Framing the Debate: A Progressive Primer on Health Care Economics

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FRANK FRITZ, HEALTHCARE DIRECTOR

If you are interested in hearing more from Frank and discussing your own opinions on healthcare policy, come to GW Roosevelt Institute’s Fireside Chat on the Affordable Care Act this Thursday, February 27th.



When discussing health care policy, a sometimes tempting line of thought emerges; instead of the government expanding its role in health care, it would be more efficient to allow the open market of consumers, providers and insurers find the best prices through competition. This is an appeal to empirical economics, as opposed to a more vague argument about freedom, basic rights, or national interests. So if it is an economic argument, what do economists think? Polarizing liberal economists such as Paul Krugman would reject it arguing instead for a British or Canadian-style government single payer system. Steven Brill, in a front page investigative article in Time Magazine, examined the American health care system—he found that while it is the most unregulated in the world, it is also the most expensive.

Why has the open market failed to provide the lower prices for health care? Is the solution to double down on our market based system? The field of healthcare economics simply does not support this approach. Over 50 years ago, economist and Nobel laureate Kenneth Arrow published “Uncertainty and the the Welfare Economics of Medical Care” in The American Economic Review. The crux of the paper is that health care is not a typical good; the market will not succeed because of numerous factors which when taken together lead to insurmountable market failure. Arrow notes “virtually all of the special features of this industry, in fact, stem from the prevalence of uncertainty.” The two essential points that complicate healthcare economics are as follows:

The Irregular Demand for Care

Excluding preventative care, health care is not a normal good, such as an automobile. The demand for medical services is irregular, because illnesses arise at unexpected times. It is difficult to compare prices between providers, because unlike shopping for a car, illness is almost always an unexpected expense that must be treated, lest the patient face a future loss of income.

Second, doctors are unique when it comes to purchasing a service. By their very nature, a doctor is expected to be more knowledgeable than a patient about health care. A great level of trust must exist between a doctor and their patient; healthcare professionals by their very nature are also much more invested in a patient’s welfare than typical service positions like a waiter or barber.

Third, when receiving care, a patient must deal with extraordinary uncertainty. It is impossible to “test-drive” a medical treatment, especially in cases such as a surgery. There is no guarantee that an expensive procedure will work, and even if it does, recovery times can differ greatly from patient to patient.

The Limits of Supply in the Healthcare market

Doctors, by their trade, are skilled individuals with a high barrier to entry. The licensing and education process to become a practitioner is long, difficult, and expensive. Because of this fact, the supply of doctors will always be limited due to difficulties in gaining certification, prices of medicine are always going to be difficult to control from a market perspective.

Arrow notes that when markets fail, “society...will recognize the gap, and nonmarket social institutions will arise attempting to bridge it”.  This means the burden of funding health care must fall upon groups within a society, not just individuals. It is our role as members of a democratic society to formulate economically-sound public policy to improve the provision of health care.

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