Stat counter

View My Stats

Sunday, January 15, 2012

You'll shoot your eye out!

A favorite ploy of health care economists who are market deniers is to channel through the spirit of Kenneth Arrow, whose sentinal work on health care economics in 1963 still shapes the debate today. In Uwe Rheinhardt's piece today in the NYTs, there is such an example:
In a recent interview with Conor Clarke in The Atlantic, Professor Arrow was asked how much of his 1963 paper “is still an accurate representation of the problems the health market faces.”
He responded:
I think the basic analysis hasn’t changed. There are wars over the details, but the basic analysis is accepted. Some specifics have changed. If you look closely at my argument there is a sociological structure. There is a kind of sociological thesis. The market won’t work – it doesn’t work well in the health context. But something else supplements the market, and the thing I put stress on in the paper are the elements that put a non-economic influence on the market: professional commitments to provide a service, to engage in services that aren’t self-serving. Standards of caring decided by non-economic actors. And one problem we have now is an erosion of professional standards. In a way there is more emphasis on markets and self-aggrandizement in the context of health care, and that has led to some of the problems we have today.
The emphasis is mine. Whenever market based solutions to health care economy problems arise, the response is predictable. A firm and confident declaration is made that the market does not work in health care. End of story. Debate is closed. Justification or empiric support is not required. A Nobel Laureate has spoken.   It reminds me of one of my favorite movies, A Christmas Story where the main character Ralphie desires a Red Ryder bee bee gun for Christmas. When he expresses his desire, he consistently gets the same response:

Ralphie: I want an official Red Ryder, carbine action, two-hundred shot range model air rifle!  Mrs. Parker: No, you'll shoot your eye out.
He gets his courage up to ask a departmental store Santa and he gets the same response. Why would you want'll shoot your eye out!!! No argument. No response. Ralphie's desires are trumped by a statement for which he has no response. He cannot ask whether this claim is supported by any sort of empiric evidence. He is not at liberty to ask whether the risk of eye injury is different in Red Ryder air gun users. It is the gospel truth and should not be questioned.

So tell me why markets won't work in health care? I don't want to be shown that market solutions will not be perfect. I take that as a given. I do not want to be shown anecdotes of imperfect outcomes. Bad outcomes will happen even with even good systems and should not be used as a basis to scrap market approaches. The center piece of Arrow's argument was the existence of information asymetries which he comments on further..

Such has changed since the early 1960s. In particular, the unimaginable advances in information technology have revolutionized many sectors of the economy. In health care, this electronic revolution has made it possible for patients to be much better informed about the efficacy of alternative medical treatments. That, by itself, should have reduced the problem of information asymmetry.

On the other hand, as medical science and practice advance rapidly, the information gap between physicians and their patients increases. Many transactions in the market for health care therefore still proceed on the basis of trust in the expertise and integrity of physicians and other health workers, rather than on the countervailing power of equally well-informed buyers and sellers, each looking out only for their own self-interest.
Is this really any different from other segments of the economy? I do not understand how to fix the brakes on my care and I suspect that a faulty brake job more likely puts me in harms way than most interactions with my physician. I have to trust that my mechanic installed the shoes correctly. I have to trust that the  mechanic who maintains the engines on the planes I fly is not cutting to may corners. I need to trust the cooks who prepare my food are not adulterating their fare. Our entire economy is based upon trust and skepticism. You need both. 

Again there are times where those who are ill at inherently at an insurmountable disadvantage but not always. In the same vein automobile repairs do not always have to happen within the context of being broken down in a desolate place with a tight time table. However, if your car breaks down in the boonies where you know no one you are more likely to be fleeced by someone who can and will take advantage of you. That does not mean we should eliminate the market to deal with automotive repairs.

The fundamental tenants of my belief in markets in health care are simple. First, it is basically incontrovertible that markets are the best tools yet developed to optimally allocate scarce resources. Second, it is impossible to make any consistent distinction between what is inside and outside of the health care economy at the margins.  Almost any good or service which enhances human life could arguably fall within the health care realm. Between health care cost inflation and ongoing redefinition of what entails health care, the health care economy will basically absorb the rest of the economy. If the health care economy is divorced from market allocation schemes, it means that the world of the future will be a throwback to the pre-market allocated world. Unless there is some other resource allocation mechanism which miraculously develops to replace market mechanisms in the near future, we will commit our descendants to wealth destroying race to the bottom.

It is not as if it needs to be all or nothing immediately. For each health care entity, give us the flexibility to move parts of our business to outside the third party system. As it stands now, you are either all in or all out. That is no way to structure a system that needs innovation. No one wants to make that big bet. Which portions of the health care business that can move to market and consumer driven models will be decided by many little bets. Many will lose. Some will win. A few will win big and winning big I mean the consumer will end up getting much more for much less. That is what markets do. Yes, someone may shoot their eye out. I am willing to take that chance.


  1. One of the issues behind the market not working is in terms of what we as a society can stomach. We can bear to say if you don't have money to fix your brakes stay home or take the bus. But many (most?) of us would have a hard time saying if you don't have money to treat your cancer, lie down and die. Early on in my life when I was acutely ill, there was no way I could have paid for the money needed to save me. I am glad that no one stood next to me as I plunged into septicemia checking my credit status. There is a second issue here. The airlines have a deep interest in being sure that the mechanic does his/her job. A larger (and deeper pocketed) entity has much to lose if substandard care is delivered. If doctors want to work as employees of large organizations, then oversight would default to the organization with the deepest interest in maintaing the integrity of its product. Yes, the individual mechanic would go bankrupt if he is terrible at his job (or her), but much as I respect my mechanic his job is not as hard as the job of the physician, and consequently, the ability to detect failure is not as hard either.

  2. Insurance is the right financial tool for someone to use when they are faced with unexpected and catastrophic health issues and insurance would be much more affordable if it were not used to pay for more mundane health costs. Most health care encounters happen under mundane circumstances and insuring the predictable and non-catastrophic serves only to make it more expensive. While the justification for such a financial arrangement is to make things more affordable, the subsidy that is the portion paid by insurance quickly gets factored into the pricing and gets converted to waste.

    Your circumstances where you were diagnosed with cancer and became acutely and gravely ill is EXACTLY where insurance should be used. However, it requires that prudent people purchase insurance when they are not well and assume under the best of circumstances they will not get anything in return except the reassurance that if they get ill, they will be protected from financial calamity. There will be some people would make unwise decisions in that they would take the risk and not purchase insurance to cover low frequency but catastrophic costs and they will find themselves at the mercy of strangers. People make bad decisions all of the time and it is not the role of the state to step in and insulate them from the consequences. To make that a policy is a really bad idea since it blurs the distinction between good and bad decisions. The economists call this moral hazard. When we subsidize those who are not prudent at the expense of those who are, everyone behaves imprudently.

    You are absolutely correct about the greater difficulty to detect failure in the health care world. There is a huge push in integrated health care systems to create metrics to measure quality and conversely detect the lack thereof. For major outcomes (life and death), these systems are in place. For the more mundane outcomes, particularly in non-hospital settings, there is a long way to go. The reality is the default metric is patient satisfaction. Thus the responsibility for assessing quality falls back on the patient and resembles the same measures of success and failure used by entities like Amazon or Target.