"Is Health Care Special?"

Uwe Reinhardt:

Is Health Care Special?, by Uwe E. Reinhardt, Economix: On a recent episode of the television talk show “Raw Nerve,” the host William Shatner, of “Star Trek” fame, had this exchange with Rush Limbaugh:

Shatner: “Here’s my premise, and you agree with it or not. If you have money, you are going to get health care. If you don’t have money, it’s more difficult.”

Limbaugh: “If you have money you’re going to get a house on the beach. If you don’t have money, you’re going to live in a bungalow somewhere.” ... “What’s the difference?”

Shatner: “The difference is we’re talking about health care, not a house or a bungalow.”

Limbaugh: “No. No. You’re assuming that there is some morally superior aspect to health care than there is to a house. …”

One must wonder whether physicians, nurses and other workers toiling day and night in health care — let alone the medics and helicopter pilots who risk their lives to help the wounded — see their work and its product quite as Mr. Limbaugh casts it. One further wonders whether families with a cancer-stricken member are likely to view going without health care as the moral equivalent of going without a beach house.

But leaving aside speculation on the moral dimensions of health care..., it should be noted that economists, too, have long wrestled with the question of whether  health care stands apart from other goods and services traded in the market place. ...

The question of in what way health care is special, if at all, was first investigated thoroughly by the Nobel laureate economist Kenneth Arrow in his still widely celebrated 1963 article, “Uncertainty and the Welfare Economics of Medical Care.” ...

To lay down a standard to which to compare the health care sector, Professor Arrow explained first on what basis economists consider a perfectly competitive market for some good or service as “maximizing human welfare,” an outcome economists describe as “efficient.” ... If those and some other conditions are met, Professor Arrow explained, then for any given initial distribution of income and wealth that market will settle down at a unique equilibrium... This equilibrium has important attributes.

First, in what Professor Arrow calls the First Optimality Theorem of welfare economics, it can be shown that in this equilibrium ... it would be impossible through any reallocation to make someone happier without making someone else less happy. It is an allocation that economists call Pareto efficient... For any given initial distribution of income and wealth, economists declare the associated Pareto-efficient allocation ... to be “welfare-maximizing”...

Second, and very importantly, in what Arrow calls the Second Optimality Theorem, he explains that if on ethical grounds society wished to distribute a good or service (for example, education or health care or food or beach houses) among people in a particular way — like egalitarian principles — it need not have government directly involved in producing or distributing that good or service. The desired distribution could be attained by redistributing income and wealth among the citizenry in a way that would drive the perfectly competitive private market to achieve the desired allocation of the good or service among the people. Better still, it would do so in the welfare-maximizing way predicted by the First Optimality Theorem.

It is easy to see why Professor Arrow’s paper fired the imagination of generations of economists ... in their argument that public health policy should confine itself strictly to making the market of health care perfectly competitive and then to redistribute income — perhaps by means of tax-financed vouchers to help subsidize the purchase by poorer people of needed health care — in order to achieve whatever distributive ethic society wishes to impose on health care. That free-market approach would automatically take care of whatever moral aspect society wishes to impute to health care.

Having established this normative benchmark, Professor Arrow explored in the rest of his paper how close the market for health care actually comes to the characteristics of a perfectly competitive norm. In my next post, I will discuss Professor Arrow’s conclusion.

Can you guess what that conclusion will be? These markets are far from the competitive ideal, and conditions such as customers having full knowledge about the relative quality of products in the market will be hard to satisfy in any case.