Basic Assumptions Examined, Part I: Medicine and the Mythology of the Market

In a post coming soon, we'll examine the medical paradigm of health vs. the public health paradigm. But let's start with economics.

Some people say (as they put it on Fox News) that the problem with health care in the U.S. is that we don't allow the Free Market(tm) to work its magic. If government would just get itself off the back of the medical industry, the Free Market(tm) would control costs and allocate resources efficiently.

The idea that the so-called Free Market(tm) can do this depends on several assumptions which are seldom true in any context, but are particularly far from true in the case of medical services. These include (and this is just a telegraphic discussion):

No externalities: All of the costs and benefits to society of the transactions are captured in the exchange between buyers and sellers. Obviously not true in the case of medicine: medical care stops infectious diseases from spreading, society loses the productivity of sick people and their dependents lose support, it's unpleasant to watch people dying on the sidewalk, etc.

Perfect information: Sellers and particularly buyers have all the info they need to purchase in their best interest. But in medicine, what you are buying is expertise. You don't know what's wrong with you or what to do about it, that's why you go to the doctor. As consumers, we have little or no ability to compare the quality of various providers, even if we could shop based on price. We have to depend on licensing requirements to give us at least some assurance that our providers are competent.

Consumers create demand: Not in medicine: the doctor tells us what we need. In medicine, once we make the initial decision to go through the door, demand is largely induced by providers. Okay, not in special cases like some cosmetic surgery or sales of Viagra, but generally. Think about the consequences of that, absent some sort of non-market intervention.

Willing sellers, willing buyers: This concept is philosophically tricky -- in some sense, everything we do is a result of free will. Even if somebody's holding a gun to your head, you could choose the alternative of being shot. But common sense tells us that medical services are often necessities -- we'll die or suffer horribly if we don't get them. And we might have to watch our friends, neighbors and loved ones suffer or die unnecessarily. Anyway, we could go into the ER unconscious or demented, unable to make decisions for ourselves at all!

Justice: Actually, the theory of the Free Market (tm) doesn't say anything about justice -- the economists' definition of "efficiency" has nothing to do with what is good or right, although they usually forget that. But regardless of what we do or do not do to keep ourselves healthy, a lot of illness is not our own fault. People consume medical services not out of choice, but because they've been hit by a bus or poisoned by pollution or infected with HIV by their philandering husband, or for whatever reason, and we can't predict when, where or how much medical services we will need.

And that's why we universally think it proper, just and reasonable that medical services be paid for by insurance -- that the financial burden be shared so we can all get what we need, when we need, for the sake of ourselves, each other, and the public health. If people don't agree, let's hear why!

There are additional basic assumptions of market theory that are violated in the case of medical services, but that's enough for now. People may wish to add more in comments, or discuss these further.

Next up: How insurance works, and some of the oddities of insurance markets.