An interesting market distortion caused by third party payment for medical care is new drug/device innovation.  Third parties (insurance companies and Uncle Sam) will pay for some new drugs and devices and not for others.  The devices that are “covered” have an incredible advantage over their potential new competitors.  

Put yourself in the patient’s shoes.  The surgeon says that a new sinus surgery that’s available will cost the patient an extra $500, as their insurance doesn’t pay for it.  Never mind that it’s better.  It’s $500!  This “insulation” from competition that those “accepted” devices and drugs receive from the third party payers who cover their products, actually allows those drug and device manufacturers to charge more than they would in an otherwise free market.  Subjecting the “accepted” devices/drugs to real competitive pressure would force price or quality re-evaluation constantly, a process  every other industry must embrace.

If some bright engineer comes up with a better total joint implant, for instance, he has no chance to enter the market place and compete with the big boys unless his device is included in the list of accepted devices that are “covered.”  The typical response by the big insurance companies when questioned about why they don’t “cover” something is “Medicare doesn’t cover that.”  So ultimately it is Uncle Sam that determines whether this new and improved total joint implant makes it.  

Much more likely is that politics will get involved, with agency bureaucrats in government recognizing their opportunity to peddle influence.  After all, how easy would it be for one of the “big boys” to get a tip from some “helpful” bureaucrat, that a new device is out there that makes their technology obsolete .  ”Big boy” company “requests” sufficient delays be put in place at federal agencies, placing the upstart in an impossible situation, so that they can them buy the young engineer out at a fire sale price.  Don’t think this has ever happened?  Seriously?

State governments helping inventors apply for federal funds for their medical inventions represents another distortion.  See my blog “Favors We Can Live Without” here for more on this. This is moral hazard at its finest when bureaucrats determine the risk part of the risk-benefit proposition.  Capital then chases an inordinate number of bad ideas, or chases the ideas that benefit the bureaucrat decision-makers.  Oklahoma’s “Center for the Advancement of Science and Technology” is one such outfit that enables such federal mal-investment, rather than limit losses for bad decisions to those who would seek to profit from the idea.  I find it incredible that taxpayers fund an agency whose job it is to invest taxpayer’s money into projects from which the taxpayers receive no windfall, other than the lie of economic growth.  Who knows what the taxpayers, left to their own devices, would have invested in.  Maybe a new inhaler for their asthmatic child?  Who knows?  Our old friend, Bastiat, continues to haunt us with “what is not seen.”  

Higher prices for drugs and medical devices.  Stifling of innovation.  Opportunities for fraud and bribery. Misuse and mal-investment of capital.  Faulty products coming to the medical market place due to politics rather than merit.  I’m sure this is only a partial list of distortions caused by the presence of third party payment for medical care.  Many thanks to Jason Sigmon, M.D. for the idea for this blog and his keen insights.

G. Keith Smith, M.D.