Why Free Markets Do Not Work in Healthcare
11 March 2017 | Pago Pago, American Samoa
Free markets do not function correctly in healthcare to allocate resources optimally because of excessive uncertainty. Nobel Laureate Kenneth Arrow has shown us that and why. I explain. There is now an economic literature on point. However, it is not well or widely understood. Absent free markets that function properly for healthcare, it is clear that government has to be involved to assist in achieving results similar to what we might get from free markets if they could work in this area, that is, be cost effective and efficiently provided medical care. Indeed, without regulation, the healthcare markets do not do that at all and have proved that.
In a typical market, say for standard widgets, the product is uniform, well defined and known and the price is likely the same across different sellers because of competition between sellers for buyers and from buyers shopping between sellers for the best price. The product and its price are known in advance. Quality and reliability, are all likely the same in this single market from competition so who you want buy from (the closest seller) is also well known in advance, because you have already shopped around and competition has made the price and these factors all the same. There is no uncertain regarding either the product or it prices. A free market works well in this situation where there is no product uncertainty and no price uncertainty.
But, unlike health care, widgets are a low dollar item and involve only a single market. None of this is true for the markets involved with healthcare.
The reason markets do not work correctly for health care is two-fold (1) the nature and varieties of uncertainty involved are too great for free markets to handle, and (2) doctors feel morally obligated to treat whoever comes to them, regardless of their capacity to pay. On the first point, there is great product uncertainty and also great price uncertainty, with almost no opportunity for buyers to shop around and sellers to compete for buyers on either product aspects or price.
Consider the varieties of uncertainty involved in purchasing medical care when you need it:
1. You don't know when you are going to need it. (purchase time uncertainty);
2. You don't know what type of medical care you will need (product type uncertainly);
3. You don't know what treatment will be thought to be required.and by whom - specific product and putative seller uncertainty);
4. You don't know who (what specialist) will actually provide it. (actual seller uncertainty);
5. You don't know whether the proposed treatment will be effective or whether further treatment will be required. (product uncertainty);
6. You don't know what the medical care will cost, in either instance.(price uncertainty); and
7. You do not know where you will be when you need it.(location or market uncertainty).
In these kinds of situations there is usually no opportunity for buyers to shop different sellers for product and price differences and sellers do not hardly at all therefore compete for buyers. Markets fail.
Price and product uncertainty alone for both buyers and sellers are enough to cause any market to malfunction, but add in all the remaining elements of uncertainty I describe and free markets have little chance, especially given the possible magnitude of the expenditure by a person, which can rival buying a house. Competition and shopping around is not feasible as in the case of widgets. Resources cannot be allocated efficiently at a market or individual level, given these uncertainties.
Additionally, and secondly, the ethics of doctors favor treatment. Just making it near to an emergency room usually assures at least stabilization treatment regardless of capacity to pay. The expense can be huge, even for that. Competitive market forces stand no chance based on this factor alone.That doctors practice, or try to practice, medicine to a single, high standard of care further compounds this price problem.
Lastly, the market for the production of doctors integral to the provision of healthcare has been rigged to produce fewer doctors than free markets would, and by a considerable margin, first by the AMA and later by the states following the will of doctors. Doctors, being fewer in number are paid more.. Excessive compensation to doctors, who run many hospitals economically, as though they were doctors' cooperatives, accounts significantly for higher treatment costs., contrary to free market principles. There is economic literature addressing this analysis as well.
All of these factors together destroy the free market mechanism for allocating resources efficiently and at minimal cost for both buyers and sellers in the healthcare markets.. Uncertainties destroy free market outcomes, along with doctors' compensation and management practices.