Why markets can’t cure healthcare by Krugman

[Guest guest]

Why markets can't cure healthcare by Krugman

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

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. '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.

http://krugman.blogs.nytimes.com/2009/07/25/why-markets-cant-cure-healthcare/