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July 25, 2009, 5:07 pm — Updated: 5:07 pm -->
Why markets can’t cure healthcare
Judging both from comments on this blog and from some of my mail, a significant number of Americans believe that the answer to our health care problems — indeed, the only answer — is to rely on the free market. Quite a few seem to believe that this view reflects the lessons of economic theory.
Not so. One of the most influential economic papers of the postwar era was Kenneth Arrow’s Uncertainty and the welfare economics of health care, which demonstrated — decisively, I and many others believe — that health care can’t be marketed like bread or TVs. Let me offer my own version of Arrow’s argument.
There are two strongly distinctive aspects of health care. One is that you don’t know when or whether you’ll need care — but if you do, the care can be extremely expensive. The big bucks are in triple coronary bypass surgery, not routine visits to the doctor’s office; and very, very few people can afford to pay major medical costs out of pocket.
This tells you right away that health care can’t be sold like bread. It must be largely paid for by some kind of insurance. And this in turn means that someone other than the patient ends up making decisions about what to buy. Consumer choice is nonsense when it comes to health care. And you can’t just trust insurance companies either — they’re not in business for their health, or yours.
This problem is made worse by the fact that actually paying for your health care is a loss from an insurers’ point of view — they actually refer to it as “medical costs.” This means both that insurers try to deny as many claims as possible, and that they try to avoid covering people who are actually likely to need care. Both of these strategies use a lot of resources, which is why private insurance has much higher administrative costs than single-payer systems. And since there’s a widespread sense that our fellow citizens should get the care we need — not everyone agrees, but most do — this means that private insurance basically spends a lot of money on socially destructive activities.
The second thing about health care is that it’s complicated, and you can’t rely on experience or comparison shopping. (”I hear they’ve got a real deal on stents over at St. Mary’s!”) That’s why doctors are supposed to follow an ethical code, why we expect more from them than from bakers or grocery store owners.
You could rely on a health maintenance organization to make the hard choices and do the cost management, and to some extent we do. But HMOs have been highly limited in their ability to achieve cost-effectiveness because people don’t trust them — they’re profit-making institutions, and your treatment is their cost.
Between those two factors, health care just doesn’t work as a standard market story.
All of this doesn’t necessarily mean that socialized medicine, or even single-payer, is the only way to go. There are a number of successful health-care systems, at least as measured by pretty good care much cheaper than here, and they are quite different from each other. There are, however, no examples of successful health care based on the principles of the free market, for one simple reason: in health care, the free market just doesn’t work. And people who say that the market is the answer are flying in the face of both theory and overwhelming evidence.
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About Paul Krugman
Paul Krugman is an Op-Ed columnist for The New York Times.
Biography »
Columns »
Books
Principles of Economics, 2nd ed. (2009)
The Return of Depression Economics and the Crisis of 2008 (Dec. 2008)
The Conscience of a Liberal (Oct. 2007)
Comments of the Moment
“ Would that be the Texas Rangers baseball team that shares honors for highest expenses AND cellar-dwelling performance? Now THAT'S a model for US healthcare reform.”— Walt FrenchProfessor in chief
“ In the free market of ideas everyone has a price.”— BradcpaOpinions for sale
“ It is very well known, Paul, that reality is liberal.”— Tim McDermottScience has a well-known liberal bias
“ I am a descendant of holocaust survivors and as such I am often disgusted by casual comparisons of everyday things to the holocaust. At the same time ... when things truly do resemble the situations that led to the holocaust they should be pointed out. ”— EzraHitler heaven
“ I can has desk organizr?”— NoahAntidote du jour
“ If people were as captivated by public affairs as they are by erotic ones, the economy would be very strong.”— magdalenaI have nothing to say about the Sanford business
“ No public plan, no Obama in 2012.”— SteveObama messes up on health care, big time
“ If the difference is that the bureaucrat standing between me and my doctor is not more interested in maximizing profits to company shareholders than in my health outcome, FINE!”— SKVThe president is making sense
“ Let's stop talking Democrat and Republican -- let's talk common sense, principles, and truth.”— David RaringPrivate borrowing is still negative
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