What makes health care special?

What do I mean by "special"?

Special means aspects of health care that would make a free market less than optimal.

Economic systems can be evaluated according to their allocative efficiency or their distributional equity.

• Allocative efficiency exists if no rearrangement could make anyone better off without making someone else worse off.
• Distributive equity means fairness in who gets what and who does what.

Equity -- fairness -- involves value judgments. Economists shy away from this.

Economists therefore usually write about efficiency, as an apparently value-neutral criterion for evaulating a market or a policy.

To ignore distribution, however, is itself to make a value judgement. Can an outcome, free market or otherwise, be labelled "optimal" if people with less ability to pay lack access to needed health care? More on this in class, and below.

Inefficiencies in health care markets

Even leaving aside unequal access by family budget, there are allocative inefficiencies in health care markets.

Free markets are presumed to be efficient. Here is why:

• Arrow's "first optimality theorem" is based on the idea that every trade between two people makes them both better off, so long as the trade in entered into volunarily. Otherwise, one or the other would not agree to the trade.
• Add up many such trades, that benefit both parties, and it logically follows that a system of free trade -- the free market system -- makes everyone better off than they would be if some trades were not allowed.

How can a market be inefficient, if this is so? A market can be inefficient if:

• If it's not perfectly competitive. (More on this later in the course.)
• If there are external costs and benefits
• If there are information problems

By definition, saying a market is "inefficient" means that there is some way to make some people better off without making anybody else worse off.

External costs and benefits

External costs or benefits are costs and benefits that fall outside market transactions.

• An external cost happens when someone takes away something of value to you, or makes your life less pleasurable, without paying you.
• An external benefit happens when you get something of value without having to pay for it.

When property rights are unclear or not easily enforced, particularly regarding collective property or public goods.

A public good is a good such that providing it to one person means providing it to everybody.

• Clean air and water are public goods
• Pollution is an external cost
• a free market allows too much

• Immunizations have external benefit
• a free market provides too little

External benefits make health care special

1. immunizations and other measures to control the spread of illness
2. External benefits from consumption of health care services
• People are happier knowing that other people are getting adequate health care
• Most people regard health care as a human right.

It may seem like I've snuck my values in, and I do believe that health care is a human right.

The difference is that I am asserting that nearly all of us also believe this, so that we, as a society, are missing a chance to raise the well-being most people, not just those whose health is neglected, by limiting access to services to what the market provides.

How do we deal with this inefficiency of the market, caused by external benefits to health care?

Arrow argues that where you have an inefficiency, societies evolve ways to reduce the inefficiency, by restricting or augmenting the market.

So we have a patchwork of formal programs and social arrangements that provide health care for those who cannot afford it:

• Formal programs to extend access to medical services to those who could not buy them: Medicare, Medicaid, indigent care funds, ..., by paying providers to treat people.
• Private health insurance with "community rating," so that the healthy help pay for the care of the sick. This system is crumbling.
  
• A social obligation on hospitals and doctors to take care of people for free, or for whatever the person can pay, or for whatever payment our public programs choose to make,
• and a social obligation for private payers to pay more than cost so that the surplus can be used to fund free care for the needy. This, too, is crumbling.

A major reason that we don't have a textbook in this class is that I have not found that takes seriously the external benefits of health care.

Private health insurance is shrinking away from its social role (more on both of these later)

• Less accepting of obligation to pay more than cost to help cover the costs of others
• "Experience" rating replacing community rating
• You can buy insurance against illness, if you have no particular risk factors. You cannot buy insurance against having risk factors.
• Put another way, you can buy insurance against getting sick, if you are healthy. You cannot buy insurance against being sickly.
  

Information problems

This causes potential inefficiency, because the consumer may make a trade that makes him or her worse off.

Arrow: Society's solution is trust. The agency relationship.

• A doctor is not quite the patient's fiduciary, but close. The doctor has other social obligations besides to the patient, in public health and law enforcement matters, for example.
• A lawyer is more like a fiduciary. A lawyer is expected to act in the client's interest exclusively.

• To foster trust, entry into medicine is restricted to those certified by the states (and the medical establishment) to be knowledgeable and trustworthy.
• Customs among doctors like not negotiating price also seek to foster trust.
• This, however, undermines competition among providers.

Health insurance also involves serious information problems.

• Consumers cannot be expected to understand technically the implications of what is or is not covered.
• Insurance policies allow insurers to revise unilaterally what they cover, under the vague rubric of "medical necessity."
• Health insurance is the most complex thing you buy.

More on this in the discussion of the Arrow reading.