit for a healthy person is an account that grows over the years and can be applied at any point to medical need of any kind.  Patient choice, patient responsibility, lots of privacy.

It was supposed to become a movement. Doctors were supposed to embrace it because collecting from the patient is cheaper than collecting from the insurance company.  They would pass the savings along, the theory said, and some did. The patient would be restrained by financial reality from overusing the health care system, and she was.  Employers would help employees by contributing to the accounts, but be relieved of the expectation that total health care coverage should be part of the compensation package.  A whole fee-for-service subculture was supposed to grow up and there would be a break from the over-priced status quo.  It didn’t, and there wasn’t.

It was a great idea that never truly caught on, and if you want proof that it never caught on, go to a medical appointment and try to persuade the receptionist that since you are going to pay on the spot for the day’s visit, she doesn’t need to photocopy your driver’s license, which is a standard procedure to prevent insurance fraud of the variety where an uninsured person seeks treatment using someone else’s coverage.  Fee-for-service makes the whole routine moot, but the staff aren’t trained to deal with your money, they are trained to fight with insurance companies. For the self-insured, a struggle ensues.

The struggle ensues every single time, at every new health care provider.  It’s exhausting, and this is a tiny illustration of a market that’s failed to pick up a signal.

On the day of the lost eyeglasses, a new job had resulted in new insurance, and there was a radical change in the transaction.  The eyeglass store had the prescription in its data system, and it had something else.  Correct insurance policy data, even though the policy had not yet been used anywhere, for anything.

The Reasonable Reporter paid a bit more than a hundred dollars instead of five hundred, and walked away whistling.

A few weeks later a coverage recap arrived in the mail, showing the part the patient paid, the part the insurance company paid, and – what’s this?  The part that was discounted to the insurance company.  Big Insurance paid less for the eyeglasses than the self-insured patient had been paying for years and years. This, perhaps, should not have been a surprise. It makes sense, until  you think the very next thought.

The reward for being a responsible patient —  for taking charge of your own health care costs and choices – is that you get to subsidize coverage for the employees at the company where they have Big Insurance. You get to pay more, out of your little individual pocket, than the Big Insurance company pays for the same service.

Which is another way of saying, “you got screwed for all those years.”

This is one tiny example in an avalanche of reasons people don’t trust markets. Congress had its thumb on the the medical savings account scale. It put a cap on the number of accounts that could be created, which meant of course, that the insurance providers did not promote the idea. Why would they, if there’s not going to be a large market for it?  If you were seduced by the notion of sending a signal to the market, you were going to be in a tiny minority.

The biggest market of all, of course, is the political market, and voters are the consumers, and politicians are the salespeople.  They know nobody wants to pay more when they can pay less.

The voice of the actual product purveyor  is mute. They have abdicated control of the product. It’s the politician’s product to protect now, so the companies stand back, except in the committee hearings where they show up to bargain, always with the recognition that they can be placed at great commercial and financial disadvantage if they rock the boat.

For an alternative and particularly deep explanation of why people don’t trust markets, watch the Book TV segment about the history of Fannie Mae. (“The Fateful History of Fannie Mae” by Wall Street Journal reporter James Hagerty.  The discussion also involves others.)  Very near the end of this segment, there is question from the audience and a brief contemplation of why congress is afraid to let the housing market work. Paraphrasing:  It’s been 70 years (since the creation of Fannie Mae), and nobody knows whether it will.

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2 Comments on “Contemplation: Why People Don’t Trust Markets”

  1. Sam Shad Says:

    One of the frustrating things is that if you have insurance and want to get a discount for paying cash the doctor cannot give the discount. It’s illegal.

  2. Cheryl Blomstrom Says:

    Perverse incentives. Argggh.

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