Wednesday, July 18, 2012

The medium is the message: reverse engineering the health care marketplace

Economists have long accepted that the market for medical care behaves nothing like most other markets. Dixit Kenneth Arrow, Nobel laureate economist.

Even without reading Arrow's seminal paper, however, it is easy to use common sense to arrive at a somewhat similar conclusion. Just consider the incentives for the average doctor. One way to approach a private practice would be to demand payment up front. But this may alienate customers. If instead I see everyone, and bill a rather large sum after the fact, I could end up with much more money--many people will pay the full amount, some will pay a bit less, and those who cannot pay at all will generally not return. In this fashion I can more effectively screen out the deadbeats without alienating my full-pay clients. I can be a successful provider while also being an ethical practitioner.

While this system may make sense in terms of provider self-interest and the expectations of customers, it hides prices, encouraging overuse and removing competition that lower prices. Some people may blame insurance for this, but even in areas like dental care, where insurance is a much smaller factor, the same sort of price opacity reigns. There are a few health care providers like chiropractors who may occasionally advertise prices, but this price competition is still the exception rather than the rule. I use a chiropractor chain who advertises prices, and although I am generally happy with their services, it feels a lot less like a professional service and much more like I'm receiving a widget. All of which is to say that, to a certain extent, the medium is the message: the way in which we perceive costs or fail to perceive costs is an integral part of the qualitative experience of the service. Hidden prices with retroactive discriminatory pricing produces a much different type of care than up front payment with price transparency.

Both models will always exist to some extent or another. The job of the state, I think, is to more clearly demarcate the boundary between widget and non-widget like services and to increase transparency in those areas where up front cost communication is impractical. Price transparency is only really possible in a situation in which there is some level of standardization in some form or another. This is easy to achieve with widget-like services, but not impossible in other areas either. It is and has always been the job of the state, through either direct control as in cases like roads and the post office, or by regulating prices as in the case of public utilities or the airline industry of yore, or by setting up a medium of exchange that allows for standardized prices, to make such standardization possible.

Some combination of all three techniques is likely necessary in health care. Legislation encouraging price transparency, setting prices in areas where it is impractical for this to occur (or perhaps setting a price chart and then allowing for providers to set a multiplier factor for some level of price competition), and directly running aspects like health insurance to bring about standardization, will all help to transform a system that is currently quite free--providers can set whatever prices they want and negotiate freely with insurance and patients--into one that is only marginally less free but far more efficient. Health care is a good example of how a free market system may not always produce a well-functioning or efficient market. But there are many ways to define freedom, and it would not be hard to invent a new understanding of the term that would still allow for a good deal of individual agency while producing a much more effective outcome.

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