America's health care system is in crisis. That is the conclusion of virtually every commentator on American medicine, regardless of political persuasion. Ask any doctor, any patient, any business executive or politician. Indeed, virtually everyone who has even remote contact with the health care system will readily agree that it is in need of serious reform.

The crisis is not new. It has been emerging for at least two decades. Over that period there have been numerous recommendations for reform. Yet we are no closer to a national consensus on how to solve our health care problems today than we were 20 years ago.

One reason why there is no national consensus on a solution is that most people do not agree on what the problem is. What we believe to be the nature of the health care crisis often depends almost entirely on where we stand in relation to the health care system.

Why People Do Not Agree on the Nature of the Crisis

For employers and many public officials, the crisis is one of costs. America, they remind us, is spending $550 billion a year on health care – more than $2,000 per year for every man woman and child in the country. Health care spending is approaching 12 percent of our gross national product, higher than in any other country.

Yet for every cryof alarm over rising health care spending, there are at least two or three other cries of alarm over our failure to spend even more money on health care. Thirty-seven million Americans, we are told, lack health insurance. Among those who have health insurance, too often the policies fail to cover needed services, such as mental health care or treatment for alcohol and drug abuse. There also is a seemingly endless list of health care needs going unmet: prenatal care for the young, nursing home care for the old, and organ transplants for the young and old. Indeed, the most popular measures before Congress and the state legislatures are proposals not to lower health care spending but to forcibly extend the reach of private and public health insurance to more people and for more services.

The conflict of perspectives does not end there. Wherever we look in the health care system, we find almost diametrically opposed views on the nature of our problems. To most doctors, the main problem is increased bureaucratic interference from government, insurers, employers and even hospital administrators – interference which raises costs and sometimes lowers the quality of care patients receive. But to almost all third-party (insurance) payers and to many hospital administrators, the problem is that doctors have too much freedom – especially too much freedom to increase costs.

Almost every patient who sees a hospital bill believes the hospital is overcharging. Almost all employers and insurance companies share that view. But almost all hospital administrators believe their hospitals are unfairly underpaid for the services performed and they worry about what services they will have to cut if they cannot increase hospital revenues. Many physicians have a similar view.

How The Medical Marketplace Differs From Other Markets

It is not unusual for the participants in a market to have different perspectives and different frustrations. In a normal market, however, major problems are solved by individual initiative on the part of consumers and producers pursuing their own self-interest. Consumers circumvent waste, inefficiency and resulting high prices by searching for bargains offered by efficient suppliers. Producers search for less costly ways of meeting consumer needs. Pursuit of self-interest by one person usually helps solve problems by creating benefits for others. Pursuit of self-interest by consumers rewards the most efficient producers, and pursuit of self-interest by producers rewards consumers.

In the health care sector, however, normal market processes have been replaced by bureaucratic institutions. Normal market incentives have been replaced by bureaucratic rule-making. As a result, the scope for individual initiative is greatly restricted and all too often people can pursue their own interests only by creating costs for others. The following are some examples:

  • Whereas in a normal market consumers spend their own money, in the medical marketplace consumers are usually spending someone else's money. Less than 10 cents out of every dollar of hospital income and only 28 cents out of each dollar of physicians' fees is paid by patients using their own funds.

  • Whereas in a normal market producers continuously search for ways to reduce costs, often when physicians and hospitals increase costs they also increase their incomes. Success depends less on service to patients and more on meeting the requirements of third-party (government and private insurance) reimbursement formulas.

  • Whereas in other insurance markets individuals are often confronted with a diversity of products, the vast majority of people who have health insurance are covered under an employer or government plan. These plans usually give people very few options. An individual usually cannot purchase a less expensive plan with a different type of coverage without considerable personal sacrifice.

  • Whereas in a normal market innovation and technological change are viewed as good for consumers, in the medical marketplace third-party payers are increasingly hostile to new technology and are discouraging its development.

  • Whereas in a normal market producers advertise price discounts and quality differences, in the hospital marketplace most patients cannot find out what the cost will be prior to admission and cannot read the hospital bill upon discharge. Patients rarely can obtain information about the quality of physicians or hospitals – even when quality problems are well-known within the medical community.

The result is a marketplace in which the pursuit of self-interest often does not solve problems, but instead creates them. When consumers consume they drive up insurance premium costs for other consumers. The primary ways in which physicians and hospitals increase their incomes also lead to increasing insurance premiums. Rarely can individuals act to change things without operating through large bureaucracies, and when bureaucracies attempt solutions their "success" usually creates new problems and new costs for other bureaucracies.