Health Policy Straw Man

In today’s Wall Street Journal, David Wessel writes:

It’s fashionable these days, particularly in Washington, to argue that the best way to improve the quality and restrain the cost of health care is to make the market for health care more like the market for everything else.

It’s also fashionable for opponents of free-market health care to caricature the case for market-based reform. 

I don’t know where Wessel comes down in that debate.  But he does employ a favorite straw man of those who oppose market-based reforms: that the case for markets “rests on the belief that health care is – in most respects – like any other product.” In fact, the case for markets does not rest on that assumption. 

That assumption is obviously false.  As Charles Phelps writes in his leading textbook Health Economics, health care markets face challenges such as extensive government intervention, uncertainty, asymmetries of information, and externalities.  Also, health care is scary, involving life-and-death decisions.  Of course, each of these dynamics is present in many markets.  What makes health care unique is how many of these factors converge in one place.

The case for markets is that markets do the best job of dealing with all those sticky wickets.  Take asymmetric information.  Critics say that the knowledge gap between doctor and patient is so great that consumers cannot be assured of quality.  But information asymmetries occur everywhere; every day, I am positively besieged by them.  I don’t know how to sew, much less build a car or a computer.  But those information asymmetries between me and a seamstress or Subaru or IBM do not prevent me from driving to work fully clothed and blogging about health policy.  Markets thrive on informational asymmetries, which are an essential part of specialization. 

So why is it that when consumers need to close that knowledge gap, or at least obtain assurance that they’re getting a quality product, they have an easier time doing so when it comes to Subaru than their doctor? 

Part of the reason is probably medical professionals’ traditional reluctance to compete with one another on the basis of price and quality.  But the larger problem is that government has insulated patients from the costs of their medical decisions.  With patients asking fewer questions about cost and cost-effectiveness (i.e., value), the rewards for generating that information are smaller.  (And herein lies an irony:  Opponents of market-based reforms argue that information asymmetries are an enormous problem, and then turn around and support further cost insulation, which exacerbates that problem.) 

That largely explains the interesting study Wessel cites, which found that patient satisfaction does not necessarily correlate with what the experts deem high-quality medical care.  It should be noted that measures of patient satisfaction and recommended care should not correlate perfectly; patients often have good reasons for not wanting what the experts consider “the best” care.  But excessive insulation at once contributes both to patient ignorance and to providers being able to get away with delivering sub-optimal care.