Health Care Non-Economics
The current Supreme Court drama over health care reform is making all sorts of headlines. One thing that is missing is sufficient criticism of the horrible economics being served up by opponents or reform.
This is simple.
People whom advocate that we ought to allow market forces to govern the health care system obviously have no clue as to how a market works. This is surprising since they tend, by and large, to be ardent market force advocates.
So, at the risk of repeating myself:
Markets are supposed to produce magical results. The magic being that they allow those involved to interact such that the outcome is agreeable to all in the sense that no one can make a change in position without reducing someone else’s position. The mechanism that brings about this magic is that of price discovery. The too and fro between people in a market eventually will establish a price at which sufficient services are provided at a price to produce the agreeable outcome where everyone gets what they need given how much they can afford. That’s long winded, but hopefully you get the drift of it.
This entire process is often wrapped up in the sentimental phrase: “market forces”. As in: we ought to allow market forces to decide the outcome. Most people seem to think such an outcome is value neutral in that no coercion takes place, no government interference is involved, and therefore, the result is not arbitrary, but ‘natural’. It’s all just the result of a bunch of free folks settling things between themselves.
Umm. No. It’s value laden throughout since the process starts with everyone’s budgets as a given. And some budgets, as we all know, are more stacked than others. Even if we accept this unequal starting point the magic doesn’t always work.
This is because the magic is only possible under very severe restrictions. In the case of health care the most salient such restriction involves the asymmetrical distribution of information.
What this means is that all the actors in a market – in the case of health care: doctors, insurance companies, and patients alike – have equal access to, and understanding of, all the information needed to make informed choices. The playing field must be level. If it is not – say when your doctor knows something about tuberculosis that you don’t – there is no way you, as an economic actor, can negotiate a proper or agreeable price. Actors also need to be able to secure competing bids for services – as you are rushed to the emergency room you would have to be able to seek different prices, doctors, treatments and so on – in order to allow the pressure of competition to eliminate undesirable side effects of cheating, rent seeking, and other anti-social behavior.
There is no way, at all, that a health care system can be run this way. It is a classic example of a circumstance where a market cannot work.
This is well known. It was the subject of a classic article by Kenneth Arrow – a Nobel prize winner – a long time ago.
Yet here we are having a discussion if none of this is known at all. And the most ignorant of the problem of market failure in health care are the very people who defend market forces.
On a broader note: the cost of health care is an issue for the economy regardless of whether the bills are paid by the government are not. Indeed in many ways the current discussion about Obamacare is a massive and unfortunate distraction from the main problem, which is to cut health care costs no matter who foots the bill. Dismantling Obamacare – which was a half-hearted reform at best – doesn’t address this key issue. It may satisfy the ideological right in our politics, but they will then be faced with a different and more embarrassing question: when the market manifestly fails, as it must, what will they do?
My guess is fudge.
They have no alternative.
Look folks: markets fail. There is no news in that. Further, any resource – like health care – that is not universally abundant has to be rationed somehow. Not everyone will get all they want. So the decision is about how we ration. Do we ration via prices in an open market? Or do we ration via some form of control over supply of service? Or in some other way? Which fairest? Which is cheapest?
In moments when they fail markets cannot be assured of delivering good results. This is already clear in our health care system which is expensive, inefficient, and produces very modest results.
It is time for a change. Even if you abhor Obamacare.
