Streetwise Professor

July 26, 2009

Health Care Nirvana

Filed under: Economics,Politics — The Professor @ 11:39 am

Paul Krugman proclaims that a free market is impossible in health care:

Um, economists have known for 45 years — ever since  Kenneth Arrow’s seminal paper — that the standard competitive market model just doesn’t work for health care: adverse selection and moral hazard are so central to the enterprise that nobody, nobody expects free-market principles to be enough. To act all wide-eyed and innocent about these problems at this late date is either remarkably ignorant or simply disingenuous.

A few brief comments in response to The Exalted One (in his own mind, anyways):

  1. Krugman falls victim to the Nirvana fallacy.  Any analysis of alternative institutions and organizations for delivering a particular good or service must be a comparative one.  It could be that, as Churchill said of democracy, that “the free market is the worst system of health care, except for all others that have been tried from time to time.”  You need to compare real world alternatives.  Just shouting “market failure” (i.e., moral hazard, adverse selection) does not end the argument.  It is only the beginning.  You need to evaluate alternatives–especially since moral hazard and adverse selection, if they exist, are endemic to the nature of the good or service, and hence are likely to affect alternative means of supplying health care.  These problems inhere in information asymmetries, and changing the system from “free market” to some alternative does not eliminate those information problems.  It just deals with them in different ways.  And those different ways can be inferior.  As Krugman well knows, since he has written about it in his books on trade, there can be government failures too.  An adult discussion of the issue should be about what set of institutions most effectively deals with the information problems inherent in health care.  A ritual invocation of market failure with no follow up on the susceptibility of alternative systems to failures that could be more severe is the sign of a lazy mind, or of a partisan hack wanting to circumvent debate.
  2. Health care economists are skeptical that adverse selection explains the problems in the health care market.  Krugman invokes Arrow, who wrote decades ago, and in a theoretical, general way.  Arrow’s work started an immense literature on insurance generally, and health insurance in particular.  And that literature does not strongly support the claim that the adverse selection model is the best explanation for the way the health care market has evolved, and the apparent dysfunctions therein.
  3. Relatedly, many of the dysfunctions in health care in the United States, and elsewhere, are arguably the result of specific policy interventions, including inter alia, the tax deductibility of insurance premia paid by employers, mandated coverage, licensing requirements, limits on entry into medicine, and tort rules.  I don’t want to sound like one of those “socialism hasn’t failed because it has never been tried” types, but it is fair to say that health care has been the subject of political manipulation and regulation, and to blame all of the things we don’t like about it on the market is a misleading and tendentious diagnosis.
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  1. The reason that health care isn’t well suited to the benefits of a competitive market model are due to the 3rd party payment system, which tends to encourage a “Tragedy of the Commons” situation. Since the market participants, patients, are not the ones ultimately paying the doctors (insurance companies pay), there is little incentive for them to economize a scarce resource. We see this result in emergency rooms nationwide every day.

    If we want to apply market principles to health care then there needs to be a positive feedback loop between supply and demand without the insurance companies serving as intermediaries. Since health care is perceived by most Americans as something of a mix between a privilege and a right, I don’t think there would be enough support for a completely free and deregulated health care market. At the same time, since health care is not, currently, viewed as a right of citizenship in America, nor is there enough support for socialized medicine or some variation therefor.

    I would suggest that we break the term “health care” into two parts and treat each market segment differently. On the one hand, I think that most people would agree that there are basic type of health care services, which every American should be entitled to as a basic human right. In this case, both you and Krugman have valid points.

    Let’s “socialize” basic health care but let the market for elective and costly procedures be determined by the “market.” I believe, based on my memory of a 60 Minutes piece, that this is the approach being taken by Oregon currently with fairly encouraging results.

    Comment by Timothy Post — July 26, 2009 @ 2:13 pm

  2. The healthcare system is bloated and predatory. We need to break out of the matrix of fast food, greedy doctors and insurance bandits, bypassing it through a values transition to healthy lifestyles and alternative medicine. We are entering a brave new world of collapsing economies, declining social benefits and aging populations. The aging baby boomers are increasingly interested in cheaper, more effective healthcare solutions, even as all prior forms of healthcare – state-backed or free-market – are becoming fiscally and spiritually bankrupt.

    Yet for the wily, this is opening up new opportunities ushered in by the gestating Wellness Revolution, which encourages people to network with each other and take personal responsibility for their own wellbeing. Health; money; happiness; security; freedom. Please contact me through my site if you’re in any of these things.

    Comment by Sublime Oblivion — July 26, 2009 @ 4:35 pm

  3. * Please contact me through my site if you’re in any of these things.

    Should be: if you’re *interested in* any of these things.

    Comment by Sublime Oblivion — July 26, 2009 @ 5:15 pm

  4. TP–Long time, no hear. The issues you raise are endemic to insurance–that’s essentially the moral hazard problem. Some of the factors that I mentioned in my original post, namely the tax subsidy for employer-provided health insurance, and the coverage mandates present in many states, contribute substantially to the overconsumption that you allude to. A system that did not tax-favor consumption of healthcare, and did not mandate people purchase coverage that they would not purchase voluntarily, would come closer to what you advocate–a system where people purchase insurance for catastrophic events, and pay for other services out-of-pocket. But that needn’t be socialized.

    S/O–This week, although the fascist strains are still present (another jeremiad against fast food companies, doctors, etc.), your inner libertarian is coming out. LIbertarians are all about taking personal responsibility for their own well being. And that’s ultimately a reason why libertarians oppose further intrusions of government into health care, because it will just further the process of infantilizing people, and deprive them of the ability and the incentive to make their own choices.

    The ProfessorComment by The Professor — July 26, 2009 @ 7:55 pm

  5. Well if the government won’t do anything (and even if it will it will probably be a half-assed job anyway), then its a good idea to look out for yourself.

    In a way that is what the fast food companies and doctors are doing. Looking out for themselves, to the detriment of the wider society. I fail to see how pointing this out makes one fascist, but anyway. 😉

    Comment by Sublime Oblivion — July 27, 2009 @ 12:06 pm

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