Wednesday, 21 May 2014

How Different a Market is Health Care?

Professor Steve Levitt has come under a bit of attack lately because of some comments he made, in part to UK Prime Minister David Cameron, and in full to Cameron's team when the PM had walked out. He asked, essentially, if the PM would be happy with a system under which Britons could come to a car dealership and pick up a car, financed - just like the National Health Service - by the state. Among those upset with these comments is Professor Noah Smith, who has argued (here and here) that health care is a different kind of market than that for cars.
I think Professor Levitt is essentially right on this. Now he never actually claimed that there are no differences between health care and other markets, but it is clear from context that he considers health care and other markets to have rather a lot in common. Certainly you would expect huge quantities to be demanded in the market for health care with services available at a zero price, just like you would expect huge quantities to be demanded under similar conditions in basically any other market.
So what is different about health care? Among the contenders are adverse selection and moral hazard. Adverse selection means that insurance buyers know more about their health than do sellers, but this is true in very many other markets as well (by the way, the health insurance market is characterized by propitious, not adverse, selection, according to very many studies - just one terrific paper with data on the issue is here). Moral hazard means that insured folks have an incentive not to take care of themselves as well, but this, too, is present in many other markets. (This issue is not primarily about insurance, but it is a common way of financing health expenses and Professor Smith mentioned these specifics in one of the posts linked to above.)
A related problem of asymmetric information is that those seeking to purchase health care do not know a lot about the product. But this, again, is true for a wide variety of other markets, such as cars, computers, plumbing services and dentistry. For most food I buy I have no idea what has been added to it. Nor do I care much, because sellers compete and have reputations to maintain.

Another issue pertaining to (lack of) information is how to determine which hospital is best while in acute need of medical attention. Will stroke sufferers "shop around"? Of course they will not, but that holds under any system. Would hospitals charge "exorbitant" fees for those coming in for heart attacks? They clearly have an incentive to do so, but competing hospitals have the same incentive. Distance may give some monopoly power, but not too much because of the presence, a bit farther away, of other hospitals.

One issue on which health care really does differ is that of (partial) unpredictability tied to possibly lethal consequences. I think this may be a reason behind the widespread impression that health care should be the business of the government because it is so "important". Bread and Weetabix are also "important" but they lack the other aspects. I think this also explains the presence of the subsidy in Professor Levitt's policy proposal for the British politicos. Given these widespread beliefs, it would be very hard to argue for no subsidy at all, so Professor Levitt's proposal seems a very good one to me.

Notice, lastly, that the aforementioned difference is not really a difference in the mechanics of the market for health care. Rather, it is simply a difference in widespread perceptions of the services offered in this market. So if free markets tend to work better than regulated ones, it really should show in performance. I am in the deep end of the pool attempting to assess the evidence on this, but I believe it is noteworthy that the Singaporean model - which as far as I can gather comes close to what Professor Levitt tried to propose to Cameron - typically receives a great deal of praise.

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