Fiscal Policy: Felix Salmon Asks a Question
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Uwe Reinhardt on Kenneth Arrow on Health Care

Uwe Reinhardt:

Health Care, Uncertainty and Morality: In last week’s post I discussed Kenneth Arrow’s exploration of whether special characteristics set health care apart from other commodities — whether it had a “moral dimension.”... Professor Arrow... concluded that virtually all the special features of the medical care industry — the role of nonprofit institutions; the expectation that physicians, although vendors of medical services, would always put the interests of their patients above their own self-interest; professional licensing and many other forms of government regulation — could “be explained as social adaptations to the existence of uncertainty in the incidence of disease and in the efficacy of treatment.”...

First, physicians may not agree on the medical condition causing the symptoms the patient presents. Second, even if physicians agree in their diagnoses,  they often do not agree on the efficacy of alternative responses — for example, surgery or medical management for lower-back pain. Third, information on both the diagnosis of and the likely consequences of treatment are asymmetrically allocated between the sell-side (providers) and the buy-side (patients) of the health care market. The very reason that patients seek advice and treatment from physicians in the first place is that they expect physicians to have vastly superior knowledge.... That makes the market for medical care deviate significantly from the benchmark of perfect competition.... Wherever asymmetry of information is present, there exists the potential for the better-informed market participants to exploit the ignorance of the less well informed. How society responds to this flaw in markets depends on the severity of its consequences....

Professor Arrow explained many of the nonmarket social institutions and regulations characteristic of medical care that he had identified as “attempts to overcome the lack of optimality resulting from asymmetry of information and the inability of competitive markets to allocate efficiently all of the risks inherent in health care.” Pointedly, he said, “It is the general social consensus, clearly, that the laissez-faire solution for medicine is intolerable.”...

In a recent interview with Conor Clarke in The Atlantic, Professor Arrow was asked how much of his 1963 paper “is still an accurate representation of the problems the health market faces.” He responded:

I think the basic analysis hasn’t changed. There are wars over the details, but the basic analysis is accepted. Some specifics have changed. If you look closely at my argument there is a sociological structure. There is a kind of sociological thesis. The market won’t work – it doesn’t work well in the health context. But something else supplements the market, and the thing I put stress on in the paper are the elements that put a non-economic influence on the market: professional commitments to provide a service, to engage in services that aren’t self-serving. Standards of caring decided by non-economic actors. And one problem we have now is an erosion of professional standards. In a way there is more emphasis on markets and self-aggrandizement in the context of health care, and that has led to some of the problems we have today.

Coming from one of the most revered economists of our age, these are sobering thoughts. Next week, I shall return to Professor Arrow’s comments on the concept of “efficiency,” as economists define and use the term. In my view, when economists wax mushy on the virtue of what they call “efficiency,” it is time to run for the hills, for they are selling a preferred moral doctrine in the guise of science.

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