Paul Krugman has a recent post, giving two reasons why the free market cannot cure health care. As should be no surprise to a Mises.org reader, Krugman is quite wrong.Drawing from a classic article by Kenneth Arrow, Krugman gives two main reasons that health care is something that cannot be left to a free market.
First, health care expenses are characterized by risk. That is: there is a relatively low probability of having a very large expense. Typically, these large expenses are such that an individual could not afford to pay them out of pocket, should the need arise.
The conclusion: health insurance is necessary.
As far as this goes, Krugman is largely correct. Health care is largely characterized by having a low probability of getting hit with some very expensive medical conditions, so some sort of insurance is a sensible solution.
However, there is no reason to claim that insurance of this type is not a “free market” phenomenon. Now, it is definitely true that our current health “insurance” scheme is not really very “insurance” like, for the most part. (Auto insurance doesn’t pay for oil changes – nor should health insurance pay for predictable annual physicals, if it exists to protect against unforeseen events.) However, this does not rule out the possibility of actual insurance in health care.
So far, we’ve seen that Krugman’s first point – though correct on the surface – does not show that the free market can’t cure health care. All he has done is predict HOW the free market would sensibly do it. This leaves a question: How does Krugman come to his conclusion from this point? Well, he makes a few claims about insurance that simply aren’t true.
“It [health care] 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.”
This does not follow at all. Now, it is true that someone other than the patient MIGHT end up making decisions about what to buy. But, there is no reason at all that this is the way things must be. For example, one could easily imagine a health insurance setup in which insurance companies paid a flat amount of money for a particular diagnosis, and leaves it up to the patient to decide how to spend that money. (For example, a cancer patient may decide to take a trip around the world rather than seeking treatment.) If we assume that the free market insurance scheme MUST work like the one we have, then what Krugman says is true – but that assumption is far too strong. Whenever markets are freed, they tend to breed variety – so it is very likely that at least some insurance companies would have a payment scheme like the one I suggest here.
“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.”
The first part is, in fact, always the case with insurance – or gambling, for that matter. Yet, when it comes down to it, most insurers (and casinos) do pay in the event that they are supposed to according to their contract. Apart from any legal ramifications from a contract breach, insurance companies also have to deal with negative consequences arising from customers being dissatisfied. If my mechanic cuts corners and puts only water in my radiator rather than coolant, then I will stop going to that mechanic – and you can bet that I’ll bad-mouth him on my personal blog, and give him a negative review with AAA. (Note: I’m actually quite satisfied with my mechanic – so no worries.) Insurance companies – in a free market – would be under precisely the same pressure. If they refuse to pay when they obviously should, then they will lose customers and develop a bad reputation. This encourages insurance companies to actually pay when they are contractually obligated to.
As far as avoiding covering people that are likely to need care – this is not so. In a free market, people who are in poor health will likely still be able to get health insurance – it will just be quite expensive for them. This is, of course, natural. Teenager drivers (or drivers with accidents on their record) are bigger risks – therefore, the fair thing to do is charge them more for insurance. The same goes for those that are under signficant health risks.
Now, it is true that, on some level, this strikes people as “unfair”. There is something in most people that makes them feel quite uncomfortable with charging the sick more than the healthy. We have a sense that “they’ve already been through enough”. Here, there’s a simple solution: private, voluntary charity. As Mises pointed out, action can be thought of as an attempt to remove a “felt uneasiness”. Certainly, seeing the chronically ill have to pay a lot for their medical expenses creates a felt uneasiness in many, and therefore it is quite likely that private charities will be set up to help alleviate the cost for sufferers of various chronic conditions. The marvelous thing about this system is that it is precisely those conditions that society actually feels compassionate toward that will receive the compassion, as it is quite likely that at least some of these charities will be disease-specific (after all, we already have numerous disease-specific foundations that fund research – so why not ones that fund actual treatment?).
So, what is clear: Professor Krugman’s first point is not anywhere close to sufficient to showing that a free market cannot solve the health care problem. Even if we grant that insurance will exist (and it probably will), it does not follow that health insurance companies in a free market will perform poorly.
“The second thing about health care is that it’s complicated, and you can’t rely on experience or comparison shopping.”
I could grant Krugman his first claim. But, I cannot grant him this one. From what is written here, it is immediately obvious that Prof. Krugman has not faced any serious illnesses. If he had, he would be aware of something called a “second opinion”. It is not the least bit uncommon for people to seek a second opinion, or, when one procedure has failed to prove effective, to try another – often from a different doctor with different ideas. Effectively, what all of this is is “comparison shopping that relies on experience”. So, based on a purely empirical level, Krugman’s claim is false. Now, it is true that because of our current insurance scheme that we don’t compare along the lines of price most of the time. But, we certainly would if prices were paid more directly by the consumer. (Note: I know that, for me, there is a significant exception to this rule. When I seek treatment, I choose a visit with my primary care physician if possible. The reason? Because the copay on my other options – urgent care and the emergency room – are significantly higher than for my doctor. Put simply: people do respond to prices!)
As an additional point, Krugman’s argument is sneaky. For a moment I was going to suggest that Krugman’s connection between “complicated” and “can’t comparison shop” was false. Then I noticed: he actually doesn’t connect the two. He doesn’t say “it’s complicated, therefore we can’t comparison shop.” He says “it’s complicated, and we can’t comparison shop.” These are two different points. I’ve already dealt with comparison shopping, so let’s go back to complication.
Let’s face it – lots of things are complicated. A car is a sophisticated piece of machinery. The laptop I’m typing on is sophisticated. Lots of things are sophisticated. True, the human body is several times more sophisticated. But, I don’t have to be a mechanic to know that my car isn’t running “right”. I don’t have to be a computer expert to know when my internet connection is “laggy”. And I don’t have to be a doctor to know that I “don’t feel good”. The fact is that what matters in my experience as a consumer of various services is my experience as a consumer of various services. The only reason complication matters is because it causes me to seek out an expert rather than try to solve the problem directly myself. But, once I follow the expert’s advice, I am capable of evaluating whether it worked – in as far as I care as a consumer.
In fact, as Austrians know, complication is a point for the free market. As Hayek noted, one significant problem with central planning is the information problem. There is simply too much information in the economy for a central authority to be able to process it effectively (or even gather it, as a very large portion of the information is actually not directly observable). So, given this complication, it makes far more sense to have consumers decide what matters and what doesn’t – as only consumers have the most important information: does their experience match what they want from their health care system? If we want to get a “yes” answer from that question, we should adopt a system in which consumers have choices. And, as we all know, the free market provides far more choices than any centrally planned system could.
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Point 2: Why are these resources “wasted”? Typically, when decisions are made with bad information that’s considered a “market failure” by many economists. Now, you’re saying that trying to get information is a “waste” of resources? By what standard?
Now, suppose that we live in a world where insurance companies can’t figure out who is risky and who isn’t. (Maybe it’s technically impossible, maybe it’s illegal.) In that case, they’ll have to price insurance based on their uninformed guess of how risky the average patient is. The result: a healthy patient faces a premium that is actuarially “too high”, while a sick patient faces a premium that is actuarially “too low”. So, many of the healthy will choose not to have health insurance, as it’s cheaper to live without it. Insurance companies will take into account the fact that the healthy have left the insurance pool, and raise premiums… Now, premiums are too high for the “moderately sick”, and they drop out – and so on. This is the standard “adverse selection” story.
So, all the money being wasted to determine people’s risk levels is actually being spent to ensure that there is a market for each risk level. Otherwise, only the very sick will be insured – and they’re going to pay very high premiums to be so. (In fact, from what I’ve read, many people are uninsured not because they are denied coverage, but because they think coverage is too expensive.)
Point 3: Being someone who has a handful of family members that have had serious medical conditions, I know that they often DID get second opinions. In fact, I don’t think any of them just gave up if what their first doctor tried didn’t work. Of course, this sample is far from random, but I’m curious if you have any evidence to the contrary.
Thanks for your response.
Point 2:
I see what you’re saying. I would say there are 2 categories of health risk; those that a patient can control, and those the patient cant. Researching the first is perhaps useful, in that patients can then face the proper incentives to live healthily.
I dont see a point in researching the second. Government intervention could solve this market failure by requiring everyone to have insurance, and that insurance comapnies offer coverage to everyone, regardless of prior health conditions, and without basing their price on the person’s health. Then everyone has insurance and no one is spending money gathering information on people’s health risks. The only “downside” I see is that people with good genes are paying a bit more to help people with bad genes.
Point 3: I dont doubt people get second opinions, and that they can help. But that doesnt make medicine the same as buying bread. I dont have evidence, but common sense says that its a lot more difficult to figure out which doctor is giving you a correct diagnosis -the process of acquiring the knowledge and necessary information to make a diagnose is expensive- then which baker is selling you stale bread. And figuring out which doctor is performing poor procedures could be impossible or costs someone’s life.
Point 2: Actually, the problem I describe will happen as long as the patient has better information about their health than the health insurance company does – even if it’s outside their control. For example, the fact that my mom has had skin cancer makes it somewhat more likely that I will get skin cancer. I know this. If my insurance company isn’t allowed to gather information about my family medical history (which is common any time someone applies for insurance), then I’m more likely to sign up for health insurance than someone who doesn’t have skin cancer in their family – resulting in the same problem that I describe. People who are high risks – even if it is outside their control – will buy health insurance, people who are low risks won’t.
Of course, we can “solve” this problem by forcing everyone to buy health insurance. The question is: do you really believe that making the healthy pay for the sick is something that should be done at the point of a gun? I have no problem with people voluntarily giving money to help the sick, but it’s quite different to make them do it or face fines/jail/etc.
Other than that normative aspect, there’s also the fact that, if everyone is forced to carry insurance, then we can expect overuse of health care, and very high premiums as a result – even if we can cut out some of the administrative costs from not gathering health information.
Point 3: Now, it’s true that I often can’t tell which doctor is giving me the right diagnosis – but I often can tell whether a prescribed treatment is working. For example, if my dermatologist gives me a medicine that’s supposed to get rid of a wart, and the wart doesn’t go away, I know that it didn’t work. If they give me a medicine for high blood pressure, and my blood pressure comes down to normal, then I know it worked. Obviously, things are harder with, say, cancer. But, seeing as patients actually want to know whether or not a treatment is working, one would expect that they’d be willing to pay for good information about whether treatments are working, and that the market would develop a system to provide good information.
What isn’t clear to me: how a system that isn’t market-based will be any better along these lines. The UK’s NHS – which is about as “government-run health care” as they come – has instructions for getting second opinions, because it is true that medicine is complicated and that doctors occasionally make mistakes. I don’t see how this creates a problem for a market-based system but not also for other systems.
As for overuse of health care if everyone was required to carry government insurance, isnt that essentially the same moral hazard problem Krugman/Arrow bring up and you suggested could be solved by paying a lump sum for a given diagnosis, rather then providing treatment?
In general, you raise interesting questions. I would just say that it seems the argument has moved from whether a free market in health care would be pareto optimal to whether it would at least be preferable to a market with some sort of government intervention.
I think there are at least some, and possibly a lot, of interventions that would improve on the efficiency of a free market. For example, you admit that it can be difficult for a consumer to judge potential cancer treatments, but assert that, if a free market was allowed to form, it would likely provide the necessary information to consumers, for a price. But isnt research a classic positive externality that will be under-produced if left to the market? So I think, at the very least, government should use taxes to pay for public information about the efficacy of different treatments and procedures.
There are other pitfalls of a free market once information problems are introduced. Consider 2 types of people, those who want to learn medicine to be liscensed and make money by tricking patients into unecessary care, and those who want to help patients. A free market could price the cost of a medical education high enough so that the altruistic types would not be able to afford it. Perhaps in England, where both the cost and financial rewards of a medical education are lower, those who end up becoming doctors are more altruistic then in their counterparts in the U.S., making it less necessary for English patients to spend resources informing themselves.
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