Health Care, Uncertainty and Morality

Uwe E. Reinhardt discusses Kenneth Arrow's thoughts on the health care market, over at the NYT's Economix:

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.” The post generated a lively set of commentaries.

Professor Arrow, a Nobel laureate, explored in the early 1960s what the characteristics would be of a perfectly competitive market for an ordinary commodity, how the medical care industry deviated from those characteristics and what aspects of health care might explain these deviations.

He 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.”

This uncertainty has several aspects.

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 about the proper diagnosis and efficacy of treatment. That makes the market for medical care deviate significantly from the benchmark of perfect competition, in which buyers and sellers would be equally well informed.