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Viewpoint (February 2003)

Author: Thomas Rice, Professor of Health Services, University of California, Los Angeles School of Public Health 

In years past, most observers believed that the provision of health care services was fraught with market failure. In particular, consumers were ignorant and providers had every reason to exploit asymmetrical information since they were paid more for doing more. Indeed, the health care industry was not unique in this respect. In a well-known essay written over 35 years ago, Kenneth Boulding noted that the atmosphere at an auto repair shop was eerily similar to that of a hospital: "The garage is permeated by the same air of professional importance, the same feeling that the customer is rather in the way, the same rather offhand bedside manner, the same assumption that the customer or the patient is, professionally speaking an ignoramus, if not a fool" (p. 206). The difference, of course, is that you can replace a run-down car but not a run-down body. Moreover, there are other means of transportation but, as yet, no alternative means of living. Finally, most people (but surely not all!) believe that there is more at stake in health than there is in auto market.  

In health care, lack of information seemed to be the key, and, as Roger Feldman and Bryan Dowd (among others) have argued, "if there is an inefficiently lower level of information in medical care markets, the solution is to inform consumers, not to insure them fully" (p. 199). Indeed, the consumer revolution was supposed to put a dent in, if not solve, the problem of information asymmetry. In the health care industry, and especially in the United States, a tremendous effort has been made to improve consumer information. Its main manifestation has been the health plan report card. At first, report cards contained voluminous information about such things are screening rates, use of particular services for chronic illnesses, health plan characteristics, and satisfaction. It soon became clear, however, that few people understood the measures and even fewer made any effort to use them. Now most report cards employ a single or just a handful of metrics and still individuals seem to be relying far too much on minimal premium differences, and much too little on quality, in making their health plan choices.

This well-meaning but disappointing attempt to quantify the benefits of alternative health plans raises an even more important issue: do people even care about what health plan to enroll in? The basis of managed competition proposals, both in the U.S. and worldwide, is to make the health plan the focus point of market competition. This dates back to the writings of Alain Enthoven in the late 1990s, but also applies to the Thatcher administration's efforts to forge "internal markets" in the United Kingdom, and more recent efforts (some of which have been since toned down) by countries such as the Netherlands and Switzerland to introduce competition among insurers into their national health care systems. Not only do such efforts face the informational hurdles noted above, but they are fraught with other problems as well:

  • Insurers competing for healthier patients, in large measure because of difficulties involved in risk adjusting health insurance premiums.
  • Greater monopolization in the hospital and physician markets, as providers attempt to gain leverage in negotiations with insurers.
  • Government moving away from a system of solidarity.

A strong argument can be made that it isn't choice of health plan, but rather choice of provider, that people care about most. The irony is that competition among health plans tends to reduce choice of providers, as exemplified by the backlash that resulted from the movement towards tightly-managed health maintenance organizations in the U.S. during the 1990s. What ensued was a mild rebellion, and one now hears that "managed care is dead" - although it's too early to know whether there is much truth in it.

Regrettably, there is no real solution to market failure in health care. Consumers would need to know as much as physicians or physicians would have to act as perfect "agents" for their customers. Neither is likely to happen. Rather, one needs to recognize that these failures are part of what makes health care different from most other goods and services. Thus, rather than trying to push government out, we need use government - perhaps even more than we do now - to obtain efficient and equitable outcomes.

Admittedly, governments are subject to failure just as are markets. According to Charles Wolf, government faces a number of challenges. Some of these include: it is often hard to define and measure outputs; by its nature, government is monopolistic and doesn't face the discipline of having to adhere to a "bottom line" of profits or losses; and it is overseen by politicians who tend to prefer quick fixes rather than long-term solutions. As a result, one often sees government operate inefficiently and in addition, inequitably since it is often beholden to special interests who contribute in one way or another to the politicians and political parties.

Nevertheless, when one looks at outcomes from health care systems - quality, access, and satisfaction weighted against costs - it is difficult to conclude that the more market-like system emblematic of the United States is indeed superior. Government and markets can and should work together since each is subject to its own particular failures, but there is little evidence to indicate that there should be a sea-change towards greater reliance on markets. So long as market failure permeates the health care sector, market-based solutions will be inadequate.

Thomas Rice

Further Reading

  • Boulding, K.E. "The Concept of Need for Health Services." Milbank Memorial Fund Quarterly 14(4), Part 2, October 1966: 202-20. 
  • Enthoven, A. 1978. "Consumer Choice Health Plan." The New England Journal of Medicine 298 (12 & 13): 650-8 & 709-20.
  • Evans, R.G.1986. "Finding the Levers, Finding the Courage: Lessons from Cost Containment in North America." Journal of Health Politics, Policy and Law 11 (4): 585-615.
  • Feldman, R., and B. Dowd. 1993. "What Does the Demand Curve for Medical Care Measure?" Journal of Health Economics 12 (2): 192-200.
  • Reinhardt, U.E. 1998. "Abstracting from Distributional Effects, this Policy Is Efficient." In: Barer, M.L., T.E. Getzen, and G.L. Stoddart, eds., Health, Health Care and Health 
  • Economics: Perspectives on Distribution. New York: John Wiley.
  • Rice, T. 2003. The Economics of Health Reconsidered. Chicago: Health Administration Press.
  • Wolf, C., Jr. 1993. Markets or Governments: Choosing Between Imperfect Alternatives. Cambridge, MA: MIT Press.                                                                     

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